IRANIAN VECTOR IN RUSSIA’S INTERNATIONAL ECONOMIC STRATEGY
Ajdar Kurtov
en.fondsk.ru
30.11.2008
Russia faces new challenges in the XXI century as it is trying to
regain the positions in global politics which it used to hold for
centuries. Moscow managed to break out of the disastrous situation
into which it had been driven by its geopolitical rivals, enemies,
and their agents within Russia that mushroomed thanks to various
foreign grants under Gorbachev and Eltsin.
In the meantime the entire landscape of the international politics has
changed. China has become one of the global leaders after two decades
of 10% annual growth. Europe remains Russia’s number one trade partner
but has not dropped its outdated anti-Kremlin phobias which some of
the EU novices from the former Eastern bloc are deliberately fueling.
Some of the decisions made by our European partners can only
be explained by these phobias. What sense does it make to host
infrastructures of the US missile defense in the interests of the
American global primacy if, quite clearly, Europe faces no threat
whatsoever from any Iranian or North Korean missiles? What is the point
of the endless efforts to bar Russian energy companies from marketing
hydrocarbon fuels to European customers? It has to be understood in
European capitals that such steps make Russia respond adequately. This
is what we are currently witnessing: recently Russian President
D. 0AMedvedev cancelled the plan to take the strategic missiles
sited in Kozelsk off duty. If not for the anti-Russian escapades,
the Iskander missiles would have never been deployed in Russia’s
Kaliningrad region. Perhaps under more favorable circumstances Russia
would not be investing heavily in new oil and gas pipelines like
East-Siberia – Pacific Ocean. Moscow is compelled to resort to the
measures it is currently taking by those who cannot accept that –
as many times in the past – Russia is reviving and staging a global
political comeback.
The list of Russia’s potential partners is by no means limited to the
EU and the US. While Gazprom faces the attempts – disguised as a quest
for the diversification of Europe’s energy supplies – to prevent it
from competing in the European market, Russia can turn to numerous
alternative partners, with many of whom it has traditionally close
ties. Iran is one of such partners.
*** Historically Persia has been among Russia’s main trade partners,
and the economic relations with it have been on the list of Kremlin’s
priorities for centuries. Russia and Persia exchanged diplomatic
missions already in the XV century. In the late XIX – early XX
centuries marked by the rise of capitalism in Russia, it implemented a
whole range of economic projects in Iran. For example, Russians built
the Anzali seaport at the Caspian Sea and the Tabriz-Jolfa railroad,
the f irst one in Iran.
Later the above and many other infrastructures were handed over to
Iran for free in the framework of the treaty signed by Iran and Russia
on February 26, 1921. It should be noted that it was a truly generous
gift – the cost of the property transferred to Iran totaled 582 mln
golden rubles, plus Iran’s debt to the Imperial Russia in the amount
of 62 mln golden rubles was waived.
The USSR cooperated with Iran actively in the economic sphere. It
helped that the two countries signed a treaty on guarantees and
neutrality and a trade agreement in 1927. On March 25, 1940 they
signed a trade and navigation treaty by which they extended maximally
favorable regimes to each other. The latter treaty also set the
principle of trade relations and ensured free transit across the
partner territories to other countries. This part of the provisions
of the 1940 treaty currently remains in effect, and this is a highly
positive circumstance as other elements of the legal framework for the
use of the Caspian Sea have been revised without sufficient grounds
by Kazakhstan and Azerbaijan in the post-Soviet epoch.
The USSR constructed a number of major infrastructures in Iran
in the 1960ies and 1970ies including the Isfahan steelworks, the
machinery plant in Arak, and the Aras River hydro-power plant. These
days we see the global media preoccupied with the struggle over the
world’s hydrocarbon resources,20but it seems to be forgotten that
in 1970 the USSR has helped Iran reach the international gas market
when the trans-Iranian Gachsaran-Astara pipeline constructed with
the assistance from Soviet specialists was launched. Iran exported
natural gas via the pipeline to the Transcaucasia in return for
machinery and equipment. The situation was not marred by talks of
"the Grand Game". When the political interests of the US and Western
Europe did not affect the process, Moscow had no problem organizing
the economic cooperation with Tehran.
By the way, currently not only Russia but also Azerbaijan uses the
Soviet-era inheritance. Largely due to the US pressure, Azerbaijan has
to stick to a fairly unprofitable system of natural gas export. For
example 5.5 bn of the 11.5 bn cu m of gas produced in the country
in 2007 (nearly 50 %) were pumped back to sustain the acceptable
level of oil output. Only 1.78 bn cu m of natural gas was exported,
and also without serious gains as 1.2 bn cu m of gas was supplied
to Turkey at only $120 per 1,000 cu m. Georgia paid even less –
only $63 per 1,000 cu m for 300 mln cu m and $120 per 1,000 cu m
for 280 mln cu m – for Azerbaijan’s gas. At the same time Iran paid
$300 per 1,000 cu m for 30 mln cu m – a relatively small amount –
supplied via the Soviet-era pipeline.
The USSR and Iran signed their first 5-year trade agreement in
1967. A brief chill in the bilateral relations began after the 1979
Islamic revolution in Iran. Iran stopped supplying natural gas to
the USSR in 1980 though in the past decade the supplies reached 72
bn cu m. Nevertheless, already in 1985 the new Iranian leadership
realized the benefits of the cooperation with the USSR and the process
resumed on a long-term basis. A permanent bilateral commission was
re-established. A new trade turnover agreement was signed in 1988 and
the sales of gas from Iran resumed. However, at that time the USSR
was plagued by the chaos organized by the Yakovlev-Gorbachev group and
known as the Perestroika. The country neglected its infrastructures,
and clashes instigated by nationalist forces began in Azerbaijan. As a
result the gas pipeline linking Iran and the USSR was left in need of
repair and could transit only some 3 bn cu m of natural gas annually.
Nevertheless, the cooperation between the USSR and Iran intensified
in other spheres. The war between Iran and Iraq which began in 1980
and took at least 1,000,000 lives ended in 1988, and Iran needed to
strengthen its defense capabilities. Naturally, the US, formerly
the supplier of weapons to Shakh’s regime, denied supplies to the
new Iranian regime which openly referred to Washington as the "Grand
Satan". Under the circumstances Iran had to turn to the USSR, China,
and North Korea for weapons supplies. Weapons contracts were signed in
1991 and Iran started buying massive quantities of artillery, armored
vehicles, and munitions. In 1991, the last year of the existence of
the USSR, its trade turnover with Iran reached over $1,374 bn, the
USSR having a considerable positive balance of trade with Iran. The
USSR export to Iran was at the level of $1 bn, while its import was
only $374 mln.
The demise of the USSR immediately told on the bilateral economic
relations.
The shift from clearing to dollar transactions and the economic
collapse in Russia caused by the radical reforms made the trade volume
shrink. Already in 1992 the trade turnover between Russia and Iran
sank to $450 mln, though again Russia had a positive balance of trade
($401 mln vs. $48.6 mln). In just a year, a certain level of recovery
was ensured – in 1993 the trade turnover rose to $1.091 bn (Russia’s
exports to Iran totaled $1.004 bn and imports from the country – $87
mln). The recovery, however, was largely owed to the supplies in the
framework of old contracts and thus could not be sustained. In 1994
the trade turnover plummeted approximately by a factor of five.
A new avenue for cooperation between Russia and Iran emerged somewhat
later.
When Germany refused to complete the construction of the Bushehr
Nuclear Power Plant, the job was taken over by Russia. In the late
1990ies, Russia’s export to Iran totaled $3.378 bn. Most of it –
47.8% – was complex equipment. Weapons accounted for 31.1%, fuel and
commodities – for 14.9%, and machinery – for 6.2%. Some major Russian
companies survived only thanks to the Iranian market. For example,
Russia sold to Iran subway train cars worth $90 mln, aircrafts worth
$21 mln, and well-drilling equipment worth $12 mln. The supplies
related to the construction in Bushehr over the period of time brought
Russia $1.01 bn. Iran also bought from Russia $220 worth of fuel
oil. The latter fact should not come as a surprise – being a major
oil producer, Iran nevertheless has a fairly underdeveloped refining
industry. Iranian refineries cannot supply the domestic demand and
the country has to import fuel.
In 2001-2005 the Russian export to Iran rose to $6.8 bn. In 2006 the
total turnover was $2.144 bn, and in 2007 – $3.3 bn. A comparable
figure is expected in 2008, since already over the first 6 months
the trade turnover made $1.65 bn. Russia continues to export a factor
of several more to Iran than it imports from the country ($1,445 bn
vs. $204 mln over the first half of 2008). Though Iran is not among
Russia’s top trade partners in terms of the financial indicators
(Iran’s share in Russia’s foreign trade is 0.5%, in Russia’s export –
0.6%, and in import – 0.2%), it is important that Russia is able to
cooperate successfully even with a country that appears to be i ts
rival in the global energy business.
The structure of the Russian export to Iran is evolving. Black metals
account for most of it (73.5% in 2007). Machinery and equipment
now account for only 7%, timber – 4.3%, paper- 2.1%, fuel – 3%,
and fertilizers – 2.4%. Russia mostly imports Iranian vegetables and
produce as well as the products of their processing such as juices and
preserves. They account for 2/3 of Russia’s import from Iran. On the
other hand, Russia also imports $90.7 mln worth of Iranian cars (25.9%
of the import). Naturally, gas is no longer imported from Iran as the
pipeline links the country to the now independent Azerbaijan. Gazprom
is negotiating swap operations with Iran.
Russia is to supply gas to the northern regions of the country where it
is traditionally in short supply, whereas Gazprom is to get the same
amount from Iran in its southern regions, tentatively in the form of
liquefied gas to be supplied to India or South East Asia. Tehran is
inviting Russia to join the project aimed at constructing pipelines
to link it to Pakistan and India.
The North-South Transport Corridor project is gradually
materializing. The corresponding deal was penned by Russia,
Iran, and India in 2000. Later the project was also supported by
Belarus, Ukraine, Kazakhstan, Oman, Tajikistan, Turkey, Armenia,
and Azerbaijan. All of these countries will benefit from the
intensification of shipments v ia the Corridor using which is going
to both expedite deliveries and reduce transit costs. For example,
transit industry representatives say that the delivery of a 40-feet
container from Mumbai (India) to St. Petersburg via the Suez Canal
currently takes 30 days, while the North-South route will help reduce
the time by a factor of 2 and the costs – by 20%. The estimates do
ignore a significant circumstance – eventually containers have to be
returned to the supplier sites. Preferably, they must be loaded with
products on the way back, but the flow of cargo from Russia to India
is not particularly intense.
Russia and Iran even organized a jointly operated transit route across
the Caspian Sea. The new Olya seaport was constructed in the framework
of the project as its location is more convenient than that of the
traditionally used port in Astrakhan. A railroad is also linked to
the Olya port, and the cargo flow via it is increasing rapidly: in
2003 its throughput was 57,800 tons, but in 2007 it reached 661,500
tons. The capacity of the seaport is actually much higher and by 2010
its throughput is expected to pass the 4,000,000 tons mark. Recently
Russia, Iran, and Azerbaijan agreed to construct a railroad to link
the three countries (Qazvin-Rasht-Astara in Iran-Astara in Azerbaijan)
which is to be integrated into the North-South Corridor.
Obviously, so far the Corridor is operating below the target capa
city. Up to 90% of the cargo it transits consists of the Russian
black metals exported to Iran. The project failed to attract cargo
flows from the EU. In 2005 the EU passed a document defining the
European transit strategy which does not even mention the North-South
Corridor. One of the reasons is the underperformance of the Russian
transit industry. Its services do not meet the demands of cargo
suppliers. Cargo remains stored at intermediate locations too long
and the transit infrastructures including the Caspian seaports are in
many cases below the XXI century standards. There are uncertainties
in customs regulations along the route. All of the above impedes
the intensification of transit, though, no doubt, the problems are
solvable.
*** The more pressure Russia’s Western geopolitical rivals and enemies
exert on the country, the more efforts it will be making to reconfigure
its trade with the West and the East (the Third World comprising
Asia, Africa, and Latin America). The Iranian vector in Russia’s
international economic activity is an important element of the process.