The approval of the Iranian Petroleum Contract is the culmination of a summer of economic diplomacy between Moscow and Tehran.
A long summer
On September 17th, Iran's parliament endorsed a new Petroleum Contract put forward by the energy ministry and the cabinet. The coming weeks will reveal which oil majors are willing to risk investment in ventures with the National Iranian Oil Company (NIOC).
Vagit Alekperov, CEO of Russian oil major Lukoil (OTCPK:LUKOY), has expressed serious determination since the signing of the nuclear deal to return to the Anaran oil field - frozen by economic sanctions - and develop other fields. Two days after the contract was endorsed, Alekperov flew to Tehran to meet with Iranian oil minister Bijan Namdar Zangeneh, who announced to the press that Lukoil was the first foreign oil firm to sign a memorandum of understanding. The symbolism of the announcement comes after a long summer of economic diplomacy between Moscow and Tehran.
A wake-up call
Trade between Russia and Iran bottomed out last year at $1.24 billion. Iran signaled at the St. Petersburg Economic Forum in June that economic ties fall far short of the strength of political ties. June and July saw lots of chatter and signaling.
An agreement was reached for direct flights from the Caspian port of Astrakhan to Tehran around the same time. A commercial attaché was sent to Moscow to facilitate business relations, and Russia extended two loans worth about $2.5 billion to fund Russian exports, but a promised $5 billion loan has not materialized. Iranian Minister of Communications and Information Technology Mahmoud Vaezi met with Energy Minister Alexander Novak in late July to reiterate the need for expanding economic cooperation, and smaller business forums continued as usual. These are all well and good, but energy is where the money lies.
A meeting in Baku
Putin capitalized on Azerbaijan's increasing dissonance with the West at a trilateral conference in Baku early this August between Russia, Azerbaijan, and Iran to strengthen economic ties. The collapse in oil prices and decline in international energy investment has made cooperation in energy projects economically and politically attractive for all three.
Energy cooperation - pipelines, joint ventures, and oil swaps - dovetails with the proposed North-South Transport Corridor (NSTC), meant to open up trade possibilities through the Indian Ocean. Oil & gas projects fund all three governments which are the largest investors in infrastructure in their respective economies. Lukoil is ready to open the gates for other Russian firms and incentivize further work on the NSTC, strengthening the potential for trade in other sectors.
Lukoil has an unquantifiable advantage over competing Russian producers in the form of its CEO, Vagit Alekperov. Alekperov is Azeri and speaks Azeri. Nearly one-fifth of Iran is ethnically Azeri, the current Supreme Leader Khamenei is ethnically Azeri, and Azeris make up a large part of the business community in Tehran. The incalculable benefits of ethnic and linguistic ties to business counterparts have catapulted Lukoil into the position of being a bridge of sorts for other Russian firms. Events since the summit in Baku bear this out.
A day after the Baku summit, Iranian Minister Vaezi said that there were good opportunities for the company to sign deals with Iranian firms. Three days later, Russian ambassador to Iran Levan Dzhagaryan was quoted saying that Lukoil planned to develop two fields in the southwestern province of Khuzestan. When Alekperov came to Tehran on September 19th, he also met with NIOC's managing director Ali Kardor and announced that appraisal studies for the Ab Teymour and Mansouri oil fields would be finished soon.
After a year of negotiating, cajoling, and jumping at every chance to open up new projects, Lukoil is leading Russia's economic diplomacy in Iran. The firm is looking for better returns on investment as it competes for greater market share and influence in Russia. Iran is the most promising low-cost market it has available.
If Lukoil builds it, will others come?
The notable absence of Rosneft (OTCPK:RNFTF) in Iran is telling. Gazprom (OTCPK:OGZPY) is pursuing memoranda of understanding with the National Iranian Gas Company (NIGC) but is cash-strapped, burdened by the combined costs and complications of projects in the Far East and Europe, and has not seemed to get anywhere in the run-up to the endorsement of the Petroleum Contract. However, the Krasnye Barrikady Shipyard concluded a $1 billion deal to build 5 offshore rigs for an Iranian firm. Gazprom is one of Krasnye Barrikady's main clients, and other firms selling equipment are finding openings.
This second tier of Russian firms tied to the energy sector is key to prospective Russian-Iranian trade ties. Iran's energy and transport infrastructure is underdeveloped and of poor quality. Russia's struggling construction sector is in the hunt for project-hungry markets willing to provide financing. Russia and Iran signed a memorandum of understanding to expand banking ties in early September, and there are reports that they would like to create a joint bank. Assuming these have impact, Lukoil's entrance into the oil sector will cement business and financial ties that smaller firms providing relevant services will exploit.
There remain serious limits to the countries' mutual trade. Russia's agricultural sector is driving exports, predominantly wheat. Iran has steadily reduced its wheat imports in recent years. Without government spending, Russia's infrastructure is inadequate to export competitive quantities of foodstuffs or other goods as other exporters use Iran's well-developed Persian Gulf ports.
There will be a considerable wait-and-see period as companies the world over gauge the risk level of Iran's business climate. But Lukoil's push into the Iranian market is cause to believe that Russian-Iranian economic relations may be set to change. Russian oil and construction firms have to get creative to cope with sanctions and the recession. Iran is a golden opportunity that the Kremlin is trying to seize.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.