April 6, 2014 | Policy Brief
Russia’s Proposed Oil-for-Goods Deal with Iran
As nuclear negotiations continue this week in Vienna, Moscow appears poised to openly flaunt the U.S.-led Iran sanctions regime. The move could undermine the Obama administration’s assurances that neither the Crimea crisis nor the recent de-escalation of sanctions would undercut U.S. leverage in its nuclear negotiations with Iran.
In January, Reuters exposed ongoing discussions between Russia and Iran over a lucrative and illegal oil-for-goods deal. Last week, Reuters revealed that the two parties were working to seal the deal. A Russian source confirmed to Reuters that Moscow had “prepared all documents from its side,” adding that completion of a deal was awaiting agreement from both sides on what oil price to use. Russia’s Kommersant newspaper reported that the Russian energy ministry was planning to tap an authorized trader to purchase the Iranian oil, and quoted a source describing the company as one that is “registered in Russia that does not operate on global markets…that is, there will be no instruments to put pressure on it.”
The proposed deal, worth possibly $20 billion, would include Russian purchases of up to 500,000 bpd of Iranian oil—boosting Iranian exports by as much as 50% from levels permitted to Iran under the Geneva interim nuclear agreement—in exchange for Russian equipment and goods. The deal would ease further pressure on Iran’s battered energy sector and at least partially restore Iran’s access to oil customers with Russian help. There is further reason for concern that such a scheme could provide a channel for the transfer of sanctioned nuclear equipment or military hardware to Iran, not to mention other illicit financial transactions.
Tehran would also love to get its hands on advanced Russian missiles, including the S-300, a long-range surface-to-air missile system, dubbed “Russia’s Patriot,” in reference to the American equivalent system. The Russian system is considered to be one of the most effective air-defense systems in the world. After intense lobbying by the United States and Israel, and the passage of United Nations sanctions which even Moscow interpreted as banning the sale, Russia cancelled its promised delivery of the S-300 to Iran in 2010. But Iran has not dropped its request; the system could be a strong deterrent to a U.S. or Israeli strike against Iranian nuclear facilities.
The Obama administration has denounced the proposed oil-for-goods deal as contrary to the Geneva interim agreement, and a violation of U.S. sanctions. The administration further views the move as a direct challenge to the global sanctions regime on Iran, particularly as international companies test the waters in an environment of de-escalating sanctions pressure. The administration is already dealing with the damage caused by Turkey’s massive sanctions busting scheme, which appears to have included $12 billion in gas-for-gold transactions and an estimated $100 billion in other illicit transactions. With other countries eager to re-enter the Iranian market, this is a bad time to convey the impression that the sanctions regime is wobbly.
The Obama administration, with Congressional backing, should make it clear to Russia that any illicit barter scheme, especially one involving Iranian oil and sanctioned goods (such as advanced missile systems), will trigger punishing sanctions against Russian sanctions busters. Moreover, this would be a clear violation of both Iran’s and Russia’s obligations under the Geneva interim agreement. As a result, if the deal proceeds in any way, the administration should re-impose all the existing sanctions against Iran that were suspended as part of the Geneva agreement and clear the way for the passage of Congressional legislation targeting Iranian oil exports, currently being blocked by the administration.
Mark Dubowitz is executive director of the Foundation for Defense of Democracies, where he leads projects on sanctions and nonproliferation.