U.S. SANCTIONS ROSOBORONEKSPORT OVER DEALS WITH IRAN

Russia is still mostly closed for business because of the extended Christmas holidays, but more bad news on its international standing is hardly a welcome gift. On January 6 the Ministry of Foreign Affairs lashed out regarding new sanctions imposed by the United States against the major Russian arms exporter Rosoboroneksport and two other companies (www.mid.ru, January 6). The sanctions in questions are not exactly new: the U.S. State Department quietly introduced them last August under to the Iran Nonproliferation Act of 2000 (see EDM, August 7, 2006). The contentious issue was addressed at the highest political level, and after President George W. Bush and President Vladimir Putin briefly met in Moscow’s Vnukovo airport on November 15, the sanctions against Russian aircraft producer Sukhoi were lifted (Nezavisimaya gazeta, November 24, 2006). But Rosoboroneksport has not been let off the hook as expected, and now complaints of deliberate injustice are multiplying.

These demonstratively hurt feelings are hardly justified. Summing up its achievements in 2006, the Russian Defense Ministry proudly announced that the $1.4 billion contract to deliver 29 tactical surface-to-air missile complexes (Tor-M1) to Iran was halfway fulfilled and would be completed in the coming months (Newsru.com, January 2). These missiles are going to be deployed around Iran’s nuclear sites, including the nearly completed nuclear plant in Bushehr (BBC News, January 2; Maariv, January 4).

In this context, the first reaction from Rosoboroneksport, accusing the United States of “unfair competition,” looks rather off the mark (RosBusinessConsulting, January 5). Indeed, the company’s main markets are China and India. New, large-scale contracts were signed with Algeria and Venezuela in 2006, but U.S. arms producers do not exactly fancy these customers. Rosoboroneksport, which, according to the presidential decree signed by Putin in December, has become the monopoly exporter of arms and armaments produced in Russia, might face some difficulties with such prospective buyers as Turkey (Kommersant, December 15). Its main problems, however, are related to the ambitious expansion plans in the civilian sector.

During 2006, this state-owned company acquired a controlling stake in Avisma, the main producer of titanium, and assumed full control over AvtoVAZ, an effectively bankrupt car-producing giant. The latter acquisition puzzled even Defense Minister Sergei Ivanov, but Sergei Chemezov, the CEO of Rosoboroneksport, has his own personal channel to the Kremlin and does not feel obliged to inform the government about every “friendly” takeover (Kommersant, December 25, see EDM, January 3). U.S. sanctions could affect prospects for international cooperation that are crucial for launching a new competitive generation of cars replacing the Soviet-era Zhiguli. Similar problems could hit two other Russian companies sanctioned by the U.S. — Kolomna Machine Building Design Bureau and Tula Instrument Manufacturing Design Bureau — that are being transformed into a multi-profile holding combining the production of modern conventional weapons and various civilian goods.

Besides these business-related conflicts, the new “issue” with sanctions contains a serious political context. Back in October, Moscow indicated in no uncertain terms that it would grant its consent to the UN resolution on Iran only if sanctions against its companies were lifted (Vremya novostei, October 18, 2006). Resolution No. 1737 was indeed adopted by the UN Security Council on December 23, and Putin expressed satisfaction that Russian contracts with Iran would not be affected (Vremya novostei, December 26). Russian diplomacy had indeed made every effort to assure that the draft resolution proposed by the European troika (France, Germany, and the UK) was narrowed in targeting the punitive measures and “softened” in every possible aspect. The Kremlin congratulated itself with finding a way out from the tight political corner without alienating either side in the protracted confrontation (Kommersant, December 25).

This joy turned out to be premature. Tehran was offended by the very fact of UN sanctions, however symbolic, and assumed a defiant pose announcing a further acceleration of its nuclear program and curtailed its contacts with the International Atomic Energy Agency (Lenta.ru, December 27). Washington also had few reasons to be satisfied with a resolution treating Iran with gentle care and maintained that it was only a first step towards a much tougher regime of international isolation. Russia, which presides in the Security Council this month, is therefore facing a tough dilemma. Its “middle-ground” position of agreeing to discipline Iran but continuing to sell arms to Tehran, condemning its nuclear program but contributing to its further advancement, is logically deficient and morally indefensible. Iran’s stubborn rejection of the UN resolution makes it imperative for the permanent members of the Security Council to send a stronger signal, but Russia is uniformly reluctant to do it.

The Russian Foreign Ministry wasted no time issuing a statement rejecting U.S. sanctions as an application of domestic legislation to international matters, thus giving the problem a greater prominence than Washington had though appropriate. This time, however, raising the profile of the issue could only increase the damage to its reputation. The more public attention is brought to Rosoboroneksport, the less it looks like a victim of “unjust and unfair” treatment, as Russian parliamentarians rushed to claim, and the more it comes out as a culprit involved in barely legal politicized mercantilism (Newsru.com, January 6). This policy is being practiced by the Kremlin in different variations, including the gas blackmail perfected by Gazprom and the bans on agricultural imports or penalties for environmental damage slammed by the authorized state agencies. This behavior is typically portrayed as asserting Russia’s ability to defend its national interests while in fact it makes just a peculiar blend of hypocrisy and self-deception.