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Russia Begins Oil Swaps with Iran

Iran has been seeking since the mid-1990s to undertake oil swaps with Kazakhstan and Turkmenistan as a way to increase its own exports. Such swaps involve Iran’s importing oil in the north on its Caspian Sea coast for domestic refining and consumption, while exporting compensatory quantities to the world market from its southern ports on the Persian Gulf. This has been part and parcel of Iran’s strategy not only for developing its own energy sector but also for situating itself as an important transit country for international trade flows in general.


However, Iranian attempts to implement swap agreements with Kazakhstan and Turkmenistan have had modest success at best. There are three reasons for this. The first is that repeated attempts to find funding to expand the pipeline to Teheran from Neka, Iran’s Caspian port where it receives the oil concerned, were ultimately fruitless despite occasional agreements being announced. The second is that (in the case of Kazakhstan) Iran’s problems processing the high sulfur content along with recurrent squabbles over pricing diminished the quantities actually exchanged, while (in the case of Turkmenistan) the over-centralized and nature of decision-making made agreements hard to negotiate and harder to implement. The third is that the political domination of Iran’s oil industry by the country’s religious leadership since 1979 has vitiated contributions to decision-making by experts, who have frequently been refused access to crucial information.

The first of these issues is now on the way to resolution through a multi-stage project to expand the capacity of the various components of the pipeline going south from Neka. The second of them is not relevant insofar as negotiations and agreements with Russia are concerned. As to the third of them, there has been movement towards decentralization of energy decision-making in Iran, although it is not yet definitive. It is hard to determine a specific manner in which the Russian swaps will promote further economic efficiency in the Iranian oil industry, but it is likely that they will represent a confidence-building measure between the sides that may have indirect follow-on effects, for example through Russian sharing of experience in the post-Soviet “de-statification” (d´s´tatisation, a term that even English-speaking analysts frequently prefer to the misleading “privatization”) of decision-making in the energy sector.


The agreement between Russia and Iran is significant in several respects. In particular, it is important for Iran's relations with Central Asia, for the more general future of circum-Caspian energy development, and for the geo-economics of Central Eurasia at large.

With respect to Iran’s relations with Central Asia, the development of oil swaps with Russia will create additional capacity that Kazakhstan and Turkmenistan may contribute to satisfying. At the same time, it shows clearly that Moscow will take advantage of its Central Asian partners’ inability to settle agreements with Teheran and so puts them on notice that their political cooperation with Russia does not restrain the economic activities of Russian energy trusts that are formally in private hands.

Regarding the second point, about the pattern of circum-Caspian energy development more generally, the Russian-Iranian agreement highlights the progress towards a de facto agreement on the division of Caspian energy resources among the five littoral states. While such a resource division is not overtly implicated in the swap agreement, the agreement itself would not have been possible without the recent establishment of a modus vivendi among the five Caspian littoral countries. This de facto settlement has taken shape as a result of a series of bilateral agreements

a method initiated by Russia with its neighbors Azerbaijan and Turkmenistan, but now extended also between Kazakhstan and Turkmenistan. Even the dispute between Iran and Azerbaijan, which in July 2001 saw the threat of the use of military force by Teheran in the south Caspian, is today greatly calmed, and the two sides look forward to a definitive settlement. Likewise in the present situation, Turkmenistan and Iran do not have specific disputes although full agreement between the two sides is not yet reached.

Finally, concerning the geo-economics of Central Eurasia at large, the swap agreement opens a new angle on the export routes for Kazakhstan’s huge offshore Kashagan deposit. On the one hand, it highlights the Iranian route for Kashagan that TotalFinaElf has long advocated, while threatening, on the other hand, to oversatisfy Iran’s increasing capacity, leaving the country unable to digest Kashagan, unless of course Kashagan oil went all the way to the Gulf without being swapped, a more complicated but not unthinkable engineering feat. Even more important, the new swap agreement gives Russia additional leverage on any pipeline that may be built southward to Iran, whether for Kashagan or not

for example, the non-Kashagan pipeline that the Russian company Transneft has been studying since mid-2001, which would run from Omsk to Neka, also allowing increased Kazakhstani and Turkmenistani swaps with Iran.


Russia’s decision to increase its swaps with Iran is partly the result of Europe’s hesitation over the last few years to commit to investments that would be necessary to construct new Eurasian pipelines that might take additional quantities of Russian oil to European markets over the next several decades. This development opens for Russia a new and potentially important route to growing Asian energy markets. It also creates additional possibilities for Kazakhstan and Turkmenistan to engage in such swaps with Iran in the future, by motivating the construction of additional Iranian capacity to handle such quantities. The growth of energy commerce between Russia and Iran opens the possibility that cooperation within the context of the “Eurasian Gas Alliance” that Russia has sought to establish with Kazakhstan, Turkmenistan, and Uzbekistan over the past year may be informally extended to certain aspects of the international oil sector as well. It is reasonable that the recently announced move to establish a Russia-Kazakhstan-Ukraine-Belarus free trade area is linked to such a project. Kazakhstan’s decision to join the initiative to establish a commercial “North-South” trade route running from India by boat to Iran, then across the Caspian Sea to Russia and finally into Europe, only strengthens such reasoning.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2003/03/russia_begins_oil_swaps_with_i.html
First published in Central Asia – Caucasus Analyst, vol. 5, no. 8 (12 March 2003): 3–4.

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