Iran and Russia: A Partnership in the Making

Introduction

The relationship between Iran and Russia has been characterized more by competition than by cooperation in modern political history. Military incidents during the Soviet era created an atmosphere of distrust, but Russia has become an increasingly prominent economic and political partner of Iran as both countries have been targeted by Western sanctions regimes. More recently, upheaval in global energy markets and the deteriorating security situation in Syria have led to the forging of stronger commercial and political bonds between the two countries.

Some have speculated that these factors suggest only a temporary warming of relations between Moscow and Tehran. However, there is greater reason to believe that these changes signal the roots of a much closer alliance characterized by cooperation in energy and power generation, joint infrastructure development, and military aid. Trade turnover, particularly in advanced weaponry, heavy machinery, and ground vehicles has increased dramatically just in the past year: overall volume has increased by 71 percent,[1] and while Russian-Iranian trade reached only $1.68 billion due to sanctions in 2014, this figure could rise to more than $10 billion[2] as Iran’s economy re-emerges.

Political Overtures

At first glance, Russia and Iran’s closer political relationship appears to be precipitated by the supportive role Moscow played in the passage of the Joint Comprehensive Plan of Action (J.C.P.O.A.) in July 2015. One of Iran’s parliamentary leaders announced that Russia has been given a priority position[3] for investment in Iran, and joint diplomatic movement on the longstanding thicket of the Caspian Sea’s legal status suggests new levels of unprecedented cooperation. However, this progress belies the difficult structural and economic position Iran is in, which does more to explain the burgeoning partnership between the two countries than mere gratitude for Moscow’s help with the J.C.P.O.A.

First, despite the flood of investment announcements and meetings with foreign executives, prospective investors in Iran are still extremely wary of the political risk of doing business there. Implementation Day lifted sanctions specifically tied to Iran’s nuclear program, like trade, financing, and investment restrictions, but they were built in with a powerful “snapback” provision if Tehran at any point does not uphold its commitment to dismantle its reactors under the supervision of the International Atomic Energy Agency.[4] Additionally, primary sanctions relating to human rights and financing of terrorism remain in force, and as a result, few U.S. investors are willing to stomach the risk to become entangled in Iran. European investors face fewer restrictions, but they remain wary for additional reasons, like the ongoing secondary sanctions that prohibit E.U. businesses from partnering with any entity that has an affiliation with the Islamic Revolutionary Guard Corps, which controls roughly a third of the country’s G.D.P. and has a large presence in key industries like oil and gas.[5]

Thus, the necessity of Western compliance with these constraints has deterred immediate re-entry into the Iranian market. But Russian companies and investors face no such restrictions,[6] and evidence since Implementation Day demonstrates that Moscow is intent on drawing Tehran in close.

Secondly, domestic economic satisfaction within Iran is at an all-time low, with President Hassan Rouhani’s approval rating slipping from 61 percent just after the J.C.P.O.A. was signed to 38 percent currently.[7] This situation reflects the fact that despite the deal flow of recent months, most Iranians who voted Rouhani in have not seen their economic fortunes rise. Internally, Rouhani has begun to downplay the speed of potential changes from the J.C.P.O.A. to bid for time. Externally, Tehran is in desperate need of foreign investment partners and additional government oil revenue, requiring $50-80 billion in foreign investment per year to meet its growth target of 8 percent annual growth.[8] Accordingly, it has flooded international markets with its oil products to regain its market share[9] and allowed Russia its priority position for investment, giving a $1 billion offshore rig contract to a Russian firm, laying new rail for the North-South Transport Corridor (N.S.T.C.), and shortlisting Lukoil and Gazprom for a list of 50 new greenfield oil and gas development projects.

Energy Investments

The easing of sanctions on Iran in mid-2015 provides an opportunity for Russia and Iran to solidify already meaningful ties in oil and gas production and power generation, and collaborate on regional grid and transportation integration initiatives.

Iran and Russia are hydrocarbons behemoths. Iran’s largely untapped natural gas reserves rank second[10] in the world only to Russia’s and both countries feature among the top ten[11] in proven oil reserves. Given their status as potential competitors, the countries initially may not appear to be the most natural of collaborators in the energy sector.

As some analysts pessimistic about Russia have already pointed out,[12] for instance, the influx of Iranian crude into international oil markets will likely take market share from Russian exporters and further depress global oil prices. Given the precarious nature of E.U.-Russian relations and the need for alternative suppliers of natural gas, Moscow and Tehran could also find themselves competing to satisfy European demand for natural gas. While these are viable possibilities, political and commercial incentives exist that are more likely to push Iranian and Russian oil and gas businesses toward collaboration instead of overt competition in both the short- and long-term.

In the political sphere, Russia is a vetted and comparatively trustworthy ally to Iran. Although Iranian-Soviet relations periodically soured due to ideological differences, those problems largely evaporated with the fall of the Soviet Union. The National Iranian Oil Company (N.I.O.C.) signed a series of collaborative agreements with Russian national oil company Gazprom to develop the South Pars gas field in 1997[13] and brokered a number of exploration and production (E&P) and natural gas distribution deals with Gazprom and other Russian oil companies in the early-late 2000s.[14] In 2013 and 2014,[15] the countries signed broad E&P and infrastructure development deals worth around $10 billion. In 2016, Gazprom submitted a formal request[16] to partner with N.I.O.C. in the construction of the country’s first natural gas liquefaction plant.

In many instances, Russian companies demonstrated their commitment to the Iranian market by signing cooperation agreements in the face of significant Western opposition. Similarly, while progressively mordant sanctions had the effect of temporarily driving private Russian oil companies with interests in the United States, like Lukoil, out of Iran,[17] Gazprom never left. It should thus come as no surprise that Russia and Iran signed a new five-year strategic energy plan in July 2016, or that Russian energy companies have been shortlisted by the Iranian government.[18]

In purely commercial terms, collaboration between Iran and Russia tallies with both countries’ short- and long-term investment priorities. Russia sees in Iran a vast yet underdeveloped hydrocarbons sector that lacks sufficiently advanced production, refining and distribution technology and expertise. Russian companies possess, and are incentivized to offer, this technology and expertise to Iranian companies, which stand to gain invaluable assistance without the political baggage implicit in any engagement with the United States or European energy companies. Russian companies are also able to do so at a much quicker pace than U.S. and European companies, which will continue to be hampered by sanctions and compliance concerns, at least in the near-term.

Some Russian government officials have publicly recognized that a window of opportunity exists to modernize the capabilities of Iranian energy companies across the value chain and bolster the expertise of local personnel. In doing so, Russian companies would position themselves to fill a short- to medium-term need as well as become a long-term partner of increasingly sophisticated Iranian companies. They would also effectively eliminate or severely reduce the chance of U.S. or European companies gaining a priority position in Iran, as well as lessen the possibility that an unproductive rivalry could form between Russian and Iranian energy companies.

Power Generation

The length and nature of Russian-Iranian ties in power generation are analogous to their relationship in oil and gas. In 1995,[19] Russian nuclear power company Atomstroyexport signed an agreement with the Iranian government to complete the Bushehr nuclear power plant, which was partially constructed prior to the Iranian Revolution of 1979 and severely damaged during the Iran-Iraq War.

Despite delays, both technical and political in nature, Russia completed development of the plant and began to supply it with fuel in 2007.[20] It became operational in 2011 and satisfies a meaningful percentage of rising Iranian electricity demand. The Bushehr plant only serves as a starting point for Iran’s nuclear power ambitions: the country’s national renewable energy agenda includes a goal of 5,000 MW of renewable power generation by 2025.[21] In this arena, Russia and Iran again stand to benefit each other. Russian companies possess the technical expertise and wherewithal to help Iran meet its nuclear power generation goals, while Iran is in a position to provide Russian companies with opportunities that have been restricted due to its geopolitical row with the European Union and the United States. Additional cooperation is already underway. In 2014, Russia agreed to build two new nuclear power reactors[22] in Iran. The agreement also includes the possibility of six further Russian-made nuclear reactors.

Beyond nuclear power, Russia has extended a $2.2 billion loan to the Iranian government to assist in financing a new thermal power plant near the Iranian city of Bandar Abbas and assist in the electrification of a railway in northeast Iran. The countries’ progress in electrification is expected to intensify in the near future[23] as both Iran and Russia seek to synchronize their electricity systems by way of Azerbaijan.

Transportation Infrastructure Development

While Iran’s customer base for its primary hydrocarbons exports seems to be diverse, its transportation options to reach these customers are, at present, quite limited. Most of its exports are currently shipped via its overcrowded port in Bandar Abbas or by tankers loaded on Kharg Island in the Strait of Hormuz.[24] Once loaded, tankers traveling west toward Europe must pass through the SuMed pipeline link (a part of the Suez Canal), which is controlled by a consortium of Saudi, Kuwaiti, and Qatari state-run oil companies.[25] Earlier this year, Egypt denied two tankers loaded with Iranian oil using the link, citing compliance with international sanctions, which had been lifted the previous month, for the delay.[26] Most analysts speculated that the incident was a deliberate attempt orchestrated by the other oil-producing Gulf states to delay Iran’s re-entry into European markets.

This is not the first time that Iran has faced interference in developing its export infrastructure—the ill-fated Iran-Pakistan Pipeline was thwarted by a large payment to the Pakistani government from a Saudi development bank in 2006,[27] and offshore development on the Caspian Sea side has been stymied by legal issues.

However, during the Baku Summit in early August 2016, Tehran once again partnered with Moscow. In order to circumvent transportation chokeholds, Iran renewed its commitment to build the remaining rail lines, financed by Azerbaijan, to complete the N.S.T.C., a transport corridor designed to facilitate rail, overland, and maritime trade between Iran and Russia as well as Central Asia, Europe, and India.[28] The route is expected to allow Russia and Iran to bypass existing maritime sea routes, reduce total shipping times, and potentially convert Iran into a hub for trade between Russia and India. Some have even speculated that the route could compete with the Suez Canal in terms of importance as a major regional transport corridor.[29] The route would also allow Russia to re-export Iranian hydrocarbons through its highly developed midstream infrastructure to end-markets in Europe. Despite being competitors in upstream oil production, these developments point toward Iran and Russia forming a potentially lucrative economic energy bloc to more effectively counterbalance its rivals in OPEC.

Although general trade turnover between Russia and Iran has grown considerably in the past year,[30] Iran and Russia’s maritime trade relationship is not nearly as impressive. The governor of Russia’s main port of Astrakhan on the Caspian Sea reported that seaborne trade with Iran in 2016 is down by 16 percent year over year,[31] and Russian investors attribute this directly to issues with corruption, unclear regulations, and complicated payment schemes on both sides. In fact, bilateral trade shares were greater during the sanctions era, probably because Russian companies alone were willing to take the risk of transacting business with Iran.

Even with the difficulties in determining the new post-sanctions trade relationship, Russia reported that the total value of its new deals in Iran in 2015 alone exceeded $40 billion,[32] and shows of cooperation on the issue of the legal status of the Caspian Sea—a longstanding source of disagreement among the Caspian littoral states (Azerbaijan, Russia, Iran, Kazakhstan, and Turkmenistan)—has given new hope to the prospect of developing beneficial trade and transportation policies. Furthermore, the involvement of Azerbaijan in the N.S.T.C. and the development of offshore projects in the Caspian Sea underscore that both countries are willing to set aside past differences and cooperate on issues of mutual interest.

Military Support

Perhaps the starkest difference of recent cooperation versus historical enmity between Iran and Russia is in military and defensive issues. Soviet support of Iraq during the Iran-Iraq war was the cause of much suspicion that still lingers to this day.

Once again, the sanctions era formed the basis of much of the cooperation between Tehran and Moscow in defense, including the sale of the S-300 air defense missile system—a well-publicized move that began as a direct response to Israeli threats of airstrikes against Iranian nuclear sites.[33] Iran and Russia were later in 2014 able to create a consensus among the Caspian littoral states in 2014 to block NATO’s courting of Azerbaijan, potentially introducing Western naval forces into their respective backyards.[34]

The most indicative signs of burgeoning cooperation have come in the post-sanctions era. In February 2016, Iranian Defense Minister Hussein Dehghan negotiated the purchasing of some $8 billion in Russian military aircraft and other defense equipment to revamp its 1970s-era military forces.[35] In August 2016, the Russian defense ministry’s announcement that Russian aircraft were launching sorties on Syrian targets from inside Iran yielded shock, and not just from the West. Some Iranian parliamentary members complained that the Russian use of Iranian military sites violated the Iranian constitution[36], pointing to a cleavage within Iran between more liberal politicians who are angling for greater foreign partnerships, and more conservative groups that want to keep Iran out of entangling alliances that smack of pre-revolution relationships. Regardless of the differences in opinion within Iran concerning its military relationship with Russia, it is only a matter of the extent to which Russia and Iran will cooperate. The converging of Russian-Iranian interests in the Syrian war, and their open military coordination in support of President Bashar al-Assad, serves as an added layer in this multi-faceted relationship that is equally growing momentum on the economic and diplomatic fronts. The structural foundations for an enduring Russian-Iranian partnership are being laid.

Conclusion

Iran’s return to the global economy has thus far not proceeded as it expected. Competition with other oil producing Gulf states for market share in global energy markets, Rouhani’s need for investment, and the war in Syria have created ripe conditions for the transformation of Iran-Russia relations away from a convergence of interests toward a more solid regional partnership.

The strengthening of Russian-Iranian relations largely began as a marriage of convenience given their mutual isolation from the West—an indirect consequence of punitive U.S. and European action against both nations. But this marriage of convenience is transitioning to a more substantial relationship, with the deepening of economic and military relations laying the seeds for greater interdependence between the two countries. Such structural interdependence in the future can potentially offset any lingering historical distrust or misgivings regarding closer ties held within political circles of either side. The war in Syria has also seen Russian-Iranian military coordination reach unprecedented levels, furthering the potential of a consolidated partnership moving forward.

Despite Rouhani’s seeming preference for an improved relationship with the West, Washington’s hitherto policy of maintaining barriers to business with Iran is leaving the Iranian government with the restricted option of greater engagement with Russia—an outcome welcomed in Moscow. Russia is tying Iranian fortunes to its own, one oil field and rail track at a time. And with few alternatives and an ambitious set of development goals, Iran is just as eager to make it work.