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June 21, 2019 No.
8133

Russia-Iran Relations – Russian Media Outlet Vesti.ru: How Iran Was 'Defrauded' By Russia Of 3.2 Trillion Dollars

The Russian media outlet Vesti.ru[1] commented on how revenues from the wider Caspian basin have been distributed, after the five Caspian states, Russia, Kazakhstan, Turkmenistan, Iran, and Azerbaijan signed the Convention on the Legal Status of the Caspian Sea, on August 12, 2018 at the Fifth Caspian Summit in Aktau (Kazakhstan).[2]

Vesti.ru asserted that the Convention is based on one of the greatest frauds in the oil industry in recent years. The media outlet also highlighted how the Caspian Sea deal benefited Russia, by enabling Moscow to distribute the shares at its own discretion, while Iran "naively" believed that it had entered into a true bilateral partnership with Russia. This naivety cost Iran $3.2 trillion in energy revenues.

Below is Vesti.ru's article:[3]


Participants of the Fifth Caspian Summit. From left to right: President of Azerbaijan Ilham Aliev, President of Iran Hassan Rouhani, former President of Kazakhstan Nursultan Nazarbaev, President of Russia Vladimir Putin and President of Turkmenistan Gurbanguly Berdymukhammedov. (Kremlin.ru)

At Stake Are The Hydrocarbon Resources Of The Caspian Sea

"Last august, five Caspian states ─ Russia, Iran, Kazakhstan, Turkmenistan and Azerbaijan ─ signed the 'Convention on the Legal Status of the Caspian Sea'. It is based on one of the greatest frauds in the oil industry in recent years.

"At the meeting of the five Caspian States, 11-12 August [2018], Iran intended to receive compensation from Russia for Moscow's maneuvers in the previous August. The Islamic Republic believes that it was deprived of its historical rights to the resources of the Caspian Sea, as well as a revenue of $50 billion a year [and that it had been] left without the support of Russia against the re-imposition of US sanctions.

"The convention does not disclose the details of the shares distribution in the Caspian Sea and only casually mentions granting the area a 'special legal status'. However, a highly placed source in the oil and gas industry, who is working closely with Iran's Oil Ministry, said there was a secret second part of the deal which threatens to blow up many years' worth of unstable relations among the Caspian states.

"At stake are the immense hydrocarbon resources of the Caspian Sea, which were contested ever since the collapse of the Soviet Union in 1991. Eventually, three additional partners - Kazakhstan, Turkmenistan and Azerbaijan - joined the partnership between Russia and Iran. Iran and the USSR had signed an agreement, back in 1921, on the equal sharing of all 'fishing rights' in the Caspian region. In 1924, it was amended to include 'all the resources extracted'. This meant that all hydrocarbon resources would be equally distributed between Russia and Iran.

"And now at stake is the distribution of revenues from the wider Caspian basin, including the continental and offshore fields. According to the most conservative estimates, they contain proven and probable reserves amounting to 48 billion barrels of oil and of 292 trillion cubic feet of natural gas. About 41% of the total volume of Caspian oil and 36% of natural gas are located in offshore fields. An additional 35% of oil and 45% of the gas is located in the mainland fields, within 100 miles of the coast.

"It is believed that the remaining 12 billion barrels of oil and 56 billion tons of natural gas are located in large basins of the Caspian Sea, mainly in Azerbaijan, Kazakhstan, and Turkmenistan. This area accounts for an average of 17% of the total oil production of the five coastal states, with an average daily output of 2.5-2.9 million barrels.

"Revenues prior to the re-imposition of sanctions against Iran by the US, at the end of last year, usually were paid, in 95% of cases, in US dollars and euros, although there were also some [payments made in] local currencies.

"Against this backdrop, the legal definition of the Caspian sea as a 'sea' or a 'lake' has far reaching consequences in terms of the distribution of revenues deriving from it. If it is defined as a 'sea', then the coastal countries could apply the 'UN Convention on the Law of the Sea' (1982), under which each littoral state could receive a maritime territory of up to 12 nautical miles, an exclusive economic zone of 200 miles and the continental shelf. In practice, Turkmenistan and Azerbaijan will have exclusive access to offshore assets that will not be accessible to Iran.

"If it is designated as a 'lake', then in order to establish borders, the countries will have to refer to international law regulating interstate lakes. As a result, each country will receive 20% of the seabed and the surface of the Caspian Sea.

Russia Can Distribute The Shares At Its Own Discretion

"In the course of preparation for the signing of the 'Convention on the legal status of the Caspian sea' last August, Iran tasked its legal experts with challenging the established 20% share, which had been informally agreed upon by each coastal state. That was based on the assumption that Russia should have a 50% stake so it could provide the former Soviet States with decent shares [from its own 50%].

"Iran was confident that Russia would show flexibility, because, after the United States withdrew from the nuclear deal last May, Moscow made a deal with Iran. In fact, [this deal] gave [Russia] control over all of Iran’s oil and gas resources. In particular, the essence of the deal was that Russia will annually give Iran $50 billion for at least 5 years. That would cover Iran's $150 billion expenditure to bring its key oil and gas fields in line with Western standards, whereas $100 billion would go toward building other key sectors of its economy.

"In exchange, Iran, while giving preference to Russia in the oil and gas sector, was supposed to strengthen its military cooperation with Russia. [Consequently, Iran] was obliged to acquire the Russian S-400 missile defense system, which would allow Russia to increase the number of listening stations in Iran and double the number of senior officials of the Islamic Revolutionary Guard Corps.

"The catch for Iran was that according to the agreement terms there was no clause allowing Iran to impose fines against any Russian development firm in the event of slow progress in any area for the next 10 years. At the same time, during these 10 years, Russia acquired the right to dictate exactly how much oil was going to be produced from each field, as well as when, to whom and for how much it had to be sold. Russia had the opportunity to buy all the oil or gas produced from the fields that its companies allegedly developed, at 55-72% of its open market value for the next 10 years.

"The Iranians naively believed that they had entered into a real bilateral partnership with Russia. Russia does not think so. From Russia's point of view, having concluded this deal with Iran, thereby essentially turning it into a client state, [Russia] had no reason to meet its previous obligations. The situation for Iran has worsened, due to the fact that Russia had problems with US sanctions and it did not want to aggravate the situation by supporting Iran, the Iranian source stressed.

"Considering this and also the fact that Russia wanted to strengthen its relations with the former USSR states, Moscow became the main proponent of the idea to designate the Caspian as a 'sea', and not a 'lake'. Russia opened a canal from the Volga River to the Caspian Sea, so that it no longer corresponded to the legal definition of a 'lake'.

"'That essentially enabled Russia to distribute the shares at its own discretion. This was going to benefit its ally Kazakhstan, by giving it a 28.9% share, and a potential ally Azerbaijan with a 21% share. Under these conditions, the share of Russia increased to 21%, the share of Turkmenistan decreased to 17,225%, and the share of Iran decreased to 11,875%. This drop from 50% to 11% means that Iran will lose at least $3.2 trillion in energy revenues,' the Iranian source said."

[1] Vesti.ru is a joint project of state-owned Russian television channel Rossiya-1, state-owned Russian-language news channel Rossiya-24 and the Management of the Russian state-owned media company VGTRK. Vesti.ru was founded in February, 2002. It is one of three leading news websites of Runet, its audience reaching about 14 million unique visitors per month.