|
|
|
|
International Affairs:
A Russian Journal
March 1999
Russian–Iranian Relations and Regional Stability
By Viktor Vishniakov *
The normalization discernible in relations between Iran and Iraq can be put down to Russian diplomacy. The Foreign Ministry’s consistent work without high-sounding rhetoric has led to a dialogue between Iran and Iraq which, to all appearances, is bound to burgeon. All possible assistance is being given to further relations between Iran and Syria. Another positive development is Russian-Iranian cooperation in the settlement of the Tajik question.
The takeover by Taliban guerrillas of the Iranian General Consulate in Mazar-e Sharif and the killing of nine Iranian diplomats in August 1998 sharply exacerbated Tehran’s relations with the Taliban movement. Iran launched wide-scale military maneuvers near the Afghan border, massed a considerable group of forces there and maintained constant tension along this border.
Unwilling to become involved into a serious conflict with Tehran, the Taliban movement met its demands and turned over to it the bodies of the killed Iranians, freed 26 captured Iranian citizens and agreed to direct talks to defuse the tense relations. By all indications, Tehran has at the present time no military plans with regard to Afghanistan albeit it will most likely continue to help the anti-Taliban forces in every way.
Not to be overlooked is also the fact that there are still at work several factors that sour relations between Russia and Iran. Russia and Iran take a different view of themselves in modern world.
The prevailing mood among the Russian elite is to identify itself with the West and to be guarded and sometimes hostile toward Islamic countries and Iran. Its dependence on Western financial structures and the desire to become integrated with Europe prevent Russia from furthering its own interests in its relations with Iran in full measure and make it proceed with caution.
***
Much in relations between Russia and Iran will depend on answering the question on whether the harmonization of relations with Iran is a tactical move or it marks the beginning of a new alignment of forces in the region. At any rate, economic relations remain the most important factor regardless of the geopolitical objectives or peculiarities of civilizations. The intensity and effectiveness of these relations will also have an impact on determining the future vector of the Russian-Iranian relations both tactical and strategic.
The problems of economic links between Russia and Iran are largely determined by the fact that Russia at the present time views Iran as a potential ally in many most important areas. First is the situation in Central Asia and Transcaucasia where Iran’s policy does not clash with Russia’s national interests. Second is that its policy is virtually the same with regard to the Caspian. Third is the opposition to the Turkish pressure and to the growing Turkic separatism on the territory of the Russian Federation. Fourth is that cooperation in developing modern technologies and power engineering, and the buying of military equipment makes it possible to enhance Russia’s role in solving regional problems.
Iran for its part shows an increased interest in shaping comprehensive relations with Russia. It plans, with Russia’s help, to boost its status of a regional power and its economic and military potential. Iran’s top officials stated more than once that, as far as they were concerned, relations with Russia are not of temporary value and do not depend on the state of Iranian-American links.
With its 60 million population and GNP of between $120 and $130 billion Iran is endowed with natural resources. In addition to oil and gas resources which are one of the biggest in the world, Iran has rich deposits of iron, copper, zinc, lead and iron ores, chromite, manganese, assorted building stones, hydro resources, etc.
Iran showed steady rates of growth in the 1990’s. The annual average growth of GNP between 1989-1990 and 1996-1997 topped five percent. Of special importance is the fact that this increase was primarily based on growth in industrial sectors that include the manufacturing industry, metallurgy, power engineering, and transport. One of the key achievements was an increase in the rate of investments. It proved possible to increase it to 23.7 percent in 1996-1997. Thus, nearly a quarter of GNP goes back into the economy. It proved possible to achieve a deficit-free budget. Two last years saw a decline in the rate of inflation which, after the 1994-1995 upswing mainly caused by a sharp fall in the rate of the rial owing to the US trade sanctions, from 50 percent in 1995-1997to 20 percent in 1997.
The bulk of the country’s hard currency comes from sales of crude oil; these takings average $14 or $16 billion a year and they can be regarded on the whole as a guaranteed source of hard currency finds. Fluctuations in the price of oil on the world market render this source vulnerable. Iran’s trading partners should take account of this circumstance. Proceeds from oil form the hard-currency part of the state budget which disburses money to buy investment goods and services, pay for defense orders, the construction of national economy facilities. The amount of hard currency earned from selling oil also determines the size of imports. The government tries as a rule to prevent excess of imports over exports by bringing in strict licensing. Excessive liberalization of import in the early 1990’s ran up a foreign debt. As a rule, up to $2.5 or $4 billion is set aside for defense, up to 2.5 or $3 billion for buying food, and up to $5 or $8 billion for imported equipment and semi-finished products. The fall in oil prices that began in the late 1997 had an extremely negative impact on the drafting of a new budget for 1998-1999 where hard currency earnings are down to $14.9 billion.
The fall in the amount of hard-currency earned from oil sales (for the state budget and for adding to the country’s hard-currency reserves) not only reduces Iran’s import potential and primarily that of state-run organizations but it also leads to the reduction of its production and industrial potential. As recently as 1997, many of Iran’s industrial enterprises experienced an acute shortage of imported raw materials and spares and that gave rise to a black market.
Dependant to a large extent upon the state of government hard currency reserves is also the policy of export/import regulation which mainly affects commercial activities of the private sector. Once customs duties are up, tougher regulations are introduced for the transfer of hard currency to the accounts in Iranian banks for exported goods. Once the mandatory transferable quota of hard currency earnings is up, this triggers not market-driven but a “floating” or export rate of the rial and this inevitably leads to a considerable reduction in foreign trade activities. A similar thing happened in the late 1997 and the early 1998 and was accompanied by a considerable fall in consumer exports.
A factor making for expanding economic relations with Iran is the just completed institutionalization of the regime, political and social stability in the country, and the ever improving body of laws. Rules accepted in international banking practices are used in financial settlement with foreign partners. Furthermore, there is a widening program for the creation of free economic zones and border markets which are also granted many functions of the free-trade zones.
The foreign debt problem is among the negative factors which increase risks of operating on the Iranian market, in addition to the extreme dependence on hard-currency earnings from oil sales (dependence on oil prices and export quotas set by OPEC). Suffice it to recall that the 1989-1999 debt tops $15 billion while only $5 billion has been paid to date.
The body of legislation is not quite complete especially legislation covering the activities of foreign companies. There are differences of approach to the operation of small and big companies, foreign or with foreign capital. Many pieces of legislation are not standardized, there are many, often contradicting, restrictions imposed by agencies of the most varied levels, less then perfect are the tax laws which breed red tape — all these things are recognized by Iranian officials as a brake on a more vigorous activity of foreign companies.
Although the regime has become stabilized and economic guidelines are included in the development plans, the differences in the pace and methods of reform remain and sometimes take on an acute nature. This cannot but negatively affect business activities either. The operation of Iranian banks is based on the principles of the Islamic banking system and thus it differs from the world standards.
Potential investors in Iran’s oil and gas sectors may face certain difficulties owing to the US Kennedy-d’Amato Act under which even non-American companies can be penalized if their investments in these sectors of Iran’s industry amount to $40 million or more.
***
Of what interest is Iran from the point of view of its import and export potential? Without a doubt, the main item of export potential is petroleum. Iran has a developed petroleum industry, oil pipelines with oil terminals in the Gulf. The petroleum industry is in the government sector represented by the Iranian National Oil Company. Owing to its plans to constantly step up oil production, Iran is interested in investors, technologies, and equipment, especially those having to do with off-shore drilling.
Having huge (world’s third) gas reserves, Iran sets itself the task to make this sector an exporting sector (export was discontinued after the gas pipeline to the USSR had been shut down in the first years after the revolution). As many people know, Gazprom has signed a $2 billion contract. However, promising can also be participation in programs of the National Gas Company of Iran, owner of more than 40,000 km of pipelines, which are not necessarily connected with developing new natural-gas fields. The gas-supply program calls for technical facilities to run municipal gas utilities networks, to utilize gas condensate and consisting of electronic pumps, meters, and so on, and gas holders. Promising are the programs of the export of gas condensate and liquefied gas.
Russia, in our view, ought to more actively support projects for the transportation of gas and oil from Central Asian states (Kazakhstan and Turkmenistan) across the territory of Iran. Economically, this is the most advantageous transportation route. The main future markets for oil of the Central Asian states are in South and South East Asia. Russia will indirectly gain from this oil transportation strategy.
Russia and countries of Central Asia are interested in widening oil export, and it is simpler to revive the already existing system of oil pipelines to do this. Despite the potential advantages of transporting oil via Iran, this is difficult to do now owing to the time and financial constraints experienced by Russia and countries of Central Asia.
The shortage of investment capital and requisite technologies is a barrier to consolidating Russia’s presence on the Caspian. A negative role in the region is played by the policy of the United States and Western oil monopolies. In Azerbaijan’s instance, cooperation with Iran in the production of Caspian oil would be rather advantageous but it is opposed by Americans.
A new network of oil and gas pipelines being built on the territories of various countries in the region is indubitably a stabilizing factor. Russia is not against transporting oil across Iran, but there is not only the problem of building new branches of the pipeline, there is also the problem of finding investors. Iran’s authorities can give a careful consideration to the selection of investors to strike a certain balance between international oil companies participating in the Caspian oil infrastructure and to avoid inordinate concentration of investments of one single country’s companies that could result in the emergence of special national interests of that particular country in the Caspian region.
***
Russian companies first became active on Iran’s energy market in 1997. Some companies have been operating in Iran for a long time. One example is the GPVO Tekhnopromexport which delivers power equipment and builds power stations. The quality of activities in this sphere improved once the biggest Russian gas company RAO Gazprom appeared in the Iranian market. Together with the French Total company, it participates in the development of the 2nd and 3rd phases of the Southern Pars fields. The RAO Gazprom has signed with the Iranian Ministry of Petroleum more than 20 agreements in various areas of cooperation (underground gas holder projects, Iranian gas exports, supplies of Russian and other equipment, oil and gas services, scientific and technical cooperation, and so on). Attesting to RAO Gazprom’s expansion in Iran are its understandings with regard to the Salman and Horasan fields. There are plans to participation in the 4th and 5th stages of the Southern Pars fields.
The following Russian companies have signaled their interest in the Iranian market of late — Yukos (oil), the AO Energomashexport, and the Energomashinostroitel’naia korporatsia (electric power engineering) which cooperate on foreign markets.
Financial support is the key element for wider activities of Russian companies in Iran. For their plans to be carried out will most likely require the opening of credit lines by Russian companies. The Russian companiesí offer of deliveries of Iranian crude in payment for the work — this is practiced in some areas of cooperation — is not meeting with support from the Iranian side now that oil prices are falling.
Taking advantage of the current Iranian legislation, a good deal of attention will be paid to setting up joint ventures and involving Iranian producing companies in carrying out joint projects. Russia’s Ministry of Fuel and Energy is working to have the government back this cooperation.
The 2nd meeting of experts of the Standing Russian-Iranian Commission for Economic Cooperation 3-6 March 1998 hammered out an agreement on cooperation in oil and gas. It outlines the future areas and principles of cooperation. The agreement is being readied for the signing. There are plans to draft a similar agreement in the field of power engineering.
The Ministry of Fuel and Energy thinks it is important to coordinate the activities of Russian companies so as to prevent, if possible, rivalry between them on the Iranian market.
***
The influence of Russian-Iranian cooperation in the field of the fuel and energy complex upon the regional problems of Transcaucasia and Central Asia can be viewed in the following aspects:
We know that Russia advocates a speedy solution to the problem of the status of the Caspian. This problem concerns the Ministry of Fuel and Energy only with regard to economic development of the Caspian hydrocarbon resources. The bulk of work is being done by the Russian Foreign Ministry which includes the formulation of the Russian side’s position.
Considering its position on the map, Iran is interested in playing an active part in solving the questions of transportation of oil and gas resources of the Caspian republics of the CIS to world markets. In addition to economic gains, this could also earn Iran considerable political dividends. As many people know, Iran’s attempts, however, are being largely blocked by US sanctions.
It seems that the exclusion of Iran from oil pipeline projects prompts Russia to push the oil and gas routes that run across its own territory. At the moment, for example, the only alternative to the proposed pipeline to carry the larger deliveries of Caspian oil toward Ceyhan are the Russian routes. According to experts, if built across Iran’s territory, the pipeline toward Ceyhan would be very efficient.
The projected gas pipeline between Tabriz and Ankara and on to Europe is a direct challenge to the Russian gas policy. If built, it could impact negatively on Russia’s position on the gas market of the Middle East and Europe. Responding in this connection to the Turkey-Iran agreement, Russia signed, in the late 1997, an agreement on gas deliveries to Turkey using a pipeline across the Black Sea bed.
Now that military-political confrontation no longer prevails in international relations, it is important to develop rules of fair economic and technological rivalry so as not to provoke an economic cold war which is very dangerous for all and one. Therefore, cooperation of Russia and Iran in the Caspian zone should not have as its objective to try and force some other sides out of oil projects but rather to include them in a collective system of developing oil deposits by international consortiums on the basis of clear legal principles of distribution of investments, profits, and so on. This would help defuse tensions that are already building up and solve the problems surrounding the Caspian. Cooperation between Russia and Iran would enable international development of the Caspian resources in the best manner.
Feasibility studies of oil transit across Iran are now under way. Iran has the necessary technological potential to commission the northern branch of the oil pipeline three and a half years from now. The establishment of mutually beneficial cooperation between Iran and Russia in this matter calls for political will of the Russian leadership. The government of Iran is doing its best to minimize the participation of Western companies in Caspian projects.
***
With regard to possible relations between Iran and international petroleum companies, it is possible to regulate forms of their activities. In particular, Western monopolies readily import gas but they try to import less oil and instead import more petroleum products. Since oil refining is the most unprofitable part of the petroleum sector, Iran’s government adheres to the “package” principle in relations with foreign companies, that is to say, it is prepared to discuss deliveries of gas only in conjunction with deliveries of oil. Unlike Saudi Arabia and Kuwait, Iran is not going to close its petroleum sector to foreign companies. Iran’s openness to foreign capital is confirmed in a project to develop gas deposits together with Malaysia and Russia.
Manufacturing industry products account for a third of Iran’s export. The most promising export items in this group of goods are petroleum products that petrochemical combines, which are being put into operation, have begun to be put on the market. The Tabriz petrochemical combine has recently put into operation a facility producing new-generation plastics — various modifications of polyester. Among the export products are varnishes, paints, lubricants, products of metallurgical combines (the combine commissioned in Yezda produces 16 grades of steel, for example), paper industry products and products of the nonferrous metallurgy which cover almost the entire spectrum of nonferrous metals.
If Iranian and Russian business circles count on long-term cooperation, the most effective option would be a combination of trading partnership with investment partnership. This is first and foremost applicable to food and gustatory sector projects which require no big investments.
I should add that plans to set up export-oriented productions can be also viewed from the point of view of Iran’s import potential because it is trying to attract for this purpose foreign investors, builders and designers. Developments in the mining industry, in 1997-1998, indicated a tendency toward expansion in the production of copper. Swedish aluminum companies have been pressed into service to indicate that aluminum can be exported in considerable amounts in long term. Promising can also prove projects to develop the uranium deposits.
Also promising is cooperation in transport, more so since the wider is the transport network in the region, the greater is the role of both Russia and Iran as a bridge between the West and the East, the North and the South. There also opens up a broad opportunity for the creation of joint transport, and in particular, transit companies. The most telling factor in favor of cooperation in this area was the signing in 1997 by the Russian and Iranian transport ministries of documents encompassing four main long-term programs calling for (1) upgrading the route between the North and the South, Helsinki and Moscow, Volgograd, Astrakhan, Anzali, Nowshahr and Bandar-e ’Abbas; (2) construction of a motor road around the Caspian Sea; (3) joint shipping on the Caspian and upgrading, as the principal ports, those in Astrakhan, Nowshahr, as well as in Olya and Anzali with each side guaranteeing to transport up to 140 tons of cargo and one three- to four-ton vessel; (4) creation of a joint company for designing and construction of Olya, a new Caspian port. One of the already operating wharves there was built by the Iranian Tide Water company. The Iranian side is prepared to buy up to half the port’s shares.
Participation in starting joint touring businesses, which are virtually taking their first steps in Iran, can prove promising. Their expansion is, of course, made difficult by Islamic bans on some forms of recreation and entertainment. Nevertheless, there have been calls in the recent couple of years urging state-run and private companies to expand tourism, and especially foreign tourism. In addition to the administrations of free-trade zones, projects of international tourism are proposed by the heads of coastal provinces, including the Bushehr province. Of special importance in this respect can be the development of the Caspian coast including the areas of Anzali, Nowshahr, Chalus, toward which the construction company of the Fund of the Indigent is building a modern superhighway from Tehran.
Everyone knows about Iran’s promising and large-scale power engineering programs calling for entering its neighbors’ markets, and Iran’s continued interest in building power stations. As a matter of fact, it could be an advantage to participate not only in major power projects, in which the USSR invariably took part, but also in small-scale power projects. For example, as little as 31,000 villages out of 50,000 in Iran have been provided to date with electrical power. It is possible to interest local Iranian power companies, which have been granted commercial independence, as well as branches of the Jihade Sazedenghi, in building small power houses which will help fulfil the program of complete electrification of the country.
Despite the current reform of Iranian economy and privatization, the most reliable remaining partners are state-run companies which have been granted commercial independence. This especially applies to production companies. State guarantees are of high standard if you work with these companies.
Some of the Islamic funds, like the country’s biggest Fund of the Indigent, and the Fund of the War Dead, are very active commercially. Many of them run their own commercial companies and travel firms. Islamic funds hold vast financial resources. There has been an increased activity on the part of waqf endowments, especially of the one called Astane Gods in the city of Meshed that owns industrial production and commercial companies, an exporting and a travel firm. One should bear in mind that many of what we regard as usual state-run structures are paralleled by Islamic structures which have the right to solve questions that companies operating in Iran can face.
Private companies prevail in commerce, services, medium- and small-sized businesses. Gaining momentum are new entrepreneurial segments involved in new productions, with companies of Italy, Germany, Japan and some other countries. Reliable companies operating on a stable basis are, as a rule, members of the national trade and commerce chamber or of those in the ostans (provinces). These chambers have considerably stepped up their activities, especially as regards export programs, owing to privatization and encouragement of the private sector.
Various cooperative organizations based on production or territorial principles occupy rather strong positions in the Iranian market. Border cooperatives, especially those engaged in export, enjoy considerable privileges and are paid government subsidies.
Russian-Iranian cooperation may prove of special importance for entering markets in third countries. They are mainly in Central Asia and the Caucasus Turkish capital is making vigorous inroads into them. No smaller economic and political gains are possible through joint campaigns in respect of countries in the Gulf and the South East area.
It appears that the fact that our economies supplement each other, especially due to the lack of economic relations with former Soviet republics, that we are relatively close neighbors, the promises of the Iranian market and of the entry in transport networks in the south and neighboring regions are advantageous both for state-run companies and for our nascent private business. Taking into account our own and American experience in Iran, the most promising is participation in projects that call for long-tern deliveries of Russian equipment, semi-finished products, and technologies. This applies not only to big and technologically complex projects but also to small projects that have in mind the Russian consumer, his or her tastes and habits. It seems that failing to take advantage today of Iran’s relative isolation and passing up the possibility to enhance Russia’s economic and technological potential, and hence its national security, with the aid of Iran’s promising market would be not only a big economic but also political mistake.
Iran is a signatory of the Treaty on Non-Proliferation of Nuclear Weapons and it has an agreement with the IAEA on its guarantees in effect since 1974. Iran’s activities in the nuclear field as a Treaty on Non-Proliferation of Nuclear Weapons signatory is fully under the control of the IAEA which has no record of any violations by Iran of its commitments. These conclusions were confirmed during the latest tour of inspection to Iran by IAEA officials who were free to visit any nuclear installation of their choice.
On 21-24 November 1998, there was a visit to Iran by a delegation of Russian parliamentarians and representatives of the Russian Ministry of Atomic Energy led by its head E.O. Adamov.
They had meetings with leaders of Iran including First Vice President H. Habibi, Speaker of the Majles A. Nateq-Nuri, ex-president and chairman of the council on wisdom of political decisions A. Hashemi-Rafsanjani, among others.
The delegation toured the Russia-aided atomic project at Bushehr to review its progress, as well as to solve a number of technical and financial problems that had arisen in preparing the plant for assembly. A protocol was signed on the turn-key project involving the construction of the first generator of a VVER-1000 (water-cooled) reactor to be completed by the Russian side in May 2003. Iran also turned to Russia with an offer, in addition to the 1995 contract on building the nuclear plant, to study the possibility of building right there in Bushehr three more generators at an approximate cost of $3 billion.
During the course of the visit, the Iranian leaders stressed on more than one occasion the absence in Iran of the desire to create a nuclear weapon.
Russia’s cooperation with Iran in building the atomic plant in Bushehr is completely in line with Russia’s international obligations in the sphere of nuclear non-proliferation, its internal legislation, as well as its obligations under the Treaty on Non-Proliferation of Nuclear Weapons to give the non-nuclear countries access to the use of nuclear power for peaceful purposes. We proceed from the fact that Iran unfailingly fulfills, and will fulfill in the future, its obligations under the Treaty on Non-Proliferation of Nuclear Weapons.
Positive cooperation between Russia and Iran makes it possible to influence situations in this or that location in such restive regions as Central Asia and Transcaucasia, and around them. This is especially true about Afghanistan. Iran, too, is trying to consolidate its positions in Central Asia, especially in a number of countries which are its close and natural neighbors as it were. Iran has an extremely great interests in Azerbaijan. There is a strong rivalry with Turkey. Iran is also interested in expanding relations with Turkmenistan and Tajikistan.
One comes to hear from Iranians about ideas for the most varied trilateral and other projects. From economists’ point of view, such projects can prove not too advantageous since most of them consist of barter. But from the point of view of political interests the Iran-Tajikistan-Russia, or Russia-Armenia-Iran associations could be very useful.
Military-technical cooperation is an important aspect of the Russian-Iranian relations. A broader cooperation between Russia and Iran in the military sphere would make it possible to end the suspicion lingering from the old times, and help resolve the issue of Russian border guards on Armenia’s and Turkmenistan’s borders with Iran; more efficiently fulfill contracts on the delivery to Iran and subsequent servicing and maintenance of Russian weapons and combat equipment; create an atmosphere of confidence and make for a more balanced assessment of the military and strategic situation in the region.
Russia and Iran could pool efforts to prevent conflicts in the region from boiling over and cause the beginning of economic development and integration. An important part could be played by the region’s organizations, including the Organization for Cooperation of Caspian States. Relations between Russia and Iran are moving along rather successfully on the whole. The political dialogue is constant and at various levels. There are contacts between parliaments, governments and ministries and departments. The level of political cooperation and understanding between our countries is higher than the level of commercial and economic cooperation. The task is to see to it that relations in the area of trade and economy should become a foundation for stronger political cooperation.
The statement “On Broader Cooperation Between the Russian Federation and the Islamic Republic of Iran” passed recently by the State Duma marks a much needed step in this direction.
The objectives of such cooperation, the Statement says, consist in “consolidation of peace and regional security, consolidation of the non-proliferation regime, equal interaction of our states, the creation of favorable conditions for their economic growth on the basis of respect of sovereignty and prevention of domination and of any forms of dictate on the world scene, the eradication of all forms of international terrorism.” At the same time, “the attempts by third countries to meddle in mutually advantageous cooperation between Russia and Iran in the economic, science-and-technology, and other areas” are characterized by the State Duma as “unlawful” and “unacceptable.”
Endnotes
*: Viktor Vishniakov is a Deputy of the State Duma of Russia, the chairman of the Subcommittee for the Issues of International Law. Back.