Russia’s New Gas Deals With Iran Are A Threat To The West

By Simon Watkins of Oilprice.com

Russian President, Vladimir Putin, arrived in Tehran last week for the second time since he ordered the invasion of Ukraine on 24 February. Just before his arrival, Russia’s state gas giant, Gazprom, signed a US$40 billion memorandum of understanding (MoU) with the National Iranian Oil Company (NIOC) that is part of a wide-ranging agenda of increased cooperation between Russia and Iran. It builds upon ideas discussed in January between Putin and Iranian President, Ebrahim Raisi, and the visit early in June of Russian Deputy Prime Minister, Alexander Novak, both analysed in full by OilPrice.com, and is crucial to the current global gas crisis.

Among other deals contained in the MoU, Gazprom has pledged its full assistance to the NIOC in the US$10 billion development of the Kish and North Pars gas fields with a view to their producing more than 10 million cubic metres of gas per day. The MoU also contains details of a US$15 billion project to increase pressure in the supergiant South Pars gas field on the maritime border between Iran and Qatar. Gazprom will additionally be involved in the completion of various liquefied natural gas (LNG) projects and the construction of gas export pipelines, according to Iranian news sources. This is designed by the Kremlin to give it even more control over future gas supplies coming out of Iran that might have found a home in southern Europe initially, before being transported north, to help alleviate the current gas supply crunch in major European countries. By also becoming more deeply involved in the huge South Pars gas field Russia has also positioned itself to disrupt LNG supplies coming out of Qatar and destined for Europe. The South Pars field is a 3,700 square kilometre area of the world’s largest gas reservoir that holds at least 1,800 trillion cubic feet of gas and at least 50 billion barrels of natural gas condensates, with the remaining 6,000 square kilometre North Field site belonging to Qatar. This takes on even broader geopolitical importance, given the ongoing interest of Russian and Iranian sponsor, China, in the perennially-controversial Phase 11 of the South Pars gas site.

Gazprom’s focus on expanding Iran’s LNG capabilities comes at exactly the time when dramatically increasing LNG supplies is vital for European states to compensate for shortfalls in gas supplies resulting from bans on Russian gas imports. It is plainly identifiable as a tried-and-tested core KGB strategy that relies on a combination of gradually increasing pressure on an enemy and then just waiting for as long as it takes for him to give up as often being an excellent way of achieving victory. The Kremlin knows that from the very start of talk about banning gas imports from Russia, Germany – the de facto leader of the European Union (EU) and its executive branch, the European Commission (EC) – did not want to cut itself off from Russian gas imports. Indeed, Germany’s response for some time after Russia’s invasion of Ukraine in February appeared much less concerned with halting oil and gas imports from Russia and much more concerned with working out how best to continue to pay for them so that Russia would not stop them due to lack of payment. This followed the 31 March decree signed by Putin that required EU buyers to pay in roubles for Russian gas via a new currency conversion mechanism or risk having supplies suspended. Then, in a directive circulated to all EU member states on 21 April, the EC said that: “It appears possible [to pay for Russian gas after the adoption of the new decree without being in conflict with EU law].” The EC added: “EU companies can ask their Russian counterparts to fulfil their contractual obligations in the same manner as before the adoption of the decree, i.e. by depositing the due amount in euros or dollars.” The EC also stated that existing EU sanctions against Russia do not prohibit engagement with Gazprom or Gazprombank, beyond the refinancing prohibitions relating to the bank. “Likewise, they do not prohibit opening an account with Gazprombank, [although] such engagement or account should not lead to the violation of other prohibitions.”

It should be remembered that Germany’s extreme unwillingness to play any part in a European ban on imports of Russian energy, particularly gas, occurred even before the reality hit home of precisely how such a ban would cripple its economic growth and impact voters during the winter months, which are now fast approaching. Inflation across European Union states is rising sharply – averaging 8.6 percent across the Union – whilst economic growth was just 0.6 percent quarter-on-quarter (q-o-q) in the first quarter of this year, with only one month of that period reflecting conditions after Russia invaded Ukraine. In Germany – for so long a global and EU economic powerhouse, driven for years by the effective devaluation of its mighty Deutschmark into the much less mighty euro – economic growth in Q1 was just 0.2 percent q-o-q, and in the previous quarter the country had seen a very rare contraction, of minus 0.3 percent q-o-q. Despite this anaemic growth rate, spiraling inflation prompted the European Central Bank (ECB) to raise interest rates across the Union for the first time in 11 years last week, thus choking off prospects for economic growth further. There have also been warnings in Germany, from local authorities, of the need for households and businesses to cut energy usage going into the winter, and the EU’s proposal that member countries cut gas use by 15 percent to prepare for possible supply cuts from Russia saw fierce opposition last week from at least 12 of the 27 member states. On the other side of the coin, Russia is earning more from energy exports now than it was before it invaded Ukraine, the rouble is at an eight-year high, and Moscow’s exports of gas account for only two percent per cent of Russia’s GDP. In short, Russia can afford to wait but the EU cannot. 

By creating a counterpoint to Qatari LNG supplies, then, and by also creating the very real prospect of disrupting them at source or in transit, as Russia or one of its proxies could easily do, the Kremlin is looking to turn the screw a little further. A happy adjunct of Russia’s plan to finally unleash the massive LNG potential of Iran – after all, Iran has the second largest gas reserves in the world, after Russia, and plans have been in place for it to exploit this for years – is that it also energises the debate about the desirability of bringing Iran back into the fold of world diplomacy by resuscitating a version of the Joint Comprehensive Plan of Action (JCPOA or, colloquially, ‘the nuclear deal’). Germany (the ‘+1’ in the ‘P5+1’ group of nations who agreed the original JCPOA, along with Russia and China, and France, the UK, and the U.S.) was never in favour of annulling the deal, and nor was France, with Russia and China also, of course, vehemently against the idea of cancelling it. As analysed in depth in my new book on the global oil markets, by seeking to drive another wedge between the de facto leader of the EU – Germany – and the U.S., Russia’s real goal is to add further pressure in its 70-year attempts to destroy the North Atlantic Treaty Organisation (NATO), which Putin personally holds responsible for collapse in 1991 of the USSR. Putin stated in 2005 that: “The collapse of the Soviet Union was the biggest geopolitical catastrophe of the century. For the Russian people, it became a real drama. Tens of millions of our citizens and countrymen found themselves outside Russian territory. The epidemic of disintegration also spread to Russia itself.’ It is this idea, above all else, that prompted him to order Russia to invade Ukraine in February. 

For Putin, then, as also analysed in depth in my new book on the global oil markets, Russia’s oil and gas resources have always been a key mechanism through which Russia can: firstly, keep the energy-needy Former Soviet Union (FSU) states now in the EU firmly in line; secondly, ensure that the principal EU states (especially Germany) do not seek to interfere too much in any of Russia’s dealings with the remaining non-EU countries; thirdly, leverage, whenever and wherever possible existing disagreements between the EU and the U.S. to critically undermine the core NATO doctrine of ‘collective defence’ against attack; and fourthly, use the prospect of given or withheld energy supplies to project its power into ‘chaotic states’ – Russia, will, where possible and when it is in its interests, create the chaos first and then project its own power into that destabilised and unfocused state.