Iran Gives Russia Its Best Chance to Hit Back Against Western Sanctions

At the end of April, once the first round of Western sanctions against Russia had taken effect, Vladimir Putin warned the U.S. and Europe that he would not let the assault on Russia go unpunished. “The Russian government has already proposed some retaliatory steps,” the Russian President said, and he would “have to think about” hitting back if the West continued to sanction Russia over the crisis in Ukraine. He wasn’t bluffing. This week Russia began lashing out against Western farmers and businesses, as well as Western diplomatic efforts in Iran, as part of a counter-offensive that most observers did not see coming, at least not all at once.

Perhaps the most surprising (and self-defeating) part of the retaliation was the decree Putin signed on Wednesday banning the import of food from countries that have sanctioned Russia. The blacklist, which the government published the following day, included many of the items that Russia’s middle class has come to take for granted—quality meat, fish, fruits, vegetables and dairy products from the U.S., Europe, Canada, Australia and Norway—whose businesses make billions of dollars a year on the Russian market for imported food. In a further snub, whose announcement on Thursday was apparently timed to coincide with the food ban, Russia defied the U.S. by granting a three-year residence permit to the American whistleblower Edward Snowden, dimming U.S. hopes of putting Snowden on trial for the disclosure of U.S. intelligence secrets.

But the more telling piece of revenge, and in many ways the more problematic for the West, came in the form of a Russian oil deal with Iran. Signed at a ceremony in Moscow on August 5, the agreement could allow Iran to sell its crude to Russia and use the proceeds to buy Russian oil drilling equipment and other technology, potentially giving the Islamic Republic a way around the West’s crippling sanctions. Years of Western diplomacy, which has sought to halt Iran’s nuclear program by isolating the Iranian economy, could thus be undermined by one of the countries that has, until now, been instrumental to that effort.

Since 2006, Russia has been one of the six countries—along with the U.S., the U.K., China, France and Germany—involved in the so-called P5+1 process to prevent Iran from enriching enough uranium to develop a nuclear bomb. A deal to achieve that outcome seemed within reach this summer as Iran held another round of talks with the P5+1 in Vienna. But as the July 20 deadline for a deal drew near, the U.S. insisted on a limit for Iran’s uranium enrichment that the regime in Tehran found unacceptable. The talks then stalled, and a new deadline for their conclusion was set for November.

The delay in those negotiations helped turn Iran’s gaze toward Moscow, says a senior official in the Iranian government, who spoke to TIME on condition of anonymity. Iran’s Supreme Leader, Ayatollah Ali Khamenei, had grown frustrated over what he saw as Western stalling tactics within the P5+1 process, so he ordered Iran’s government to move ahead with the Russian oil-for-goods contract, says the source. “Though [the Ayatollah] does not often interfere in the policy process, the deal with Russia he oversaw personally, because the West was dragging out the talks in Vienna and putting forward unfeasible demands on the nuclear program.”

By that time, the Russian oil-for-goods proposal had been on the table for months, says Radzhab Safarov, head of the Russian Center for the Study of Contemporary Iran, who advises the government on Iran policy. The proposal was part of Russia’s efforts to shore up alliances with the West’s rivals, particularly with China, Venezuela, North Korea, Cuba and most recently Iran, in reaction to Western sanctions. “Our proposal was laying there like a dead weight until July 20 when the situation began to change and open up unique opportunities for Russia,” Safarov says.

Iran’s earlier hesitation over the deal was understandable; Russia had gone back on its agreements with the Iranians before. Under pressure from the U.S. and Europe in 2010, Russia backed out of a contract to sell Iran advanced surface-to-air missile systems, known as the S-300. That betrayal is well remembered in Iran, whose leaders also had practical grounds to be wary of the oil-for-goods deal. Apart from making Iran sell its oil below the market price, it would increase Russia’s weight in the global energy market, an outcome that the Iranians would prefer to avoid, says Hassan Beheshtipour, an Tehran-based foreign policy expert. “Russia is pursuing a monopolistic policy, and wants to have an exclusive role as the energy hub of the world,” he tells TIME. “So on the energy market Russia and Iran are not just allies but competitors.”

The West’s sanctions have now helped them overcome their differences. Though the oil-for-goods deal is still tentative—announced as a far-reaching “memorandum of understanding” rather than a detailed agreement—it will already strengthen Iran’s hand as it goes into the next round of talks with the P5+1. “It gives Iran momentum and confidence to adopt a harder position at the talks,” said Cliff Kupchan, an analyst at the Eurasia Group consultancy in New York City. “Hard liners now have a more plausible argument that Iran can survive economically if talks fail.”

That prospect has already raised “some very serious concerns” in Washington, said David S. Cohen, the U.S. Treasury Department’s Under Secretary for Terrorism and Financial Intelligence. “I think it would have an impact on the P5+1 process,” Cohen said in a call with reporters on Thursday. “I can’t predict what impact it would have, but it would have an impact. We have been very clear with the Russians at the highest level that they ought not move forward with such a deal.”

The U.S. resistance to the deal has always come with a warning: Any Russian oil firm that deals with Iran would be violating the U.S. embargo on Iranian energy exports, and could therefore become a target for U.S. sanctions as well. But this tactic carries diminishing returns. By isolating a country as big as Russia, the West lays the ground for an alliance of countries opposed to the U.S. This club of states could learn to overcome their isolation from the West through mutual support and trade, and their combined influence over the global economy and energy supplies could come back to haunt the West eventually.

Further sanctions would then be the West’s main weapon in combating such an alliance. But as Russia’s food ban shows, the Kremlin is prepared to pre-empt those measures by isolating itself—and its citizens—in part to weaken the impact of future Western sanctions. Putin’s potential for retaliation against the West is also far from exhausted. He could, for instance, revive the deal to sell S-300 missiles to Iran, thus giving the Islamic Republic an even stronger hand in its nuclear negotiations. As a last resort in halting Iran’s nuclear problem, Israel has long threatened air strikes against Iranian enrichment facilities. But the danger of launching such an attack would go up dramatically if Iran had S-300 missiles capable of shooting down Israeli planes.

Still, Russia’s budding alliance with Iran does have a major weak spot, and that is the P5+1 process itself. Though its chances off success looked dim after the July deadline had to be extended, the negotiators still hold out hope of reaching a deal by November, one that would lift sanctions against Iran in exchange for limits on its nuclear program. That would ease Iran’s isolation from global energy markets and, by extension, diminish the Iranian interest in an oil-for-goods deal with Russia. “The Iranian elites have a vital interest not simply in cooperating with China, Russia or Turkey under some convoluted schemes, but to deal with the West directly and legally, in ways that are mutually beneficial,” says Roustam Semeev, a Geneva-based energy trader and market analyst.

While the Russian oil-for-goods agreement would give Iran a backchannel for sidestepping Western sanctions, it would not unlock the full potential of Iran’s vast energy resources. For that the Iranians would need Western sanctions to be lifted through the P5+1 process, allowing Iran to sell its oil and gas directly to Europe and beyond. That would be a major blow to Russia’s dominance of the European energy market. Mikhail Korchemkin, the director of East European Gas Analysis, a U.S.-based energy consultancy, estimates that Iran could take Russia’s place as the main European natural gas supplier in the course of a decade if it were allowed to begin investing in pipelines and exporting freely to the West.

Given the current trend in Western sanctions, Russia could be on its way to replacing Iran as the outcast of the global energy market. That is a prospect that Putin will do just about anything to avoid, including through the sabotage of Western diplomatic efforts in Iran. So while the ban on food imports will hurt Western exporters, the Iranian nuclear negotiations will likely remain the main theater for Putin’s retaliation. For now, at least, he seems to have the Ayatollah on his side.

— Additional reporting by Simon Shuster / Berlin.