Last month, on Nov. 24, The P5+1 Nations (the five permanent members of the United Nations Security Council, including The United States, Russia, China, France, and The United Kingdom, plus Germany) finally reached an interim nuclear agreement with the Islamic Republic of Iran. The agreement, which lessens about $7 billion in sanctions on Iran in return for a halt in uranium enrichment beyond 5 percent and granting of access to several nuclear facilities to the International Atomic Energy Agency (IAEA), is only a six month deal, however it establishes leeway and good faith for further, long term negotiations over the next several months.
Although the current sanction relief will take time to implement, and only amounts to about one month’s worth of Iran’s oil sales (before sanctions), it establishes a stepping stone for Iran to reemerge onto the global market for oil. Already, Iranian negotiators have begun conversation with the Organization of Petroleum Exporting Countries (OPEC), discussing how Iran will eventually rejoin the oil market en masse. However, over the past year, Iraq has annexed most of Iran’s market share of oil sales, and will most likely not return to the status quo voluntarily. Thus, when Iran does finally rejoin the market in force, it will most likely lower prices drastically. Already, simply with an announcement of the nuclear deal, oil prices dropped in markets around the world, only recovering temporarily from holiday travel in the United States. The downward trend in oil pricing has begun recently, as non-OPEC nations, such as the United States, have increased crude oil and natural gas production and exportation, and before the nuclear deal was forecast to continue for several years. Yet the Iranian development will accelerate this decrease in prices to levels not seen in years.
With a drop in oil prices globally, several economies dependent on oil sales will falter, but none worse than the Russian Federation’s. The Russian government depends on oil sale excise taxes for 45 percent of its annual revenue, and relies on the oil industry to spend huge amounts of money within Russia, bolstering other sectors of the economy that are related to oil extraction. Any drop in oil prices will cause the Russian economy to suffer. Currently, oil extraction in Russia is much more difficult, and thus more expensive, than extraction in many other places around the world. It costs about $70 dollars to produce a barrel of oil in Russia. Also, economic growth in the federation has already declined drastically. The International Monetary Fund has recently slashed economic growth forecasts for this year and next by half, from 2.4 to 1.2 percent growth. This decrease follows three years of decreasing growth, from over four percent in 2011 to current levels of just above one percent. If global oil prices are to drop even moderately, to just under $100 per barrel, oil production will no longer be profitable in Russia. If production falls off, the Russian budget will decline drastically, other industries will no longer have oil money to succeed, and the economy will almost certainly fall into recession or depression. With a receding economy and declining governmental budget added to the existing governmental corruption and infrastructural decay in Russia, the protest and opposition movements that have recently failed to gain headway would increasingly become more powerful, and upheaval will ensue.
Although the nuclear deal is a step in the right direction regarding international diplomacy, a resurgence of Iranian exportation on the global commodity scene could very possibly spell disaster for Russia.
Although the two nations are trading partners (especially for military sales) and share foreign policy goals (Syria, for example), the deal was formulated heavily in secret, in bilateral discussions between Iran and the United States, not Russia. In fact, even as multilateral discussions began in Geneva this fall, they began between all P5+1 nations with Iran, except Russia (whose negotiator was still en route). The possible implications of these moves are yet to be determined, but regardless, the impending global economic climate does not favor the Russian Federation, and Iran’s contribution will directly exasperate the economic woes of the new sick man of Europe.
Jake Sweely is a member of
the class of 2017.
