Europe, Fall 2013, World — January 6, 2014 at 11:10 pm

Petrol Patronage

How Crony Capitalism Affects Russia’s Relations With Iran

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Russia Iran_1

Hassan Rouhani’s election as President of Iran has generated great excitement in the West. Many have interpreted it as an opportunity for a reversal of course on Iran’s nuclear ambitions and conciliation in the US-Iran relationship more generally. But the new president is not the only actor who could stand to play an important role in resolving the ongoing crisis between Iran and the West. In particular, Russia’s position on the United Nations Security Council (UNSC) and its important regional role in the Middle East could allow it to block progress on the Iran issue. The question is, will it?

Deciphering Russian intentions is not an easy game, although that has not kept some from trying. Much of the literature on Russia’s relationship with Iran emphasizes Moscow’s unwillingness to toughen its stance on issues like Iran’s nuclear program. Other analysts go even further, suggesting the existence of a strategic partnership between Tehran and Moscow.

But Russia’s actions towards Iran cannot be so easily described. Russia has supported four rounds of tough UN sanctions aimed at encouraging Iran to meet its international obligations under the Non-Proliferation Treaty. As a result, Iran’s economy has been left in shambles and the oil-rich nation has been forced to impose a strict gasoline rationing system. And, while Russia oscillated between plans to delay and to deliver the S-300 missile defense system, it ultimately decided to reach beyond the demands of international sanctions by cancelling the deal, as well as 10 to 12 billion dollars in other arms sales to Iran.

At the same time, it does not appear that these actions indicate a desire in Russia to appease Western interests in Iran. While it obliged the United States and its partners on sanctions and eventually on the S-300 issue, Russia has generally avoided other opportunities to ameliorate its relationship with the United States, even in the context of the Iranian nuclear issue. For instance, in October 2007, after approving a December 2006 round of UNSC sanctions and just before an additional round in March 2008, Russia denounced a round of unilateral US sanctions on Iran, with Putin himself calling them useless and unhelpful.

Above all, Russia’s actions on the Iranian issue appear inconsistent and lack an overarching strategic logic. On security issues, Russia is more than willing to stand up to Iran. Moreover, while Russia and Iran’s economic relations have grown consistently in the past decade, the roughly $4 billion in annual bilateral trade between them remains insignificant to the Russian economy.

In the case of Iran, Russian actions are often driven by informal patronage networks at the top levels of Russian government and society. These patronage networks revolve around President Vladimir Putin and his political allies, many of whom worked with him in the KGB in the 1980s. In exchange for their loyalty, these individuals are able to extract financial and political benefits. It is necessary to detail some of these key players in the Russia-Iran relationship and identify their particular interests in Iran. This analysis builds upon recent scholarship by Professor Kimberly Marten of Barnard College on the effects of informal patronage politics on Russian foreign policy and demonstrates the complexity of Russian-Iranian relations. In this way, it points to the need for tempered expectations in the West, even if Iran should turn a corner in its foreign relations.

One of the most influential players in the Russia-Iran relationship is Alexei Miller, the current head of Gazprom, Russia’s immense natural gas exporting monopoly. Miller, who is widely considered to be in Putin’s inner circle, is also intimately affiliated with Dmitry Medvedev, Putin’s self-appointed heir to the presidency in 2008 and longtime Chairman of the Board of Directors at Gazprom. He and his allies at Gazprom have their own interests in Iran that are based upon the natural gas business.

Russia’s traditional dominance of natural gas markets has been challenged by two other leading international natural gas producers: Iran and Qatar. Of the two, however, Qatar has proven a particularly difficult rival for Russian gas giant Gazprom. Since liquid natural gas (LNG) rose to the forefront of the natural gas industry in the mid-2000s, Qatar has targeted the primary market for Gazprom’s international gas exports: Europe. And, in addition to supplying increasing amounts of LNG to Western European countries by ship, the tiny Gulf state has also announced a desire to build a pipeline to Turkey, challenging Gazprom’s business there as well.

Like Qatar, Iran also has the potential to upset Gazprom’s natural gas strategy. In 2011, it produced 4.4 percent of the world’s natural gas. Moreover, Iran has the second-largest natural gas reserves in the world, which could permit it to drastically increase its production if given access to proper technology.

Despite this potential to upset Gazprom’s plans, Gazprom’s relationship with Iran is much warmer than it is with Qatar. Iran is neither geographically, given its distance from Europe, nor politically, in light of international sanctions, positioned to export natural gas to Europe, which is the region most vital to Gazprom’s export strategy. And unlike Qatar, despite its production of natural gas and large reserves, Iran is still a net-importer of natural gas.

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Still, Gazprom remains suspicious of the Iranian potential to undercut its supply lines. As a result most attempts at cooperation have ended without tangible benefits. For example, in July 2010, Sergei Shmatko, then a member of the board of directors of Gazprom and the Russian energy minister, signed an important agreement with his Iranian counterpart on behalf of the Russian state that would open the floodgates to natural gas cooperation between Iran and Russia. This cooperation agreement, however, has been placed on hold for years. Similarly, a 2008 Gazprom agreement with Iran over the development of the Azar fields was outright cancelled. And while the Gas Exporting Countries Forum has encouraged cooperation with both Qatar and Iran, more than anything the forum has been used to push Gazprom’s own gas-exporting agenda. The bottom line is that more than anything, Gazprom sees Iran as a competitor in the natural gas market, and Alexei Miller and his compatriots can be expected to do their very best to protect Gazprom’s supply lines, particularly in Europe, against incursion from Qatar, Iran, or any other natural gas-exporting country.

Another key player in the Moscow-Tehran relationship is Igor Sechin, head of Russian oil major Rosneft, currently Russia’s largest producer of oil. Sechin has earned the unofficial title of Russian “energy tsar” for his dominating role in the industry: In addition to his position as the CEO of Rosneft, he serves on the boards of energy holding company Inter RAO, hydro-electric company RusHydro, and the United Shipbuilding Corporation. Until May 2012, he also served as deputy prime minister under Putin.

Rosneft is a giant of international oil production. In 2011, Russia accounted for 12.6 percent of world production of oil, or 10.34 million barrels per day, and Rosneft is the most significant player in the Russian oil market. While Rosneft’s gas production is relatively meager, in recent months it has completed a number of deals to increase its gas holdings and challenge domestic competitor Gazprom, most recently its major oil and gas deal with Azerbaijan’s SOCAR state energy company.

With Rosneft’s new and still relatively small role in international gas politics, it is difficult to assess the distinct effect of natural gas in Sechin’s approach to Iran. Thus, as of yet, Rosneft’s position in oil determines Sechin’s primary perspective on Iran. And with oil production at 4.8 percent of the global total and the second-largest proven reserves of oil in the world, Iran is certainly a competitor. For instance, when Russian oil production began to drop along with international oil prices in 2008-2009, Sechin put pressure on Iran and other OPEC members to drop their production totals and help stabilize international oil prices at a rate beneficial to the Russians. In doing so, he exemplified the widespread belief that oil production is a zero-sum game for producers. Going forward, Sechin can be expected to do everything he can to stifle Iranian oil production and, most importantly, prevent it from coming to market.

Sergei Chemezov, Putin’s former neighbor and friend from his KGB days in East Germany, is another individual widely considered to be in Putin’s inner circle. As the CEO of Russian Technologies, of which Rosoboronexport, the state arms exporter, is a subsidiary, he is the de facto head of nearly all Russian arm exports, including those to Iran.

While Rosoboronexport’s interests in Iran are quite limited – Russian arms sales to Iran, while highly publicized, are quite small relative to other major clients such as India, China, Vietnam, and Algeria – Putin relies on Rosoboronexport for his own political benefit. Thus, Chemezov’s oversight of Russian arms exports to Iran provides Putin an important political bargaining chip in the international arena. The December 2005 deal to provide Iran a high-tech S-300 missile system and is a prime example of this. In the end, the S-300 political maneuver allowed the Russians access to new unmanned aerial vehicle technology from Israel after Israeli Prime Minister Netanyahu made a secret deal with Medvedev to stop the arms transfer in October 2009.

Sergei Shmatko, the aforementioned Gazprom affiliate, is another key player in the Russia-Iran relationship. Since 2005, he has headed Atomstroyexport, the Russian corporation charged with the construction of the highly controversial Bushehr nuclear power plant in southwestern Iran. The plant and Atomstroyexport are important for several reasons. First, Russian specialists will continue work at the plant for the next two years, even though control over the plant has been given to the Iranians. In addition, the unique technical aspects of the plant make it an important symbol of Russian scientific prowess, particularly in nuclear engineering. Lastly, talks on the construction of further nuclear plants in Iran by Russia continue, and a new deal would bring both economic and political benefits to the Kremlin. In particular, a plan of this nature would economically benefit the Russian nuclear construction industry and those associated with it, in addition to serving as political tool for Putin to use in Russia’s foreign policy.

Unfortunately for Putin, Shmatko is an important personal ally of Medvedev, with whom he shares a mutual connection to Gazprom. However, Shmatko’s boss, Sergey Kiriyenko, who is the head of Atomstroyexport’s parent corporation Rosatom, watches over the Bushehr plant as an affiliate of Putin. This configuration assures that both Putin and Medvedev are able to have some input into Atomstroyexport’s interactions with the Bushehr plant and the Iranian nuclear program at large.

Another layer of complication beyond the competing interests of each of these individuals is the existence of running tension between Rosneft and Gazprom. These companies have each pursued projects in Iran and consequently found themselves in competition with each other. One example is the recent $2.9 billion purchase of Itera Oil & Gas by Rosneft, which challenges Gazprom’s natural gas dominance. This means that, in the future, Rosneft and Igor Sechin may begin to incorporate natural gas considerations into their set of interests in Iran to a greater degree.

There is also a personal dimension to the Gazprom-Rosneft competition. Dmitry Medvedev and Igor Sechin in particular have been embroiled in a bitter contest for years. Recently, however, Medvedev has lost favor with Putin, and locked horns with Sechin. Upon gaining the presidency in 2008, one of Medvedev’s first actions was to demote Sechin from his position as deputy chief of staff to the deputy prime minister. And in 2011, Medvedev passed a law purporting to prevent corruption but whose key effect was to force Sechin to step down from his position as chairman of the board of directors of Rosneft. Moreover, in July, Medvedev sacked a senior natural resources official who was a political ally of Sechin. In response, Putin has allowed Sechin to acquire the board chairman position at Rosneft’s state-owned parent company Rosneftegaz earlier last year and agreed to the recent purchase of TNK-BP by Rosneft proposed by Sechin. And the Kremlin has recently toyed with the idea of eliminating Gazprom’s prized LNG export monopoly.

These domestic competitions have important ramifications in Russian policy towards Iran. In the short term, Putin’s favoring of Sechin over Medvedev suggests that Rosneft will get the better of any competition with Gazprom in Iran. This means that Rosneft’s Kremlin-backed foray into natural gas both in Iran and in other countries will likely continue.

The upshot of these political, business, and personal connections is that Russian’s Iran policy is not wholly driven by calculations of state interest. The actions and plans of Putin and his allies, rather, weigh more upon their own individual interests and political associations, and the tensions resulting from them. Russian support of any Western plan to tackle the Iranian nuclear issue will be derived in part from these individual interests and their associated corporate interests – and Washington needs to understand that as it plays the increasingly difficult game of discerning Russian intentions.

Furthermore, Washington needs to know where these interests point – to the often ignored, yet fundamental reality that the important actors in the Russia-Iran relationship do not want conciliation in the US-Iran relationship. Nothing could be more threatening to Alexei Miller and Gazprom in Iran than for Western natural gas companies to begin investing in Iran’s natural gas fields and pumping out natural gas to be sold in traditionally Gazprom-dominated natural gas markets. Nothing could be worse for Igor Sechin’s Iran policy than to have Iranian oil competing with Rosneft’s oil in Western markets or to have Western oil companies pumping oil out of Iran’s vast reserves. Conciliation in the US-Iran relationship would also take away Putin’s ability to bargain with the West on arms exports and nuclear issues that relate to Iran, which is no small issue, given how frequently he has used these tools in the past. Clearly, this type of a rapprochement is not likely to happen anytime soon, but Russia will do what it can to keep this possibility off the table.

Rouhani’s election is certainly a step forward for the West in its goal of resolving its Iran problem, but Russia’s complicated foreign policy towards Iran shows that international tensions over the Iranian nuclear program are a long way from gone. Even if Iran under Rouhani does want to get along, don’t expect Putin and his peers to play matchmakers.

Artwork by Cibel Quinteros

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