Monday, April 26, 2010

Austria's Marriage with Iran: a Perilous Relationship

Diana Gregor, Ph.D.

Iran's oil minister Masoud Mirkazemi attends the 154th regular meeting of the Organization of Petroleum Exporting Countries in Vienna on Sept. 9, 2009. (Photo: Joe Klamar/ AFP-Getty Images)

The Iranian nuclear program and Iran's hidden nuclear agenda have not only brought about an imbalance in the Middle East and in the Gulf Region, but have also created a critical situation with regard to security throughout the world. The developments of the past years and Iran's current nuclear policies do not point toward a change of heart. Vienna has gained relevance ever since Austria became a (non-permanent) member of the U.N. Security Council. However, Austria has accrued a reputation of being soft on Iran, ever since it joined forces with Italy in 2008 to head a group within the European Union that was against additional pressure and measures against the Islamic Republic. From that time on, public pressure on Austria has continuously increased. The United States, Great Britain and France have all complained about Vienna's "slack" position.

Austro-Iranian relations: complex bilateral ties steeped in tradition

There are approximately 680 Austrian companies that have business dealings with Iranian companies or the Iranian state. In recent years, export credits were issued, among others, to Voith Siemens (turbines for a pump storage power plant), Andritz AG (modification and modernization of a paper recycling plant), Liebherr (construction cranes) and VAI (construction of an electric steel plant). Around 35 Austrian companies have branch offices in Iran; another 500 have business dealings with the Islamic Republic every now and then. Today, only a few speak publicly about their involvement with Iran. Green technology (waste of energy is widespread; Tehran has an enormous smog problem), alternative energy and automobile industry subcontracting are sunrise industries. In 2006, the Iranian Chamber of Trade President Khamoushi said, "Austria is our gateway to the European Union."

Austrian exports to Iran have doubled since 2002. However, it is the envisioned deal between OMV and Iran that has made Austria a long-term strategic partner of the Islamic Republic. In 2008, Austria exported 305 million euros worth of goods to Iran.

Following the protests surrounding the Iranian Presidential elections in June 2009, Michael Friedl, the Austrian foreign trade commissioner in Iran, publicly appealed to companies to not discount Iran as a business partner due to the political events.

OMV and Iran

OMV Aktiengesellschaft is one of Austria's largest publicly traded companies. OMV is the leading energy group in the European growth belt. Around 66 billion cubic meters of natural gas are transited through Baumgarten, one of the most important natural gas interconnection points in Europe, every year. OMV's Central European Gas Hub is one of continental Europe's three largest hubs.

South Pars Gas Field

Together with the North Field in Qatar, the Iranian South Pars gas field is the largest known natural gas field in the world. The gas reserves are located within the borders of both countries, and 500 trillion cubic feet of the total 1,300 are on the Iranian side. Iran plans to develop the gas field in several phases.

In April 2007, OMV signed a "Heads of Agreement" with the National Iranian Oil Company (NIOC) on a possible involvement of the Austrian company in the development of parts of the South Pars gas field (Phase 12) in the Persian Gulf, in a gas liquefaction facility for Liquefied Natural Gas as well as in purchase contracts for Liquefied Natural Gas.

To date, OMV has not succumbed to pressure regarding its investments in the South Pars gas project. OMV executive board member Helmut Langanger stated that Iran is continuously pressing OMV to begin with investments, but OMV would rather wait for oil prices to recover. Furthermore, OMV has made it clear that it could still take on the role of a partner, should it decide not to become an investor.

Nabucco Gas Pipeline

The Nabucco Pipeline is one of Europe's most important gas infrastructure projects. Beginning in 2014, it will transport natural gas from the Caspian region and the Middle East to Europe. The pipeline will run 3,300 km from Erzurum in Turkey via Bulgaria, Romania and Hungary to the Austrian natural gas interconnection point Baumgarten.

Around half of the transported gas will be transited from Baumgarten through Austria to Central and Western European countries. Construction is set to begin in 2011. In a first step, the connection between Ankara and Baumgarten will be laid, which constitutes around 2,000 km of the pipeline.

OMV and the National Iranian Oil Company

The NIOC is a crude-oil and natural-gas supplier based in Tehran. The company is owned by the Iranian state and is part of the Iranian Ministry of Petroleum. Like most important enterprises in Iran, NIOC is held firmly in the hands of religious foundations, traders and businesspeople who co-financed the Islamic Revolution of 1979 and the Islamic Revolutionary Guard Corps (IRGC). Since the IRGC control the nuclear and arms programs, this in turn would mean that OMV would be indirectly co-financing the Iranian nuclear program.

An Iranian bomb: yes or no?

There are three concrete reasons why Iran should be prevented from enriching uranium. First, because this would give Tehran the possibility of further enriching and processing its lightly enriched uranium. Second, because it would fit perfectly within Iran's non-compliance policy with regard to all U.N. Security Council Resolutions, which makes it impossible for IAEA inspectors to document the full magnitude of Iran's non-compliance. Third, an Iranian nuclear weapon could trigger a nuclear arms race in the Middle East and Gulf region. By signing the biggest deal to ever take place between Iran and a European company, Austria has rewarded Iran's demonstrative and unswerving defiance of all U.N. resolutions.

Austria's generosity with regard to Iran

German political scientist Matthias K√ľntzel notes that the Iranian Revolutionary Guards loyal to the regime control around 80 percent of Iranian foreign trade. He adds, "The idea that pursuing business dealings with Iran supports President Mahmoud Ahmadinejad's regime is a possibility. ... Most companies are under the control of national organizations, which have names like 'martyr-foundation.'" Business dealings with the Revolutionary Guards' companies or front companies should be made especially punishable.

While top-ranking British, French and German politicians are quite vocal about new Iran sanctions, Austria remains silent. In recent years, Austria has vehemently contributed to keeping the Iranian regime from international isolation, and has not taken any steps toward destroying the economic basis of the dictatorship of the Ayatollahs and the Revolutionary Guards.

A catalogue of measures for Austria: impulses for changes in its policies toward Iran

Austria has made a clear "statement" by closing the deal between Iran and OMV (the Republic of Austria holds 31.5 percent of OMV's shares). Besides the close economic ties between Austria and Iran, there are also close diplomatic ties between the two countries, which send the wrong signals to the Islamic Republic.

It is likely that the international community will soon be faced with a dilemma consisting of one of two scenarios:

Attack Iran militarily before it produces a nuclear weapon or gains the necessary parts to construct such a weapon.
Learn to stop worrying and love an Iranian bomb.
The past seven years have shown that Iran does not react to diplomacy without preconditions. Which sensible country would not take the West's position and consider tougher sanctions?

Economic measures that Austria should adopt
One possibility for putting pressure on Iran is a fuel embargo. Despite its prominent position as the second-largest exporter of crude oil within the Organization of the Petroleum Exporting Countries, and despite the fact that it has the world's second-largest natural gas reserves, Iran does not have enough refinery capacity and must re-import its own oil after having it refined elsewhere. A naval blockade would prevent the Islamic Republic from importing refined oil. This in turn would have an enormous impact on Iran's economy, effectively plunging Iran into "in a deep economic and social hole." Olivier Guitta of the Middle East Times believes that the only weapon that could avert war with Iran is an energy blockade, as sanctions and resolutions have proven virtually ineffective. 85 percent of Iran's income stems from the oil business. Therefore, Iran has two vulnerable spots: an "international export ban of refined petroleum products to Iran, coupled with an embargo" on the oil that Iran exports daily could "jeopardize the regime," writes Guitta. Naval blockades and embargoes would endanger Iran's stability.

Iran's dependence on foreign refined fuel might not present the key solution to Iran coming around on the nuclear issue; however, such an embargo could have consequences that might turn out to be efficient. The Iranian energy sector has latent "neuralgic points." It is assumed that a sudden gas-processing deficit will arise, which might last until 2013 and result in a decline in direct foreign investments. Furthermore, a decrease in Iran's ability to import and export is also anticipated.

For this reason, Austria should suspend all business with companies supplying Iran with refined fuel, or put a moratorium on new deals.
Moreover, the Austrian government should prevent banks from giving loans, insurances or grants to foreign companies supplying Iran with energy resources.

The Iranian banking sector is dependent on the euro. In 2007, the Melli bank (Iran's largest state-owned bank) exchanged its dollar investments for euro investments. In July 2008, all 27 E.U. countries entered a legally binding agreement to freeze all bank assets managed or held by the Melli bank. All European governments committed to divesting all assets held with the Melli bank, thus freezing all bank assets.
Iranian companies must be prevented from "using" the euro as currency. Without U.S. dollars and euros, Iran will find it too difficult and expensive to circulate hard currencies in the world. Besides, such a measure would cause costs for business deals with the Iranian government and other Iranian entities to skyrocket.
All foreign assets held by members of the Iranian government should be frozen. Travel restrictions should also be imposed on them.
Austria should suspend all (future) guaranteed public subsidies designated for economic development in Iran (especially those going toward the energy sector).
Austria would have to ensure that insurance companies do not insure Iranian tankers and liquid containers that supply Iran—thus "feeding" the Iranian nuclear program.

Austria could penalize Iran for not adhering to international security regulations by prohibiting Iranian air transport services from entering E.U. countries.

Alternative measures that Austria should adopt
A key approach to gaining a better understanding of Iran, and in turn being able to initiate appropriate attempts at negotiations, includes the analysis of demographic developments within the Islamic Republic. A considerable majority of the 70 million Iranian residents is young: Around half of the population is 24 years of age or younger. The Iranian elite, on the other hand, is becoming older and less popular. Ever since the controversies surrounding the presidential elections in June of 2009, the Ayatollahs' legitimacy has increasingly come into question and been challenged. Without help from the West, the Ayatollahs' power will once more be cemented.

This development carries great potential for change. The current demographic situation in Iran will change the country's political future through a shift in power from the clerical leaders to a younger generation. The West must learn to understand that the focal point will be on Iran's "streets" and not in clerical seminaries.

It is important that the West does not become a medium for Iran's strategic ambitions. This only gains time for Iran in order to pursue its nuclear program. This has been the case many times before, as in 2006, when the former Iranian chief negotiator Hassan Rowhani admitted that Iran had used the stalled time during negotiations with the E.U. "troika" to install technical equipment at the plant in Isfahan.

An effective way of exerting pressure is by pulling out European diplomats from Iran, as this would send an unequivocal diplomatic message.

Dr. Diana Gregor is a Middle East analyst and researcher with a main focus on Iran and its nuclear program. This article is a truncated representation of her research paper on Austria's economic ties with Iran, titled "Austria's Marriage with Iran: Recommendations for the Suspension of a Perilous Relationship."

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