Since the American president withdrew his country from the Iranian nuclear deal, oil prices have risen to their highest in the past four years.
The fall of oil prices since 2014 had hit hard the USA’s eternal foe’s economy. When the US and the EU imposed sanctions on Russia, oil prices plummeted and lost more than half their value. The Russian rouble followed a similar curve as the Russian economy heavily relies on oil exports revenues.
To counterbalance such economic downturns, Russia created the National Reserve Fund. This fund was topped up with oil revenues and the Russian Ministry of Finance was able to use it to meet the country’s needs when oil revenues would fall under the budget break-even price.
Amounting to $90 billion before sanctions hit Russia, the National Reserve Fund was eventually emptied in 2017 after several years of low oil prices.
All Russia needed was rising oil prices. Ironically, it is the American president who pulled the trigger.
What’s the deal now?
President Donald Trump’s decision to pull out of the Iranian nuclear deal which he deemed “the worst deal ever” resulted in an almost instant rise of oil prices. Washington will also re-impose sanctions on Tehran’s oil exports in November. This deadline is set to allow companies and banks to terminate existing deals with their Iranian counterparts.
Even though the actual full scale impact of this decision on the global oil supply as well as on oil prices is still difficult to measure, speculation on the markets gave another boost to oil prices.
“[Oil] prices shot higher as traders digested the impact on Iran’s oil exports” which currently meet 3 percent of global demand, underlined the Financial Time.
While some industry insiders predict Iran’s oil exports could shrink by over 40 percent, others argue that the lack of international support could dilute the effect of sanctions.
China, France, Germany, Russia and the United Kingdom are the other parties involved in the deal signed in 2015 and still support it.
The impact of sanctions will also depend on whether international buyers actually comply with the sanctions. The world’s largest energy consumer, China, has already ignored Washington’s sanctions in the past and multiplied deals with sanctioned Russia. The Asian dragon will most likely ignore US sanctions against Iran and continue its business as usual.
If the OPEC nation found it much harder to sell its oil to other countries, China would probably become a top choice for long term deliveries. A pipeline between the two countries crossing Pakistan has been under discussion since 2015. Negotiations could be accelerated under the Belt and Road Initiative, and even more if Iran had to increase its reliance on the Chinese demand.
Iranian oil exports could also be rerouted to countries which “have a higher risk tolerance for taking [oil under sanctions],” emphasized Marwan Younes, chief investment officer at a New York-based commodities hedge fund.
What’s in for Washington?
Withdrawing from an effectively working deal with Iran, long term EU allies, China and Russia has significantly undermined Washington’s diplomacy, according to BBC defence and diplomatic correspondent Jonathan Marcus. However, something else might be in the pipeline for Washington.
If the sanctions severely shrunk the OPEC nation’s oil exports, the US could benefit from the situation filling the gaps on the global market.
According to the Energy Information Administration, American crude oil production will count an additional 2 million barrels per day by the end of next year. This extra supply could replace the gap left by Iran on the global market.
Another key energy player and long term US ally could take advantage of the renewed sanctions on Iran’s oil exports. Tehran’s eternal foe, Saudi Arabia, is holding back over 2 million barrels per day under its current OPEC quota.
Together, Washington and Riyad’s reserves could easily make up for any potential oil shortage on the global market.
What’s in for Moscow?
Moscow was already closely cooperating with the OPEC cartel to cut production so as to keep oil prices rising.
Washington’s latest decision to exit the Iran deal and re-impose “the highest sanctions” on Iran’s oil exports will most likely drive oil prices higher than what was already expected.
Rising oil prices are a boon for Moscow which has been impatiently waiting for the moment when it could refill its national reserves.
More oil revenues will strengthen the Russian economy and help it face any future US and EU sanctions.
President Donald Trump’s lastest move offers ideal ammunition to Russian president Vladimir Putin who started his fourth term with his highest ever score just the day before.
Two days after his fourth inauguration and only one day after Donald Trump’s announcement to leave the Iran deal, the Russian president had an ideal opportunity to show the world the recovering Russian might.
Victory day is one of the most celebrated dates on the Russian calendar. Unlike in Europe, in Russia the end of WWII is celebrated with the highest pride and happiness by all Russians.
This year the mood is even brighter as stably recovering oil prices since summer 2017 have helped Russia pass through probably the worst effects of Western sanctions and get back on its feet.
The traditional military parade held on Red Square, two steps from the Kremlin -centre and symbol of the country’s political power, was the occasion for the Russian president to demonstrate to the world his country’s intact might.
As tensions with the West rose, in particular with NATO’s expansion to Eastern Europe and the conflict in Ukraine, Vladimir Putin has strived to modernize the Russian army. Oil revenues allowed him to rebuild the world’s second most powerful and feared army, so much that the Cold War rhetoric has come back in full bloom.
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.
