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Sep 24, 2009 | 12:09 GMT

13 mins read

Iran Sanctions (Special Series), Part 2: FSU Contingency Plans

Summary
Russia has been using its relationship with Iran as leverage against the United States. In the face of the very real possibility of sanctions targeting Iran's gasoline imports, Russia could continue using Iran to upset U.S. plans by supplying the Islamic republic with gasoline. However, Moscow knows that such a move would come with a political price. Editor's Note: This is part two in a three-part series on what sanctions against Iran could mean for Iran, U.S.-Russian relations, Israel and the global economy.
Click here to download a PDF of this report Click here to download a PDF of the entire Iran Sanctions Series Russia, having found its strength again, has been pushing back against U.S. influence in the former Soviet Union while the United States has been preoccupied with its wars in Iraq and Afghanistan. But even with its success against the Western geopolitical offensive in many places on its borders, Moscow still demands that Washington put an end to its plan to expand NATO, drop its backing of Georgia and Ukraine, and abandon any military buildup in Poland. One of Russia's favorite pieces of leverage to use against the United States has been its relationship with Iran. Since 1995, Russia has been helping Iran build its nuclear power plant at Bushehr, though Moscow has refrained from completing work on the plant in order to keep the issue alive and in the Russian arsenal of threats against the United States. Russia has continually delayed the delivery of advanced military technology to Iran, like variants of the S-300 air defense system that would complicate a potential military strike. Russia also has routinely blocked hard-hitting sanctions on Iran in the U.N. Security Council. All of this has served to bog Washington down in another Middle Eastern foreign policy dilemma while Russia coaxes the United States into separate negotiations over Russian interests, such as the West backing away from Russia's near abroad. This arrangement has not only given Russia a trump card in its negotiations with the United States; as long as Russia can use Iran against the United States, Tehran is more capable of deflecting U.S. pressure. But now the United States has devised a relatively robust sanctions plan that will bypass the United Nations, so Russia will not have a chance to use its veto power. Yet Russia could create a massive breach in the sanctions. The new U.S. sanctions plan targets Iran's gasoline imports, which make up at least a third of the country's consumption and most of which are shipped to Iran through the Persian Gulf. Such a supply cut could devastate the Iranian regime and economy, forcing Tehran to make real concessions on its nuclear program. Venezuela, another state hostile to Washington, has offered to step in and fill some of Iran's gasoline needs despite the sanctions, but Venezuela's shipments to the Persian Gulf theoretically could be interrupted by even a minor U.S. naval blockade. Therefore, if Iran is to circumvent U.S. sanctions and get its gasoline, it will have to look closer to home. Russia and several former Soviet states bordering Iran have one of the few alternative supply options — sending gasoline in by rail or ship from the north — which neither the United States nor Israel could block militarily. Moreover, these countries have spare gasoline refining capacity.

Spare Capacity

Iran's gasoline imports fluctuate frequently but average about 176,000 barrels per day (bpd) — although the Iranians currently are importing more than 400,000 bpd as they are stockpiling in preparation for possible sanctions. Russia — and quite a few other former Soviet states — would be able to fill Iran's basic import needs. In this discussion, an understanding of gasoline refining capacity is necessary. Every refinery typically has facilities that convert oil into several different products, ranging from gasoline to diesel fuel to kerosene. For most refineries in the former Soviet states, gasoline accounts for about 10 to 15 percent of their total refining capacity. However, it is rather simple to increase that percentage. Refineries do it frequently, such as when gasoline inventories get built up in preparation for peak season demand. At the higher end of refining gasoline, most refineries produce at 45 percent, but theoretically refineries can scale up gasoline production to up to 70 to 85 percent of total refining capacity before the feedstock becomes "over-cracked" and gasoline yield falls. Since gasoline refining can fluctuate over such a wide range, STRATFOR will simply report the total refining capacity for each country. Russia is currently the world's largest oil producer (it recently surpassed Saudi Arabia) at 9.9 million bpd. Russia exports 7.4 million bpd of that oil in either crude or refined products, mainly to Europe. But Russia is also one of the largest refiners in the world, with a capacity to refine 5.5 million bpd of oil products. Russia's oil production has been declining, mainly because market demand has slumped following an economic slowdown, but Russian refineries are still working at about 80 percent of their capacity. Considering the size of Russia's refining sector, increasing their refining closer to capacity could cover Iran's basic import needs many times over. Russia is not the only energy giant in the region. Azerbaijan, Kazakhstan and Turkmenistan are all net crude and gasoline exporters. STRATFOR sources have indicated that Kazakhstan is not considering any gasoline sales to Iran, due to the large U.S. economic presence in the Central Asian country. This leaves Azerbaijan and Turkmenistan, both of which border Iran, and both of which have plenty of spare refining capacity. Azerbaijan currently produces about 1 million bpd of crude and has a domestic refining capacity of 442,000 bpd. However due to a lack of global demand, Azerbaijan is only refining at 27 percent of its capacity, leaving a spare capacity that could cover Iran's import needs twice over. Turkmenistan is in the same situation — producing about 195,000 bpd of crude, but only refining at 20 percent of their 286,000 bpd capacity. This means that Turkmenistan's spare capacity alone could easily cover Iran's import needs. Between Russia, Azerbaijan and Turkmenistan, there is plenty of spare capacity to produce the gasoline that Iran would need in the event of sanctions. The next issue is how to get the gasoline to Iran.

Rail Transport

The former Soviet states have a vast series of rail interconnections, and their close proximity to Iran makes this transit option one of the most likely. Russia's southern belt of refineries lining the northern Caspian region is along a series of rail networks that could transport gasoline to Iran in the matter of a few days. Azerbaijan and Turkmenistan's refineries are along rail networks that could transport gasoline to Iran in less than a day. A typical gasoline-carrying train in the former Soviet states is capable of transporting approximately 40,000 barrels of gasoline. For any of the former Soviet states to fulfill Iran's current gasoline needs, the trains would have to be sent four or five times a day. (click here to enlarge image) One problem with this is that the former Soviet Union's rail network is on a different rail gauge from most of the rest of the world — a leftover from Soviet times, when Josef Stalin wanted to prevent any potential invader from using the Soviet Union's rail network to sustain an offensive inside Soviet territory. The rail gauge in Russia and the former Soviet states is 1,520 mm. Iran is on the standard 1,435 mm gauge that most of the world uses. In the past, any cargo traveling from one of the former Soviet states by rail would have to be off-loaded from the Russian train cars and reloaded onto foreign cars with a different gauge — wasting days on the journey. However, since 2003 Russia has been mass-producing rail cars with an adjustable gauge, allowing for the gauge to be shifted in mere hours. Due to increasing oil prices, the Russians also mass-produced liquid tank cars, increasing their fleet from 100,000 cars to more than 230,000. Since demand for crude and gasoline declined, most of these tank cars are sitting idly in Russia, so there would be no shortage to send to Iran. But for Russia to get its gasoline to Iran, it would have to go south along the Caspian via Azerbaijan or through Kazakhstan, Uzbekistan and Turkmenistan. Azerbaijan or Turkmenistan could also use the Russian rail cars to send gasoline to Iran. There is a problem with either Azerbaijan sending gasoline to Iran via rail or Russia using rail connections via Azerbaijan to supply Iran: The rail lines in the region do not actually run into Iran. Of the two rail lines from Azerbaijan to Iran, the most extensive runs from Azerbaijan to Armenia, to the Azerbaijani exclave of Nakhchivan. This line was severely damaged during the Nagorno-Karabakh War and remains in disrepair, so it cannot handle any traffic. The second rail line runs along the Caspian Sea from Russia to Iran via Azerbaijan, with multiple refineries along the way. A rail line near the Iran-Azerbaijan border on May 28, 2009 However, this line ends once it reaches the Iranian border; all cargo has to be trucked into Iran. Azerbaijan has used this line to send gasoline to Iran before, and there has been much talk about expanding the line farther into Iran (though no progress has been made on construction). This line is running at approximately 27 percent capacity, which means it has room for a surge of rail cars going to Iran. Azerbaijan's rail lines might be problematic, but Turkmenistan has rail lines that connect with Iran's rail network. However, for Russia to send gasoline to Iran via Turkmenistan, the trains would have to transit Kazakhstan and Uzbekistan. Uzbekistan's relationships with Russia and Turkmenistan are deteriorating, and STRATFOR sources in Kazakhstan have said the country has taken part in discussions on allowing such a transit. There is no indication, however, that Uzbekistan has been approached about the subject.

Shipping Options

There is also much discussion of shipping gasoline to Iran on the Caspian Sea, which is bordered by Russia, Kazakhstan, Turkmenistan, Azerbaijan and Iran — five countries that have continually bickered about dividing up the sea among them. Currently, only a nominal amount of gasoline is shipped across the Caspian, but such shipping could be accelerated very easily as the basic technology of ports and pipelines that ship crude oil can be quickly converted to handle gasoline — particularly when considering the very limited infrastructure of a port. Iran's northern port on the Caspian, Neka, for example, can currently handle 300,000 bpd of crude. Even with a 50 percent loss rate from a switchover, this one port could theoretically handle all of Iran's import needs (and Neka also boasts the necessary road, rail and pipeline infrastructure required to then distribute any imported gasoline supplies to the rest of the country). (click here to enlarge image) The problem with Russia shipping gasoline to Iran is that Russia's northern Caspian ports — Astrakhan and Makhachkala — are frozen over for more than four months out of the year. Kazakhstan has been expanding its capacity to ship crude and gasoline at Aktau, though Astana is not planning to fulfill this particular supply request for political reasons. The ports in Azerbaijan and Turkmenistan, however, are equipped to ship gasoline or crude to Iran. Azerbaijan's Baku port has a 301,200 bpd liquid cargo capacity. In 1996, Baku sent 50,000 bpd to Neka when its gasoline exports to Russia were cut off due to war in the Caucasus. The capacity at Turkmenistan's Turkmenbashi port is unknown; it is only known that there is some capacity. Iran's port at Neka can handle 300,000 bpd of liquid cargo — more than enough to fill the Iranians' demand for gasoline. Neka also has crude and gasoline storage, though only for 45,000 barrels.

The Russian Dilemma

Russia and the former Soviet states are clearly able to fill in Iran's gasoline needs should the United States successfully cut off supplies. But Moscow is weighing the political decision on whether to do so very carefully. The Russians have said continually that they feel the United States' new push for sanctions would not be successful, though it is Russia itself that would prevent that success. The new sanctions are designed to pressure the companies involved in operating in Iran, supplying Iran with gasoline or insuring those supplies, but with Russo-U.S. relations in decline, Russia will weigh the benefits of successfully crushing U.S. sanctions plans against the pain any U.S. economic pressure could create. STRATFOR sources in the region have confirmed that Russia is taking this issue very seriously. Currently it is unclear whether Azerbaijan would take part in defying the sanctions since the United States has such a large economic presence in the country. Azerbaijan does have energy swap deals in place with Iran and has also made more plans to increase other energy supplies, like oil and natural gas, to Iran. But Baku has not made a decision yet on the specific issue of gasoline supplies, though STRATFOR sources have indicated that Baku has at least been included in talks with Moscow and Ashgabat. Turkmenistan is the more likely player to create gasoline supply contracts with Iran. Turkmenistan is still one of the most isolated countries in the world, despite the government's proclaimed push to change that fact. The United States has no real leverage it can use to force the country to not supply its neighbor with gasoline. Moreover, Turkmenistan is in a financial crunch because Russia stopped receiving energy supplies from the Central Asian state, and Turkmenistan is looking for a new source of income. But Moscow has ensured that it holds enough influence over Turkmenistan in the realms of the military and social stability to keep Ashgabat from making such a move without its consent. Russia wants to make sure that no other country will usurp its ability to ruin U.S. sanctions. Overall, the decision for any of these states to deliver gasoline to Iran comes down to Moscow. Russia is using this threat in order to pressure the United States into recognizing its sphere of influence. This trump card could force the United States to act against Iran militarily, as all the U.S. "diplomatic" efforts will by then have been exhausted. Then again, if Russia plays this card, it could also force the United States to act more aggressively against Russia, which will have proven its willingness to support Iran through its actions, not just its rhetoric.

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