Russia and Iran scratch backs for the long game

Russia and Iran scratch backs for the long game
Russian arms producers are vying for a place at the Iran table.
By bne IntelliNews February 5, 2016

As Russian defence contractors jostle for position to supply billions in weapons to Iran amid the gradual lifting of international sanctions, the countries have been aligning on world issues in recent days, pitching themselves as guarantors of peace and stability while tending their individual agendas.

The top advisor to Iranian Supreme Leader Ayatollah Ali Khamenei on international affairs, Ali Akbar Velayati, ended four days of talks in Moscow on February 4 with a meeting with President Vladimir Putin in the Kremlin. Velayati was a former foreign minister for 16 years and still has a big hand in shaping Tehran's foreign policy.

No details were released about the content of that meeting, which came as the sides move to revive some of their former close cooperation over political issues, trade, energy and Tehran's nuclear programme. "Iran and Russia as neighbouring countries have a long history and relations that are more than 500 years old and can be instrumental for creating peace, stability and tranquility in the world and on the regional level," Velayati said earlier. "Today we are witnessing valuable cooperation in the Middle East, western Asia, and in Syria in combatting terrorism."

Sift out the lofty statements and there are pressing undercurrents. Moscow cannot now hope to compete with Western companies in most areas in technology-hungry Iran, but is eager to cash in some of the billions from its many frozen defence, energy and infrastructure projects in the Gulf state. For its part, Tehran needs to keep Russia on side for possible resumed confrontation with the West.

"Iran, which has an active missile programme and has drawn the West's ire for its actions toward other countries of the region, needs to maintain good ties with Russia and China in case the West decides to introduce new sanctions through the UN Security Council to punish [Iran] for either this programme or for its efforts to become a regional hegemony contrary to the West's wishes," says Simon Saradzhyan, a research fellow at the Belfer Center for Science and International Affairs at Harvard University. "So Iran will continue to trade with Russia even now that sanctions are lifted in order to maintain good relations with Russia so that the latter blocks any UNSC actions detrimental to Iran."

The sanctions were lifted in January after the International Atomic Energy Agency (IAEA) verified Tehran's compliance with the Joint Comprehensive Plan of Action (JCPA) on implementation of agreements on its nuclear programme. The measures can be restored under a so-called "snap back" provision if Tehran reneges on its obligations.

Iran is also mindful that the EU and US previously introduced their own sanctions in the absence of UNSC resolutions, such as those imposed on Russia over Ukraine. "[If] that happens to Iran for reasons described above, Iran will have nowhere else to turn but to Russia and China for some of the sophisticated arms, such as fighter aircraft and missile defense systems," Saradzhyan says.

It is a long-term strategy, however: sanctions on conventional weapon sales to Iran will remain for five years, and relating to ballistic missile technologies for eight.

Only 500,000 barrels a day

Throwing in as a sweetener prospects of removing visa requirements for Russian citizens, Velayati said Iran wishes to buy more weapons from its old supplier. He also cited $40bn in signed contracts with Russia waiting to be fulfilled in electric power generation, construction of power stations and railway networks, while nudging the oil debate forward.

"In the energy sector, Iran and Russia should not have competition and need to work together. Our position is that countries such as Iran, Russia, Venezuela, and Iraq, for the production of the energy market should conduct more contacts and consultations," Velayati said, following assurances by Iranian officials that Iran's return to the oil market does not adversely affect prices.

"The world is producing 120mn barrels of oil daily and 500,000 barrels added by Iran will not seriously influence the market," Iran's ambassador to Russia, Mehdi Sanaei, said in January. Current oil prices are unacceptable, the ambassador added, calling for steps to reduce global  production or keep it at the same level. Iran so far has no plans to build a gas pipeline to Europe.

Meanwhile, during a visit to Tehran on February 4, Venezuelan Oil Minister Eulogio del Pino said representatives of six member-states of the Opec cartel are ready to hold an emergency meeting on coordinated reduction of oil production with non-Opec members. According to the minister, Opec members Iraq, Algeria, Nigeria, Ecuador, Iran and Venezuela as well as non-members Oman and Russia have agreed.

In January, Lukoil became the first Russian company to resume working in Iran, with two new oilfield projects. Litasco, Lukoil's trading subsidiary, is now the first post-sanctions buyer of Iranian oil in Europe.

Russia now also wants to broaden the package of agricultural products deliveries after Iran agreed to lift the ban on the supply of poultry meat from Russia by mid-February.

Market moved on

As well as hundreds of billions of dollars of investments, Iran needs not chickens but high technology. This can be provided mainly by Western Europe, Japan and possibly China and the US, so in economic terms the Iranians are now pivoted more to the West. In nuclear energy, space exploration, railways and military-technical cooperation, Russia can compete with Western firms, but only with strong state support.

But some experts believe the Iranian market is already lost for Russian companies. "Before the lifting of sanctions, Russia felt like a queen in Iran as the market was almost empty and the Iranians were ready to let Russians into their projects without competition," the head of the Russian-Iranian Council for Public Affairs, Rajab Safarov, told Vedomosti before Valyati's arrival. "But Russia hesitated, and sometimes openly played up to the West," he said, citing the S-300 surface-to-air missiles, which the Kremlin in 2010 refused to supply to Iran so as not to spoil relations with the US.

"Our senior managers have always been pro-Western and did not even try to delve into the Iranian economy, believing that the people of the East are practically Taliban in turbans," Safarov added.

The Russians lost not only billions in profits, but also the confidence of Iranians, and now up to 90% of the market can go to Western business, he believes.

Others say it's much too soon to write off the trade potential. "Yes, Russian trade with Iran can decline and will decline as Iran now has the capability to buy elsewhere, but any talk of a 'lost market' is premature," notes Saradzhyan. "While Russian cars and some of the other machinery are not competitive on world markets, many types of Russian arms (including fighters and missile defense systems) are, as are Russian nuclear power plants. Otherwise Rosoboronexport [state defence exporter] and Rosatom [state nuclear power builder] would not have a combined portfolio of outstanding orders exceeding $100bn."

Military bonanza

As well as building Iran's nuclear power station at the southern Gulf port of Bushehr, Russia has supplied the country with weapons since the Soviet era, with a five-year suspension from 1995 during the close relationship of former presidents Bill Clinton and Boris Yeltsin. In his first year as president, Putin rescinded the agreement in 2000 and Russia resumed arms supplies before former president Dmitry Medvedev annulled the $800mn S-300 missile deal a decade later under UN pressure. The paid advance was returned to Iran, which still filed an almost $4bn lawsuit against Russia at the Geneva Court of Arbitration. Putin lifted the ban on the supply of S-300s in the spring of 2015.

In November, as the lifting of the sanctions loomed, Tehran again expressed interest in buying a broad range of Russian weapons and not only the S-300 systems. "They are interested in the whole range of our weapons, because they have a big army, but due to the sanctions they have not had any upgrading for a very long period: in the air forces, navy and ground troops," Russian presidential aide for military-technical cooperation, Vladimir Kozhin, told TASS.

Despite the long lead time to resuming cooperation, armament companies are already piping up with proposals. Tank builder Uralvagonzavod said on February 3 it is ready to organise licensed production of T-90S tanks and modernisation of T-72S tanks in Iran. The company's cooperation with Iran was also suspended in 2010. A day earlier, the commander of the Iranian ground forces, Ahmad Reza Pourdastan, said Iran preferred not to purchase T-90s but build them in-country. Also on February 3, Russian truck maker Kamaz said it is ready to resume truck assembling in Iran, where it already ran an assembly line from 2007 to 2010.