FRESH AIR

Empowering Russia’s allies is not the answer to the energy crisis

Aug 31, 2022 | Oved Lobel

Iranian oil tanker
Iranian oil tanker

The increase in energy prices in Europe due to Russia’s invasion of Ukraine has led some Western countries, including the US, to consider options for increasing supply from alternative sources. Unfortunately, among those sources are Iran and Venezuela. As a senior French official recently told reporters, “So there is a knot that needs to be untied if applicable… to get Iranian oil back on the market. We have Venezuelan oil that also needs to come back to the market.”

The US and several other countries continue to engage Iran in hitherto stalled negotiations to revive the nuclear deal, which would see more Iranian oil enter the market. Meanwhile, a high-ranking US delegation visited Venezuela in March to not only try to get multiple American hostages released, but also to potentially remove sanctions – both Iran and Venezuela were and are subject to the so-called “maximum pressure” policy – and allow Venezuela to export more oil. In June, the US greenlit renewed oil-for-debt shipments by Venezuela to Europe.

This may sound like intelligent realpolitik to those unfamiliar with the nature of the relationship, and in this case the energy relationship, between Russia, Iran and Venezuela; after all, the theory goes, releasing Iranian and Venezuelan oil could theoretically offset prices and help contain Russia. Unfortunately, the reality is more complicated, especially when one factors in the Chinese Communist Party (CCP). As I have written previously, the Russia-China-Iran axis is a reality, and there is no means of easing pressure on one or more countries in the entente without strengthening the axis overall.

Much of Venezuela’s energy industry has come under virtual Russian control over the decade, not only via Russia’s partnership with Cuba – which colonised Venezuela and siphoned off its oil in the late 1990s in partnership with Iran – but also through direct loans in exchange for oil and ownership interest in Venezuelan energy projects. Russia’s state-owned Rosneft and its boss, Igor Sechin, perhaps the second most powerful man in Russia, almost single-handedly kept Venezuelan President Nicolas Maduro’s regime afloat, while Sechin himself regularly meets with Maduro and had a close relationship with his predecessor, Hugo Chavez. Furthermore, as Reuters reported in 2017:

Rosneft has also positioned itself as a middleman in sales of Venezuelan oil to customers worldwide… Rosneft now resells about 225,000 barrels per day (bpd) of Venezuelan oil – about 13 percent of the nation’s total exports…Venezuela gives Rosneft most of that oil as payment for billions of dollars in cash loans that Maduro’s government has already spent.

By 2020, the Trump Administration’s Special Representative for Venezuela Elliott Abrams told reporters:

The Russian role in the economy, particularly the oil economy, is larger and larger. Russian companies are now handling more than two-thirds, more than 70 percent, of Venezuelan oil.  They market it, they finance it, they hide it, ship-to-ship transfers, changing the name of boats, turning off transponders. They sell gasoline and diluents.

Despite some sanctions-busting manoeuvres by Rosneft, there’s nothing to suggest the situation has changed. On the contrary, Russia brought Iran into the picture, a country that has not only shipped multiple tankers of gasoline to Venezuela, but has also been flying in “technicians, workers, and material to revive Venezuela’s oil industry” since at least April 2020. Iran and Venezuela also recently signed a 20-year cooperation agreement that will include their energy sectors, and Iran is building oil tankers for Venezuela. For obvious reasons, then, easing pressure on Venezuela only serves to empower Russia and Iran.

Russia and Iran, meanwhile, have always had a sanctions-evading relationship, one set to deepen if the nuclear deal is revived. As Matthew Karnitschnig recently wrote for Politico:

Russia plans to use Iran as a backdoor to circumvent international sanctions over Ukraine if Tehran’s nuclear accord with world powers comes back into force…The principal attraction of Iran is that it provides a backup route to sell sanctioned Russian crude oil.

Regardless of whether the reported US$40 billion energy deal between Russia and Iran actually results in anything concrete, the two countries will continue to cooperate as much as compete in the energy sphere. In May, for instance, a Russian-flagged and operated tanker carrying Iranian oil was seized by the US off Greece, although Iran then hijacked two Greek tankers in retaliation and Greece ultimately released the oil back to Iran.

That same month, the US Treasury Department sanctioned an Islamic Revolutionary Guard Corps – Qods Force (IRGC-QF) oil-smuggling network “backed by senior levels of the Russian Federation government and state-run economic organs” that “has acted as a critical element of Iran’s oil revenue generation.” This is not the first time a joint Russian-IRGC oil smuggling network has been sanctioned. The “ghost armada” that previously shipped primarily Iranian oil in defiance of sanctions has now reportedly shifted to transporting Russian oil.

Finally, there is the CCP, which has benefited enormously from Iranian, Russian and Venezuelan oil, in the process propping up all three, particularly Iran. In 2021, China more than doubled imports from Iran and Venezuela compared to 2020. The aforementioned Iranian tankers delivering gas and supplies for Venezuela’s industry reportedly loaded up with Venezuelan oil and then shipped it to China. It is the CCP that ensured “maximum pressure” was never maximum, purchasing fluctuating but always massive amounts of Iranian oil to keep the regime afloat and take advantage of low prices. With cheap Russian oil now in the mix, China has reportedly slightly reduced its intake of Iranian oil, but is still purchasing it.

The CCP was previously the Venezuelan regime’s biggest lender, loaning approximately US$60 billion from 2007-2016. Venezuela’s debt to China, around US$20 billion in 2016, is mostly paid back via oil shipments, and there are reports that the CCP is preparing to rejoin Russia and Iran in propping up the country.

China’s top oil producer CNPC reportedly began laying the groundwork to fully re-enter Venezuela in September 2021. CNPC was officially shipping Venezuelan oil until August 2019 and in November 2020, the China Aerospace Science and Industry Corp (CASIC) began transporting tens of millions of barrels of Venezuelan oil via tankers formerly owned by CNPC-listed vehicle PetroChina.

What seems like realpolitik is therefore counterproductive. There is simply no way to compartmentalise these countries; the energy networks are too intertwined. Easing pressure on any of them will result in empowering all of them.

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