When Russia will Ready to Join the WTO…

Dr. Zura Garakanidze*

Russia’s persistent interest in Iranian energy projects casts a problematic light over its bid to join the World Trade Organisation.

  • Moscow is already violating the WTO’s rule on relations with unrecognised separatist states
  • It also appears ready to invest in Iranian oil and gas, enough to violate Western sanctions regimes
  • Russian companies’ Armenian subsidiaries are involved in some of these projects

In an interview with Interfax on September 8, William Burns, the US under-Secretary of State for Political Affairs, noted that the US and Russian presidents had decided at their June 24 summit to set September 30 as a target for resolving several outstanding bilateral issues.

“[As] I said before, Russia is making good progress towards those goals,” Burns said. “The United States is doing everything it can to be supportive, so I think it’s possible to preserve and build on [the] momentum that has built up, and I think we are at a moment where Russia’s accession to the World Trade Organisation [WTO] is closer than it has ever been before.”

However, information published by the Russian media makes clear that Russia is violating at least one WTO rule – and may be gearing up to break another.

Separatism and sanctions

First, the WTO prohibits trade with unrecognised separatist states. However, since the 1990s, Russia has enjoyed wide-ranging economic co-operation with Abkhazia and South Ossetia, two regions that have declared independence from Georgia.

Moreover, after invading Georgian territory and occupying South Ossetia and Abkhazia in August 2008, Russia formally recognised the independence of these two regions. It also concluded joint border defence treaties with both of them and has officially recognised customs checkpoints on their common borders.

Secondly, the WTO requires its members to avoid violating sanctions imposed by the organisation’s other member states. This casts a problematic light on Moscow’s dealings with Tehran.

In a gesture of goodwill following the announcement of a “reset” in US-Russian relations, the Kremlin has joined not only with the UN, but also with the US, EU, and Japan in endorsing unilateral sanctions against Iran. At the same time, however, some Russian state-owned companies (along with their Armenian proxies) are looking to co-operate with Iran on the type of investment projects targeted by the US and the EU – and therefore by the WTO.

Co-operation plans

On April 9, the Congressional Research Service (CRS) published a report for US legislators on Iranian sanctions. This report stated: “Major purchases of oil or natural gas from Iran would not appear to constitute violations of ISA, because ISA sanctions investment in Iran, not trade with Iran (even in energy products). Nor do sales to Iran of equipment or services for Iran to build its own energy projects appear to meet the definition of investment under the act.

However, Russian companies are going beyond the scope of such activities outlined above. Moscow and Tehran have been discussing plans for the realisation of joint investment projects in the oil and gas sphere over the long term. In July 2010, Russian Energy Minister Sergei Shmatko and Iranian Oil Minister Masoud Mirkazemi signed a joint statement on co-operation in the oil and gas sphere.

“In a gesture of goodwill following the announcement of a “reset” in US-Russian relations, the Kremlin has joined not only with the UN, but also with the US, EU and Japan in endorsing unilateral sanctions against Iran.

The document states that the parties intend “to study the possibility of establishing of a joint bank to finance projects in the oil and gas and petrochemical sectors.” To this end, they will consider establishing a joint venture and mull plans for selling a portion of their joint production on ex-changes.

According to Shmatko, the partnership between the countries in the designated direction has no practical limits. For his part, Mirkazemi has declared repeatedly that sanctions imposed by the US and EU haven’t affected Iran’s economic and industrial development in any way.

The above-mentioned agreement calls for Russian companies to spend about US$2.2 billion on oil- refining projects designed to help Iran overcome its long-standing dependence on imported motor fuels, especially petrol. This is part of a wider effort by Tehran to build up the country’s downstream sector and expand petrol production capacity.

Bypassing sanctions

In theory, building new refining facilities in Iran is problematic because of the sanctions regimes seeking to bar foreign investors from pumping more than US$20 million into energy projects. However, Russia found a way to extend its fruitful energy cooperation with Iran some years ago.

In 2007, media reports indicated that Russia’s Gazprom Neft, the oil arm of the state-run natural gas monopoly Gazprom, was considering proposals for the construction of a refinery in Armenia with a capacity of 7 million tonnes per year (140,000 barrels per day). The oil- processing plant was to be built near the city of Meghri, on the border with Iran.

Earlier, Yerevan had offered Moscow the opportunity to build a refinery with a throughput capacity of 3-4 million tonnes per year (60,000-80,000 bpd). However, the Russian side said it would not go through with the project unless the plant’s capacity could be increased.

Re-routing oil through Armenia

This seems excessive, given that such a plant’s petroleum product output would far exceed the amount needed to cover Armenian demand. As such, it seems more likely that the Russian side was looking at the project as a means of helping Iran process more oil.

“Russia and Iran … have said they might sign swap deals allowing gas to be transported from Turkmenistan to Iran in exchange for Tehran’s commitment to make equivalent volumes of its own gas available on Gazprom’s behalf in southern Iran.”

Indeed, the proposed Meghri refinery is supposed to receive oil pumped from Tabriz, a city in north-western Iran, via a 200-km pipeline, and would then transport the resulting petroleum products back to Iran by railway. The transport infrastructure needed to accomplish this will be constructed with help from Russian companies.

The project has not drawn much attention lately, but considering the joint statements made by Russia and Iran on the development of a new transport corridor, a revival is not out of the question. Once a legal base for the project is established, starting work would be easy. The two countries indicated recently that this process was already underway.

According to a report from the Tert. am news agency, work on the project may begin soon. The agency said on September 14 that construction of the Iran-Armenia oil pipeline was slated to begin in the autumn of 2010 and would finish about two years later. Officially, Armenia will cover 50% of the required investments, and Iran will cover the remaining 50%. It is worth noting, however, that virtually all of Armenia’s energy infrastructure is owned or controlled by Russian state-owned energy companies.

Other projects

Meanwhile, Russia and Iran have discussed other high-value energy projects. They have said they might sign swap deals allowing gas to be transported from Turkmenistan to Iran in exchange for Tehran’s commitment to make equivalent volumes of its own gas available on Gazprom’s behalf in southern Iran.

Tehran has also shown serious interest in Russian proposals for the construction of a liquefied natural gas (LNG) plant in Golestan Province and has said it may enlist Russian help to build an oil pipeline from the Caspian port of Neka to Jask, a port on the Gulf of Oman.

Additionally, Iranian authorities are ready to consider offers made by Russian state-owned and state-controlled energy companies for development licences covering new oil and gas deposits in Iran. Tehran may make these licences available on a non-competitive basis.

Meanwhile, Gazprom Neft is currently continuing negotiations for development rights to two Iranian oil deposits, Azar and Changouleh. Last year, it struck a deal with the National Iranian Oil Company (NIOC) on the formation of a joint venture to exploit these fields.

In the gas sector, Gazprom is working at a section of South Pars, Iran’s largest gas field and home to about 8% of world gas reserves. South Pars is also being targeted by Sibur, a petrochemical company controlled by Gazprom. The Russian gas monopoly may also become involved in the construction of the 2,700-km Peace Pipeline, also known as the Iran-Pakistan-India gas link. Gazprom held discussions on the project with Iranian officials in 2009.

Russian involvement and interest in the above- mentioned projects can be documented through reports in the Russian press. As such, there seems little reason to doubt that Moscow stands ready to commit funds far in excess of the US$20 million thresholds set by ISA.

True, the plans outlined here have yet to come to fruition. However, if Russian companies go forward with them, Moscow will be in contravention of WTO rules. And when this potential violation is viewed against the backdrop of its occupation and recognition of breakaway regions of Georgia, Russia ought to be farther from accession to the WTO than it ever was before. PR

* Dr. Zura Garakanidze is an author in News-Base E-magazine.

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