Satellite photo of the Bushehr reactor complex in Iran. President Putin has vowed to withdraw all Russian atomic engineers now working in Iran if the regime refuses to allow international inspections of its nuclear facilities.

The International Herald Tribune report below is just the latest in a string of articles published in recent weeks describing the Islamic Republic's growing cash flow problem. The Council on Foreign Relations recently released a report describing the decline of Iranian oil and gas production due to mismanagement and a lack of new investment. Last month MSNBC reported that the U.S. has secretly cut a deal with Saudi Arabia to boost Saudi production, thereby decreasing world oil prices and putting more economic pressure on Tehran (it costs the Saudis about half as much to pump a barrel of oil out of the ground as the Iranians). Russia Blog predicted that the U.S. might pursue this strategy to financially squeeze the mullahs in our post The Long War in the Middle East and Russian Oil back in August 2006.

Nonetheless, certain pundits who have been featured prominently in the pages of Newsweek International and the Wall Street Journal still insist that Iran is a more trustworthy partner to supply Europe with energy than Russia!

Finally, while the Kremlin has been accused of plotting to create a troika with Qatar and Iran to monopolize the world gas market, this week Gazprom Deputy CEO Alexander Medvedev told reporters that he doubts that an OPEC-style global cartel for natural gas is even possible. Medvedev said, "It is hard to speculate gas market participants will prove capable of coordinating gas prices among themselves," due to the necessity of obtaining long term contracts for deliveries via natural gas pipelines.

Logo of Rosatom, Russia's atomic energy agency

Original Article

Russia deals a setback to Iran's plan for reactor
By Andrew E. Kramer
Monday, February 19, 2007

MOSCOW -- Russia said Monday it would slow work on Iran's nearly completed Bushehr nuclear power plant after Iran was late in making its $25 million monthly payments.

The strange commercial dustup between Russia and Iran added a new twist to the deeply contentious project to build a Russian-designed, water cooled reactor in Iran, a decade-old deal that is close to the center of Washington's concerns over Iranian nuclear ambitions.

The dispute that became public Monday will delay, perhaps by a year, any delivery of nuclear fuel to Iran, Russian officials and experts said. Low-enriched uranium rods for a reactor core were scheduled to be shipped next month.

Iranian officials denied Monday that they had been late in making payments, IRNA, the official Iranian press agency reported, according to Reuters.

"So far the payments have been accomplished according to the contract," Mohammad Saeedi, the deputy head of Iran's Atomic Energy Organization, said, according to IRNA.

Russia's stringent commercial demands came just two days before a United Nations ultimatum to halt uranium enrichment was to expire Wednesday. They were also in keeping with a Kremlin policy of pumping up the bottom line across the spectrum of state businesses, which range from oil and gas to nuclear power.

"The accounts are not being paid." Ivan Dybov, spokesman for Rosatom, the Russian nuclear agency, said in a telephone interview. "We confirm that there are financial problems."

At issue, he said, was a request last month from the Iranian bank that settles accounts to pay in euros rather than dollars, he said.

It was not clear whether Iran's current account difficulties sprung from United Nations sanctions on Iran's nuclear industry introduced Dec. 23, or a parallel U.S. effort to persuade European banks to freeze dollar-denominated accounts held by Iranian citizens, analysts said. Also, independent of these restrictions, the Iranian government has a stated policy of settling oil and other large contracts and holding state reserves in currencies other than the dollar.

Russia has refused payment in euros, Dybov said. The Iranian central bank settled less than 25 percent of the dollar-denominated bill in January and missed the February payment entirely, he said.

"We aren't turning down the euros," on principle, Dybov said, but any change in terms must be incorporated in an amendment to the Bushehr contract, he said. Both the payment conditions and the exact shortfall are commercial secrets, he said.

Also, safety equipment that was to be delivered to Iran from an unspecified third country will not arrive on time, further delaying the project's inauguration, Dybov said. The plant was scheduled to be initiated in October and connected to the Iranian power grid in November.

The Interfax news agency cited Andrei Cherkasenko, a member of the board of Atompromresursy, another state company in the nuclear industry, saying Bushehr could not be inaugurated until mid 2008. Dybov declined to comment on when the plant might be brought online.

The disagreement Monday between Russia and Iran was not the first in the 15-year history of the Bushehr plant. Russia, for example, had promised to ship fuel in 2005, but then did not.

"From time to time the Russians get fed up with the Iranians and the Iranians get fed up with the Russians" and works slows down, Rose Gottemoeller, the director of the Carnegie Moscow Center and an expert on the project, said in a telephone interview. "The Russians have been very canny in using the Bushehr project to back up their diplomacy," by modulating the construction schedule, she said.

"If you draw a comparison to gas and oil, they haven't cared that much about how good a supplier they seem to appear," when modulating commercial deals to fit political or diplomatic goals, she said.

Also Monday, a spokeswoman for Atomstroyexport, the lead contractor, suggested rising energy and commodity prices had diminished the Bushehr contract's profitability for Russia. In November, for example, the company signed a deal with Bulgaria plant to build two VVR-1000 reactors of the same type being installed in Iran -- but for €2 billion, or about $2.6 billion, each, she said.

Russia insisted, in the face of opposition to Bushehr from the Untied States and Israel, that the project was commercially viable. Russia signed a memorandum of understanding in 1992 and a contract in 1995. Since then, the economics of energy and commodity markets shifted to Russia's disadvantage, according to Marina Alekseyenkova, an analyst of Russia's engineering sector at Renaissance Capital.

Russian power plant contractors, for example, only began routinely hedging their contracts against rising prices for steel in 2004, she said. Without such a condition, Russia's profits for machinery suppliers to the Bushehr plant could have been eroded, she said, undermining support for the project in the Russian nuclear industry.

"It is below current market rates," she said. "It's not obvious it will be a money maker for Russia."

Nazila Fathi contributed reporting from Tehran.

UPDATE: Townhall.com, a website for conservative American political columnists, has another story on the U.S. strategy of economically squeezing Iran, complete with comparisons to U.S.-Saudi economic warfare against the Soviet Union in the 1980s. It remains to be seen, however, if such a strategy is actually underway and whether it will prove effective.