Russian will halt all arms sales to Iran, will energy alliance also collapse?

MOSCOW-Russia, a long-time arms supplier to Iran and a major business partner with the Iranian government in the natural gas and oil business that fuels much of the positive growth of the Russian Federation’s economy, has cut off the flow of arms.

Russia issued a statement from its Foreign Ministry, saying “Despite recent Russian attempts to broker a ceasefire and hostage release agreement between Israel and Iran, the two governments have become unwilling to compromise, citing an ever growing list of demands on each side. In response, Russia has decided to halt all weapons sales to Iran.”

The earlier hostage crisis began when an Israeli fighter had been shot down within Iranian territory and was being held at an Iranian
hospital. This recent incident led to increasing tensions between Iran and Russia, and an eventual breakdown of communications. “This step is
regrettable,” said Russian President Dmitri Medvedev, “however, we must show Iran that we have a serious interest in countries engaging the world;
no purpose is served by increasing isolation.”

The break between the countries on arms cooperation is surprising, as it would threaten an even more valuable pipeline: the historic July 13, 2008 agreement between Gazprom and Iran to collaborate on a massive scale in the provision of oil from the Iranian fields and natural gas from Russian sources to new and developing markets, including India and Pakistan.

Both economies are heavily dependent upon energy resource revenues. Iran’s production has been lagging and AFP reported in 2008 that it was looking to a revitalization of flow of its oil through the deal with the massive Russian provider, which is in fact a state agency, one of the few solely state entities remaining in the post-Soviet  economy.  The deal was to provide natural gas to Pakistan and India through the so-called peace pipeline and the implications for Gazprom’s already concerned natural gas customers in the U.K. and Europe, in addition to the effect on the world economy, which quivers everytime Gazprom threatens to cut off service to former Soviet neighbors.

But the U.S. Department of Energy is not concerned about this development. An official with the department said,  “It would have to be taken up with Russia, but the United States presumes that European customers will not be affected by the current actions.  The pipeline from Russia to Europe will still be open, and there should be no impact on that service.  Russia remains a major natural gas producer, so issues in Iran should not adversely affect the energy situation in Europe.”

However, European and U.S. markets have shuddered mightily upon the whims, threats and announcements from Gazprom. And, on just the news of the bombing of the Iranian sites Friday, markets dropped more than 400 points in one day and oil prices shot above $100 a barrel from a $95 a barrel open.  Hurt by the drop in world markets, Russia is more dependent than ever on the profits from Gazprom.

The developments on Friday put the stability of much of the world’s energy resource reserves in question. With Iraq embroiled in a war, Iran contaminated with radiation and without an ally in Russia and with Saudi Arabia destabilized by the growing conflict in the Middle East and threats of Al Qaida violence in Yemen, the most secure energy producer may emerge as Hugo Chavez’s Venezuela. That could make already skittish U.S. markets shy.

Since 1992, Russia has sold Iran hundreds of major weapons systems, including twenty T-72 tanks, ninety-four air-to-air missiles, and a
handful of combat aircraft like the MiG-29.

Late last year, Russia agreed to sell Iran a $700 million surface-to-air missile defense system (SA-15 Gauntlet) along with thirty TOR M-1 air-defense missile systems, ostensibly to defend its soon-to-be-complete, Russian-built nuclear reactor at Bushehr.

Moscow also plans to upgrade Tehran’s Su-24, MiG-29 aircraft, and T-72 battle tanks. Iran has shown interest in S-300 anti-aircraft missiles from Russia and Belarus, which can intercept enemy aircraft ninety to 180 miles away.

Michael Eisenstadt, director of the Washington Institute for Near East Policy’s Military and Security Studies Program, says Iran is building up its naval presence. In April 2006, the Iranians claimed to have tested a high-speed torpedo—similar to the Russian-made VA-111 Shkval—capable of destroying large warships or submarines.

Iran already fields China’s Silkworm anti-shipping missile and an array of mine technologies.

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