Wednesday, March 21, 2007

Ploy and Counter-Ploy

Last week, we cautioned against Russia's sudden willingness to "get tough" with Iran's nuclear program. Moscow's criticism of Iranian defiance came on the heels of an impasse over the Bushehr nuclear power plant, being built by Russian contractors. Tehran apparently fell behind in its payments (no surprise to anyone familiar with how Iran pays its international bills), prompting the Russians to reduce the number of workers at the site, delay the shipment of nuclear fuel, and postpone the scheduled start-up of the Bushehr reactor.

As we speculated at the time, Russia's actions were seemingly aimed at getting Iran to make its required payments, allowing the nuclear project to proceed. Now, Moscow's foreign minister, Sergey Lavrov, has largely confirmed that stance, saying that there is "no link" between the Bushehr project, and Russia's endorsement of slightly tougher sanctions against Iran. On Tuesday, U.S. and European officials insisted that Russia had threatened to withhold fuel for the Bushehr plant, until Iran suspended its uranium enrichment efforts. Speaking to members of the Russian Parliment, Lavrov denied that claim:

"It's not the first time that we are seeing such an unscrupulous approach aimed at driving a wedge between us and Iran," he told lawmakers in the lower house of parliament. "There is no link whatsoever between the U.N. resolution ... and the implementation of the Bushehr project."

In other words, if Tehran makes the required payments, work at Bushehr will resume P.D.Q. Lavrov also reported that the new sanctions have been softened, at Moscow's insistence. According to the AP, the draft measures include:

"..a ban Iranian arms exports, freezing the assets of 28 additional individuals and organizations involved in the country's nuclear and missile programs — about a third linked to Iran's Revolutionary Guard.

The package also calls for voluntary restrictions on travel by the individuals subject to sanctions, on arms sales to Iran, and on new financial assistance or loans to the Iranian government."

Lavrov's comments are meant to remind Iran that it still has friends in Moscow, provided Tehran does the "right thing" on the payment issue. If the Iranians balk, the Russians can play hardball, although they do not want to lose the multi-billion dollar project at Bushehr. By separating the reactor project from the sanctions process--and watering them down, to boot --Moscow is giving Iran plenty of wiggle room to resolve the Bushehr issue.

On the other hand, Tehran is still making a few ploys of its own. On Wednesday, Iran's supreme leader, Ayatollah Ali Khamenei, said that his country will pursue nuclear activities "outside international regulations" if the U.N. Security Council proceeds with tougher sanctions. Khamenei didn't specify what those activities might include; his comments were aimed primarily at the U.S. and its European allies (which have been pushing for tougher sanctions), but there was a veiled message for Moscow as well. If the Russians maintain their tough stance on the Bushehr project, Iran might try to finish the complex on its own, or seek assistance from another foreign partner, such as North Korea.

As we noted last week, Iran's "slow pay" policy is no surprise to anyone familiar with how Tehran pays its international bills. But the Iranians may also be using the payment process to express displeasure over the quality of work performed at Bushehr, the project's overall pace, or some of the "hidden costs" typically associated with Russian technology deals. However, we'll stand by our original prediction that the Bushehr matter will be resolved in a few weeks, and the project will be back on track by late spring or early summer. That would delay reactor start-up at the complex until late 2007 or early 2008.

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