MOSCOW — Russian Energy Minister Alexander Novak announced last week that he and Iran's oil minister have signed a memo of understanding and are hammering out a five-year, multi-billion-dollar trade deal between Tehran and Moscow

The agreement includes expansion of cooperation and business in construction, electrical infrastructure, as well as the delivery of cars and equipment and goods for everyday use, the Russian Ministry of Energy's spokesperson said.

The agency said that the specific contracts would be officially negotiated between the two countries in September. 

Russian government sources say President Vladimir Putin and Iranian President Hassan Rouhani discussed an economic partnership during their first meeting last September in Bishkek, Kyrgyzstan. The two presidents then ironed out the details during a meeting in China last May. 

Above all, the agreement is about oil, though it also proposes growing the economic partnership in a number of other areas. The first draft of the document suggested that Russia would buy 25 million tons of Iranian oil per year, about one-fourth of total Iranian production. The final version lowered that sum to a maximum of three million tons per year, which would be purchased by government-controlled traders created specifically for this purpose.

The arrangement is an effort to minimize the effects of possible sanctions by the West. Iran will sell oil to Russian companies and will use the money to buy Russian goods. Sources say Iran has also agreed to sell the oil at a small discount from market prices. 

The most important obstacle to an oil partnership between Iran and Russia is delivery. In light of the oil embargo on Iran, the two countries must first make sure it's possible and, if so, determine whether it is economically viable. At one time, delivery to Belarus or Ukraine, where Russian companies already have refineries, was considered a possibility, but that idea has since been abandoned because of the obvious political conflict. 

In addition to crude oil, Iran would also provide Russia with cement, carpets and agricultural products, says Levan Dzhagaryan, Russia's ambassador in Tehran. Meanwhile, Iran is interested in purchasing Russian machinery, metals, trucks and grains. 

A file photo of Iran's Abadan refinery — Wikimedia Commons

According to Mehdi Sanai, the Iranian ambassador in Moscow, part of the proceeds from oil sales to Russia would be used to hire Russian companies to build a second nuclear energy plant. Iran also hopes that Russian companies could help electrify Iran's railroads and reconstruct electrical stations and infrastructure. Iran is also considering buying electrical energy from Russia. In addition, the ambassador says Iran would welcome a joint project to establish a small oil refinery on Iranian territory. 

Washington’s response

The United States has tried to prevent this deal, threatening both Russian and Iranian companies with sanctions, say Russian government sources. Washington insists that a stronger economic relationship between Moscow and Tehran would undermine its sanctions against Iran and would violate the temporary agreement on Iran's nuclear program (Under which U.S. sanctions against Iran have been weakened but not removed.)

Russian officials believe President Barack Obama's administration is worried that income from trade with Russia would weaken Iran's interest in a long-term compromise. U.S. embassy officials were not available for comment. 

Experts say the agreement has been signed now primarily because of Russia's increasingly deteriorating relationship with the West.

"Moscow invested a lot of effort in the diplomatic resolution of Iran's nuclear issue, and it was willing to refrain from doing anything that would have caused a negative reaction from the U.S.," says Andrei Baklitski, an expert at the Russian Center for Policy Studies (PIR). 

"Now Russia is less willing to listen to U.S. recommendations, and Iran — whose importance for the West has increased immensely, both in relation to the situation in Iraq and in the search for an alternative to Russian fossil fuels — has more room to maneuver," he continues. "In addition, in the past Moscow had to weigh a potential deal with Iran against the possibility of sanctions from the U.S. for violating Iran's oil embargo. But now that there are sanctions anyway, that factor is less important.” 

Moscow’s eagerness to work with Iran is also explained by the fight for the Iranian marketplace. Since the end of last year, when the process for ending sanctions against Iran began, business delegations from China and a whole list of European countries have appeared in Tehran.

Reuters and The Wall Street Journal reported recently that German businesses were considering moving away from the Russian market to focus on Iran instead, a reaction to the situation in Ukraine. The German Chamber of Commerce predicts that once the sanctions are relaxed further, the annual export market from Germany to Iran will be worth 10 billion euros.

As one German business executive puts it, “As soon as the sanctions against Iran are lifted, the market with explode.”