In February and March 2007, Russian-Iranian relations faced a short, but intense crisis over
the alleged failure of Iran to pay its Russian contractor, AtomStroiExport, in full and on time for progress made on construction of the Bushehr nuclear power plant (NPP). (Russia took over construction of the Bushehr plant in 1995, years after Germany withdrew from the project.) The underlying reasons and the full scope of the payment crisis are not yet entirely clear, but these events hint at an emerging rift between the two countries over a broad range of issues.

The crisis became public in mid-February 2007, when Irina Yesipova, a representative of AtomStroiExport, disclosed that Iran had failed to make payments on the project since the middle of January. [1] Subsequent statements by Russian officials and leaks to the media revealed that the problem was considerably more severe.

Background
According to Russian sources, problems began in the fall of 2006, soon after the head of the Russian Federal Atomic Energy Agency (Rosatom), Sergey Kiriyenko, signed an agreement with his Iranian counterparts finalizing the schedule for the completion of work at Bushehr. According to the September 2006 deal, the nuclear power plant was to be commissioned in September 2007 and to start commercial service in November 2007. In March 2007, approximately six months prior to the beginning of plant operations, Russia was to supply nuclear fuel for Bushehr. The implementation of this schedule was contingent on Iran’s timely payment. [2] Russian sources claimed, however, that payment in the last quarter of 2006 constituted only 60 percent of the agreed sum, with Iran paying $8 million in October and $22 million in November. [3] In December 2006, Kiriyenko went to Tehran and signed an additional agreement establishing a payment schedule, according to which Iran was to transfer $25 million to AtomStroiExport each month until construction was completed. [4] Instead, according to a February 2007 statement by Rosatom press secretary Sergey Novikov, Iran made its last payment in January and it amounted to only $5.1 million. [5] By mid-March 2007, Russian officials reported that total Iranian arrearages had reached $140 million, including those incurred previously, meaning that the payment crisis had begun well before Kiriyenko’s September 2006 negotiations. [6] Although AtomStroiExport continued construction work, it said it faced difficulties in paying subcontractors for equipment and materials. [7]

Iranian officials claimed that they had made all payments in full and on time. Responding to AtomStroiExport’s original disclosure in February 2007, the deputy head of the Atomic Energy Organization of Iran (AEOI), Mohammad Sa’idi, declared that all payments had been made according to schedule and that whatever issues existed would be solved in 10 days. [8] The AEOI reported that Tehran had transferred $12.7 million on March 1, but AtomStroiExport denied it received any payment. [9] Subsequently, Iran hinted that Russia’s accusations represented an attempt to squeeze more money from Iran than had previously been agreed upon. Consequently, Iran asked Moscow to formulate its position on additional payments. [10]

The reasons for the dispute remain unclear. Several Russian sources indicate that the breakdown in payments was caused by Iran’s decision to switch all its foreign trade from U.S. dollars to euros. This complicated the deal because all contracts on Bushehr had specified payment in U.S. dollars and transfers were to be made through U.S. banks. However, only relatively minor adjustments in the payment procedures would have been required to restore the normal schedule. [11] Moreover, this explanation does not seem complete, because AtomStroiExport did receive some payments in U.S. dollars, suggesting that other factors were also at issue.

Consequences of Payment Dispute
At the end of February, Vladimir Pavlov, the head of AtomStroiExport’s Bushehr Department, said for the first time that the agreed timeline for the completion of the Bushehr NPP could slip due to nonpayment, although he ruled out cancellation of the project. [12] By the middle of March, Russia’s official position was that the construction schedule would be delayed. Rosatom press secretary Novikov said that Iran’s refusal to solve the payments issue made commissioning of the NPP in September 2007 impossible. [13] He elaborated that since payments were delayed by two months, the commissioning would also likely be delayed by two months. [14] A few days later, Rosatom head Kiriyenko confirmed that delay. [15] Unofficially, Russian experts put the completion of construction at mid-2008. [16] Russian representatives announced that the transfer of nuclear fuel would be postponed as well, consistent with the arrangement that the transfer of fuel was required approximately six months prior to the commissioning of the nuclear power plant. [17]

In addition to nonpayment, Russian officials cited another problem that hampered the construction: Iran had insisted that it purchase on its own all of the Bushehr plant’s equipment that Russia could not provide, approximately 10 percent of the total. (AtomStroiExport had originally proposed that it would make these purchases). Russian representatives claimed that delivery of some of the equipment ordered by the Iranians was late and that this contributed to the delays in completing the entire project. [18]

The two parties have held intense and apparently rather acrimonious negotiations on the issue of payments. The first round took place in early March and ended inconclusively. Sa’idi, the Iranian representative, gave a highly positive account of the outcome, however, which angered Russian negotiators, who retorted that not only had a solution not been found, but the parties had even failed to agree on a joint communiqué. [19] Only after another round of negotiations in late March in Tehran was a solution found. On March 26, AtomStroiExport reported the receipt of the first funds transferred since the middle of January 2007. [20] In early April, Kiriyenko announced that Iran was gradually complying with the payment schedule, but catching up would take time because the first quarter payments amounted to only $15 million instead of the $75 million agreed to. [21] The final agreement on the payment controversy was signed on April 22, 2007. Yesipova of AtomStroiExport also revealed that Iran was transferring funds, “but not in the amounts we need.” [22] Neither side divulged a new schedule for the completion of work at Bushehr or when and whether Russia would supply nuclear fuel for the nuclear power plant.

Russia’s Position on Iran’s Nuclear Program
Throughout the dispute, Russian officials maintained that the nonpayment issue was strictly technical and had nothing to do with international efforts to persuade Iran to halt more controversial aspects of its nuclear program, specifically its pursuit of sensitive nuclear capabilities outside the Bushehr project that could provide access to material suitable for nuclear weapons. (Note: In late December 2006, the UN Security Council, under Resolution 1737, had unanimously imposed sanctions on Iran for its failure to comply with earlier Council requests that it cease activities related to the potential production of nuclear weapons materials.) Speaking in late February, Russian Foreign Minister Sergey Lavrov insisted the slowdown in completing Bushehr was not intended to increase pressure on Iran to halt its other nuclear activities. [23] In late March, moreover, the Security Council of the Russian Federation (a body roughly equivalent to the National Security Council in the United States) published a special statement denying that Russia linked completion of Bushehr to the issue of Iran’s compliance with Resolution 1737. [24]

Nonetheless, the Russian media noted that the issue of nonpayment, although a problem for many months, surfaced at roughly the same time as the International Atomic Energy Agency (IAEA) was to report to the UN Security Council on Iran’s compliance with UN Resolution 1737. [25] When the IAEA reported that Iran had not complied with Resolution 1737, the UN Security Council proceeded to impose additional sanctions on it through Resolution 1747, which was adopted on March 24, 2007. The Russian media has suggested that Moscow’s decisions to make public the failure of Iran to meet its payments and to delay Bushehr’s completion, along with the shipment of nuclear fuel, were intended to strengthen Russia’s hand during the negotiations in the Security Council on Resolution 1747. These steps would have allowed Moscow to argue behind the scenes that harsh new UN measures, which it has traditionally opposed, were unnecessary because Russia was already increasing pressure on Iran through the Bushehr relationship. This possibility seems less persuasive, however, since Russia accepted new payments from Iran just two days after UN Resolution 1747 was adopted and is now obligated to fulfill the contract. [26]

If there is a link between Russia’s Bushehr freeze and Iran’s refusal to slow its sensitive nuclear activities, it was most likely indirect and reflects a general dissatisfaction with Iranian intransigence on the latter issue. In the middle of March, an unnamed “informed source in Moscow” seemed to point in this direction when he stated in an interview that Tehran was abusing Moscow’s friendly attitude. Moreover, according to this source, Russia’s international reputation was suffering because of its support for Iran – a cost it was not prepared to endure forever. [27] The Chairman of the Committee on International Affairs of the Federation Council (the upper chamber of the Russian parliament), Mikhail Margelov, declared that Iran behaved like Soviet clients in the “third world.” These clients understood friendly relations as charity, Margelov stressed, and bled the Soviet economy and budget. Iran seemed to be reviving that practice, he complained, but must understand that if it did not pay for the facility, the Bushehr nuclear project would not be completed on time. [28]

These and similar statements suggest that there are limits to Moscow’s goodwill and to the political costs it is prepared to endure for its support of Iran. Russia is now on record as intending to fulfill its contract and complete construction of the facility. If Iran violates the contract, however, Moscow might seek a new excuse for slowing or halting the project. Continuing disputes over the Bushehr project and the increasingly hostile accusations from both sides, moreover, call into question whether Iran will make good on its earlier promises to purchase additional nuclear power plants from Russia and whether Russia will maintain its previously proclaimed interest in constructing such plants.

Nikolai Sokov – Monterey Institute Center for Nonproliferation Studies