BACKGROUND: Iranian-Russian relations have been growing since 1987 when then the Soviet Union changed its policy of supporting Iraq in its war against Iran. By removing obstacles and creating common political and security grounds, certain factors, apart from economic incentives, have made Tehran and Moscow closer to each other since 1991, including the Soviet Union’s fall, Washington’s efforts to create a unipolar international system and the growing presence of the Western countries, particularly the United States, in the Caucasus and Central Asia. However, their cooperation on energy-related issues has been limited. Major differences over the Caspian Sea’s legal regime, in general, and Russia’s bilateral agreements with Kazakhstan and Azerbaijan to divide the latter’s northern part, in particular, have limited such cooperation. Moreover, Russia’s and Iran’s individual efforts to establish themselves as a major, if not the major, transit route for the exports of Caspian oil and gas has practically put the two countries in a competing position. Nevertheless, the American government’s efforts to create a third route for such export bypassing both Iran and Russia have created grounds for their cooperation. Being a major challenge to both Iran and Russia, the May inauguration of the Baku-Tbilisi-Ceyhan pipeline, a major means to secure the American objective of exclude Iranian and diminish Russian influence over oil exports from Central Asia and the Caucasus, brought about a new urge for Iranian-Russian extensive cooperation on energy issues. Against this background, the timing of Iran’s two major oil announcements less than two weeks after the BTC inauguration is not surprising. Iran’s Deputy Oil Minister for International Affairs Hadi Nejad-Hosseinian stated on June 8 that in his visit to Moscow, he had proposed to unspecified Russian energy corporations to delegate oil and gas exploration and development operations of Iran’s Caspian Sea reserves yet to be discovered. Accordingly, upon reaching agreements with its Caspian neighbours, Iran would commission through buy-back agreements the exploration and development projects of such reserves to Russian companies as well as to non-Russian ones. According to Nejad-Hosseinian, in case of future discovery of economically viable oil and gas fields in Iran’s sector of the Caspian Sea, the Russian companies would be authorized to recuperate their invested capital in such project along with a mutually agreed interest by selling the reserves’ production. Unspecified Russian companies to which the proposal was made will reportedly reply to the proposal within a month.

IMPLICATIONS: Given Iran’s opposition to bilateral agreements to divide the Caspian Sea among its littoral states resulting in its refusal to make any such agreement with other littoral states, it is unclear, which part of the Caspian Sea will be offered for exploration to a successful Russian bidder. Moreover, even Nejad-Hosseinian acknowledged disputes between Iran and other littoral states, presumably Turkmenistan and Azerbaijan, over the ownership of certain offshore oil and gas reserves. Keeping these obstacles in mind and in the absence of a binding legal regime, he mentioned Iran’s plan to find a mechanism so that the Russian companies would be able to take part in its Caspian development projects. He added that certain oil and gas development projects, presumably in the undisputed Iranian Caspian waters, would be implemented regardless of the absence of such regime. As Iran will also invite other unspecified international oil companies to bid, Tehran will pursue such projects should the Russian companies decline to do so. However, the latter would have “a high chance” to win, Nejad-Hosseinian added. In what appears to be a direct challenge to the US-backed BTC, Nejad-Hosseinian stated on June 8 that, during his Moscow visit, he also offered unidentified Russian oil companies 25-year swap deals for receiving as much as 300,000 barrels of Russian Caspian crude oil at Iran’s Caspian Sea port of Neka and delivering to Russia’s designated customers an equal volume of Iranian oil at the Iranian Persian Gulf oil terminals. If Iran succeeds in concluding such major swap deals, the large-scale, in contrast to the current small-scale, swap of crude oil from Turkmenistan and Kazakhstan via Iran will be a realistic option for both Iran and the two Caspian countries. Factors justifying such swap deals will include the much lower cost of exports through swap deals via Iran compared to the high exporting cost of oil from those countries through the BTC and Neka\'s potential capacity of handling up to 700,000 barrels of crude oil a day.

CONCLUSIONS: Thanks to stable and expanding Iranian-Russian relations, there is a solid political ground for concluding major oil and gas agreements between Iran and Russia, despite their disagreements over dividing the Caspian Sea. The two country’s strong interests in extensive economic ties further encourage such agreements. In particular, the benefits of large and long-term swap deals between Iran and Russia should encourage both sides to conclude an agreement to that effect. Those deals will not only help Russia increase its exports and oil-generated revenue without heavy investments in its oil-export infrastructure, but will also guarantee a significant income in transit fee for Iran and feed most of its northern oil refineries now mainly fed from Iran’s oil fields in the south. Moreover, such swap deals could turn Iran into an economically attractive route for exporting the portion of Turkmenistan’s and Kazakhstan’s oil not exported through Russia, a development with major political and economic implications for the Caspian region. However, all these are geared to the conclusion of an agreement in this regard and its implementation within the next few months.

AUTHOR’S BIO Dr. Hooman Peimani is a Senior Research Fellow with the Centre for International Cooperation and Security (CICS), Department of Peace Studies, University of Bradford, UK.