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Crude Business

The U.S. plan to curtail Iranian oil exports seems to be coming undone.

The Obama administration may be betting that sanctions on Iranian oil exports force the country to make concessions over its nuclear program. But Iran is now exporting more oil than at any time since mid-2012, raising doubts about how effective that sanctions strategy has been.

Iran's crude oil exports jumped to 1.65 million barrels per day in February, thanks to increased purchases by China, India, and South Korea, according to revised data released Friday by the International Energy Agency. That is well above the informal cap of about 1 million barrels per day set by the administration as part of the limited sanctions relief given to Tehran during the six-month interim deal to hold nuclear negotiations.

The IEA said that preliminary data showed that Iran's oil exports dropped to about 1 million barrels a day in March, "but that figure will likely be revised upwards closer to February levels upon receipt of more complete data." In other words, Iran's oil exports appear to have jumped and stayed consistently higher since the announcement late last year of the interim deal.

Iran's oil exports are a key source of government revenue; U.S. officials believe that Iran agreed to negotiate in large part because sanctions placed on its energy and financial sectors since 2012 had poleaxed Iran's economy. While Iran's economy is still in dire straits, the International Monetary Fund said this month that Iran could post modest economic growth between now and next year.

Critics of the limited sanctions relief offered to Iran as part of the interim deal say that the higher-than-expected oil exports are a shot in the arm for Tehran and, by shoring up Iran's economy, could further undermine the already troubled nuclear talks. EU foreign affairs chief Catherine Ashton and Iranian foreign minister Mohammed Javad Zarif said Wednesday that "a lot of intensive work will be required to overcome the differences" between the two sides, who will meet again next month in Vienna.

"This enhances Iranian nuclear negotiating leverage and makes it more difficult to conclude a diplomatic deal that dismantles Iran's military-nuclear program," said Mark Dubowitz, the executive director of Foundation for the Defense of Democracies, a group that advocates tougher sanctions on Iran. 

State Department spokesperson Jen Psaki said Friday that the reported amounts of crude oil that Iran sold refers to volume over a six-month period, and that over time the amount will average out to 1 million barrels. "Month-to-month variability is normal in oil markets," Psaki said, "and we still expect and anticipate...that this will average out over a six-month period." 

Since 2012, the U.S. and Europe have sought to hamstring Iran's economy by limiting the amount of oil it can export. In general, the sanctions policy has been successful, pushing Iran's exports down from almost 2.5 million barrels per day to as low as 800,000 barrels a day last fall. As part of the interim nuclear deal --and in the teeth of heated opposition in Congress-- the U.S. halted further cuts to Iranian exports, but said that Iran could not sell additional volumes of oil while talks continue.

But the latest IEA figures show that China and India, in particular, continue to be large buyers of Iranian oil despite U.S. efforts to get both countries to curb their consumption. The IEA said that China likely imported about 500,000 barrels of Iranian oil a day in the first quarter of 2014, compared with about 430,000 barrels a day last year.

India's purchases of Iranian oil have also jumped sharply, despite both U.S. diplomatic arm-twisting and Indian pledges to curtail imports. The IEA said that India's first-quarter Iranian oil imports were about 340,000 barrels a day compared with just 190,000 barrels a day last year.

To be sure, exact figures on Iran's oil exports are hard to nail down exactly, and fluctuate from month to month. The IEA's own revisions each month to its estimates of Iranian oil exports underscore how tricky it is to paint an accurate picture of how much oil Iran is selling and to whom. One problem, the IEA says, is that many Iranian oil tankers don't carry electronic devices that could track their movements.

Obama administration officials say they don't put much stock on monthly estimates, and that they are focused on keeping Iran's exports of crude oil at an average level of about one million barrels per day during the six-month period of negotiations --which Iran appears to be exceeding.

Additionally, administration officials note that the IEA estimates of Iran's oil exports can present a slightly distorted picture. That's because the IEA tallies regular crude oil and lighter so-called condensates together in its oil figures; U.S. sanctions are only directed at regular crude oil. An administration official said in an interview last month that the United States is "comfortable" with the level of Iranian crude exports; an administration official reiterated that view today.

The State Department did not respond to a request for comment.

The latest apparent rebound in Iranian oil exports comes as Moscow is challenging the U.S.-led effort to maintain pressure on Iran. Since the beginning of this year, Russia and Iran have reportedly been in talks regarding an oil-for-goods barter deal that could bring Iran as much as $20 billion in exchange for about 500,000 barrels of oil per day.

Obama administration officials, including Secretary of State John Kerry and Treasury Secretary Jack Lew, have repeatedly stressed that such a deal, if it were finalized, could trigger U.S. sanctions on Russia. This week, leading lawmakers, including Sens. Robert Menendez (D.-NJ) and Mark Kirk (D.-Ill.), the authors of key sanctions legislation, urged President Barack Obama to "put Iran on notice" if it tries to evade limits on energy sales.

Anton Siluanov, Russia's finance minister, rebuffed those warnings Friday, saying that Russia only acknowledges United Nations sanctions on Iran, not U.S. restrictions on Iran's oil exports.

This article has been updated.

Dieter Nagl - AFP - Getty

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Risky Business

Amid political uncertainty in Russia, insurance companies are finding a niche.

Stephen Kay's phone has been ringing off the hook. American companies with investments in Russia have been calling him incessantly over the past couple months to ask about insuring against political instability, including the possibility that the Russian government might confiscate their assets.

Kay, the head of political risk insurance in the U.S. for Marsh, a unit of the world's largest insurance broker Marsh & McLennan, sells a specialized type of insurance to companies that want to do business in other countries, but that are worried war or political strife could endanger their investments. Kay's company sells policies that protect against everything from cyber-attacks to hurricanes. But it's political risk insurance that's in demand since Russia invaded Ukraine and annexed Crimea, sparking a tense standoff between Moscow and the West.

The ongoing standoff has put U.S. companies that operate in Russia in a particularly tricky position, as the two sides trade threats of economic warfare and American companies look to cover their Russian assets. Secretary of State John Kerry warned Tuesday that the U.S. could roll out more sanctions for Russia's meddling in Ukrainian politics. After Washington froze the assets of businessmen, politicians, and a bank close to Putin last month, members of Russia's parliament fired back by considering legislation that would allow them to take over American and European companies in Russia. 

That's why so many people are calling Kay -- investing in Russia suddenly looks a lot more perilous. It's already the country with the highest level of political risk insurance. Insurers had at least $27 billion worth of exposure at the end of 2013, according to information collected by the Berne Union, a group of trade and investment insurance companies.

Foreign direct investment in Russia jumped in 2013 to $94 billion according a United Nations report, but has been falling since the beginning of this year. Investors have already moved $50 billion out of Russia in the first three months of 2014, which Fitch Ratings said Wednesday puts Russia's already struggling economy at risk.

"We believe the Ukraine crisis is exacerbating a longer-term slowdown in the Russian economy," the ratings firm said.

Unfortunately for Kay, instead of a sales boon, he has a lot of what he calls "uncomfortable conversations." That's because he no longer has any insurance to offer. Once a country is already in the midst of a political crisis, insurers consider it too risky to sell new policies.  

"When you're looking for homeowners insurance, it's a little too late to buy the insurance when the house is already burning, right?" Kay said. "The events going on right now in Russia are like a burning fire."

Political risk insurance can cover physical damage, such as to buildings from riots or terrorism, as well as financial damage like a foreign government refusing to pay out a contract or let people move money out of the country because of an economic crisis. If civil war breaks out and a factory is destroyed or new political leaders come to power and decide to nationalize foreign-owned companies, the insurer would compensate the policyholder.

Businesses that want to insure new ventures or assets that are already on the wrong side of what threatens to become a new Iron Curtain have little recourse but to wait for the volatile situation to settle down. It's unclear what proportion of foreign direct investment is insured worldwide. The contracts are private and many companies don't disclose the details. Big multinational companies often buy policies to cover their operations in multiple countries over several years, according to people in the insurance business.

American corporate giants, including General Motors, PepsiCo, Coca-Cola, Boeing, and Exxon Mobil, have substantial investments in Russia. General Motors, which produces SUVs in two Russian factories, declined to comment on the company's use of political risk insurance. "We don't disclose this information for competitive reasons," a spokesman said in an email. Boeing also declined to comment. Coca-Cola, PepsiCo, and Exxon did not immediately respond to requests for comment.

Russian lawmakers haven't moved forward with the idea of taking over parts of Western companies, but numerous countries have seized the assets of foreign firms, usually as part of a domestic economic program rooted in socialism or communism. Russia itself nationalized swathes of foreign industry in the wake of the 1917 revolution. More recently, Venezuela, Bolivia, and Argentina have incurred the wrath of foreign investors by expropriating businesses, especially in the energy sector.

Political risk insurance was created to encourage investment in Europe as part of the Marshall plan to rebuild the continent after World War II. The Overseas Private Investment Corporation (OPIC), a U.S. government agency, still provides insurance to companies that want to invest in projects that aim to achieve development goals, as does an arm of the World Bank.

But much of the political risk market is now private. It's backed by some of the world's largest insurance underwriters like American International Group (AIG), Zurich Insurance Group, and ACE Group, for whom it is a small part of their business. Because they also underwrite insurance policies on everything from life insurance to workers compensation, the giant companies generally aren't threatened by any one political event.

Curtis Ingram, another broker who sells political risk insurance at Aon, said it's much harder to quantify political risk than other types of insurance that can rely on historical statistics to gauge the future. 

"It's just not life insurance or auto insurance or even windstorms," said Ingram, vice president of Aon Risk Solutions' political risk practice. "It's profoundly unpredictable."

The underwriters can also end up owning parts of companies that they insure, which can help them recover some of the costs of paying claims. If a government decides to take over part of a foreign-owned business, the insurance company would compensate the original owner and then take over ownership of the factory or oil field that was expropriated. The insurance company can then continue to press the country's leaders to return the asset or give them compensation. In 2012, insurers reported recovering $51 million from holding onto expropriated assets, according to the Berne Union data, but in 2013 they reported zero. It all depends on whether the government that took the assets will agree to settle the dispute.

The giant insurance companies are often in a better position than investors to play the long game and wait to see if the political winds change. But the odds of that happening in Russia are still unknown.

"Nobody's got a crystal ball; nobody can really foresee one year out," Kay said. "The Russian crisis confirms that. Nobody really saw that coming."

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