Iran’s S-300 lawsuit against Russia may backfire

I’m resuming posting briefs I write for Oxford Analytica. This one was published in early September.

In July, news broke that Iran had filed an arbitration case in Geneva seeking a 4 billion dollar fine against Russia for cancelling its contract to sell S-300 anti-aircraft missile systems to Iran. There has been speculation that the claim is actually part of a move by the two sides to restore the contract, perhaps as part of a larger deal that would have Russia resume significant military sales to Iran. In fact, Tehran’s move has angered Moscow.

Impact

o   The presence of the S-300 systems would make Iranian nuclear installations much less vulnerable to attack by Israeli or Western forces.

o   The situation complicates Russia’s relations with Iran, and makes it harder for Moscow to maintain ambiguity on Iran’s nuclear programme.

o   It is possible that Moscow has already threatened, in private, to cease UN Security Council vetoes of anti-Iranian resolutions.

o   If it moves forward, the case in Geneva is likely to be decided in favour of Russia.

What next

Tehran’s lawsuit may result in at least a temporary cooling of Russian-Iranian relations and a corresponding opportunity to increase international pressure on Iran over its nuclear programme. Russia is less likely than ever to resume sales of weapons to Iran in a situation where such a move would be seen as caving in to Iranian pressure. Instead, Moscow will seek to pressure Tehran to withdraw the claim without preconditions, and may publicly threaten to stop vetoing anti-Iranian resolutions in the UN Security Council if Tehran does not comply.

Analysis

The contract to sell five S-300PMU-1 battalions to Iran for 800 million dollars was originally signed in December 2007. The Russian government promptly became subject to a great deal of private and public lobbying by Israel, the United States and other Western countries that sought to have the deal cancelled.

Russia reverses its decision

Although the Russian government has resisted Western pressure for several years, it decided to cancel the contract in September 2010. Soon after the passage of UN Security Council Resolution 1929, which imposed sanctions banning the sale of most missile systems to Iran, then-President Dmitry Medvedev went further by announcing that Russia would stop virtually all military exports to Iran. The Russian government then returned the 167 million dollar advance it had received from Iran for the missiles. The units themselves were disassembled. The total losses to Russian arms exporters as a result of the freeze on military sales to Iran could be as a high as 1 billion dollars per year.

Iran has periodically sought to restore the contract. These efforts initially consisted of quiet diplomacy, followed by public complaints. To increase pressure on Russia, in April 2011, the Iranian government filed a case with the International Chamber of Commerce in Paris, claiming damages of around 900 million dollars from the cancellation of the contract. Iran’s argument is that the UN-mandated sanctions approved in 2010 did not apply to the S-300 missiles, since these were ground-to-air missile systems and designed primarily for defensive purposes. Observers largely agree that Russia’s move went beyond what the UN sanctions required.

The S-300 dispute generated widespread attention again this summer, as the Iranian government withdrew its case from the Paris tribunal. Tehran refiled it at the International Court of Arbitration in Geneva, and raised the damages sought to 4 billion dollars. Neither side drew attention to the lawsuit; information about the filing became public in July with the publication of the annual report of Rosoboroneksport, Russia’s state arms dealer. Since Rosoboroneksport is listed as the defendant in the claim, the potential liability was listed in the report.

Iranian officials have repeatedly noted that they are not interested in receiving the money they would get by winning their case. Iran saw Medvedev’s decree as a public humiliation that affected its pretensions to status as a regional power, in addition to reducing its ability to defend itself against possible Israeli or US air strikes.

Iran wants contract restored

The Iranian ambassador to Moscow has openly stated that should Russia agree to send the missiles, Iran would withdraw its suit. The implication is that Iran was using the suit in order to pressure Moscow to reinstate the contract. The size of the claim is equal to one-third of Rosoboroneksport’s annual revenue.

Tehran makes serious miscalculation

Tehran believes that the return of Vladimir Putin to the presidency, combined with escalating war of rhetoric on the part of Israel vis-a-vis Iran, has created a window of opportunity for Russia to reconsider its decision. It may be easier for Putin to restore the contract than it would have been for Medvedev, who signed the original decree to cancel the sale. Iranian leaders also believe that Russia wants to avoid the regional chaos that would most likely follow Israeli or US air strikes against Iranian nuclear facilities. One way of preventing such strikes is to bolster Iranian defences against air attack, which is the main purpose of S-300 missile systems.

However, if Iranian leaders believe that putting financial pressure on Russia will force them to resume arms sales, they have miscalculated. Russian leaders have already indicated that they will take a harder line against Iran’s nuclear programme if Iran does not withdraw the suit. One Kremlin official was quoted stating that if Tehran does not withdraw its claim in the near future, it will be on its own in dealing with the international community on nuclear issues.

Change of tactics

Iran appears to have recognised its error in judgment and has already begun to back off. The Iranian ambassador said that the size of the claim was increased by the court, rather than by Tehran. This seems unlikely, as even if the court chose to include punitive damages without an explicit request from Iran, the amount would have been discussed with the plaintiff in advance.

An end in sight?

Russia does not want to be seen as Iran’s pawn. At the same time, Moscow wants to maintain an ambiguous position on Iran’s nuclear programme — seeking to prevent Tehran from acquiring nuclear weapons while helping it resist Western pressure to completely shut down its nuclear programme, which Tehran insists is for peaceful purposes.

While the case is unlikely to result in a long-term shift in Russian-Iranian relations, it may damage the relationship in the short term. Iran will test the domestic Bavar 373 long-range air defence system during military exercises in October. If the system proves successful, Tehran may feel less of a need to continue seeking the S-300 and may decide to end the episode by withdrawing its claim.