Corporate Debt Review

Anti-American Energy Alliance Strengthens

Turks & Chaos

The heads of state from Iran, Russia, and Turkey met in Teheran last week. And while most media attention was focused on the ostensible reason for the summit (Syria), something else was brewing on the sidelines.

Presidents Hassan Rouhani, Vladimir Putin, and Recep Tayyip Erdogan were providing a clear signal that militants opposed to Syrian strong man Bashar Hafez al-Assad were facing a full assault.

The target is the rebel-held region Idlib in northwestern Syria that holds over three million people, mostly displaced refugees. Russia and Iran have been indicating for some time that the enclave was subject to attack. The ostensible reason is to end meaningful opposition to Assad, an ally of both Moscow and Teheran. That, in turn, stands in direct contrast to the US policy interest of driving Assad from power.

In that respect, the US is losing. A few presidential tweets are of little consequence in the absence of a concerted American posture. There is little genuine likelihood that US troops or air strength will be applied. In consequence, strong words from Washington are falling on deaf ears.

On the other hand, Erdogan is looking at a different problem. He has already declared that Turkey cannot sustain another major influx of Syrian refugees and is on record as opposing civilian casualties. Both will certainly result from the impending attack on Idlib.

Erdogan’s recommendation that a ceasefire be called-allowing noncombatants to leave the region of Idlib- was categorically rejected by both Russia and Iran. In response, Erdogan has stated that Turkey will not sit idly by and allow the killing of innocent civilians.

The reality of the situation obliges Russia and Iran to make some allowances for what takes place on the Turkish border. But the assault now seems inevitable.

Banks For Nothing

Another development emerged in the background of the summit however, attesting to observations my contacts in the region have been making and I have discussed here in ECRG Intelligence. As the Syrian view solidifies, the three countries represented in Teheran late last week have been moving on another front. Here, Turkey has the opportunity to be at the center of a concerted attack on American energy decisions and has far more to gain.

The issue here surrounds renewal of US sanctions against Iranian crude oil exports, set to kick in November 4. Despite acknowledgements from all of the other foreign signatories to the Joint Comprehensive Plan of Action (JCPOA) that Iran had been abiding by the treaty’s tenets, Trump announced a unilateral US withdrawal from the accord in May.

JCPOA provides an Iranian agreement to defer nuclear activities that may be applied to weapons development in return for the phasing out of external sanctions. Aside from the US, the other signatories (the UK, France, Germany, Russia, China, and the EU) have vowed to keep the treaty functioning, although it will be difficult in the face of US pressure seeking to prevent Iran from having access to sources of global finance, while Iranian oil is prevented international sales.

Added is the US threat of secondary sanctions – penalizing foreign-based companies for working with Iran.

As I have noted in earlier commentaries, the November US moves will not have the European and United Nations backing provided under the earlier sanctions. Additionally, this time around Iranian oil exports will be receiving some significant support.

Which brings us back to the “other” matter being discussed on the sidelines of Friday’s heads-of-state meeting in Teheran.

Russia has already pledged to support Iranian oil exports once the US sanctions are re-imposed. Moscow would like to redirect those exports through pipelines controlled by its state company Transneft. That could be effected in two ways: (1) using Turkish pipelines; and/or (2) via contract swaps with Kazakh and Azerbaijani oil already through-putted across Russia.

Turkish banks and other financial third parties are eyed as likely intermediaries for pre-finance and credit requirements. In the previous sanction environment, Teheran had fabricated alternative financing arrangements using the penumbral area surrounding the Dubai stock exchange and banks in Doha.

This time around, Doha is still an option, and the banks there are stronger than they were in the earlier Iranian attempt to export in defiance of the US, the UN, and the EU. Qatar remains in support of Iran, but the United Arab Emirates is now part of the coalition led by Saudi Arabia, and including Egypt and Kuwait as well, that has placed a diplomatic embargo on Qatar.

That means Dubai and Abu Dhabi are not options for Teheran, while the Qatari capital of Doha is.

Also, in a decided break with past support for US sanctions, the EU, London, Paris, and Berlin have indicated they will support bilateral arrangements between their central banks and Bank Markazi (the Iranian central bank), thereby providing sovereign support for banking to maintain trade ties with Iran.

Rial Problems

The next phase of this opposition to US intentions is likely to be an accord involving a combination of the Russian-supported financing with initiatives emerging in Europe and Beijing. Regarding the latter, Chinese policy-makers are instituting favored treatment for Iranian oil exports at the same time they are putting American oil and LNG (liquefied natural gas) on tariff lists in response to the trade threat from the White House.

However, both China and Russia intend to use trade surpluses with Iran to pay in-kind for acquired Iranian crude export volumes. Teheran, on the other hand, needs to obtain as much revenue in cash as possible.

The Iranian domestic economy is cratering even before the US sanctions have been introduced. The street value of the local currency (the rial) has declined so badly over the past few weeks that the cost of goods and services has spiked as much as 150%. The ability to exchange for dollars is effectively suspended. Where it could be had over the weekend, with offers being made up on the fly, sources are telling me the exchange rate is around 150,000 rials to $1.

Rouhani has been forced to testify before an angry majlis (parliament) on the deteriorating economic situation. The president’s domestic political leverage against a religious conservative leadership is narrowing. What the opposition has in mind is still to be determined.

As I noted in the last ECRG Intelligence, my contacts are playing this carefully. There are no firm indications that the career individuals in the Ministry of Petroleum are being shown the door. But not hearing from many of them is disquieting.

Meanwhile, the oil wrinkles floated by Moscow and Beijing remain indirect ways of trading crude, and even more indirect ways of financing that trade. Teheran will take what it can get. Nonetheless, the market is anticipating a decline in Iranian exports.

And that will serve to buttress oil prices in the near-term.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.