FOCUS: Western sanctions send Russia eastwards

• Date: 01 December 2017
• Published date: 01 December 2017
• DOI: http://doi.org/10.1111/oet.12540

FOCUS

Western sanctions send Russia eastwards

Sanctions impos ed on Russia by the US and EU over

Russia’s annexation of Crimea are prompting Russian

energy companies to sell more of their oil and gas to

countries east of Suez in preference to their traditional

marketsinEurope.ExportsofoiltoAsiahaverisen

signicantly since the rst round of Western sanctions

in 2014 [1]. In recent weeks, the Russians have been

establishing new ties with countries in the Middle East.

Most of the activity has concerned oil; but now Moscow

is planning to send more gas eastwards as well.

Mideast moves

RussiahasbeenactivelyinvolvedintheMiddleEast

since the 18th century. In the 1950s, the Soviet Union

soughttobecomecloselyalliedtotheregion’smain

military power, Egypt; but ties weakened in the 1970s

following the death of Moscow’s main ally, President

Gamal Abdel Nasser, and his replacement by Anwar

Sadat, who expelled Soviet “advisers” from Egypt in

1972 and sought better relations witht he US. At varying

times, the USSR had political ties with Iraq, Syria, and

South Yemen. In recent years, Moscow has looked for

alliances based more on economic than purely political

and military ties, with particul ar emphasis on energy.

A key part of this relatively new economic role is

oil, where Russia has found common cause with the

oil-exporting nations of the Middle East in its desire to

reverse the decline in global crude prices since 2012 and,

in 2016, it worked closely with Saudi Arabia to forge

an alliance between OPEC and 11 countries outside

the cartel to cut their combined production by about

1.8 mn bpd from the beginning of 2017 [2]. Russian

eorts in this sphere, together with Moscow’s support for

an extension of the deal to 31 March2018, have eased the

wayforRussiatodiscussaseriesofbilateralenergydeals

withanumberofOPEC’sMiddleEasternmembers,

including Saudi Arabia, Iraq, Iran, and Kuwait.

In October,Saudi Arabia’s King Salman visited Russia

to discuss trade and economic cooperation between the

two countries. Trade between them is restricted by the

fact that both cou ntries are large expor ters of oil. Any

major new deals aretherefore more likely to cover invest-

ment rather than trade. One such deal could be a petro-

chemical plant in the kingdom in which the Russian state

rm, Sibur, might participate. Gazprom Ne has indi-

cated its interestin some form of upstream collaboration.

At rst sight, there appears to be little scope for any

substantial energy trade between the two countries; but

two separate deals are under discussion: one involving

the export of Saudi crude, and the other, the possible

import by Saudi Arabia of Russian gas. It has been

proposed that some Russian-owned reneries run Saudi

crudeonaregularbasis.Futuregastrademightinvolve

the supply of Russian liqueed natural gas (LNG) to

SaudiArabiaforuseinpowergenerationandother

large scale industrial applications.Saudi Arabia is a large

producer of gas, with an output of just over 11 bn cfd,

all of which is consumed domestically; but potential

demand is outstripping supply, giving rise to the pro-

posal to supplythe kingdom with Russian LNG,possibly

following Saudi investment in a future LNG scheme in

Russia, although any such deal appears to be a long way

o at present.

Elsewhere in the Middle East, Russia has been dis-

cussing cooperation in upstream projects with Kuwait,

along with the possible supply of LNG to the emirate. It

is already involved in Ira q with production by Russian

oil companies both in Iraq, notably by Lukoil at West

Qurna, and in Kurdistan, where Gazprom Ne is the

operator of the Garmian eld-complex. Russia’s largest

oil company, Rosne, also has a crude oil term supply

deal with the Kurdistan Regional government (KRG),

although there is some uncertainty over the immediate

future of exports from Kurdish oilelds [3]. Rosne

also made an important foray into Middle Eastern gas

recently when it agreed to acquire a 30% shareholding

in Egypt’s Zohr gaseld, which is estimated to hold up

to 30 tcf of gas [4].

Russia is also keen to sign deals with Iran. Any

such deals, however, would complicate relations between

Moscow and Riyadh, given the growing Saudi hostil-

ity to Iran over the latter’s increasing political inuence

acrosstheMiddleEast.eSaudisareghtingaproxy

war against Iran in Yemen, where Iran has been sup-

porting Houthi rebel s opposed to the Saudi-backed gov-

ernment in the south of the country. e two countries

also nd themselves on opposite sides in the conict in

Syria,andRiyadhisalsoputtingpressureonthegov-

ernment in Lebanon to take ac tion against Iranian-based

Hizbullah g roups, which are represented in t he Lebanese

parliament.

A number of Russian rms, however, are keen

to become involved in Iran’s growing oil and gas

industries. Si x Russian companies are reported to be

interested in bidding for work covered by Iran’srecently

introduced Iran Petroleum Contracts, including the

75,000 bpd North Azadegan eld, along with South

Azadegan, where it has been proposed to double output

to 160,000 bpd. More controversially from a Saudi point

of view is Russia’s existing arrangement under which

its state-owned nuclear power company, Rosatom, is

involved in the construction of Iran’s second nuclear

power station, Bushehr-2, and in a future station at

© 2017 John Wiley& Sons Ltd