Is Russia’s Middle East Endgame Trouble for Global Energy Markets?

Russia’s recent foray into the Middle East has left many theorists questioning how altruistic Russia’s endgame will be for the region and world. Previously, Russia has focused directly on regions it believes were in the purview of its ‘near abroad’.

Russia’s sudden active intervention in Syria was an unanticipated development and a watershed moment for 21st century Russian foreign policy. This new assertive phase is placing Russia firmly in the Middle East and changing the geopolitical balance of power in the region.

Embedding into the Middle East

Russia’s goals in the Middle East are clearly long term and deep rooted. Currently Russia is engaging with multiple MENA nations, however, the territories of Syria and Iraq are the keystone of their regional ambition.

Militarily, Russia is developing a constant presence in the Mediterranean and the northern areas of Syria and Iraq. So far Russia and Syria have ratified a 50 year lease of Syria’s Mediterranean Hmeymim Air Base and agreed to Russian use of the Mediterranean Tartus port for 49 years. Not included in these deals has been the establishment of a Russian base in the Syrian Kurdish run region of Afrin. Both of these locations are capable of hosting the largest Russian military presence outside of its borders since the Afghan War and will pose a threat to both Western energy companies operating in the region, such as Noble Gas, and to the military support that comes with them.

Yet these bases are really only the protective shield for Russia’s overwhelming investment into the territories of Syria and Iraq. The recent agreements from oil and gas giants like Rosneft and Gazprom Neft’s with Syria, Iraq and the Kurds are just the start of Russia’s unrestrained economic permeation of the Middle East.

Rosneft alone has been estimated to have spent 4 billion on Kurdish oil and gas prospects in the past year. While companies like Euro Polis have signed deals that will give them 25% of Syria’s oil and gas revenues from recaptured fields. Mercenary companies like Stroytransgaz are also set to start investing large sums thanks to Russia’s policy that rewards private security contractors who secure territory from the extremists.

A New Energy Union?

The end result of all this intervention is that Russia is slowly becoming the Middle East’s, and by extension the global energy industries’, power broker for the 21st century. According to Dr Cyril Widdershove, one risk of Russia’s foray into the Middle East is a change in the power structure of the energy market, in particular OPEC. According to Widdershove,

“Throughout OPEC’s history, Riyadh has been the main power broker in the oil cartel, pushing forward price and production strategies; most of the time this was done in close cooperation with all the other members, most of them Arab allies. This changed dramatically after Saudi Arabia and Russia agreed to cooperate in global oil markets.”

Put simply, in the past year the collusion by Russia and Saudi Arabia on the direction of the global oil market has meant an alliance between the OPEC and non–OPEC oil producing nations. An alliance has been the saving grace of the energy industry allowing the industry to cull the glut of oil on the market. Yet there is cause for concern that this new alliance could pose a larger risk to the global energy markets.

Risk to Energy Markets

Russia now has a coterie of likeminded MENA oil producers who can see the benefit in the creation of a global oil cartel led by an aggressive Russia. A leadership position that Russia would relish, given that it has routinely utilised its influence over oil and gas pipelines from Central Asia, the Caspian and the Black Sea regions to place pressure on countries receiving these exports. Examples from the 2005-2009 and 2014-2015 gas shortages demonstrate how Europe, in particular Eastern Europe, suffered through gas and oil shortages and price hikes thanks to the Russian-Ukrainian political dispute.

Threats to turn off gas or oil pipelines to countries like the Ukraine or to Estonia in the early 1990’s also demonstrate the willingness of Russia to play hardball no matter what the situation. This worries European gas and oil suppliers because with the addition of the Syrian “Tap” to Russia’s pre-existing control over the Baltic and Black Seas pipelines, Nord Stream-2 and Turk Stream, Russia is now in a position to circumvent Eastern European countries and their transit fees, and place themselves firmly in control of the EU’s gas imports, including those from the Middle East. Furthermore, with oil and gas pipelines critical to China and India also utilising Russian companies it is not overreaching to presume Russia will not hesitate to utilise price hikes, shortages and rents from these assets to restore economic prosperity and assert dominance globally through the energy sector if needed.

A Permanent Situation?

There are some winners from this geopolitical shift. The MENA nations have been slowly seeing a fall in western involvement in the region since the turn of the century as they slowly but inexorably moving away from oil dependence. Thus Saudi Arabia and many of GCC nations have been seeking new markets. Predominantly in South Asia, China and the Former Soviet Union (FSU). The new investment opportunities, plus China’s recent One Road Initiative and India’s recent rival boom has opened up new markets for the MENA nations. When combined with Russia’s geopolitical support and military interests these new markets are a secure investment opportunity.

Russia’s new found position as the Middle East’s global patron is contingent upon balancing its relationship with Saudi Arabia and Iran. So far Russia has been able to overcome the sectarian divisions between its allies to forge beneficial agreements. The question remains, how long can Russia sustain this status quo, given the escalating conflict in Yemen and tensions between Saudi Arabia and Iran? Both of which have the potential to derail Russia’s Middle Eastern and global power play.

Putin’s Failure Will Be Navalny’s Gain

Today Russia is quietly staring into a future defined by political upheaval. The recent national protests, on June 13th and March 30th, are just the harbinger of a very real challenge for the Russian government. Across the country Russians are becoming increasingly disillusioned with the endemic government corruption that permeates all level of the Russian state. When combined with the ongoing recession, more Russians are willing to seek a new way.

Not since the failed Snow Revolution has Russia seen this level of organised protest and mobilisation occurring across the nation. While these protest may have been initiated by Alexei Navalny’s Anti-Corruption Federation, the fire was already ablaze within a significant segment of Russia’s population.

An Old Problem with No New Answers

The brewing tension and antagonism has been on the Russian government’s radar since 2008, when Vladimir Putin’s acolyte Dimtri Mevedev promised to deal with the increasing problem during his term as President. At the time government officials claimed that corruption was appropriating an estimated one third of the government’s annual budget. Yet the creation of an inter-governmental task force to tackle corruption did little to address the issue. Which is why, since 2011, Vladimir Putin has continued the anti-corruption legislation and rhetoric during his presidential campaign and current term.

The problem is that these measures were too rudimentary. An anti-corruption pledge, the firing of a governor who was caught out and the new criminal measures did little to address the problems which were historically woven into the Russian bureaucracy and society. Thanks to the failures of communism in the Soviet Union, the population of the USSR has often been forced to create a set of secondary channels through which they could obtain necessary goods and services.

These so called ‘blat’ or patronage networks did not fade after the implosion of the USSR. Instead, during the upheaval they became entrenched into every level of the new state apparatus, which thanks to its origins has a disproportionately hefty say over the lives of its people, businesses and economy.

The Economic Fallout

For everyday Russians the impact of corruption can be vast. From simply obtaining a driver’s license to gaining electricity from your local provider or getting basic medical treatment everything is touched. Bribes are even factored into the retail price of groceries and other goods and services. For example truck drivers often have to pay bribes of 50,000 ($926) to 70,000 rubles ($1,300) to policemen along their route and as a result the prices of their goods then rises to cover these hidden payments by the transport firms.

As Lyubov Sobol, a member of Alexei Navalny Anti-Corruption Federation investigating Moscow city corruption, stated,

Everyone who lives in Moscow does not receive the services they are entitled to since a significant percentage (of the budget) gets eaten because the government pays higher prices for goods and services because of corruption and kickbacks,”.

It is worse if you are a foreign firm trying to establish yourself in Russia. Ikea for example recently had 9.3 billion roubles in its Russian subsidiary accounts frozen and had to rely on Boris Titov, the Presidential Commissioner for Entrepreneurs' Rights to rectify the situation. Ikea has been bogged down in Russian corruption since 2007 with ongoing litigation thanks to a well-connected generator supplier, Konstantin Ponomarev.

A Disillusioned Country

The extensive nature of Russia’s state corruption has disillusioned Russians across the country which in turn is encouraging many who are younger to become politically active. Via social media platforms, towns and regions across Russia are now home to mobilised groups who have created civil organisations to rally against state based corruption.

Take the website Beautiful Petersburg, established in 2015, it provides Russians with a way to address corruption of local authorities who are not looking after their towns, cities or regions. It has grown to spread throughout Russia and now provides on the ground support to local groups fighting funding misappropriation or park closures around the country.

This surging opposition to the local and state authorities is not surprising, argues civil rights activist and editor of Russian language magazine The Insider, Roman Dobrokhotov, given how out of touch the Kremlin is with the needs and wants of the younger generations. For many of this so called Putin Generation the rampant corruption has forced them below the poverty line, while those in power enrich themselves and their families. As one protestor from this week’s protest stated "We are against the corruption that is costing the future of our young people,”

No longer trusting the legitimacy of regional and the state authorities this segment of Russian society now wants an answer to this country-wide problem and they are looking directly at Vladimir Putin.

A Risk To Putin?

According to a recent survey two thirds of Russians blame the Russian President for the endemic corruption and 79% percent believe corruption has "completely infected" or "significantly infected" Russia's organs of state power. While many may be calling for Putin’s removal in the 2018 elections, it is unlikely.

Putin has had numerous years in power to build his own vast patronage network and ubiquitously place his clients throughout the state apparatus. From appointing regional governors to city mayors, Putin has had a hand in most political, military and economic appointments. As a result, his control over the state government is absolute.

Putin’s only real challenger, Navalny, will most likely be precluded from entering the 2018 electoral race due to a controversial embezzlement conviction that precludes him from challenging Mr. Putin in next year’s election. But Putin should be aware that Mr. Navalny is winning the long game and that if the Kremlin does not address corruption nationwide the protests will continue to escalate and becoming a constant thorn in Putin’s side.

As demonstrated in the Arab Spring, a young politicized and disaffected youth during times of economic hardship have nothing to lose and everything to gain. Many affected by the corruption appear to still be quietly hoping that Putin will step up and dismantle the corrupt networks. However, given Putin’s need for the patronage apparatus to maintain his hold on power this is unlikely.

Surviving this loss of legitimacy as the economy continues to weaken will be a tough ask for the President and the Russian state. The way forward for authoritarian leaders is generally to fall heavily on the use of aggressive and belligerent tactics against the opposition. However in the case of Russia this will only go so far. Putin’s greatest strength may be his patronage networks but it is also his Achilles heel. In attacking Putin’s cronies, Navalny has brought Putin’s right to rule into question. To maintain his position Putin will be forced to remove some of his closest allies in an attempt to isolate himself from these charges. To do so in the current system will create large scale instability within the state and Mr. Putin will risk losing his network’s support and his position as President.

Is Iran at Risk

This year, the Iranian economy was slated as the economic market for investment. Thanks to the Joint Comprehensive Plan of Action (JCPOA), institutions such as the World Bank believe that economic growth in the Iran will jump 4.6% from last year creating boom conditions. However, growth in Iran is often contingent on two factors. One is the expansion of oil and gas production, which thanks to the recent OPEC deal is now transpiring. The second is Iran’s relationship with the international community, in particular the United States.

When Iran conducted a series of recent mid-range ballistic missile tests earlier this year, the aftermath saw many market analysts become more cautious about Iran’s economic revival and the security of their clients investments. Citing the unpredictability of the Trump administration, its aggressive policies and the continuation of older sanctions and fines that companies like Amazon are currently facing, there are fears that Iran’s boom may be at risk.

The Problem with Sanctions

Economically, the risk with the older sanctions is that they have spooked many investors including corporations like Apple.

Apple had, from September 2016, been slowly adding Iranian developed I0S apps to its online store, many of which were banking and e-commerce related applications. However, in January, Apple removed many Iranian apps like Digikala, the largest e-commerce site operating in Iran, despite companies like Digikala using the Shaparak payment system which is isolated from international systems thereby not breaching the American regulations.

The new regulations are also spooking the international banking community which is highly suspicious of the current American administration’s reaction to doing business in Iran. Some of the world’s biggest banks who had worked under the previous internationally-accepted trading regime were outraged by the large fines the US banking authorities issued to them and as a result have told their clients that if they want to work in Iran, they will have to find other bankers.

For Iran, this will limit the amount of investment interest in the country and place in doubt many of the larger deals currently in place. Boeing’s deal for example, is shadowed by doubt thanks to their need for the Trump Administration’s approval over any transactions with Iran, and given the current administration’s desire to control Iran through all means this deal faces an uncertain future.

The Rich Keep Getting Richer
Even if these deals do go through, Iran’s economic future is still threatened thanks to endemic governmental corruption. According to Iranian opposition leader, Maryam Rajavi, much of the countries new revenues are being channelled into state enterprises controlled by the Iranian Revolutionary Guard Corps (IRGC) or those run by the Supreme leader Ayatollah Khamenei’s network and may do little to increase the economic prosperity of Iran. Instead, it is more likely to increase tensions within the society and the government of President Rouhani will bear the brunt of this economic failure in the upcoming electoral process.

Economic Problems will lead to Political Risks

The lack of economic growth and endemic corruption will figure heavily in the hardliner candidates, Ebrahim Raisi and Mohammad Ghalibaf, campaigns’ for this week’s national election. If Iran is to continue an upward economic trajectory and exchange with the west, moderate President Hassan Rouhani needs to consolidate his political grip on the Iranian parliament for another 4 year term. An act he may not be capable of thanks to the failure of economic growth to materialise for the majority of Iranians.

Rouhani is aware that he needed this economic recovery. In 2013 he campaigned and won on a platform of economic reform and the development of civil rights and society. What’s worse is that it was an expected outcome from the 2015 nuclear deal. As hard-line conservative presidential candidate Ebrahim Raisi argued in the first presidential debate on May the 5th, the ‘deal was like a cheque that the government has been unable to cash’.

Instead, the Iranian economy has slumped and Iranian unemployment is at the highest level in 4 years at 12.7 percent with a reported 30.2% percent of those unemployed being highly educated young adults. This combination of high youth unemployment and increasing economic difficulties can be expected to create significant problems for the next Iranian government.

Typically, high youth unemployment when paired with high rates of underemployment, inequality, and the marginalization of educated youth inevitably leads to significant social upheaval, political instability and potential civil violence. A fact that could destroy the gains Iran has made thanks to Rouhani’s government.

The risk of returning the hardliners to power is very real. According to Iranian political analyst Hamid Farahvashian who pointed out that thanks to the ‘uncertainty over Trump’s Iran policies, Iran’s presidential election [on May 19th] and the economic hardship’ there is a real possibility the establishment will give ‘more power to the IRGC (Iranian Revolutionary Guard Corps).’ Many of the IRGC’s members are seeking a return to a much more extreme, aggressive, militaristic and repressive strand of national politics; a position support by the Ayatollah Khamenei.

The Middle East at Risk

The threat to the Middle East from Iran under a president like conservative Ebrahim Raisa will be the rise of a more aggressively revolutionary Iranian foreign policy. Currently Iran has a heavy presence in all the flash points throughout the Middle East. From Syria and Iraq, to its sponsorship of the Al Houthi rebels in Yemen, Hezbollah in Lebanon and Palestine and its aid for Kurdish militias or its support of the more sectarian opposition parties in Bahrain, Iran is a source of instability across the Middle East. Under a conservative government this is expected to get worse. According to experts Iran’s engagement in Yemen and Syria will intensify and there is further belief that they may expand their operations to include Turkey via their current support networks for the Kurdish militias.

Is the Potential For Genuine Economic Growth Gone for Good?

Despite these risks Iran still provides exciting opportunities. European, African and Asian companies are well placed to avoid the fallout from American sanctions and this is where Iran is taking advantage of the energy sector which is predicted to bring in 33 billion in revenue for the next calendar year. China, for example, plans to expand its trade with Iran to 600 billion dollars in ten years as part of its One Belt Initiative to take advantage of these gas deposits. Likewise, India upped its energy imports by nearly 6% to nearly 546,600 barrels per day (bpd).

Iran pharmaceutical manufacturing industry is also predicted to continue its extraordinary growth rapidly thanks to its new global medical market the halal pharmaceuticals program which is attracting investment from the Middle East and South East Asia. While another sector that has potential to avoid any economic contraction is the e-commerce industry which has seen huge growth spurts with the Iranian e-commerce industry overall growing 25% in the Middle East last year.

Even if these sectors are growing, much still depends on the outcome of the election. Investors prefer stable, less volatile, political environments for long term investments and Iran under the conservatives, who plan to do little to address corruption or the youth unemployment crisis, will be a volatile political environment. Under these circumstances Iran could see it’s hope for economic development fail to emerge as the country returns to its position as an international pariah dependent upon Russia and China for its development.