Monday, March 12, 2007

Slow to Pay

One of the great truisms in life is "never lend money to a relative." In the arena of arms trading and technology transfers, the maxim is "never do business with Iran," that is, if you're a stickler for such trivial details as "full payment" and payments made on time.

Russia appears to be learning that lesson the hard way (again), via the deal to build Iran's first nuclear power plant at Bushehr. Drudge has the link to this AP story, indicating that the state-owned Russian firm is delaying launch of the reactor, because Tehran is paying only a fraction of the $25 million monthly bill for construction and start-up activity at the complex.

In a statement, the Russian firm Atomstroiexport said that Iranian payment delays will postpone the scheduled September start-up of the plant's nuclear reactor. The firm also said that there "can be no talk" of supplying fuel for the reactor until the payment issue is cleared up. Representatives of Atomstroiexport met with Iranian representatives last week (in an effort to resolve the dispute) but those talks collapsed, prompting Moscow's threat to delay the project. Delivery of nuclear fuel for the Bushehr reactor is scheduled for this month, and on Sunday, Iran "sternly" urged Russia to meet that deadline, according to the AP.

On a related note, the Russian media reports indicates that Moscow is growing tired of Tehran's continued defiance of U.N. security council sanctions, warning the Iranians to cooperate and stop playing "anti-American" games. That comment--from an unnamed official--suggest that Russia might be close to yielding to western pressure for tougher sanctions against Iran's nuclear program.

While such a stand would be helpful, a word of caution is in order. Quite frankly, it is possible to read too much into these developments. After failing to resolve the payment issue in last week's negotiations, Moscow is now using the press to convey pressure tactics to Iran. If Tehran doesn't pay up, the Russians can threaten to delay fuel deliveries to Bushehr, start-up at that complex, and--if all else fails--they can side with the west and (perhaps) derail the entire project. But that would also mean the loss of hundreds of jobs for skilled Russian engineers and technicians, and the billions potentially riding on completion of the facility and its operation. At this point, I doubt that Moscow is ready to throw in the towel; reading between the lines of the AP dispatch, one gets the impression that a big check from Tehran could get the entire venture back on track.

As for the Iranians, the fact that they've fallen behind on payments for the Bushehr complex is no surprise. Any analyst who's followed Iranian arms purchases and tech transfers for any length of time can tell stories about projects that fall behind schedule--or end completely--for a couple of reasons:

1) Tehran's military industrial complex is notoriously cheap, inefficient and corrupt [and]
2) Iran rarely pays its bills on time

Let's begin with the cheap and corrupt portion of the equation. As we've noted on numerous occasions in this blog, Iran is a nation sorely in need of new military hardware, particularly in its air defense sector. For example, the Russian-made S-300 surface-to-air missile system seems tailor made for Tehran, offering state-of-the-art protection against air and missile attack, even at long ranges. And, credible intelligence reporting suggests that there have been contacts between Russia and Iran about a possible purchase over the past decade. In some cases, the information suggested "imminent" deliveries, but to date, the S-300 has never materialized in Iran, which still relies on 1960s and 1970s-era Chinese, American and Russian missiles for air defense. Given the apparent need, why have these acquisitions been derailed? After early interest, Iran (typically) balks at the price, suspends negotiations, and the deal remains dormant until some in Tehran starts the process again, angling for a better deal.

Now, suppose that the right people in Iran actually decide to follow through on a purchase. That's the hard part, right? Guess again. Like many military-industrial complexes in the third world, Iran's procurement system is replete with front companies, middlemen, retired officers and other "interested parties" (read: mullahs and their off-spring) that want a piece of the action. The actual sale will, likely, be negotiated through an Iranian arms dealer or front organization, used to penetrate the MOD establishment and obtain a favorable decision. Obviously, that sort of access costs money, and there are plenty of "vendors" who've been burned by Iranians who promise more than they can deliver, while accepting huge "fees" for their services. By comparison, the U.S. DoD procurement system is a veritable model of efficiency and integrity, regardless of what John McCain might think.

Let me offer a case in point that illustrates the Iranian system in action. A few years back, someone the MOD in Tehran decided that the military needed better technology for concealing some of its equipment from attack. A middleman approached a well-known vendor in the Far East, promising potentially large orders and joint ventures, if the company could deliver what the Iranians were looking for. The vendor--known for advanced technology is that particular area--was interested and offered to sell a few prototypes to Tehran for $50K. If the Iranians found them satisfactory, the vendor could supply more, at a set price. To get the ball rolling, the Far East firm required the stated down payment. Additional installments--for series production --would follow after the prototypes were delivered and approved. No problem, the middleman replied. You'll have your money within a month. And, by all indications, the vendor had every reason to believe the sincerity of the middleman--and the Iranian MOD interests he represented.

Needless to say, the Far East firm did not receive the promised payment in 30 days. Months dragged by, and still no money from Tehran. When pressed, the Iranians indicated that they were still interested, and the check was, well...err...being processed, or something like that. Down payment for this "priority program" was finally made almost a year later, and by all indications, Iran never followed up with more orders. And remember: this was a decidedly low-dollar program; total value for the package was somewhere in the six-figure range. Obviously, we're not talking about new airplanes, missiles or even fuel for a nuclear reactor. The technology involved is not covered by international agreement, so obtaining an export license (or approval of a third party government) was not an issue.

So what happened? Hard to say. One theory suggested that the Iranians were trying to pull a fast one, obtaining advanced prototypes for little/nothing, then attempting to reverse engineer them. When the vendor refused to deliver without required payment, that plan fell through. Another possibility is that the middleman lost influence, or someone within the MOD decided that the project wasn't a high priority afterall. There's also the chance that the "right" palms weren't greased within the Iranian bureaucracy, putting a kabosh on the deal once and for all.

And finally, there's the most likely scenario: this program was simply another case of Iran refusing to pay its bills in a timely manner, while attempting to get maximum value for minimum payment. The same may be true at Bushehr; years into the project, Tehran may feel that Moscow has "too much invested" in the complex to pull out now, allowing them to put the squeeze on monthly payments. Conversely, those recent "threats" from the Russians are meant to show that they have leverage, too. The next step in this process would be for Iran to threaten to "fire" the Russian contractor and attempt to finish the job itself, hire a Chinese firm to do the job, or simply make the required payments.


ADDENDUM: There are isolated examples of Iran paying for equipment--and receiving it--in a timely manner (the SA-15 program comes to mind) but those are exceptions, and not the rule. In Tehran, the phrase "the check is in the mail" takes on an entirely different meaning. The impasse a Bushehr may also indicate that Iran is unhappy with the work performed at the nuclear facility. Moscow has its own reputation for shoddy work and double-dealing, as almost anyone with experience in their "joint ventures" can tell you.

In fact, this entire episode is something of a kabuki dance between players who are adept at manipulating the art of the deal. On one side, you've got the Russians, who often promise advanced technology at bargain basement prices, only to inform buyers (once the deal is signed) that there's an additional charge for maintenance, training and other services . On the other side, Moscow may have met its match in Tehran, which demands state-of-the-art equipment, but has its own agenda in actually paying for it.


jaymaster said...

So let’s say Iran has agreed to pay Russia $25 million a month for delivery and support of said nuclear reactors.

Would it not be a bargain for the US (or the Saudis, or Isrealis, or any suitable consortium), to offer say, $50 million a month to Russia for them to NOT deliver the goods?

Anonymous said...

As a fellow blogger, I must commend you for giving credit to Drudge. Most bloggers would have just linked to the site and be done with it.