US-Iran Interim Agreement and Russia: Moscow’s Path to Strategic Win or Loss?

Iran’s starting implementation of the interim agreement on its nuclear program last year

signals a little optimism in resolving the decades-long dispute over the issue and making the Middle East

a little safer. In fact, one of the biggest potential beneficiaries of the deal is Russia. Nevertheless, a

permanent, peaceful resolution of the nuclear issue followed by a broader, comprehensive accord

threatens Russia’s resurgent position in the Middle East.

The agreement on November 24th of last year represented a “breakthrough” according to

Russian President Vladimir Putin. Indeed, the breakthrough can be said to signal a diplomatic win for the

major powers (P5+1 countries including Russia, China, France, United Kingdom, the United States and

Germany) plus Iran and also the return of Russia’s influence in the region. For some time, Putin and

Russia have argued that America’s confrontation with Iran over the latter’s nuclear program represented

something else: regime change. Washington’s experiments in democracy promotion and humanitarian

intervention from Kosovo and Iraq to Libya and Georgia, only confirmed the Kremlin’s view that

Washington has a habit of meddling in other countries’ affairs. The march of war after the August 21st

chemical weapons attack in Syria and the quick solution of removing Syrian President Bashar al-Assad’s

weapons stockpiles without the use of force represented a turning point in Russia’s influence in the

Middle East. Here, in contrast to the failure of stopping the war in Iraq and the air campaign against

Libya, Russia was able to prevent another intervention by Washington in the region. The deal with Iran is

a continuation of Russia’s recent success at checking American military power in the region and

bolstering Russian influence.

In this regard, the interim agreement provides some short-term benefits to Russia’s image

abroad. Wariness of American intervention in the Middle East is at an all-time high. In a poll taken by

the Pew Research Center last May, it found that nearly eight in 10 Germans, a majority of French and

British citizens, and even close to seven in 10 respondents in the Middle East opposed American military

involvement in the Syrian civil war.1 Even though millions around the world emphatically oppose further

American military intervention in the Middle East (including, by a wide margin, Americans), the actions

of the US Congress and supporters of hardline American views against Iran indirectly support Russia’s

growing influence in the region. For example, a bill in the U.S. Senate emerged only a few weeks after

the initial agreement was signed which demanded that the United States seek to remove Iran’s nuclear

reactors and force Iran to discontinue all enrichment, and also added delayed sanctions to the end of the

agreement’s trial period.2 It’s clear: the voices of a loud minority in Washington opposed to the deal

provide Russia’s political leaders with an opening to play peace broker in contrast to their hawkish

Americans counterparts.

In addition, Putin said before the end of last year that the UN’s “authority… will structure

our work in 2014” regarding the U.S., Chinese and Russian roles in joint efforts to solve the Middle

East’s security issues.3 This comment is a clear rebuke to American unilateral use of force and sanctions

as Putin sees it. The intervention in Libya, U.S. President Obama’s proposal to strike Assad’s chemical

weapons, and the continued rejection of U.S.-Iran diplomacy in the U.S. Congress gives Putin the fodder

to frame any American interests in the region as a disguise for regime change – even with the case of

Libya, despite backing by a majority of the UN Security Council, including Russia. Even though opinions

of Russia in the Middle East are decidedly negative, Russia’s significant role in producing the agreement

advances a narrative of Russia as an engaged peacemaker in the region. This could only help boost public

attitudes regarding Russia’s engagement in the Middle East.

There are, however, obstacles in maintaining this narrative. A comprehensive deal that

solves the nuclear issue, addresses outstanding concerns, and brings two implacable, mistrusting

1 See May 2013 Pew Research Center study on Middle Eastern and Western popular opposition to military action against Syria. Stokes, Bruce. “Middle Eastern and Western publics wary on Syrian intervention,” Factank, May 2, 2013. Available at http://www.pewresearch.org/fact-tank/2013/05/02/middle-eastern-and-western-publics-wary-on-syrian-intervention/ - accessed on January 21, 2014.2 Kearn, David W. “The Folly of New Iran Sanctions,” Huffington Post, January 19, 2014. Available at http://www.huffingtonpost.com/david-w-kearn/the-folly-of-new-iran-san_b_4619522.html 3 Lerma, Xavier. “Putin and the Iran Problem,” Pravda, December 31, 2013. Available at http://english.pravda.ru/opinion/columnists/31-12-2013/126522-putin_iran_problem-0/ - accessed January 22, 2014.

adversaries closer together after thirty-plus years of enmity would be akin to a “Nixon goes to China”

moment for this generation. Russia knows that the U.S.-led sanctions regime has been viewed as

unnecessary and discriminatory towards Iran, which only supports the views of Russia and many other

countries that the United States has singled out Iran for unique punishment. U.S. recognition of Iran’s

right to enrichment shatters that perception and restores some of Washington’s credibility as a good-faith

partner in diplomacy. In addition, continued negotiations toward a final deal legitimize the negotiating

parties. U.S. and Iranian diplomats may grow to understand each other’s interests, learn about their

different perspectives on issues of mutual concern, and communicate solutions beyond the typically short

political clock. Symbolically, in other words, a comprehensive deal would begin to undo more than thirty

years of unofficial regime change policy in Washington, and tear down another piece of this narrative.

There are the economic benefits to consider with this interim agreement, among them the

potential evident in a comprehensive final agreement for Russian interests. The optimism surrounding the

Geneva agreement signed in Geneva has spurred Iran and Russia to begin negotiating a $1.5 billion per

month oil-for-goods deal.4 Some analysts say this is only the beginning of outside interests considering

Iran as new, fertile ground for investment. Others anticipate further progress would inevitably bring

sanctions to an end. In fact, ministers, dignitaries, and business representatives from several European

countries have recently traveled to Iran to discuss opportunities in investment and trade. Russia’s

ongoing relations with Iran give it a slight advantage compared to the West in the near term, but an end to

the sanctions regime under a comprehensive deal endangers Russia’s long-term commercial prospects in

Iran.

First, it is necessary to keep in mind that Russia was party to neither the European Union

nor American sanctions levied against Iran. Russia has always viewed unilateral sanctions as

counterproductive, and the current environment favors Russian participation in Iran’s capital markets due

to Western companies’ role in the sanctions regime. Although the U.S. Congress’s part in the sanctions

4 Foster, Peter. “White House concerned about Russia’s oil for goods Deal with Iran,” The Telegraph, January 14, 2014. Available at http://www.telegraph.co.uk/news/worldnews/northamerica/usa/10570147/White-House-concerned-about-Russias-oil-for-goods-deal-with-Iran.html - accessed online on January 22, 2014.

regime and Western businesses’ continued hesitance to trade with Iran will pose risks, it would be a

mistake to think that increased trade will not be realized in a final agreement. Russia is hurriedly trying to

advance enhanced bilateral trade talks and dialogue about the nuclear program with Iran in anticipation of

the booming market a comprehensive agreement between Iran and the West may portend.5

Second, current Russian investment in the Iranian economy should chill any thoughts of

Russia outgaining the West in trade after a final agreement. According to 2010 estimates, Russia’s share

of Iran’s exports in GDP was a paltry 0.4%. In comparison, China, Japan, Italy, and Spain had shares of

20%, 12%, 7.2% and 5.1% respectively.6 This is in spite of the fact that Russia and Iran have had an

uneasy, yet surprisingly cooperative relationship since the end of the Cold War. Historical antagonism

and cultural differences may explain this low amount of investment, but it does not withstand scrutiny

when compared to several of the Western countries’ stakes. A factor that may explain this is Russia’s

record on doing business. For instance, the Iranian government has complained to Russia about cost

overruns, previously undocumented account arrears, and construction delays in projects around the

country – especially in the case of the Bushehr nuclear reactor. This may be expected with a country still

mired at 92nd in overall ease of doing business, 157th in trading across borders, and 178th in dealing with

construction contracts.7 Russia’s difficulties with investment pose major risks to its ability to take

advantage of openings in Iranian trade markets.

Finally, the efficiency, innovation, and technology vested in Western companies dwarf

Russian capacity at the moment. In Iran, sanctions have limited investments in technology. For example,

oil and gas sanctions have diminished Iran’s refining capacity and ability to explore new energy fields

due to a prohibition on purchasing technology from American (and European) energy companies. Such

companies are market leaders at maximizing production capacity and discovering new fields. For 5 Look at Putin’s comments receiving credentials of Mehdi Sanaee, new Iranian Ambassador to Russian Federation. PressTV. “Geneva Deal Execution Ensures Iran Nuclear Rights: Putin,” PressTV, January 16, 2014. Available at http://www.presstv.ir/detail/2014/01/16/345954/geneva-deal-ensures-iran-nrights-putin/ - accessed online January 21, 2014.6 Simoes, Alexander. “Learn More about: Trade with Iran,” The Observatory of Economic Complexity. Available at http://atlas.media.mit.edu/country/irn/ - accessed online January 21, 2014. 7 World Bank Group. “Doing Business: Measuring Business Regulations,” World Bank, 2013. Available at http://www.doingbusiness.org/data/exploreeconomies/russia/ - accessed online January 22, 2014.

instance, Shell Corporation spent $9.7 billion in capital investments in the third quarter of 2013 alone and

Total S.A. spent $4.96 billion in investments over the same time period.8 Meanwhile, Gazprom, the

leading energy company in Russia, lost nearly $40 billion in 2011 due to corruption and inefficiency.9

While Shell expands its business in new markets and Total deepens its involvement in the Kashagan

fields in Kazakhstan, Gazprom suffers from bureaucratic mismanagement and raids by rent-seeking

government elites. Although this example highlights but one sector of the economy, the staggering

differences in efficiency and investment among American, European, and Russian businesses illustrate

the larger difficulty of the notion that Russian companies can outcompete Western investors in Iran’s new

markets after a political rapprochement.

Therefore, a permanent political resolution to Iran’s nuclear program and a broader

rapprochement between the West and Iran carries significant political and economic risks for Russia. The

intransigence of hardline elements in Iran compromising to the extent that a sweeping reconciliation were

possible may still be considered a flight of fancy. President Hasan Rouhani’s election augurs a hopeful

era of moderation and openness wherein such compromises signify more than fevered optimism by the

Iranian people and political doves everywhere. An improving status quo in the Middle East short of full

rapprochement between the United States and Iran only serves Russia’s strategic and political goals.

First, continued negotiations by the P5+1 and Iran’s compliance with transparency and

accounting in its nuclear program satisfy the international community’s desire to solve the impasse

diplomatically. Second, further progress weakens support for maintaining the sanctions regime itself.

Even if a final deal is not completed at the end of the six-month verification period, Iran may well have

earned enough credibility to convince skeptical members of the international community to ease

sanctions. Third, U.S. involvement in direct talks with Iran and opposition to a military strike against 8 Shell Global. “Third Quarter 2013 Results,” Shell Global Investor Centre, October 31, 2013. Available at http://www.shell.com/global/aboutshell/investor/financial-information/quarterlyresults/archive/2013/q3-2013.html - accessed online January 22, 2014; Total S.A. “Third Quarter 2013 and First Nine Months 2013,” Total, October 2013. Available at http://total.com/en/Total-2013-en-3Q-Results-311013-pr - accessed online January 22, 2014.9 The Economist. “Gazprom: Russia’s Wounded Giant,” The Economist online, March 23, 2013. Available at http://www.economist.com/news/business/21573975-worlds-biggest-gas-producer-ailing-it-should-be-broken-up-russias-wounded-giant - accessed online January 19, 2014.

Syria lessen the likelihood of war breaking out. Finally, an extension of the political clock for

negotiations checks the effectiveness of a limited strike on Iran’s facilities and gives the Iranians more

time. The current state of affairs emboldens Russian engagement in the region, checks Washington’s (and

Israel’s) military ambitions, provides more time for Moscow to develop deeper relations with Tehran, and

prevents the Americans and Europeans from freezing out the Russians in Iran. An old Russian saying

goes, “Vinegar that is free, is sweeter than honey.” Although a continuation of the status quo will be sour

to many, for Russia the current state will be more delightful than the reward.