The China-Russia oil and gas deals take on new resonance in a market which now includes a resurgent Iran after recent relaxations of its major oil and gas-related sanctions of recent years.
The China-Russia nexus is a compelling combination of a major global supplier meeting a major global consumer of oil and gas, with deals often built in defiance of major global sanctions policies. From a Middle East perspective, the re-emergence of Iran is a major factor, as further oil and gas supply has been enabled as a result of the sanctions imposed in recent years having been relaxed. Not least in a market where relatively low oil price has presented challenges for many producers, and where both China and Russia have been involved in deals of their own with Iran.
There is no doubt that sanctions policy enforcement on a global scale is hitting global industries such as oil and gas in a profound way. Take the two most potent weapons of current enforcement – removing access to US dollar-denominated transactions, (Russia – via Ukraine-related sanctions), and restricting oil and gas suppliers from participating in the market (Iran, prior to the relaxations allowed as part of the JCPOA/Iran Nuclear Deal). Bearing in mind that sanctions policy is only as effective as the ability to enforce it.
To every action there is an equal and opposite reaction – in sanctions policy terms, this is often the case – see Russia in response to the Ukraine sanctions. In reality, to paraphrase: to every sanctions-related action, you can certainly expect an opposite reaction – compliant, or, more tellingly, subversive. This could be greater compliance with existing issues, leading to gradual lifting of sanctions. Or a more subversive response in direct contravention of sanctions policy, where deliberate attempts are made to satisfy existing and future supply/demand needs by finding ways around it.
There is little point ignoring the major impact of Ukraine-related sanctions on Russia’s ability to function as an economy. With oil and gas revenues a major source of income, the double whammy of major US dollar restrictions and a relatively low oil price are certainly influencing forward planning. Tie-ups between China and Iran in recent years are a good indication of the unintended consequences of economic sanctions policy. As this has led to a shift in the strategic nature of oil and gas-related projects, as one of the world’s largest consumers (China) looks to source the best supply from sanctions designated and targeted countries such as Russia and Iran, looking to inter-governmentally brokered deals to find away around tough sanctions.
For Iran, the impact of severe sanctions policy has been considerable in the past. Its output was virtually halved, after former sanctions were imposed in 2011, from 1,400 thousand barrels a day in 2014 compared to its previous 2011 figure of more than 2,600 thousand barrels a day. With further sanctions relaxation afforded to Iran in the aftermath of the JCPOA, for China and Russia, the emergence of a sizeable potential oil and gas partner offers a powerful new dynamic, for differing reasons. Despite Russia’s contention of “unjustifiable Western sanctions”, there is no doubt that oil and gas-related ballistic missile and military deals between Russia and Iran pose great potential issues for major global sanctions enforcers, such as the US, with retaliation from this and global sanctions regimes a real possibility.
There is certainly cause to think that China’s deals with Iran, such as the trade deals agreed in January 2016 for $600bn, may ultimately be negative for Russia. Particularly if China shows a continued willingness to go to the Iranian oil and gas market for supply. It should be noted that China was importing crude oil from Iran even when Iran was under sanctions, and there is plenty to suggest that both China and Russia are trying to forge relationships with countries at the wrong end of the global sanctions regime. Inter-governmental deals may appear to be a more robust way around harsh sanctions regimes, but they are by no means infallible, and there may be repercussions for major illicit activities, such as the state sponsoring terrorist activities.
The impact of sanctions enforcement is having fascinating knock-on effects in the oil and gas space. With Russia’s economy so highly correlated to the oil price, and sustained low oil prices in recent times, it is almost certainly the weaker link in the China-Russia oil and gas nexus, with its current, sanctions-related requirement for US dollars – something which China, with its substantial holding of US Treasuries, is readily able to supply.
OPEC’s calls for a production freeze – and the response to this – have reflected the complexity at the heart of dealing with OPEC and non-OPEC members, such as Iran and Russia – particularly when those non-members have a lot of potential supply and are able to weather the storm of relatively low oil prices.
Recent oil price levels may not be excessively low by historical standards, but many oil and gas producing countries have embarked on major infrastructure programmes – particularly in the GCC countries – and are feeling the impact of sustained, lower prices. The presence of non-OPEC Russia and Iran into the mix looks set to bring further uncertainty in the Middle East and elsewhere. With major demand from China, which will not be averse to lower commodity pricing in more challenging markets as it struggles to sustain previously consistent high levels of growth.
It may well be the case that the strategic machinations of China and Russia are subordinate to the proper functioning of oil and gas markets. But there are very real issues surrounding the funding of oil and gas industry players, and these are particularly acute where oil prices face sustained, relative lows. Likewise, with so much sanctions-busting activity prior to, and subsequent to, major sanctions enforcement initiatives, there is a clear read-across between the prospect of further enforcement and violations in the face of major potential breaches.
As Iran and Russia have found, trying to trade without being able to supply the market due to sanctions, or being denied access to US dollar transactions, are major obstacles to the ability to perform. So the implications of any future deals between China, Russia and Iran will necessarily lead to significant knock-on effects in the Middle East and globally.
