Authored by Vanand Meliksetiam via Oilprice.com,
The energy industry is highly sensitive to U.S. sanctions due to the petrodollar being the single most important currency in global trade. Washington is able to exert significant influence by limiting access to the dollar through its financial institutions. Russia is especially exposed to Washington’s ire as a significant part of its governments’ coffers are filled by revenues from its oil and gas sector.
In recent years, Russian companies have been increasing their activities in several unstable countries where the U.S. has imposed sanctions. This tactic from Russia comes with huge opportunities but also a significant amount of risk.
The level of this risk is illustrated by the absence of western oil companies in these areas as they are accountable to their shareholders. Privately held companies also struggle to operate in these areas due to their reliance on international financial markets and the difficulty with carrying out due diligence. Venezuela and Iran are prime examples of oil rich areas that are struggling under U.S. sanctions.
At the same time, absence of many major western oil companies in unstable regions is one of the reasons why Russian companies, both majority state-owned and privately held organizations, have got involved. Limited competition strengthens the position of Russian firms during negotiations. The host countries face a predicament in many cases as they have to choose between a bad deal or no deal at all.
A prime example of this is Moscow’s involvement in Iran, which has been ongoing for years. Even during the years of sanctions due to Tehran’s nuclear program, Russia was able to strike a barter deal where Iranian oil was exchanged for other products. This deal bypassed the international financial system and sanctions. Even now when the U.S. has unilaterally withdrawn from the Iran Nuclear Deal and is about to reinstate sanctions, Moscow and Iran are intensifying cooperation.
Days before the Helsinki summit and the meeting of Presidents Putin and Trump, Iranian officials struck a deal in Moscow for an investment of $50 billion in the oil and gas sector. While western firms are reluctant to continue doing business in Iran, let alone increase cooperation, Russian firms are seizing the opportunity to boost their portfolio with even more Middle Eastern assets.
The political instability and economic meltdown in Venezuela has caused a serious challenge for the country, but it has also created an opportunity for Chinese and Russian companies. Politically supported by their respective governments and with next to no risk of going bankrupt, these firms have extended loans and provided support where commercial western companies wouldn’t dare to.
Energy, however, is much more than just a source of revenue for Moscow. The involvement of major Russian energy company provides the host countries with much needed resources to explore their hidden riches. It makes these states more or less dependent on Russia and therefore a pliable foreign policy tool to wield in the interest of Moscow.
Although the possible returns are significant, resources can be used only ones. Every dollar, ruble or euro spent or every Russian engineer sent abroad is one more that cannot be used for the benefit of the domestic Russian industry. However, the exact same argument can be applied in the opposite direction. As Russia is extending its cooperation with OPEC – increasing the likelihood that its production cuts could be more widely applied in the future – propping up production in other countries could be a way to use resources when domestic production is artificially limited.
However, by putting Russian boots on the ground and financial resources in foreign economies, Moscow risks being tied up. Russian investments in Iran and Iraq are significant. So is its involvement in Syria. Moscow is performing a delicate balancing act with each of the actors in the conflict: Iran, the West, Turkey, Israel and the Arab world. In recent months, pressure has been mounting from the Trump administration, supported by the Saudi led bloc and Israel, to reduce Iran’s influence over Syria and the Middle East.
Iran’s significant influence over local organizations and militias in Syria and Iraq put it in a formidable position to exert influence over Russian policy in the Middle East. The recent uprising in Southern Iraq due to electricity and water shortages shows how delicate the situation is. Demonstrators, in part, aimed their ire towards the energy sector where Lukoil, for example, has significant investments. Although no damages were incurred to Russian assets, the protests are another example of just how vulnerable Russian investments in these areas can be.
Although plausible, it is unlikely that Iran will use Russia’s oil investments to exert influence. Tehran cannot afford to damage its relations with Moscow at the moment considering how isolated it currently is. It is perhaps this knowledge that is giving Russia the confidence to get increasingly involved in Iran. Only time will tell if this strategy will pay off in the long term.
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