Eastern Entente: Houthi Campaign
Following developments in the Houthi campaign, the growing cooperation between China, Russia, and Iran is becoming a major concern for the Red Sea region. This emerging ‘Axis’ increases uncertainty for stakeholders in commodity trade, as the stability of the Suez Canal, Strait of Hormuz, and Gulf of Oman are threatened. Iran’s power projection in the region, characterised by the use of proxy groups in an ‘Axis’ of resistance, has paralysed global trade flows. Although China and Russia's involvement is presented as a means to stabilise the region and foster trade, rising scepticism clouds maritime traffic and worsen future prospects (as quantitatively analysed in a recent article by the Global Commodities Watch). The geopolitical and economic implications are profound and pose risks to all parties involved, raising questions about the motives behind this new ‘Axis’ formation and what it means for the disruptive ‘Axis of Resistance’.
Axis of Resistance - In Retrospect
Since the Iranian Revolution of 1979, the Tehran regime’s foreign policy has been characterised by its desire to propagate its brand of Shi’a Islam across the Middle East. To this end, it has long developed and fostered relationships with sympathetic proxy groups throughout the region. This has allowed it to project power in locations that might otherwise be beyond its reach while exercising some degree of “plausible deniability." In January 2022, this prompted the former Israeli Prime Minister, Naftali Bennett, to brand Iran “an octopus” of terror whose tentacles spread across the Middle East.
The country’s so-called “Axis of Resistance'' has expanded since 1979, its first major franchise being Hezbollah, which was founded in 1982 to counter Israel’s invasion of Lebanon that year. Its most recent recruit has been the Houthis. This group was established in northern Yemen in the 1980s to defend the rights of the country’s Shi’a Zaidi minority. What was initially a politico-religious organisation then evolved into an armed group that fought the government for greater freedoms. It was able to exploit the chaos of the Arab Spring to capture the national capital, Sana’a, in the autumn of 2014, and the group now controls around 80% of Yemen’s population.
Exactly when the Houthis became a part of the “Axis of Resistance” is something of a moot point, but the general consensus among the group’s observers is that it started receiving Iranian military assistance around 2009, with this almost certainly contributing to its capture of the Yemeni capital, Sana’a, in 2014. Since the HAMAS attack against Israel on October 7, 2023, it has rapidly emerged as a key Iranian franchise whose focus has been attacking shipping in the southern Red Sea. At the time of writing, an excess of 40 vessels had been targeted, while repeated US-led strikes against Houthi military infrastructure on the Yemeni coast appeared to have had limited success in degrading the group’s intent or capability.
March 2024 saw a proliferation in the number and efficacy of attacks, with the first three fatalities reported on the sixth of the month as the Barbados-flagged bulk carrier True Confidence was struck near the coast of Yemen. Around three weeks later, on March 26th, four ships were attacked with six drones or missiles in a single 72-hour period. Separately, on March 17th, what is believed to have been a Houthi cruise missile breached southern Israel’s air defences, coming down somewhere north of Eilat, albeit harmlessly.
Since starting their campaign against mainly international commercial shipping in the waters of the Red Sea and Gulf of Aden in November 2023, the Houthis have become one of the mostaggressive Iranian proxy groups in the Middle East. This and their apparently strengthened resolve in the face of US and UK strikes have substantially raised their profile internationally and won them plentifulplauditsfrom their supporters across the region. The perception that they are standing up to the US, Israel, and their Western cohorts has been instrumental in developing their motto“God is great, death to the U.S., death to Israel, curse the Jews, and victory for Islam” into a mission statement.
Map of Houthi Attacks
Source: BBC
Iran-Houthi Mutualism
In terms of regional geopolitics, the mutual benefits to Iran and the Houthis of their cooperation are far-reaching. For their part, the Iranians can use the Houthis to project power west into the Red Sea and Gulf of Aden, pushing back against the influence of Saudi Arabia and other Sunni states. Although not part of the Abrahamic Accords of 2020, Riyadh has been showing signs of a willingness to harmonise diplomatic relations with Israel, even since the events following October 7, 2023. This is a complete anathema to Tehran, for which the Palestinian cause is central to its historic antagonism with Tel Aviv. The fact that Saudi Arabia was instrumental in setting up the coalition of nine countries that intervened against the Houthis in Yemen from 2015 onwards only strengthens Tehran’s desire to confront the country’s influence regionally.
A secondary benefit of the Houthis’ Red Sea campaign is that it helps to maintain Tehran’s maritime supply lines to some of its franchise groups further north in Lebanon, Gaza, and Syria. Their importance to Iran’s proxy operations was illustrated in March 2014 when the Israel Defence Forces (IDF) conducted “Operation Discovery," intercepting a cargo ship bound for Port Sudan on the Red Sea’s western shores carrying a large number of M-302 long-range rockets. Originating in Syria, they were reckoned to have been destined for HAMAS in Gaza following a circuitous route that included Iran and Iraq and which would have culminated in a land journey from Port Sudan north through Egypt to the Levant.
Iran began to increase its military presence in the Red Sea in February 2011 and has since established a near-permanent presence there and in the Gulf of Aden, to the south, with both surface vessels and submarines. However, this footprint is relatively weak compared to that of its presence in the Persian Gulf, to the east, and it would be no match for the Western vessels that have been operating against the Houthis in the Red Sea since late 2023. The latter’s campaign in these waters can, therefore, only reinforce Iran’s presence thereabouts.
A lesser-known reason for Iran’s desire to maintain influence around the Red Sea is a small archipelago of four islands strategically located on the eastern approaches to the Gulf of Aden from the Indian Ocean and Arabian Sea. The largest of the four islands is called Socotra and is considered by some to have been the location of the Garden of Eden. With a surface area of a little over 1,400 square miles, it has, in recent years, found itself more and more embroiled in the struggle for hegemony between Iran and its Sunni opponents in the region. In this sense, it and its neighbours could be seen to have an equivalence to some of the small islands and atolls of the South China Sea that are now finding themselves increasingly on the frontlines of Beijing’s regional expansionism.
While officially Yemeni, Socotra has long enjoyed close ties with the United Arab Emirates (UAE), with approximately 30% of the island’s population residing in the latter. Following a series of very damaging extreme weather events in 2015 and 2018, the UAE strengthened its hold on Socotra by providing much-needed aid, with military units arriving entirely unannounced in April 2018. Vocal opposition from the Saudi-allied Yemeni government led to Riyadh deploying its own forces to the island in the same year, but these were forced to withdraw in 2020 when the UAE-allied Southern Transition Council (STC) took full control of the island. Since then, Socotra has been considered to be a de facto UAE protectorate, extending the latter’s own influence south into the Gulf of Aden.
Shortly after came the signing of the Abrahamic Accords, which normalised relations between Israel and several other regional countries, including the UAE. Enhanced cooperation with the UAE gave Tel Aviv a unique opportunity to expand its own influence in the region through military cooperation with its new ally. In the summer of 2022, it was reported that some inhabitants of the small island of Abd al-Kuri, 130 km west of Socotra, had been forced from their homes to make way for what has been described as a joint UAE-Israeli “spy base." For Iran, this means that Israel now has a presence at a strategic point on the strategically vital approaches to the Red Sea from the Indian Ocean.
Perhaps a greater irritant for both the Houthis and Iran is the presence of UAE forces on the small island of Perim. This sits just 3 km from the Yemeni coast in the eastern portion of the Bab al-Mandab Strait, giving it obvious strategic importance. The UAE took the island from Houthi forces in 2015 and started to construct an airbase there almost immediately. Although there is no known Israeli presence there, Perim is now a major thorn in the side of Iran’s own regional ambitions. In the regional tussle for supremacy, this is yet another very pragmatic reason for the Houthi-Iran relationship.
Perim Airbase
Source: The Guardian
Since February 2022, much has been made of the extent to which Ukraine has become a weapons incubator for both sides in the conflict there, not least with regard to innovative drone and AI technology. Given the range of weaponry now apparently at the disposal of the Houthis in the Red Sea and Gulf of Aden, it may be that that campaign is serving a similar purpose for a Tehran keen to test recent additions to its armoury. Indeed, the Houthis’ use of a range of modern weapons, including drones, Unmanned Underwater Vehicles, and cruise missiles, since November 2023 continues to be reported on a regular basis.
In return for prosecuting its campaign in the Red Sea, the latter received substantial material military support from Tehran, allowing them to raise their standing even more. The aforementioned attack, which killed three seafarers aboard the True Confidence, was the first effective strike against a ship using an Anti-Ship ballistic Missile (ASBM) in the history of naval warfare. First and foremost, this will have been regarded as a major coup for the Iranian military assets mentoring the Houthis in Yemen. Additionally, it has given the latter’s global standing a further boost since an attack of this magnitude would be more normally associated with the much more sophisticated standing military of a larger country.
A simplistic analysis of the Houthi-Iranian relationship could stop at this point. However, recent events in the Middle East and further afield show that it is a relatively small coupling in a much larger, global marriage of convenience. A clue to this appeared in media reporting in late January 2024, when The Voice of America reported that Korean Hangul characters had been found on the remains of at least one missile fired by the Houthis. This led to the conclusion that the Yemeni group has received North Korean equipment via Iran.
North Korean missile supposedly used by the Houthis
Source: VOA
Russian Involvement
In late March 2024, Russia and China signed a historic pact with the Houthi in which the nations obtained assurance of safe passage through the Red Sea and Gulf of Aden in return for ‘political support’ to the Shia militant group. Despite the assurance, safety for Russian and Chinese vessels is not guaranteed. In late January, explosions from missiles were recorded just one nautical mile from a Russian vessel shipping oil, while on the 23rd of April, four missiles were launched in the proximity of the Chinese-owned oil tanker Huang Lu. Evidently, increased regional tensions incur an extra security risk for Russian tankers, regardless of the will of the Houthis to keep said tankers safe.
The Kremlin is trying to walk a thin line between provoking and destabilising the West while simultaneously trying to avoid, literally and figuratively, capsizing regional Russian maritime activity. Its seemingly contradictory two-pronged approach aims to secure vital shipping routes while fostering an anti-Western bond with regional actors. Russia is seen upholding its anti-West rhetoric, which serves as a cornerstone for bonding with regional actors and pushing forth Russian economic interests, while silently attempting to facilitate regional de-escalation led by Washington. Despite being a heavy user of their veto power in the UNSC, Russia abstained from voting on Resolution 2722, which demands the Houthis immediately stop attacks on merchant and commercial vessels in the Red Sea.
On January 11th, Washington put forth UN Resolution 2722 to the UNSC, which sought to justify attacks on Houthi infrastructure as a push-back for the group’s recent activities in the Red Sea. During the voting procedure of the resolution, Russia chose to abstain, even though Moscow often frequents vetoes as a tactic to show support for Kremlin-friendly states in Africa and the Middle East. The resolution subsequently passed, and the US and UK commenced their first strikes on Yemen the following day. These reveal Russia’s interests in securing enough stability to continue shipping its estimated 3 million barrels of oil a day to India, while aligning with overarching geopolitical alignments.
Russia’s interest in stabilising regional conflicts may lie in the threats to its weapon supply chains. As the war in Ukraine drags on, Tehran’s importance as a weapon supplier increases the Kremlin’s collaboration efforts. Putin continues to foster and protect regional connections by actively protesting Western regional presence, attempting to balance the current crisis with crucial ties to middle-eastern nations.
Trade Route Diversion
Since the onset of the crisis in the strait, Russia has utilised the opportunity to bolster anti-Western and pro-Russian sentiments. For one, Russia has flagged various Russian transport initiatives. On January 29th, Russia’s Deputy Prime Minister, Alexey Overchuk, noted that Russia’s “main focus is on the development of the North-South international transportation corridor," which is a 7200-km multi-modal transport network offering an alternative and shorter trade route between Northern Europe and South Asia.
International North-South Trade Corridor
A key part of the trade route involves an imagined rail network spanning from Russia to Iran. Though positioned as a universally beneficial transport option for both Europe and Asia, it seems Moscow and Tehran would benefit the most. The two highly sanctioned states, whose connection has recently deepened due to their shared economic isolation from the global economy, could position themselves as lynchpins of an effective transport network.
Unlike Tehran, which still has control over the vital Strait of Hormuz choke point, Russia’s political might in terms of energy transport networks is quickly dwindling after the Baltic states’ complete exit from the BRELL energy system and the West’s resolve to decrease energy dependence. The North-South corridor thereby holds value as a catalyst of global energy transport and trade.
However, this vision is thwarted by financial crises, with workon the railroad from Rasht to Astara in Iran suffering setbacks. Iran does not have the means to pour into the project and has already obtained a 500 million euro loan (about half of the total cost of construction) from Azerbaijan in FDI. In May 2023, it became known that the Kremlin would fund the project themselves by issuing a 1.3 billion euro loan to Tehran, despite Iran’s ballooning debt to Russia. The same month, Marat Khusnullin, Deputy Prime Minister, announced that Russia is expecting to invest approximately $3.5 billion in the North-South corridor by 2030. This is likely a major underestimation of the costs needed to complete the project.
With Iran’s growing debt and Russia’s war-born financial strain, further trade route developments are sure to be delayed. Seeing as the railroad project between Russia, Azerbaijan, and Iran has been in existence since 2005 with no concrete end in sight, the North-South Corridor, despite Russia’s active marketing campaign in light of the troubles in the Red Sea, is unlikely to become a viable transport option in the near future.
The Northern Sea Route (NSR), which Putin has similarly promoted since the start of the Houthi attacks, is likely to suffer a similar fate. The NSR’s realisation as a major global route is hindered by the fact that the Arctic Circle’s harsh climate causes the route to be icebound for about half of the year. Furthermore, in light of the recent war in Ukraine, the NSR is off-limits to even being considered a viable transportation route for large swaths of the West due to sanctions against Putin’s regime.
Russia: Long-Term Strategy
With Russia’s closest regional naval presence being Tartus in Syria, Russia is also interested in establishing naval bases closer to the Red Sea. Russia’s primary interest is to establish a port in Sudan. High-level bilateral negotiations have been actively taking place between Khartoum and Moscow, with an official deal being announced in late 2020. The construction of a naval base would increase Russia’s influence over Africa, facilitating power projection in the Indian Ocean. Nonetheless, the ongoing Sudanese civil war seems to have stalled negotiations.
The region is of such strategic interest to Russia that Moscow has recently pushed forth another alternative for bolstering its presence in the Red Sea: a naval base in Eritrea. During a state visit to Eritrea in 2023, Russian Foreign Minister Sergey Lavrov underscored the potential that the Massawa port holds. The same year, a Memorandum of Understanding was signed between the city of Massawa and the Russian Black Sea naval base Sevastopol, in which the two countries pledged to foster closer ties in the future.
A New Axis
China and Russia have recently struck a deal with the Houthis to ensure ship safety, as reported by a Bloomberg article. Under the agreement, ships from China and Russia are permitted to sail through the Red Sea and the Suez Canal without fear of attack. In return, both countries have agreed to offer some form of “political support” to the Houthis. Although the exact nature of this support remains unclear, one potential manifestation could involve backing the Yemeni militant group in international institutions such as the United Nations Security Council. In January 2024, a resolution condemning attacks carried out by the Houthi rebels off the coast of Yemen was passed, with China and Russia among the four countries that abstained.
Despite instances of misfiring by Chinese ships after the deal, the alignment between these countries has been viewed as the emergence of an “axis of evil 2.0." Coined by former U.S. President George W. Bush at the start of the war on terror in 2002, the term “axis of evil” originally referred to Iran, Iraq, and North Korea, which were accused of sponsoring terrorism by U.S. politicians. Indeed, China and Iran have maintained a robust economic and diplomatic relationship. China is a significant buyer of Iranian oil, purchasing around 90 percent of Iran’s oil output, totalling 1.2 million barrels a day since the beginning of 2023, as the U.S. continues to enforce Iranian oil sanctions.
Chinese Dominance of Iranian Crude Oil Exports
Source: Seeking Alpha
However, it may be far-fetched to consider China, Russia, Iran, and North Korea as a united force akin to the Communist bloc against the West during the Cold War. After all, there are significant tensions within these relationships. For example, Beijing has not fully aligned with Moscow regarding the invasion of Ukraine. Additionally, there are power imbalances within these relationships, as Iran relies on China far more than China relies on Iran.
Despite the thinness of this idea of an "axis," it remains concerning that these powerful countries (three of which are nuclear-armed) are aligning against the democratic world. Considering the volume of trade passing through the Suez Canal and the impossibility for the U.S. and company’s Operation Prosperity Guardian to protect every ship in the region, the deal struck between China, Russia, and Iran may be a significant factor that could shift the current global economic balance towards the side of the "Eastern Axis.”
Similarly, China’s recent activities against the Philippines in the South China Sea could be viewed as an attempt to undermine the Philippines’ economy, which heavily relies on its seaports. This could force the Philippines to capitulate or incur significant costs for the U.S. should it decide to provide more assistance to further enhance the Philippines’ defence capabilities.
China: Long-Term Strategy
In recent years, China has increased its ties with countries outside the ‘Western sphere’. Apart from being present in the Gulf of Oman and destining a myriad of vessels to secure the region, it has made strides in developing long-term partnerships with Russia and Iran. Chinese collaboration with Russia is advertised as having “no limits,”, and its 25-Year Comprehensive Cooperation Agreement with Iran further cements its political and economic involvement with both nations.
The security and economic aspects of China’s long-term plans are the most relevant to commodity trade, as violent conflicts and geopolitical tensions are the prime hindrances to trade flows through the region. Nonetheless, the cooperation of these nations does not bode well with the West and could negatively impact trade regardless of improved security.
China’s circumvention of the financial sanctions placed on Iran mocks the international community’s concerted effort to dissuade Tehran’s human rights violations, nuclear activities, and involvement in the Russia-Ukraine war. Its “teapot” strategy, which allowed China to purchase90% of total Iranian oil exports, relies on the use of dark fleet tankers and small refineries to avoid detection and evade the financial sanctions placed on Iranian exports.
Increased its bilateral trade flows with Russia also point to increased cooperation, with $88 billion worth of energy commodities being imported by China in 2022, with imports of natural gas increasing by 50% and crude oil by 10%, reaching 80 million metric tonnes. In 2023, bilateral trade reached $240 billion, proving both countries hold cooperation as a pillar of their economic strategy.
Chinese-Iranian Oil Trade
Source: Nikkei Asia
The West has increased efforts to dissuade cooperation with Russia, as seen with the creation of the secondary sanction authority. These sanctions cut off financial institutions that transact with Russia’s military complex from the U.S. financial system and have successfully led three of the largest Chinese banks to cease transactions with sanctioned companies. Despite the success of certain measures and sanctions, cooperation between both states remains, and their involvement in the Middle East will ensure collaborative efforts for the foreseeable future.
Conclusion
The evident development of collaborative endeavours among the ‘Eastern Axis’ countries is enough to engender strife and uncertainty in trade in the Red Sea. It is becoming increasingly evident that uncertainty will still roam the seas regardless of whether the Houthi conflict is tamed, preventing maritime trade in the Red Sea’s key routes from reaching their potential. The reliance of regional security on both violent attacks and political alignments, such as the involvement of the Eastern Axis in the region, highlights how deeply supply-chain stability is intertwined with geopolitical relations, establishing Iran as a determinant of the Red Sea’s future commodity trade prosperity.
2024 Elections Report: Risks & Opportunities for Commodities Sector
In the ever-evolving landscape of global commodities, the year 2024 stands as a pivotal juncture marked by transformative elections across diverse regions. As nations prepare to cast their ballots, the outcomes hold the power to shape policies and strategies that will significantly influence energy, trade relations, and resource management worldwide.
This report encapsulates the intricate intersections between political shifts and their repercussions on the commodities sector. London Politica’s Global Commodities Watch has made a selection of the most significant countries, and analysed the potential impact of elections based on election programmes, past policies, and scenario planning.
The 2024 BRICS Expansion: Risks & Opportunities
With its 15th summit on August 2023 BRICS gained increased attention. The main focus of the summit was on the potential enlargement of BRICS by admitting new members. During the summit, it was announced that 6 countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates - had been invited to join the group, with their official entry into the bloc set to take place in January 2024.
The expansion of BRICS has raised questions regarding the implications for international politics and economics. And while most analysts seem to agree that it means something significant, it remains unclear what exactly. This report, therefore, analyses the potential risks and opportunities of the expansion, with a particular focus on the commodities sector. Our analysis addresses questions regarding the interests of BRICS+ countries, the challenges and opportunities for the bloc itself, and the wider commodities sector.
Potential scenarios for Israel - Palestine conflict and effect on commodities
On October 7, Israel was attacked by Hamas. The event, which was classified as Israel’s 9/11 by Ian Bremmer, led to at least 1,300 fatalities and 210 abductions. Israel has launched a strong military response, and as of the 20th day since the original attack the situation remains unresolved. Both sides are experiencing ongoing hostilities and Netanyahu, Israel’s president, stated that the country is preparing for a ground invasion of the Gaza Strip, which will result in further civilian casualties.
Various groups are threatening to involve themselves in the conflict. Hezbollah, for instance, has issued warnings indicating the possibility of launching a significant military operation from Lebanon to northern Israel if the latter enters the Gaza Strip. It also has been discussing what a ‘real victory’ would look like with its alliance partners Hamas and Islamic Jihad. Israeli forces, on the other hand, bombed Syria shortly after air raids sounded in the Golan Heights, a disputed territory that has been annexed by Israel since 1967. This offensive targeted the Aleppo airport and sources claimed its goal was to stop potential Iranian attacks being launched from Syria. Additionally, Iran has faced accusations of funding the attack, which raises concerns about its involvement.
Consequences for commodities
The ongoing conflict has emerged as a significant geopolitical factor on global oil markets. However, there have not been immediate impacts on physical flows yet. During the weekend of 7th to 9th October there was an increase in Brent crude prices of about 4% , which later fell 0.2% after Hamas released two American hostages. Prices fell even further after Israel appeared to hold off on its widely expected ground invasion of Gaza. These dynamics show that the risk premium in the oil price takes into account the severity of the conflict and the likelihood for escalation.
Yet, Israel’s limited oil production capacity means that, if the conflict remains localised, it is unlikely to have a significant impact on global oil supply. Traditional energy commodities (and their prices), that can be viewed as a substitute to oil, have not been impacted so far either. Natural gas, for example, is both a substitute to oil and also largely produced by Israel with its southern offshore Tamar field. Despite European gas prices reaching their highest price since February on Friday 13th, markets do not appear to be pricing in the possibility of an escalation extending beyond Israel and Gaza. If that was the case, even higher prices would be recorded.
The most significant impacts on oil markets are more likely to occur if other nations actively engage in the conflict. After the explosion of a hospital in Gaza on 17th of October, Iran called for an oil embargo against Israel in retaliation for the deadly attacks. The Gulf Cooperation Council (GCC) countries have expressed their unwillingness to support Iran, stating that “oil cannot be used as a weapon”, which helped markets to not consider any embargos for the moment. Moreover, the impact of this action would be limited, since Israel could source its oil from a wide array of other countries.
Another point worth mentioning, it is estimated that 98% of Israel’s imports and exports are made by sea, making the national ports a crucial part of the country’s infrastructure. These ports are currently under a significant risk of potential damage, which has heightened shipping insurance premiums and affected the costs of importing into and exporting from Israel.
Possible scenarios and implications
1. If the conflict remains confined to the Israel - Palestine region
While there could be short-term volatility in oil prices during the most intense attacks and as potential escalation threats rise, neither of these regions are significant oil producers. Therefore, recent rises are not expected to have a lasting impact on oil prices, which should soon stabilise between $93 and $100 per barrel. However, it is important to mention that this price range was already predicted before the current war between Israel and Palestine took place.
2. War involving Hezbollah
Some recent attacks have taken place between Israel and Hezbollah, however, if the latter joins the conflict, the impact on oil markets could be more substantial. This could lead to potential global economic consequences due to risk-off sentiment in the financial markets, leading to oil prices rising by $8 per barrel, approximately. Another group that can act on the conflict are the Houthis, an Iran-backed group in Yemen which allegedly launched missiles against Israel on October 19th, that were intercepted by the United States. While Yemen primarily exports cereal commodities, its involvement can further escalate geopolitical tension and instability in the region.
3. Iran enters the conflict formally
The most significant impact on the oil market would arise if Iran officially joins the conflict, potentially causing a $64 per barrel increase to a price of $152.38 for Brent crude. Iran controls the Strait of Hormuz, a passage crucial for connecting the Persian Gulf with the Indian Ocean. Thus, if the Strait is blocked, important countries for oil production such as Iraq, the United Arab Emirates, and Kuwait would be landlocked. Consequently, Iran would see its gas revenues rise due to higher prices. This situation also creates challenges for gas importing countries, especially for the EU’s energy security that has already seen a cut of supply from Russia.
As a consequence of Iran’s increased involvement shipping expenses would likely increase, also associated with war-risk premiums on shipping insurance. Those refer to additional costs that are also included in shipping prices to cover for vessels and cargo that are operating in areas of geopolitical risk. In the Ukrainian and Russian conflict for example, the war risk premium was firstly around 1% and has further escalated to 1.25%. While the overall value may not be significant, it can still present an additional challenge in the trading of energy related commodities.
Moreover, Iran is still exporting a significant amount through loopholes. If Iran decides to formally join the conflict, there probably would be stricter enforcement of sanctions by the United States which would tighten global oil supplies. Higher oil prices would also cause external geopolitical impacts. In the US, elevated oil prices could be a factor against the election of Joe Biden, who has invested significant political capital on the Middle East’s diplomacy with an attempt to normalise Saudi Arabia and Israel relations. For Russia, on the other hand, higher oil prices are vital to increase the country’s revenue and continue its war against Ukraine.
The most extreme scenario would entail Israel conducting a strike on Iran’s nuclear facilities, potentially causing oil prices to surge well beyond $150 per barrel. Therefore, heightened efforts to remove U.S. sanctions on Venezuelan oil would help relieve the strain on global oil prices. Increased access to Latin America's oil resources could act as a shock absorber against price increases and supply disruptions. In the US, more specifically, it would offer a more favourable outlook to Joe Biden's administration.
Decoding TotalEnergies’s massive $27 billion dollar deal with Iraq
On the 10th of July 2023, French major oil company TotalEnergies and the Iraqi government finally signed a much delayed $27 billion dollar energy deal, directed towards increasing the country’s oil production capacities by developing four oil, gas, and renewable projects. The signing of the deal, named the Gas Growth Integrated Project, took much longer than expected owing to several key reasons. First, a number of Shi'ite lawmakers had also cried foul over the deal, pointing to the lack of transparency and absence of bids from other oil companies. Another significant setback in the initial days of negotiation arose from TotalEnergies rejecting the now abolished Iraq's National Oil Company (INOC) as its partner in the project, mainly due to its lack of full legal status from the new Iraqi government. Iraq’s state owned Basrah Oil (BOC) will now be a partner in the project. The main hindrance to the project stemmed from sharing of revenues, which was finally resolved when Iraq agreed to take a stake in the project of 30 percent, in place of initial demand of 40 percent, giving majority stake to the French company.
Despite initial hiccups, the deal is seen as a welcome move both overseas and at home, one that will optimistically put Iraq on the path towards achieving energy sufficiency and helping to improve the business climate and attract further foreign investment. Iraq holds the world’s fifth largest proven oil reserves at 145 billion barrels, representing 8.4 percent of global reserves. Iraq’s potential as an oil producing nation has been held back due to years of sectarian violence, lack of transparency, governance, and poor environmental laws, leading to the withdrawal of many oil majors from the country. Exxon Mobil, Shell and BP have all scaled back their operations in recent years.
The launch of the Gas Growth Integrated Project is a watershed moment in Iraq’s history. The deal will see TotalEnergies intensify its efforts to increase gas production in the Ratawi field in the oil rich Basra region. This will help reduce Iraq’s reliance on gas imports from neighbouring Iran. For a long period of time, Iraq has relied on its neighbour for electricity and gas imports. Iran uses this as a leverage to exert influence on Iraqi politics. Iran, in the past and in the present, funds the training of the Popular Mobilization Forces, a paramilitary group trained to flush out the remaining US troops and anti-Iranian Kurdish elements that have operated in the northern region of the country. All of Iran’s initiatives are aimed towards keeping Iraqi and the American governments on its heels and exerting its influence in the region where the US has sought, from time to time to forge alliances and partnerships in order to nullify Iranian clout. Iran is a significant partner for Iraq in terms of trade and development prospects, with the latest breakthrough being in the railways sector. An MOU had been signed in March 2023, outlining executive procedures for establishing a rail connection between the two countries. Iran is making significant inroads into Iraq's economic landscape, creating an opportunity to invalidate America’s significant investments in the region. Iran’s economically driven shrewd tactics, such as these, will likely help to negate the US influence in the region as a whole and compel the US to rethink on its sanctions against Iran given that the commercial interests are at stake.
It appears that the US has also sought help from its Middle Eastern allies to hold back Iran’s ascendancy into Iraqi soil. Keeping its political differences aside, Saudi Arabia’s ACWA has agreed to develop The 1 GW solar power plant project in collaboration with TotalEnergies. The project seems to be part of the Iraqi government’s long term plan of solving electricity supply woes through installation of renewable sources. A portion of the revenue generated from the Gas Growth Integrated Project will be used by the French company to fund three additional projects: 1 GW solar power plant; a 600 million cubic feet a day gas processing facility, and a seawater project to boost Iraq’s southern oil production.
From the outside, the establishment of the solar power plant is a welcome move towards advancing Iraq on the path of self-sufficiency through sustainable modes of energy production. At the same time, it also appears to be a well crafted move by the Iraqi leadership to deviate attention from the environmental hazards that oil majors in Iraq have already created over a substantial period of time. Prior western oil majors have caused significant water shortages and pollution during its operations. The same environmentally catastrophic outcomes are likely to happen when TotalEnergies drives its efforts to increase production in the Ratawi oil field.
Past records also demonstrate that plants used by oil companies including BP and ExxonMobil accounted for 25% of the daily water consumption in a region of almost 5 million people. This leaves significantly less water for agriculture and other activities upon which the local rural communities are dependent upon. The harmful affluents emitted as a result of gas production has already affected the health of the residents in Iraq’s Basra region, with cancer rates having significantly grown in the region. While the deal has been projected to herald a new dawn in Iraq’s history, what remains to be seen is the possibility of the deal causing more harm than good to the Iraqi people in the long run.
Iran to begin revamp of Venezuela’s largest refinery complex
Iran’s 100-day revamp of Venezuela’s largest refinery complex signals a commitment by Venezuela to end reliance on U.S. refinery technology whilst strengthening ties with Iran. Additionally, it provides Maduro with the opportunity to boost his domestic popularity by bringing the nation out of economic despair.
The €460 million contract will see Petroleos de Venezuela (PDVSA) and the National Iranian Oil Refining and Distribution Company (NIORDIC) working together to revamp the Paraguana refinery complex on the coast of western Venezuela in an effort to restore its crude distillation capacity and boost fuel output. Also included in the revamp is a project aimed at restoring the complex’s power supply. Technicians from the Islamic Republic are considering adding upgraded crude from the Petromangas project, a PDVSA joint venture with Russian state-owned company Roszarubezhneft. NIORDIC will outsource work and hire contractors to repair five of the nine distillation units, which do the primary refining of crude oil. Iran will be procuring the parts, overseeing the installation and handling the inspection before PDVSA oversees the refinery’s operations. In May, a €110 million contract was signed to repair Venezuela’s smallest refinery, El Palito, situated in the centre of the country, a project which is currently underway.
Despite having the largest crude reserves in the world, Venezuela has struggled producing oil products like gasoline due to a lack of investment, refinery outages, and U.S. sanctions. Since 2020, long lines at gasoline stations have been common. The relationship between Iran and Venezuela began under President Chavez when Iran established a plant to produce Iranian bicycles in Venezuela. Iran and Venezuela’s alliance has strengthened in recent years in order to overcome U.S. sanctions. Both nations are seen by the U.S. as sponsors of terrorism and human rights violators. NIORDIC has been sanctioned by the U.S. due to its use of oil to support the Islamic Revolutionary Guard Corps. Prior to the 2017 sanctions, Venezuela’s oil output was 1.9 million bpd before falling to 350,000 bpd in the second half of 2020.
Iran has provided Venezuela with crude and condensate as well as parts and feedstock for its ageing 1.3 million barrel per day (b/d) oil refining network. Additionally, Iran has also sent multiple fuel tankers to Venezuela to help them cope with the lack of gasoline; Maduro has used gold to pay for Tehran’s services. The Islamic Republic has been of fundamental importance in helping Venezuela boost its severely weakened petrochemical industry and wider economy. Relations between the countries extend beyond commodities as there has been an increase in military cooperation over the years. Qassem Soleimani, late commander of the Islamic Revolutionary Guard Corps, visited Caracas in 2019 to help with the establishment of revolutionary militias and the country’s military industrialisation.
The revamp of Venezuela’s largest refinery complex will see the use of Chinese and Iranian parts and equipment in refineries originally built with US technology. Difficulties may arise with the integration of old and new components. The distillation plants must be online for the refinery to work but Venezuela will have to consider the need for chemical products that the plants require, like catalysts and antifoaming agents, which are manufactured in the United States, in order to carry out modifications and replacement of parts in the distillation units. In the last year, technicians from Iran have inspected the refineries several times in preparation for the 400 Iranian workers who are set to work alongside 1,000-1,500 local Venezuelan staff and contractors. PDVSA sent home hundreds of Venezuelan workers to make way for Iranian technicians during the El Palito revamp which triggered protests, indicating that discontent among Venezuelan workers will be a likely source of contention again.
International actors view Iran and Venezuela’s alliance as a hindrance to Western values and many see the Latin American nation as simply a base to develop operations to access international markets due to its privileged geographical location. Maduro wants Venezuela to have a relationship with the United States whilst also becoming a partner of the Russians and Iranians, in the process learning how to avoid U.S. sanctions. This seems unlikely, especially given Western hostility towards Russia amidst the invasion of Ukraine and due to the firm relationship Venezuela has built up with Iran over the years. The most likely scenario is that the U.S. will push back against warmer relations with Venezuela due to its growing relationship with Western adversaries Iran and Russia. Since 2017, Venezuela has faced over 350 sanctions from the U.S. and it is probable that more will follow thanks to growing authoritarianism and a lack of political concessions.
Domestically, if challenges are mitigated, a successful revamp will yield the results that Venezuela is in dire need of. Following the mid-June restart of the 150,000 b/d crude upgrader operated by PDVSA and Roszarubezhneft which turns extra heavy oil into exportable grades, Venezuelan exports have surpassed 700,000 b/d. Exports have primarily gone to China with Iran receiving 131,000 b/d of crude and fuel oil last month and Cuba receiving 75,000 b/d last month. Consequently, Chevron’s exports fell slightly to 134,000 b/d compared to 150,000 b/d in May. If the Paraguana refinery complex is able to start producing fuels again, this will build upon the success of the Petromangas project. Venezuela will be able to boost its fuel output and export diesel and gasoline at higher levels. Exports will go to the United States as part of a 6-month deal with Chevron, and to allies China, Iran, and Cuba. This will have ramifications for the international market as it will increase the fuel supply, much to the benefit of Western countries that have faced shortages in the fallout of Russia’s invasion of Ukraine. The refinery’s return will bring additional wealth to the Latin American nation, but if lavish spending at the hands of Maduro continues, and minimal efforts are made to alleviate the effects of sanctions, domestic discontent will grow, and the President will see his popularity plunge.
Lithium in Iran: Iranian Gold is Black & White
Iran's Ministry of Industry, Mine, and Trade has declared that a significant discovery of 8.5 million tonnes of lithium has been made in Qahavand, Hamadan. The discovery puts Iran in possession of the largest lithium reserve outside of South America. Furthermore, the Ministry has indicated that there could be even more significant amounts of lithium to be discovered in Hamadan in the future. These developments position Iran to potentially overtake Australia as the top supplier of lithium in the world, although it will be heavily reliant on Iran's diplomatic trajectory.
Background
Lithium is widely referred to as "white gold", similar to petroleum being “black gold”, and is a critical element in the shift towards green energy. It serves as a fundamental component in lithium-ion batteries, the primary energy storage system in electric vehicles (EVs). While lithium-ion batteries have been employed in portable electronic devices for several years, their use in EVs is growing rapidly. By 2030, it is anticipated that 95 per-cent of global lithium demand will be for battery production. However, the price of lithium has been declining for several months, and the recent discovery of Iran's reserve is expected to continue this trend. The extent of the impact on global markets will depend on Iran's ability to export and their production capacity.
Iran's economy is facing significant challenges due to a combination of domestic and international factors. The country has been under severe economic sanctions from the United States since 2018, which has severely impacted its ability to trade with other countries and access the global financial system. The ongoing protests and civil unrest have also taken a toll on Iran's economy. Inflation has been a major problem in Iran, with the annual inflation rate reaching over 40% in 2022. This has led to a decline in the purchasing power of the Iranian currency, the rial, and made it difficult for many Iranians to afford basic necessities.
Analysis
Given Iran's current domestic instabilities, the new find will likely be used as a tool to stabilise the Rial (IRR) which is especially volatile due to international sanctions adversely impacting the country and international political disputes, like the developments linked to the JCPOA. However, as extraction is not planned to begin till 2025, there will not be any real direct short-term economic relief; the government will have to rely on the market’s reaction to future potential.
The discovery will also have diplomatic and foreign policy implications. According to IEA projections, the concentration of lithium demand will be in the United States, the European Union and China. Iran can leverage the necessity of lithium supply to the energy transition and net-zero emission goals as a bargaining chip in future negotiations with Western powers over sanctions relief and its nuclear activities. Iran's growing and diversifying portfolio of essential commodities is a potential threat to those pushing for its exclusion from global trading networks. The new discovery can even act as a catalyst for Iranian membership in BRICS.
China has long-standing economic and political ties with Iran, even amidst Western sanctions. China has been a significant importer of Iranian oil, and in recent years, they have invested heavily in Iranian infrastructure and other sectors. With the discovery of a large lithium reserve in Iran, China is primed to take advantage of its relationship to further pursue its trade interests for rare earth minerals. This could further strengthen the economic ties between the two countries, and also create a new avenue for diplomatic relations. However, the relationship between China and Iran is not without its complications. China's increasing involvement and improved relationship with Iran's regional rivals such as Saudi Arabia has raised concerns in Tehran.
Despite these challenges, the potential economic benefits of the lithium discovery in Iran are significant enough that China is likely to overlook some of these complications and Iran can strengthen its diplomatic ties with political powerhouse. The demand for lithium is expected to increase exponentially in the coming years, particularly in China, which has set ambitious targets for the adoption of electric vehicles. Therefore, the availability of Iranian lithium could be a significant boost to China's domestic EV industry.