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Iran-Russia Energy Relations

Friday, July 8, 2011

From a Bilateral to a Multilateral Regional Cooperation

Mandana Tishehyar
PhD in International Studies, Jawaharlal Nehru University, India & Lecturer, University of Tehran, Iran

For thousands of years, the two great Empires of Iran and Russia were in the neighborhood, sitting next to each other and sharing memories with ups and downs. Apart from wars and invasions which blurred the relationship between the two sides, they had the opportunity to pave the way for expanding the economic cooperation. Although the economic and trade cooperation between the two countries goes back to hundreds of years ago, their cooperation in the field of energy has a life less than a century.

95 years ago, in 1916, for the first time Iran's government gave the concession of Iran's north oil to one of the Russian merchants, named Khoshtaria. Although, unlike British merchant -William-Knox Darcy who attained the same concession for the Southern oil fields and established a great oil empire in the southern part of Iran- Khoshtaria was unable to use this concession to invest in the oil fields of the Northern region of Iran, having this privilege was a turning point in entering Russia into the issues related to Iran's energy policy.

During 1920s and 1930s, the communist government in Russia cited the Khoshtaria concession repeatedly to prevent Iran's government to give similar concessions to American oil companies such as Standard oil Company which was interested in participating in Iran's North oil-rich regions.

When American Sinclair Oil Cooperation attempted to gain Iran's North oil concession again in 1944, Sergey Kavtradze, Deputy Foreign Commissar of the USSR, headed a delegation and came to Iran to push for a Soviet share in the Iran's oil industry.

In December 1944, despite Soviet opposition, Mohammad Mosaddeq, Iranian nationalist who was a member of the Parliament, successfully advanced legislation preventing any government official from granting Iranian fields to any foreign investor without explicit approval from the Parliament. Kavtaradze protested the change, claiming that it was aimed against the Soviet Union, but the Iran's government refused to renegotiate and he returned to Moscow without having registered any gain.

However, the Russians continued to insist on their enthusiasm for establishing an Iran-Soviet Oil Company and put it in the schedule of Prime Minister Qavam's personal discussion with Stalin in Moscow. Soviet troops did not withdraw from Iran proper until May, 1946 after receiving a promise of petroleum concessions based on the Qavam-Sadchikov agreement. In fact, Qavam arranged a deal with the Soviets, granting an oil concession in the North contingent on the approval of the Iran's Parliament. Under the terms of the agreement with Qavam, Soviet troops began withdrawing from Iran. However, when the new Parliament was seated, they immediately voted against the proposed Soviet oil concession.

After that, for near two decades, the relations between the USSR and Iran were restricted to formal diplomatic contacts. The strengthening of the influence of the United States on Iran had a negative impact on the bilateral relations. Nevertheless, both sides took gradual steps towards improving their relations. During 1960s, Iran pioneered in opening new doors in normalization and expansion of its relations with the Soviet Union.

In 1966 beside the major agreements for economic and technical cooperation and joint projects for building industrial facilities in Iran, the USSR was to cooperate in the construction of the Trans-Iranian gas pipeline for exporting gas to the Asian republics of the Soviet Union.

According to the agreement, Soviet organizations would design and survey the plants, supply equipment and provide experts for providing technical assistance. The Agreement envisaged supplies of gas to the Soviet Union and supplies of machinery and equipment to Iran for the period from 1970 to 1985.

The 1,106 km Trans-Iranian gas pipeline was launched in 1970. Its northern section of 500 km was built by the Soviet side. From the locality of Bid-e Boland, where the head facilities are situated, the pipeline passed along a route to Isfahan, Kāšān, Qom, Tehran, Qazvin, Rašt, Anzali, and Āstārā. From Āstārā, the gas entered the USSR, and in late 1970, supplies of gas to the Trans-Caucasus began. It was Iran’s first export gas pipeline. In 1972, the export of gas amounted to 8 billion cubic meters and was on the increase in subsequent years.

On the other hand, with the termination of constructing natural gas pipeline, a serious crisis arose between Moscow and Tehran about the price of exported gas to the Soviet Union. The conflict continued over a year and finally the Soviet government accepted to increase the price of the purchased natural gas.

In 1972, a new treaty on developing economic and technical cooperation was signed which envisaged the participation of the USSR in the development of Iranian oil-and-gas and petrochemical industries, and power energy facilities.

One of the latest examples of energy cooperation between the USSR and Iran during the Pahlavi's regime was signing an agreement in December 1976 to export Iran's Natural Gas to Germany and France via Soviet's territory and through the Soviet-Iran natural gas constructed pipeline.

However, further expansion of economic relations and strengthening of political relations were interrupted by the Revolution of 1979 in Iran. After the overthrow of the shah, the leadership of the USSR declared its intention to develop friendly and neighborly relations with Iran. The Soviet leadership was attracted by the anti-American mood of the new authorities. However, the Islamic leadership announced the main trend of its foreign policy to be “neither East nor West”.

The subsequent events indicated that the new regime was curtailing its ties with the USSR. Immediately after the revolution, Iran announced a price rise for the gas supplied to the USSR. The Iranian-Soviet relations also suffered an important setback when the Soviet troops invaded Afghanistan in December 1979. Relations were also adversely affected by the supply of Soviet weapons to Iraq at the peak of the Iran-Iraq war. This was the result of the mutual antagonism between Marxist-Leninist ideology and the Islamist government of Iran, and Muslim antagonism to the Soviet occupation of Afghanistan.

After the collapse of the Soviet Union in early 1990s, forming a new round of relations and cooperation between Iran and Russia was anticipated. However, over two decades, since the formation of the Russian Federation, economic cooperation between the two countries -particularly in the energy sector- still has not been expanded much. Trade between the two countries is not significant and the value of bilateral cooperation in upstream and downstream industries of oil and gas is not expanded as expected. While Iran and Russia are two giant powers in the field of energy reserves in the world, they have not been successful to improve relations with joint investments in the fields of exploitation and transportation of energy and in forming a strong partnership in the international energy markets.

It is understandable that Russian economy in recent years has constantly changed its dependency on exports of technology, to dependency on exports of raw materials, especially oil and natural gas. Therefore, the Russians have set most of their technology and capital to maintain and increase their domestic production levels in the oil and gas fields. Also it seems that dependency on revenues from the sale of raw materials does not make both countries' economies complementary enough to meet the needs of each other.

Furthermore, Russia may consider the expansion of Iran's capacity to export energy in contrast with the Russia's strong presence in the global energy markets. This, of course is inconsistent with the realities of international economy and interdependency between economies in the era of globalization. Moreover, while the Russia's traditional energy customers are mainly among European countries, Iran's oil purchasers are mostly from the South, South East and East Asian countries.

Another obstacle to expand energy cooperation between Iran and Russia in recent years is international sanctions against foreign companies investing in oil and gas industries of Iran. This has limited the presence of Russian major oil and gas companies in Iran's energy industries and due to the international pressure, they prefer to avoid massive investments in this section.

However, what has been neglected is a policy to enhance cooperation through the development of multilateral regional relations. Russia and Iran neighboring with strategic region of Eurasia, provides the two countries with a special capacity that has not been considered seriously until now. Cooperation for the development of energy industries in the Caspian littoral states, providing new infrastructure for energy transportation from these surrounded areas to the energy markets via Russia and Iran and attention to the capacity of the north - south corridor which was established previously in a framework of an initial agreement between Iran, India and Russia, can create a new arena of regional cooperation among these countries.

Shanghai Cooperation Organization (SCO) formed between China, Russia and Central Asian countries in recent years and joining countries such as Iran, India and Pakistan as observer members of the organization can be an important step to shape different dimensions of regional cooperation, especially in the field of energy. During the Summit session of this organization in 2006, Iran presented the proposed initiative to shape the energy cooperation between the members of SCO. This initiative was welcomed by the other Member States. Iran discussed that while the three countries of Central Asia, including Kazakhstan, Uzbekistan and Turkmenistan, along with Iran and Russia, are considered as the major oil and gas producers in Eurasia, other members of the organization, such as China, India, and Pakistan, are the largest energy consumers in Asia and even in the international level.

Regarding this reality, organizing a network of cooperation among energy producers and consumers in the Caspian region is achievable through multilateral cooperation, intra-organizational investments and providing energy transportation network between these countries. It can also allow the participated countries to expand energy cooperation with Iran through the formation of a consortium of Eurasian national oil companies. Therefore, the effect of sanctions against these countries will also be neutralized.

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