Independent Analytical Center For Geopolitical Studies

Will Iran Become Russia's Energy Rival?

Relations between Iran and Russia are replete with instances of rushing from friendship to outright hostility and vice versa. Moscow has always verbally defended Iran's right to use nuclear energy for peaceful purposes, but when it came to specific cases, as a rule, it supported sanctions against Iran in the UN Security Council, voting in solidarity with the West. Actually, Moscow never considered Iran a strategic partner and has repeatedly used it in the Kremlin's intrigues against the United States. But then about what strategic relations between the Russian and the IRI can we talk if the trade turnover between the two countries in 2014 amounted to a total of less than1 billion US dollars, while the trade turnover between Iran and China was more than 47 billion US dollars? Deliveries of Russian arms to Iran and prolonged construction of the Bushehr NPP are of purely commercial and not allied character. Actually, Moscow does not benefit from the improvement of relations between Tehran and Europe, as it will facilitate the supply of Iranian energy carriers to the EU and will inevitably create competition. Moscow is afraid of rapprochement between Tehran and Washington, because, in its opinion, the pro-American Iran is more dangerous than a nuclear Iran.

Most possibly, in the post-sanctions period we will observe the struggle between the West/USA, China and Russia for the opportunity to have influence on Iran. Although, in our view, Iran will be neither pro-Russian nor pro-American nor even pro-Chinese. It will seek a balance between the forces of the world, pragmatically defending its national interests. Iran is a powerful enough state not to be known as someone's satellite.

Experts suggest that after lifting of the sanctions from Iran, enormous amount of Iranian oil will be exported, which will significantly influence the world oil prices. After the conclusion of the above-mentioned Agreement, the world energy market immediately reacted to the prospect of lifting the restrictive measures from Iran. The price of a barrel of crude oil has fallen by more than 1 US dollar and totaled 56 dollars 70 cents. How much will oil cost after the lifting of the sanctions from Iran? Forecasts range from 40 to 20 US dollars per barrel. President of OAO “LUKOIL” Vagit Alekperov predicts that the oil price could decrease to 25 US dollars per barrel. Taking into consideration the Russian budget's dependence on oil prices, this will result in catastrophic profit losses to its economy. In any case, significantly greater losses than from all the West's sanctions taken together. It should not be ruled out that some OPEC members might go to an extreme measure and reduce their production for the sake of higher oil prices and to engage Iran in discussions about quotas. The current OPEC quota on oil production is 30 million barrels per day. We should not rule out that Russia might even go for a temporary reduction of its oil production, that is what it actually proposed in November last year. But then, OPEC left the quotas unchanged.

Moscow believes that the Russian losses from increased sales volumes of Iranian oil in the world market would be offset by contracts for the supply of weapons to Iran and nuclear reactors for nuclear power plants. However, the profit from such supplies is much lower compared to the potential losses from the drop in oil prices below 50 US dollars per barrel. From the sale of arms to Iran and nuclear reactors, Moscow can receive no more than 10-15 billion dollars, and that —only in 5 years, when, in accordance with the Vienna Agreement, a full military-technical cooperation of Russia with Iran will be possible. Russia's possible losses of profit from falling oil prices will make tens of billions of US dollars and not in 5 years, but in a year, or even sooner.

Analysts of the City of London believe that in the situation of lifting sanctions against Iran, Tehran and Moscow will toughly compete in the European market of supplying energy carriers. However, we can also hear “soothing” predictions of some experts who believe that the creation of conditions for large-scale deliveries of Iranian gas to Europe will need at least 7-8 years after the lifting of sanctions against the IRI. This is explained by the fact that, firstly, it will be necessary for several years to substantially increase gas production in Iran, and, secondly, it will take a few years to build a proper export infrastructure, although all this can be done simultaneously. Therefore, they say, Iran in the short term cannot be considered as a powerful alternative to Russian energy supplies to Europe.

From our point of view, increasing the production and export of Iranian gas will take place much earlier, probably in 2-3 years. Since most powerful transnational companies are interested in cooperation with Iran in the energy sector, and there is a large enough demand for the Iranian energy carriers on the world energy market. Especially when all this is accompanied by blackmail and uncertain supplies from Moscow, which also seeks to use its oil and gas resources as an “energy weapon”. Vice-President of the European Commission for Energy Union Maros Shefchovich believes that the Agreement with Iran will help to diversify energy supplies to Europe, ensuring the reliability and safety of the process while keeping prices low.[1]

One Should not Fall into Euphoria...

Implementation of the Agreement with Iran will depend on the situation in the world, in particular, on the state of affairs in the Middle East, as well as on the position of the political forces — liberal and conservative — in Iran, and, accordingly, on the domestic and foreign policy of Tehran. According to experts, one should not feel a premature euphoria from the signed in Vienna and approved by the UN Security Council Agreement with Iran. There are at least three influential countries that in one way or another are not happy with lifting of sanctions and embargoes against Iran. They are Russia, Israel and Saudi Arabia, Qatar and Turkey. On 3 August, US Secretary of State John Kerry is scheduled to meet in Qatar with the Foreign Ministers of the Gulf countries, to familiarize them with important details of the Agreement with Iran to try and develop together a strategy to contain Iran if it does not stop destabilizing the situation in the region.

Of course, Moscow cannot openly express its dissatisfaction. Moreover, it tries to position itself as such, which has played a “key role” in signing the Vienna Agreement. In support of this thesis, they quote US President Barack Obama's words, thanking Putin for the role his country played in reaching the Agreement on Iran's nuclear program. In his speech July 17 this year, at a meeting with permanent members of the Security Council of the Russian Federation, Vladimir Putin also made a curtsey to Washington, saying “... the finalization of agreements with Iran was made possible with the leading role and the constructive position of the United States”. But then we know that politicians often say not what they really think. At this, in Moscow they remember that in 2014 the trade turnover between the USA and Russia increased by 5.6 % and amounted to 29.2 billion US dollars, while with the countries of the European Union it decreased by 4.3 %. But in Moscow, for some reason, they do not focus on the fact that the trade turnover between the United States and the Russian Federation for the period from January to May in 2015 decreased by more than 30 %.

In the Ukrainian media one can come across some authors' statements that when America benefits — it will “surrender Ukraine to Russia”. As the saying goes, “dog does not eat dog”. Such claims are heard in connection with the signing on July 14 in Vienna of the Agreement with Iran. At this, they argue “the Moscow played up to Washington” not only seeking to weaken the sanctions imposed on Russia, but also to obtain concessions from Washington in the Ukrainian issue.

Commenting on such philosophizing, Assistant Secretary of State Victoria Nuland at a press conference in Kyiv July 17, 2015 stated that “... the United States did not agree with Russia on concessions on the Ukrainian direction in exchange for Moscow's assistance in resolving the Iranian nuclear program, as the USA has never traded with some at the expense of others in international relations”. V. Nuland reminded that the United States would continue to demand from the Russian Federation to act in accordance with the obligations assumed under the Minsk Agreements.[2]

Unlike politicians, experts and political scientists often “afford the luxury” to say what they think. Thus, the present policy of the Obama administration towards Iran is perceived by some Russian experts as hostile towards Russia, whose purpose is “to tear this country from Russia and to use Tehran to remove Russia from the European energy market”. In their view, Iran plays the role of Saudi Arabia of 1982-1984, when the USA and the KSA by the collapse in oil prices contributed to the collapse of the Soviet economy and the disintegration of the USSR. Russian experts are trying to present another direction of US policy towards Iran as the Americans' desire with the help of Iran to “cut down to size” other important regional players — Turkey, Saudi Arabia, Israel and Egypt, which largely began ignoring the White House, and “dared” to lead their policy in the Middle East without looking back at Washington.[3]

In the past, Israel's influence on the negotiation process with Iran was serious enough. However, in recent months, the Obama administration almost completely cut the Israeli side out of the loop, as the saying goes, in the formation of the Agreement, which caused outrage in the Israeli Prime Minister Benjamin Netanyahu, who always in his election manifestos promised not to allow strengthening of Iran and creation of nuclear weapons by it. It should be noted that in Israeli political circles, there are those who believe that the Agreement with Iran takes away the Iranians from building a nuclear bomb to a greater extent than an Israel's air attack on Iranian nuclear facilities could do.

By a long stretch of the imagination, Israel and the Russian Federation could take advantage of many opportunities to disrupt the implementation of the Agreement with Iran. Suffice it to Israel to start the next fighting (and the reason for this is always there) on the Israeli-Lebanese border against “Hezbollah”, which is supported by Iran, and the US Congress, where there is a powerful pro-Israel lobby, will not vote for the “deal with the ayatollahs”. In the context of the next Israeli-Lebanese war, B. Obama's veto would be easily overcome.

Taking advantage of flaws in the UN resolutions on limiting the arms trade with Iran, V. Putin back in mid-April said that he was ready to supply Iran with AA missile systems S-300, for which Iran had already paid. If this really happens, it could be a better gift for Israeli Prime Minister Benjamin Netanyahu and a worse gift for Tehran. If the S-300 are delivered to Iran, Israel will not be slow with destructing them from the air before they are put on combat duty. An Israeli attack on Iran most likely would provoke appropriate steps against Israel. There is no doubt that in such a situation, the United States would be on the side of Tel Aviv. Consequently, the Agreement with Iran would be canceled, and oil prices would rise, which would meet Moscow's interests.

So, the supply of Russian AA missile systems C-300 to Iran could play the role of a “Trojan horse.” Hope that Tehran is aware and will not provoke Israeli “hawks”. Besides, a similar anti-missile system (SAM HQ-9) and at a lower price Iran, if it wishes, can purchase from China, which has delivered them to Turkey, having disappointed NATO's leadership. It also very much angered the Kremlin, which has long been accusing China of cloning Russian weapons.[4] According to a report by the Stockholm International Peace Research Institute, China, at the end of 2012, hit top 5 the world's largest exporter of major conventional weapons.[5]

High-ranking representatives of Saudi Arabia believe that with the signing of the Agreement with Iran, a danger in the Middle East will grow. According to Saudi officials, “... Iran is destabilizing the entire region by its actions in Iraq, Syria, Lebanon and Yemen”. It should be noted that Saudi Arabia had used all its lobbying power to put pressure on the United States, and to prevent the signing of the above-mentioned Agreement.

July 15, US President Barack Obama held talks on the phone with the King of Saudi Arabia and the Crown Prince of the United Arab Emirates. He comforted them, and persuaded that “... I remain close to my friends in the region and support their defenses, while continuing to work for solving the problems posed by Iran”. It should be noted that, unlike El-Riyadh, the leadership of the United Arab Emirates welcomed the signing of the Agreement with Tehran. July 18 this year, at a joint press conference with US Secretary of State John Kerry, Saudi Foreign Minister Al- Jubeir said Tehran should use the Agreement on the nuclear issue to improve its economic situation, and “not to get involved in adventures in the region”.

Recently, the newspaper The New York Times reported about the talks, which allegedly are going on between the leaders of Saudi Arabia and Russia. It is alleged that El-Riyadh has offered President Putin to help in raising the price of oil in exchange for Moscow's refusal to support Syrian President Bashar Al-Assad. It is reported that the negotiations on this issue have continued for several months, but so far, the parties have not come to a common solution.[6] We believe it is unlikely that El-Riyadh will be able to carry out the decision of raising the price of oil through OPEC and even more doubtful is possibility of Putin's abandoning B. Assad.

June 26, Foreign Minister of Iran Mohammad Javad Zarif arrived in Kuwait, beginning his tour of three Arab countries in the Persian Gulf, including Iraq and Qatar. During the tour, M. Zarif intends to inform the leadership of these countries on the details of the Agreement signed in Vienna, as well as to discuss issues of cooperation and coordination of joint efforts in the struggle against terrorism.[7]

The State and Prospects of Cooperation between Ukraine and Iran in Energy Sector

Speaking on the 14^th of February in Kyiv on the occasion of the 36th anniversary of the victory of the Islamic Revolution in Iran, the Iranian Ambassador to Ukraine Mohammad Beheshti Monfared pointed out that, based on the principles of mutual respect and common interests, the Islamic Republic has always sought and seeks to deepen its friendly relations with our country.[8] Among the eight countries of the Persian Gulf in 2012, Ukraine had the largest turnover with Iran, amounting to 1 232 112.4 thousand US dollars. In 2013, as a result of international sanctions imposed, the Ukrainian-Iranian trade turnover decreased and amounted to 877.541 million US dollars, which is by 28.8 % less than in 2012. In the unfavorable because of the events in Ukraine year of 2014, the volume of Ukrainian exports to Iran amounted to 703 million US dollars, while imports — to 52.6 million US dollars. Over the 6 months of 2015, Ukraine exported to Iran agricultural products alone totaling 350 million US dollars. Given the forecasts of a large grain harvest in Ukraine this year (60 million tons), supplies to Iran by the end of this year are expected to be even more significant.[9]

A meeting of the Intergovernmental Ukrainian-Iranian Joint Commission on Economic and Trade Cooperation is scheduled for September 2015 and this will activate the cooperation between our countries.

Lifting of sanctions against Iran opens new prospects for Ukrainian-Iranian cooperation in general and in the energy sector — in particular. The increased cooperation with Iran in production and transportation of energy carriers and development of energy and oil and gas sectors was determined as one of the promising directions of bilateral cooperation in the early 1990s.

Iranian gas supplies to Ukraine were determined priority in the Verkhovna Rada's Decision “The main directions of economic policy of Ukraine in conditions of independence” of October 25, 1991. This document dealt with the support of Armenia's proposal for the construction together with other republics of the USSR of a transcontinental gas pipeline “Iran-Europe” through the territory of Ukraine. For the first time officially this question arose in January 1992 during the visit of the Foreign Minister of Iran, and is enshrined in Article 4 of the Agreement on Principles of Relations and Principles of Cooperation between Ukraine and the Islamic Republic of Iran of 15 October 2002 (ratified May 15, 2003).

In the recommendations of the parliamentary hearings “Energy Strategy of Ukraine till 2030” approved by the Verkhovna Rada 's Resolution of May 24, 2001, Iran was identified as one of the most promising partners of Ukraine in terms of the diversification of gas supply.

The development of Ukrainian-Iranian cooperation in the energy sector was planned to develop in the following directions:

1. Ukrainian companies' participation in exploration and production of oil and gas on the territory of the IRI;
2. Ukrainian companies and experts' activity to create new and modernize the existing gas transportation capacities from the IRI to Europe;
3. Purchasing Iranian gas in order to diversify sources of gas supply to Ukraine.

January 7, 1992 a Protocol was signed in which Iran expressed its readiness to supply to Ukraine (Odessa Port) 5 million tons of oil by tankers and to increase the volume of deliveries to 12 million tons in 1994. Iran also gave Ukraine a loan amounting to 30 million US dollars for oil purchases. However, as pointed out by the first Ambassador of Ukraine in Iran I. G. Maidan, Ukraine has not taken advantage of “opportunities of getting the Iranian soft loans allocated for the supply of Iranian oil and gas, and also failed to attract Iran's significant investment resources”.[10]

According to calculations of Derzhnaftogasprom and JSC “Ukrimpeks”, was recognized as a rational the transportation of natural gas from Iran to Europe via Azerbaijan, Georgia and Ukraine. Founding documents were prepared for creation of the gas company “Iran-Ukr-Azer”, which was supposed to lay a transcontinental gas pipeline if foreign investment had been attracted. The project of transportation of Iranian gas to Europe for some time had been seriously discussed by the sides interested. There had been determined several projects of construction of transport corridors on the route: Iran-Ukraine-Europe. The most promising was recognized the route “Iran-Armenia-Georgia-Black Sea-Ukraine-Europe”.

In 2000, Kyiv Scientific Research Institute of “Transgas” developed a feasibility study for the project of the gas pipeline: Iran-Armenia-Georgia-the port of Supsa-the bottom of the Black Sea-the port of Feodosiya-Ukraine-Europe. The project provided for laying on the seabed of 550 km of pipes. The Ministry of Fuel and Energy of Ukraine estimated the project at 5 billion US dollars, shipments had to be about 40 billion cubic meters of gas per year, of which 10 billion cubic meters — for Ukraine with a further increase to 15 billion cubic meters.

Fundamentals of cooperation between Ukraine and Iran in the energy sector were laid down in July 2003 at the first meeting of the Joint Committee on Cooperation in the energy sector, which ended in signing of the Memorandum of Understanding between the Ministries of Energy of both countries. This Memorandum declared Ukraine's readiness to buy Iranian natural gas in the volume of 10-15 billion cubic meters per year, as well to explore possibilities of Iranian gas transit through Ukraine to Europe. Following the meeting of the above-mentioned Joint Committee, were also determined the directions for cooperation between the two countries in the oil and gas industry and conditions for Ukrainian companies' participation in implementation of projects on the territory of Iran.

In the absence of direct progress in the construction of the gas pipeline according to the scheme Iran-Ukraine-Europe, Ukraine was also considering the prospects for a sea route of gas transportation from Iran by LNG tankers. However, due to the strengthening of sanctions against Iran in 2011 and the annexation of the Crimea by Russia in March 2014, this question was also postponed until better times. Taking into consideration the strong growth and renewal of the Iranian tanker fleet and plans for the development of the shipbuilding industry, the Iranian leadership has expressed readiness to cooperate with Ukraine in construction of LNG tankers and LNG infrastructure (terminals) by partial funding, since Iran does not have enough of its own technologies in this sphere.

During the last 10-15 years, Ukrainian state and private companies have been trying to gain a foothold in the Iranian energy market on their own or in cooperation with powerful foreign oil and gas companies. Before the sanctions were imposed, Iran had been inviting Ukrainian companies to participate in the development of hydrocarbon deposits field “South Pars”, where there were great opportunities for Ukraine, especially in creation of consortia carrying out barter agreements (grain in exchange for energy carriers) and other forms of cooperation.[11]

Recently, examples of such cooperation have been demonstrated by Ukrainian companies, supplying Iran with equipment for pumping gas produced by Sumy Frunze Plant and with pipes from Khartsyzsk plant. Some Ukrainian companies that did not want to advertise their activities in the Iranian market, had joint projects with such Iranian companies as “Petropars” and “Hіrbodan” in the sphere of exploration, development and production of oil and gas, construction of new and reconstruction of the existing refineries.

Since 1996, the SE “Zorya-Mashproekt” in Mykolaiv has been supplying Iran with engines for compressor stations, which are used in the Iranian gas pipelines, in particular for the pipeline IGAT-7 (Iran-Pakistan) which is 1,850 km long. The latest contract between SE “Zorya-Mashproekt” and Iranian company ParsCar Ltd was signed in April 2010.[12]

The Iranian company PEDEC together with the National Iranian Oil Company NIOC planned to lay an underwater pipeline for the transportation of gas produced at the field “Salman” in the Iranian sector of the Persian Gulf to the terminal on the Sirri Island. For this project, the PEDEC created a consortium, which included the Ukrainian branch of the Iranian company Iran Naft Gas Prom Pars and the “Institute of Oil Transportation” (Kyiv).[13]

We believe that using the geo-strategic position, unique opportunities of Ukraine as a transit country for energy resources from the East to Europe, the Ukrainian government should work out a set of measures of a political, economic, scientific and technological nature, aimed at the practical delivery to Ukraine of the Middle East’s hydrocarbons, including Iranian ones. A special role should be played by a comprehensive study of the routes of supply to Ukraine of Iranian oil and gas. The current unstable situation in the Middle East must not slow down the work on the projects of energy transportation corridors from the Gulf sub-region to Ukraine.

Most of the signed bilateral documents between Ukraine and Iran are declarative and do not go to signing of contracts. The reasons for intensions not turning into actions are as follows: lack of regular and continuous cooperation with partners; unstable financial state of the majority of Ukrainian public and private companies; frequent changes of heads of relevant Ukrainian ministries and companies, and as a result — the lack of continuity in their activities; the inability of the overwhelming majority of Ukrainian companies to work in Iran's specific conditions; lack of the state's regular and sufficient financial, informational and diplomatic support to Ukrainian companies.

Under the conditions of active work of the involved Ukrainian ministries and departments, the energy resources of Iran and other Gulf countries in 3-5 years can play a key role in Ukraine's solving problems to diversify its energy supplies and creating a reliable system of energy security. Firstly, it is determined by the fact that according to experts, over the next two decades, the Gulf region will play a dominant role in the global oil and gas market. Secondly, unlike the Central Asian energy resources, transportation of which to Ukraine is exercised on the territory of Russia and through the Russian energy transport system, the Middle East's oil and gas resources, with the assistance of European corporations, can be supplied to Ukraine by the energy transport corridors, which are beyond Russia's control.

In Iran and other Gulf countries, Ukraine will have to compete with the leading European and Asian countries. Our coming out onto the energy markets of these countries will require regular maintenance of planned activities and coordination between the Cabinet of Ministers of Ukraine and some state and private companies. Economic cooperation with Iran and other Gulf countries could provide Ukraine with opportunities for mutually beneficial cooperation and realization of large-scale economic projects. Ukraine could actively participate in the construction in these countries, primarily of industrial infrastructure and large energy facilities.

The success of any project is determined primarily by the company's having financial resources for its implementation. This is especially true of financial expenditure overseas energy projects in Iran and other Gulf countries, where traditionally operate powerful Western companies and consortia that own not only the latest technologies but also great capitals. With few exceptions, the Ukrainian oil and gas companies do not have such capital, but as a rule, they have a qualified staff and quite modern technology. In this situation, to gain a foothold in the energy market of the Persian Gulf, Ukrainian companies should create consortia with companies of leading countries of Europe, USA, China, India and other countries, that have both advanced technologies and sufficient financial resources.

After the commissioning of the gas pipeline “Nord Stream”, through the Ukrainian GTS today Europe is getting twice less gas than it was getting 3-4 years ago. It should be added that every year the volume of gas supplied by “Gazprom” to Europe gets decreased mainly due to the increasing opportunities for European countries to receive gas from alternative sources — the LNG from Qatar, the United States and other countries. In these circumstances, in order to maintain the efficiency and utilization of the Ukrainian GTS, it is necessary as soon as possible to return to the gas pipeline projects, first of all to the one from Iran and Iraq through Turkey, the Black Sea, Ukraine and further to Europe. In this case, Turkey will have more advantages (as a transit country) compared with the countries of the Caucasus, where Russia and its “Gazprom” have quite a great influence.