Why Russia values a non-nuclear Iran more than higher oil prices

By Simon Saradzhyan | August 11, 2016

One of the key questions that remain unanswered more than one year after the signing of the Joint Comprehensive Plan of Action—the Iran nuclear deal—is why Russia supported it. A failure of the talks between Iran and the P5+1 (Russia and the four other permanent members of the United Nations Security Council, plus Germany) would have at least stopped decline in the price of oil and tangibly benefited the Russian economy.

As the talks edged toward completion in 2015, some Russia watchers in the West began to suspect that Russia might be looking for ways to stir up trouble, so that oil prices would go up. For instance, Pavel K. Baev of the Peace Research Institute Oslo claimed in April 2015 that Vladimir Putin’s decision to supply arms to Iran was meant to instigate “a disruptive crisis that could curtail the flow of oil from the Gulf” and thereby solve the “very grave and urgent problem that originates in the Middle East: low oil prices.” A few months earlier, Dimitri Simes, president and CEO of the Center for the National Interest, warned that Russia might resort to destabilizing actions to prop up oil prices, though he rightly refrained from predicting that Russia’s destabilizing behavior may include efforts to disrupt the Iran nuclear deal. In May 2015, Business Insider’s Elena Holodny listed the decline in oil prices as the second most important reason why, in her view, Russia feared an Iran nuclear deal (the first reason being that Russia preferred to keep Iran from establishing trade and economic relations with the United States).

In August 2015, the US Energy Information Administration estimated that an increase in Iranian oil exports, which would follow a deal between P5+1 and Teheran, could bring the anticipated 2016 price of oil down by $8 per barrel. That would have been a significant loss for Russia: Oil and gas accounted for 43 percent of the government’s revenues in 2015, and Russia was estimated that year to lose about $2 billion in revenue for every dollar fall in the oil price. And this year, for instance, with the Iran deal already in place, the price of crude oil has averaged below $50 per barrel, while Russia needs it to be above $80 per barrel to balance the budget.

A failure of efforts to resolve the dispute over Iran’s nuclear program, on the other hand, could have stopped, if not reversed the decline in oil prices, at least temporarily. In an event of such a failure, futures traders would have sought to account for the increased probability that United States and its allies might try slow Iran’s nuclear program down militarily. Increased tensions between Tehran and Western capitals would have also ensured Iran’s continued reliance on Russia and China for arms and other machinery, exports of which allow Russia to preserve some token diversification of its economy.

Yet in spite of these and other tangible dividends that the failure of nuclear talks would have generated, Russia chose to support the July 2015 deal and played an important role in sealing it. One possible explanation is that Russia opposed the deal but had to endorse it, because a refusal to do so would have exposed Russia as a spoiler. I, however, believe Russia’s top diplomat Sergey Lavrov and his deputy Sergei Ryabkov are too experienced to have allowed such a blunder. Had Russia wanted to disrupt the nuclear deal it would have acted to tacitly improve Iran’s best alternative to the negotiated agreement long before the negotiations entered the final stage. And had Russian president Vladimir Putin viewed the successful conclusion of JCPOA as a blunder of his top diplomats, he would have surely fired some of them. Rather, I see at least four reasons why Putin chose to support the deal.

Why Russia signed on. First, as my reading of Russia’s vital interests indicates, preventing Iran from obtaining nuclear weapons is of greater lasting value to Russia than shorter-term gains from a surge in oil and gas prices.

Second, although any regional destabilization induced by the failure of the Iran nuclear talks would have had a significant effect on oil prices, the effect would have been temporary. For instance, the first Iraq war had no lasting effect on oil prices, according to a recent chart in the Economist.

Third, the model of economic growth based on rising oil prices is no longer working for Russia. Even high oil prices will not restore the economic growth rates of 7 percent per year that Russia saw in the 2000s, and the Russian government knows this well. As the head of Russia’s Central Bank, Elvira Nabiullina, observed in April 2016: “Whatever the oil prices are, even $100 per barrel again, we won’t be able to grow by more than 1.5 percent to 2 percent without structural reforms and better investment climate.”

Fourth, the lifting of the international sanctions on Iran allows Russia to increase trade with Iran, counteracting some of the losses that Russian exporters will endure from competition on the Iranian market with Western suppliers—competition that is bound to intensify as Western governments lift their own national restrictions on their companies’ trade with Tehran. As one Russian government source observed in 2015 when assessing the benefits of the pending deal: “Russia can not only boost cooperation with Iran in the military-technical sphere, but also actively develop the trade and economic relations with it.” 

The Iran nuclear deal contains two valuable lessons for world leaders seeking to gauge how to pursue a constructive relationship with Russia on the basis of shared interest. First, the deal demonstrated that Russia puts its longer-term national vital interest above short-term economic gains. The deal also demonstrated that Russia is prepared to cooperate in pursuit of vital interests, even with those countries with which it has strained relations—as has been the case between Russia and the West since the beginning of the Ukraine crisis.

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