The sight of Russian tanks rolling into Georgia in August had many world leaders speaking of a new Cold War. Certainly the images conjured up memories of Russia’s invasion of Prague in 1968 and marked a new low in its already brittle relationship with the West.
The diplomatic crisis is also throwing Russia’s business interests in the Middle East into sharper relief. Incensed by US warships entering the Black Sea with aid for Georgia in August, and Poland’s decision to sign up to the US missile defence shield in Eastern Europe the same month, Moscow is hitting back.
On 18 September, Russian state arms export group Rosoboronexport unveiled plans to sell anti-aircraft systems to Tehran, offering greater protection to Iran’s nuclear facilities from a potential US or Israeli attack.
Earlier that month, Russia’s nuclear equipment and export monopoly, Atomstroyexport, announced that work on its $1bn contract to build Iran’s nuclear plant at Bushehr was nearing completion, and would be “irreversible” by early next year.
There is also widespread expectation that Russia will renew a military partnership with Syria, selling weapons systems to its old ally in exchange for permission to revive its Cold War naval base at the Syrian port of Tartous.
US Secretary of State Condoleezza Rice has reacted to Russia’s actions in Georgia by saying they are part of a “worsening pattern of behaviour” and that Moscow’s “international standing is worse now than at any time since 1991”.
Russia’s President Dimitri Medvedev has not helped with recent comments that his country would not fear a new Cold War. But although the announcement of these deals may have been deliberately designed to bait the US, Russia’s latest steps in the Middle East defence market expose the limits of its influence in the region.
Aerospace and defence technology is a critical market for Russia, and one in which it has previously excelled, but the industry has fallen on hard times at home.
While billions of dollars are being pumped into Russian defence manufacturing to resuscitate the industry, Washington has largely cornered the market in arms sales to the Middle East. With defence markets in the region now largely falling along old Cold War lines, Russia has few customers.
According to the International Institute of Security Studies, the value of Moscow’s over-the-counter defence sales to the region between 1997 and 2006 was barely a tenth of Washington’s (see table, page 28).
Only Egypt, Israel, Kuwait, Morocco and the UAE have bought arms from both Russia and the US in the past decade, and in most instances the big deals have been done with Washington. For example, Egypt’s defence deals with Moscow during the period amounted to $300m, compared with $9.6bn in agreements with the US.
Russia’s only captive markets in the past decade have been states that have been distanced from the West, such as Algeria, Iran, Libya, Syria and Yemen. Even this list is set to shrink further with the US welcoming Libya back into the fold and courting the country’s leader, Muammar Gaddafi.
“Russian arms producers would like to supply to any country that is willing to buy, but it is very difficult to penetrate new markets,” says Yury Fedorov, Prague-based Russian analyst for Chatham House.
“Even if Saudi Arabia wanted to buy from Russia, it would mean turning away from the US, and that does not look likely.”
Despite its assistance with the Iranian nuclear programme and the latest weapons deal, Russia’s relationship with Tehran is a delicate balancing act that belies the bullish rhetoric on either side, which is aimed at their domestic audiences.
Moscow has consistently opposed a military strike on Iran’s nuclear facilities, as well as economic sanctions, but has no wish to see Tehran armed with nuclear weapons and a potential conflagration on its own doorstep.
“Russia’s approach to Iran’s nuclear programme is motivated by business and strategic interests,” says Fedorov.
“Russia does not want a military attack on Iran, but equally it does not want Iran to get nuclear weapons or a political solution that might open the way to a Westernisation of Iran. At a time when Iran is fiercely anti-American, Russia can play a critical role, and so is interested in freezing the situation.”
Moreover, Iran is a valuable export market for Russia, not just for its nuclear and military technology, but also civil aerospace sales and engineering work on the Islamic republic’s creaking infrastructure.
Iranian airlines have discussed purchasing planes from Russian manufacturer Tupolev to bypass US sanctions.
Although Iran Air has ruled itself out of a deal, other low-cost carriers in the country remain interested. At a time when even Russia’s domestic carriers prefer to stock their fleets with Airbus and Boeing jets, rather than buy Russian, such sales are invaluable.
Russia could also be hoping to import energy from Iran. Paradoxically for such an energy-rich country, Russia continues to experience difficulties with power generation at home, and its domestic nuclear construction programme has stalled.
“It is possible [for Russia] to export nuclear technology and import energy, because of the problems with energy generation at home,” says Carlo Gallo, analyst at business risk consultant Control Risks.
“The defence sector at home is also in a difficult position. Iran is a very useful export market in many areas.”
Overall, rather than stoking a new arms race, Russia’s efforts appear to be designed to boost its business ties with the region to resuscitate industries that are flagging at home.
Defence and nuclear sales may be limited to a handful of nations, but in other areas Moscow is targeting the entire region, and is also keen to draw Arab investment to Russia itself. The Arab Expo event in Moscow on 22 October will showcase investment opportunities in Russia, and a Russian investment conference will take place in Dubai in November.
“By the end of last year, trade volumes between Russia and the Arab world were more than $6bn, and we are seeing new opportunities throughout the region, particularly in the Gulf, as well as great interest in the Russian market from Arab investors,” says Vladislav Lutshenko, deputy director of the Russian-Arab Business Council, which is organising the Arab Expo event.
“We are not talking about a Cold War, and we have business interests far beyond Iran and Syria. Business is like water – it flows around obstacles and goes where it must. We have good relations with all Arab nations and see the whole Arab world as a potential market.”
Part of Moscow’s problem in the Middle East is that it does not enjoy the same economic leverage as it does elsewhere.
Moscow’s strongest card in its relations with Europe, for example, is its gas supplies – a factor that does not hold the same resonance in the Gulf. Russia has vast expertise in the energy market, but its largest firms must compete for work in the region with everyone else.
Lukoil has production facilities in Egypt, and an exploration contract in Saudi Arabia, but a production deal agreed with the former Saddam Hussein administration was suspended and has not yet been renewed.
Gazprom, the Russian state-owned oil and gas giant, has significant interests in North Africa, striking up partnerships in Algeria and Libya. However, plans to create a gas equivalent of Opec, which have been pushed by Russia in the past, have fallen by the wayside.
Officials now accept that there is no prospect of Russia forming an energy cartel with Middle East gas producers.
“The most advantageous arrangement for sellers and consumers of natural gas has always been long-term supply contracts that sometimes span several decades,” says one Gazprom official.
“This is why gas cannot be as liquid a commodity as oil, and impedes the creation of an international structure akin to Opec, which regulates production to influence prices.”
In other sectors, Russian companies have also found the region a difficult one in which to do business.
Russian Railways has enjoyed success in North Africa, where it is building a new transport hub in Algiers and a section of Libya’s high-speed line along the Mediterranean coast.
However, in August, MEED revealed that Saudi Arabia was to retender a major construction package on the North-South minerals railway, a contract that was originally won by Russian Railways.
Moscow’s state-owned rail operator complained of political bias and is still seeking an explanation from Riyadh as to why its contract has been withdrawn.
Saudi Arabia, however, is unapologetic about its decision. One source close to the project says the authorities looked at the Russian bid and were “not convinced”. Undaunted, Russian Railways remains part of the Saudi Oger Consortium bidding on the $6bn rail link between Mecca and Medina.
The developing economies of the Middle East are certainly keen to attract money from Russia. In the Gulf particularly, an influx of Russian visitors has brought valuable investment.
But although trade links are growing, they still trail far behind the links with other markets. Trade between Russia and the UAE, for example, was worth $800m last year, compared with $12bn between the UAE and the US, and $6.3bn with France.
While Moscow flaunts its links with Iran and Syria in the face of US-led sanctions, its wider business interests around the region are relatively fragile and underdeveloped.
Outside the energy sector, Russia is not the industrial power it once was. It needs export markets such as the Gulf, far more than the Gulf needs it, if its companies are to prosper.