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#4 (60), 2017

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Global Security

JCPOA and Russia?s Interests in the Iranian Nuclear Market


Anton Khlopkov


The Joint Comprehensive Plan of Action (JCPOA) to resolve the crisis over the Iranian nuclear program has attracted criticism from some Russian analysts, who argue that the plan runs counter to Russian national interests. The  critics worry, in particular, that the Rosatom state nuclear energy corporation risks losing the Iranian nuclear energy market as a result of the easing of sanctions on Iran and the country?s reintegration into the global economy. They believe that the adoption of the nuclear deal in Vienna on July 14, 2015 by the six international mediators (Britain, China, France, Germany, Russia, and the United States) and Iran will facilitate Iranian partnership with other leading nuclear exporters, to the detriment of Russian-Iranian cooperation. Are these worries justified? How strong is Russia?s position in the Iranian nuclear energy market a year on from the adoption of the JCPOA? Which of the other nuclear exporters could enter that market? This article aims to answer these and several other questions.


Bushehr-1

First, let us look at the results of Russian-Iranian cooperation on peaceful uses of nuclear energy in the 12 months since the adoption of the Vienna agreements. The scope of this review will not include cooperation pursued as part of the JCPOA implementation ? i.e. the removal of Iran?s excess quantities of low-enriched uranium to Russia in exchange for natural uranium supplies, and the conversion of the nuclear enrichment facility in Fordow to the production of stable isotopes for the medical and industrial purposes.

Let us begin with the Bushehr NPP. The contract to build the No 1 reactor of that plant, which was signed on January 8, 1995, has now been fulfilled and completed. On April 20, 2016, the Iranian Nuclear Power Production and Development Company (NPPD) received the operating license for the reactor from the national nuclear regulator. Under the terms of the contract, this signifies the completion of the reactor?s delivery to the customer and the fulfillment of the contract. It is now safe to say that despite the political pressure, the technical challenge of integrating the German equipment received by Iran in the late 1970s into the Russian reactor design (something the Iranians had insisted on), and financial difficulties, the Russian nuclear industry has fulfilled all its obligations concerning the construction of the No 1 reactor in Bushehr and the launch of its commercial operation. In 2015 the reactor accounted for 1.27 per cent of Iranian electricity generation.

Rosatom also continues to provide service and maintenance for the No 1 reactor, to supply all the nuclear fuel required for its operation, and to train the Bushehr NPP?s Iranian personnel. In 2015 the Russian company delivered the latest batch of nuclear fuel to Bushehr, worth over 3.5bn roubles, or 58m dollars at the average 2015 exchange rate. In July-August 2016 Rosatom also conducted a three-week training program for senior Bushehr NPP managers, with an emphasis on the ongoing, scheduled, and preventive maintenance at nuclear power plants.

None of these developments is a direct consequence of the adoption of the JCPOA, because the UN Security Council made an exception for foreign countries? cooperation with Iran on building NPPs when it introduced the sanctions regime some years ago. Nevertheless, the Vienna agreements have created a more favorable political and business climate for such cooperation. More specifically, it has made it much easier to provide such ancillary services as insurance and reinsurance, as well as to make timely payments (thanks to Iran?s re-connection to the SWIFT international payments system), including payments for Bushehr NPP maintenance and fresh nuclear fuel deliveries. Additionally, the lifting or suspension of unilateral US and EU restrictions has enabled Rosatom and its subsidiaries to continue cooperation with Iran?s nuclear energy industry without worrying about falling foul of the sanctions regime.


Bushehr 2 and 3

The easing of the sanctions has not only restored Iran?s ability to conduct various financial transactions, but also to invest in its own development. The Vienna agreements have given Tehran extra financial capacity to finance its projects on peaceful uses of nuclear energy, which its political leadership is determined to pursue. In particular, they have made it easer to secure financing for the projects to build more Russian-designed nuclear power reactors in Iran in accordance with the Russian-Iranian bilateral protocol signed on November 11, 2014.

The Vienna agreements should also create a more favorable climate for using supplies and subcontractors from third countries. To illustrate, the project to build

the No 1 reactor in Bushehr relied on equipment and materials from 10 different countries. Securing those supplies was a significant problem. The agreements should also eliminate problems with the transit of cargoes for Bushehr via third countries.

In another sign of progress in the Russian-Iranian peaceful nuclear energy cooperation program since the adoption of the JCPOA, the two countries have stepped up preparations for the construction of the No 2 and 3 reactors at the Bushehr site. In 2015 they signed a protocol on the entry into force of the November 11, 2014 contract to build the two new reactors. They have also made engineering surveys at the site of these future reactors.

Rosatom expects to start designing the No 2 and 3 reactors and to have construction teams on the ground in Bushehr by the year?s end. The ceremony to ?lay the first stone? at the site will also take place later this year. Construction work will begin in earnest in 2018. The whole project will cost an estimated 11bn dollars. It is expected, that the financing will be provided by Tehran itself, making the Bushehr project more attractive for Rosatom compared to similar projects in other countries (Bangladesh, Belarus, China, Egypt, Finland, Hungary, India, Jordan, and Vietnam), most of which will rely on Russian credit financing.


Second Iranian NPP

It is no secret that Iran does not wish to rely on Russia alone for its future NPP projects. The country is looking for a potential non-Russian partner for its plans to build a second nuclear power plant (provisionally referred to as Iran-2). Such an interest was mentioned by representatives of the Iranian Foreign Ministry, the Atomic Energy Organization of Iran (AEOI), and Iranian expert community long before the adoption of the Vienna agreements. It does in fact make sense, and was to be expected for a country planning to build several NPPs.

How much progress has Iran made in seeking a new foreign nuclear energy partner since the adoption of the JCPOA?

The U.S. nuclear industry does not seriously envisage Iran as a partner for the foreseeable future, because bilateral relations between the two countries remain difficult. Even more importantly, Washington has yet to lift all of its unilateral sanctions that limit the ability of U.S. companies to supply nuclear technology to Iran. Besides, the two countries lack the legal framework for joint nuclear projects; they have yet to sign a peaceful nuclear energy cooperation agreement (referred to as the 123 Agreement in the United States).

Another major nuclear exporter, France, has received repeated invitations from Iran over the past 15 years to cooperate on peaceful uses of nuclear energy. Paris, however, has always declined such invitations, especially in view of its efforts to secure closer relations with Israel and the Arab states of the Middle East. There have been some nuclear contacts between Iran and France since the adoption of the JCPOA, but so far Paris does not seem to have revised its previous stance on the issue. The two countries also lack a bilateral agreement on peaceful nuclear energy cooperation. Let us also not forget the grim shadow looming over any such cooperation ? namely, the history of Iran?s participation in the Eurodif uranium enrichment consortium. Even though Tehran has held a 10-per-cent stake in the venture for many years, it has never been able to gain access to the enriched uranium produced by the Eurodif facility in France.

According to a statement made in 2016 by Iranian vice-president and AEOI head Ali Akbar Salehi, several Asian countries (including China, South Korea, and Japan) have expressed interest in helping Iran build NPPs. But Japan?s nuclear industry is deeply integrated with that of the United States. Toshiba holds the controlling stake in America?s Westinghouse, and Hitachi has formed an alliance with General Electric. Japan?s entry into the Iranian nuclear energy market would therefore require the necessary legal framework to be put in place not just between Tokyo and Tehran, but also between Washington and Tehran. That is unlikely to happen any time soon, for reasons already explained.

South Korean companies will face similar difficulties. They have yet to fully overcome their dependence on U.S nuclear reactor technology and know-how, so they would also need a 123 Agreement to be signed between the United States and Iran. To underline this point, the project by South Korea?s KEPCO to build the Barakah NPP in the UAE could only go ahead after the signing of a 123 Agreement between Washington and Abu Dhabi. Nevertheless, of all the aforementioned nuclear exporters, South Korea has the best chances of launching an NPP project in Iran over the medium term. But this is conditional on KEPCO being able to offer a reactor design that does not use any U.S. technologies or know-how. According to some estimates, such technologies account for about 5 per cent of the Barakah NPP project.

China?s prospects in the Iranian nuclear energy market deserve a more detailed analysis. Like Moscow, Beijing prioritizes nuclear energy in its national energy strategy. As of August 10, 2016, there were 35 nuclear power reactors in operation in the PRC, 15 of which were launched in 2014-2016. Another 20 are being built. Russia has 36 nuclear power reactors in operation, with another seven being built. Beijing has now set itself the objective of building more reactors of its own design for foreign customers. So far the only such customer is Pakistan, where two reactors are already in operation with another three under construction. Chinese nuclear power reactors have a number of competitive advantages, in particular low cost and relatively quick delivery. The state-owned Chinese financial organizations are also willing to provide credit financing for NPP export projects.

Chinese industry is showing interest in resuming nuclear energy cooperation with Iran, which was put on hold in 1997 as a result of a package deal with the United States. During a visit to Tehran by Chinese leader Xi Jinping in January 2016, the two sides discussed the possibility of joint NPP projects. Such projects may include the resurrection of an old proposal for Chinese participation in building the Darkhovin NPP on the Karun river. Another possibility would be to build an NPP in the southeastern Iranian province of Sistan and Baluchestan (one of the country?s least developed), on the coast of the Gulf of Oman.

The resumption of Chinese-Iranian nuclear energy cooperation is also made more likely by the positive record of such cooperation in the late 1980s and early 1990s, when China supplied a series of nuclear research and laboratory facilities. These facilities included the early stages of the nuclear fuel cycle.

As far as we know, when Iranian diplomats meet their Chinese colleagues, they often complain of China?s 1997 decision, taken under U.S. pressure, to suspend nuclear cooperation with Iran. They argue that the move undermined China?s reputation as a reliable partner. Chinese researchers, meanwhile, say that China?s 1997 decision was not unanimous, and that debates about it continue to this day. For its part, Beijing hoped that Chinese-Iranian trust on nuclear issues would be mended by the role played by the Chinese delegation in the discussions on international cooperation with Iran in the area of peaceful nuclear energy during the nuclear talks.

A major limiting factor for Chinese NPP exports is the need to incorporate the lessons learnt from the Fukushima disaster into China?s own reactor technology, in order to reach the required safety standards. At present, China does not have its own 3rd-generation reactor design that could be offered to foreign customers without the involvement of suppliers from third countries. Meanwhile, Russia, the United States, South Korea, and France are already building Generation III and III+ reactors in foreign countries.


Conclusion

The idea that the JCPOA has been detrimental to future Russian-Iranian peaceful nuclear energy cooperation is unfounded. Events in the first 12 months since the adoption of the Vienna agreements have shown that the logic of its proponents is flawed. In particular, their argument that Russia should have tried to keep the sanctions against Iran intact in order to maintain its monopoly on nuclear energy cooperation with the country has no basis in reality. Formally, Russia has never had such a monopoly in the first place. The exceptions made in the UN Security Council sanctions regime applied to all light-water reactor suppliers, not Russia alone.

It is highly likely that any future reactors to be built at the Bushehr NPP site will use Russian technology alone. Up to three new reactors could be built by 2025-2030, and up to five by 2030-2035, given the capacity limitations of the Bushehr site itself. How many Russian-designed reactors will be built in Iran, and how fast, will depend on diligent implementation of the JCPOA by all the parties, on Iran?s determination to pursue its ambitious nuclear energy development plans, and on the ability of the Russian and Iranian partners to agree on the technical and commercial aspects of such cooperation. The adoption of the JCPOA should speed up practical steps on building the new reactors planned for Iran?s first NPP in Bushehr. Russian-Iranian trade remains fairly limited, so the Bushehr NPP will remain the benchmark of the two countries? trade relations for years to come.

Under the existing legal framework between Russia and Iran, up to eight new reactors can be built in Iran using Russian technology. But it is unlikely that Russian contractors will start working on another NPP site before they have filled the existing Bushehr site to capacity. That capacity is estimated at six reactors; the figure includes the No 1 reactor already in operation and the unfinished reactor which the Germans began to build decades ago, and which will never be completed.

If Iran invites bids for a contract to build its second NPP, the contract will most likely be awarded to a non-Russian nuclear exporter. Chinese and South Korean companies seem to have the best chances, despite the weaknesses their offers have in addition to their obvious strengths.

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