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Iran sees no benefit from Ukraine war as Russia undercuts it on steel and oil

Tehran thought the Russia-Ukraine war would see it grab more of the market. Instead, Moscow has taken oil and steel customers from Iran
Liberian-flagged oil tanker Ice Energy (L) transfers crude oil from the Russian-flagged oil tanker (AFP)
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Tehran

In the beginning, Iran saw Russia’s war in Ukraine as an opportunity.

A global rise in steel and oil prices was assumed by Tehran to be a good thing. It would lead to more money for sanctioned Iran from its main sources of income.

Instead, Iran’s share in these key markets is being lost - to Russia. Facing western sanctions itself, Russia is offering attractive discounts on both commodities, snatching away custom from Iran in the process.

'Following the start of the Ukraine-Russia war, Moscow focused on India and China, which are Iran's oil main markets'

Iranian energy analyst

Over the past few months, Iran’s oil exports to China have dropped. At the same time, China has imported more oil from Russia. Western sanctions on Russia mean that, with little demand for it in Europe, Moscow’s crude oil is now heading to China. 

Iran’s oil exports to China had fallen by 34 percent as of May, said Hamid Hosseini, president of the Oil and Gas Exporters' Union in Iran.

In comments reported by local media, he continued: “After all, China is in the south of Russia and they are neighbours, and Russia has a port in this region that can easily load crude oil, and the markets of the region - not only China but also the countries of Southeast Asia - can be potential customers for Russia.”

Iran’s economy grew last year, with the latest reports showing that in the first nine months of the last Persian year, which ended in March, GDP was up by 5.1 percent. However, without oil income, this rate stood at 3.8 percent, underlining the current importance of the oil and gas industries to Iran’s economic growth.

Javad Oji, Iran’s oil minister, hasn’t denied reports about Russia overhauling Iran in the market. “Russia has offered discounts for oil buyers, but given the sanctions that have been applied against this country by the West, it takes time for the Russians to find customers,” he said on 18 May.

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An Iranian energy analyst, who spoke on condition of anonymity, told Middle East Eye: “Following the start of the Ukraine-Russia war, Moscow focused on India and China, which are Iran's oil main markets.

“Iran could have revived its lost oil markets amid the rising price of oil in the world, but what we are witnessing now is the worst scenario, as even our main markets are being overtaken.”

He continued: “Coordination with the Russians could have made it possible for Iran to reduce its losses, but I have heard that the Russians aren’t even willing to coordinate with Tehran over discounts and prices.”

Russian steel discounts

When Russia invaded Ukraine, Iranian steel manufacturers saw a huge opportunity to increase their exports. Instead, Moscow offered up its steel at a discount, attracting Tehran’s old buyers.

“Iran had a good share in markets in neighbouring countries and East Asia, especially China, which is one of the largest importers of steel, but Russia and the Iranian government blew everything up,” an Iranian economic analyst, who did not want to be named, told MEE.

“Countries such as Afghanistan, China, South Korea, and Thailand, which are major Asian customers for Iranian steel, are shifting towards Russia,” the economic analyst said. “Under these circumstances, Iran's $6bn in earnings generated by steel exporting companies has been endangered.”

A steel manufacturer, who spoke to MEE on condition of anonymity, said that sanctions on Iran meant their share of the market was limited.

'Now we see that Iran’s steel exports have fallen sharply, which is due to the heavy discounts offered by the Russians'

Iranian steel manufacturer

“This means that companies and countries that want to work with sanctioned countries aren’t too many. So the number of people we can have a deal with is limited,” the manufacturer said.

"On the other hand, the steel market is a special market, as it is considered high-risk and companies can be blacklisted by the United States due to violation of sanctions for dealing with us."

Following the US withdrawal from the 2015 nuclear deal with Iran, the White House reimposed extensive sanctions against Tehran in areas including oil and steel. Both countries have been engaged without success in indirect talks for the revival of the deal.

The steel manufacturer told MEE that despite the sanctions, Iran has been able to establish a “strong role in this market and build trust. In general, our prices are 20 percent below black market prices.”

In 2021, Iran was the tenth largest producer of steel in the world, with Russia the fifth largest and China the largest. Before the war in Ukraine, Russian steelmakers were the most profitable in the industry.

Now, heavyweight producers like Severstal, which is controlled by billionaire CEO Aleksandr Shevelev, are facing demands from importers in Asia to sell at discounts of up to 40 percent off the market price of sheet steel. These discounts are hitting Iranian producers hard.

“Now we see that Iran’s steel exports have fallen sharply, which is due to the heavy discounts offered by the Russians,” the Iranian steel manufacturer told MEE.

Domestic problems

On top of this, steel manufacturers point the finger of blame at the Tehran government, which in April imposed an 18 percent tariff on the export of raw steel and has done little to address widespread power outages across the country.

In a recent letter to the Iranian Ministry of Industry, Mine and Trade, Rasoul Khalifeh-Soltani, head of Iran’s Steel Producers Association, wrote that in the fiscal year 2021-22, Iran’s steel industry “fell short of its target output by 6m tonnes, inflicting a loss of $4bn,” and that “restrictions levied on energy supply and power outages were the main reason behind that loss”. 

'Russia isn’t deliberately trying to take markets from Iran or anyone else, though that’s nevertheless the outcome...' 

Andrew Korybko, Moscow-based analyst

"Our exports will be less and less as the power cuts are being applied to the steel manufacturers,” the steel maker told MEE.

The economic analyst echoed the steel manufacturer, saying that the Tehran government and Russia had kept Iran’s steel industry from profiting on the global market.

“As the Iranian government saw the global prices of steel rising and export companies were making huge profits, it sought to have a share from this profit. That’s why it announced new tariffs,” the analyst said.

“This series of decisions led Iranian manufacturers to increase their prices for foreign customers. This was concurrent with Russia offering great discounts to buyers, resulting in Tehran losing many of its customers in the world," they said.

"Such bad days for Iran’s steel industry will have a negative impact on Iran’s economic growth and will also probably depreciate Iran’s currency against the dollar, as the steel industry has had an important role in Tehran’s foreign exchange earnings while the country has been under heavy US sanctions.”

Competition and cooperation

Andrew Korybko, a Moscow-based political analyst, told MEE that Moscow was not seeking to undermine Iran's position in oil and steel markets: “Russia isn’t deliberately trying to take markets from Iran or anyone else, though that’s nevertheless the outcome from it selling certain western-sanctioned resources a lot cheaper than everyone else, especially to Asian customers.

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“This is disrupting the market because some suppliers’ traditional customers have opted to purchase Russia’s discounted resources instead. Iran, in this example, will either sell less, redirect its sales, or lower its prices.”

Korybko, noted, however, that "all the newfound talk about Russian-Iranian resource market competition ignores an exciting avenue of cooperation that emerged in parallel with that development, which is the revived interest in the North-South Transport Corridor.”

The International North-South Transport Corridor is a 7,200km-long network of rail, ship and road routes that aims to move freight between India, Iran, Afghanistan, Russia, Central Asia and Europe. Both Iran and Russia are member states of the project.

“It is, therefore, important to keep this new long-term opportunity in mind when talking about Russian-Iranian short-term resource market competition in Asia," Korybko said. "Both have more to gain through logistics cooperation, which is now being prioritised.”