Putin’s Oil Slick

Russia has apparently barged into America’s nuclear negotiations with Iran, and is threatening to undermine the U.S.-led sanctions effort by working on a new oil deal with Tehran.

While any such deal could offer some short-term financial succor to Iran, and score a geopolitical victory for Russia, it would create a whole host of headaches elsewhere.

A potential energy pact between Moscow and Tehran promises to complicate the Obama administration’s efforts to forestall fresh Iran sanctions coming out of Congress. If the deal comes to pass, and is allowed to stand, it could also undermine the existing sanctions regime on Iran. But the oil deal also raises questions about Russia’s long-term strategy in the region.

According to a Reuters report, Russia and Iran are close to finalizing an oil-barter deal which would see Moscow trade unspecified goods to Tehran in exchange for about 500,000 barrels of oil a day — roughly half of Iran’s battered current export level. At current prices, that much oil would be worth about $1.5 billion a month.

Russia doesn’t need the oil – it has plenty of its own. So the idea is that it would be shipped off from Iran. Russian and Iranian officials told Reuters that they expect to finalize the deal soon, regardless of what happens in the Geneva negotiations over Iran’s nuclear program.

Russia has a few obvious incentives to make such a deal: It puts Moscow square in the center of international efforts to defang Iran’s nuclear program, and sends a clear signal to the U.S. that it will push back against Western efforts to increase economic pressure on the regime, all while poking the Obama administration in the eye.

"It’s a double win: He weakens and embarrasses Obama, and puts himself in the thick of things" regarding Iran’s nuclear future, said Amy Myers Jaffe, executive director of Energy and Sustainability at the University of California, Davis.

But the prospective oil deal is also a bit of a puzzler. Adding a big chunk of new Iranian supply to the global oil market would likely push crude oil prices down — or at the very least take the froth off of historically-pricey crude. That is exactly what Russia, whose budgetary health depends on oil revenues derived from prices that are as high as possible, has long sought to avoid.

And especially for Iran, the deal carries plenty of risks. Tehran agreed to talk about suspending aspects of its nuclear program in large part because it hoped to win some relief from the crippling economic pressure caused by the U.S. and European sanctions on oil exports. On Friday, Iranian and Western negotiators resolved most of the outstanding issues needed to move ahead with the interim nuclear deal.

But inking an ambitious deal with Russia to export 50% more than it now does will only give ammunition to lawmakers in the U.S. who are champing at the bit to tighten the screws on Iran. Iran, for its part, has warned that any fresh round of sanctions will be a deal-breaker for nuclear talks. And the Senate now has a nearly filibuster-proof bill that would ratchet up sanctions.

"This deal is a jaw-dropper, and will make it a lot tougher for the Obama administration to veto that bill now," said Mark Dubowitz, executive director of the Foundation for the Defense of Democracies, a big advocate of tougher sanctions on Iran.

"The market apparently no longer has to fear the economic minefield put around Iran. This puts lie to the claim that you can turn sanctions on and off like a spigot," he added.

A senate aide said that the prospective Russian-Iranian oil deal underscores how the sanctions regime on Iran is actually unraveling, thus reducing U.S. leverage.

"The longer the Senate waits to take action, the less likely it will be our diplomats can reach a deal that actually achieves our objectives," he said.

Iran’s oil-dependent economy has been hammered by two years of Western sanctions on its energy exports. Even much of the oil that it does sell is through a barter arrangement, or in the expectation of future payments. Iran’s cash crunch is acute. "Iran has to find a way to accommodate more exports: this is the reason behind this," an Iranian official told Reuters.

The future of Iranian oil production is also at stake. Sanctions have threatened the shut-in of a lot of Iranian oil fields, because the country simply cannot export or store everything it normally produces. Some countries can shut down production and start it up a few years later with few ill effects, but fields that rely on gas injection to maintain pressure could go into terminal decline if shut down, said Jaffe. That gives Iran a reason beyond short-term barter gains to start shipping more oil.

But it also raises questions about Russia’s strategy in the Middle East and Mediterranean. Russian companies, including Gazprom, have been trying to elbow into the nascent Eastern Mediterranean natural-gas boom; Gazprom in particular is trying to finalize a deal to export Israeli gas, and Vladimir Putin has cozied up to Israeli Prime Minister Benyamin Netanyahu. Bolstering Iran won’t help Russia’s new-look policy in that part of the world.

It also could have the effect of jeopardizing future Russian-Saudi relations, since any Russian moves to bolster global oil supplies could collide with Saudi budget imperatives. International support for Shiite Iran is anathema to the Saudis – Riyadh has gone ballistic at the U.S., its long-time security blanket, over the Geneva talks.

The Russian Embassy in Washington, D.C., and the Iranian mission to the United Nations did not respond to requests for comments on the purported deal. Iranian oil officials said over the weekend only that there was no final agreement for an oil-barter deal, according to Iranian news wires.

UPDATE: A White House spokesperson said over the weekend that the reports of the deal still aren’t confirmed. "If true, however, such a deal would raise serious concerns as it would be inconsistent with the terms of the P5 + 1 Joint Plan of Action and could potentially trigger U.S. sanctions," the spokesperson said.

Despite the risks of blowback from Washington, some Russia watchers see the prospective deal as being consistent with Putin’s desire to take pressure off Iran that his predecessor had supported. And Russia has long maintained that U.S. and European sanctions on Iran’s oil exports are unilateral, punitive measures-unlike the softer penalties hammered out by the United Nations security council.

"Negotiating a deal that would relieve some of the pressure on Iran without violating UN sanctions would be in line with this policy," said Simon Saradzhyan, a research fellow at Harvard Kennedy School’s Belfer Center.

John Hudson contributed to this report.

This story was updated Jan. 12, 2014.