Following the recent dismantling of cross-border sanctions, Russian state company Rostec has struck a pioneering deal with Iran in an effort of human survival. With recent technological breakthroughs in the field of salt water desalination, Rostec and Iran are working together to bring a €1 billion desalination plant to the port of Bandar Abbasa (1). This is the first deal between Iran and Russia since the “lifting of the Western sanctions against Iran” (2).
Subsequent to the 1979 Iranian Revolution, the United States placed sanctions on Iran with hopes of weakening their economy and preventing nuclear technology advancement. When Iran continued to research the capabilities of nuclear technology, the UN Security Council placed sanctions against Iran (3). Yet, even with sanctions from major Western powerhouses, Iran still hoped to be a key member in global politics with its energy influence. With Iran’s leverage in oil and gas, the United States responded by investing in alternate forms of energy, further weakening Iran (3).
Russia and Azerbaijan, two energy producing countries, see an opportunity in Iran, and have guaranteed safe passage for transportation for their exports. The sanctions that led to these plans will strengthen Russia, Azerbaijan, Turkey, and Iran so western sanctions will not allow “economic stagecraft” against the Eastern counterparts (3). As a result of the recent Atomic Energy Agency’s reports, Tehran’s compliance with nuclear pursuit codes has caused the UN, EU, and somewhat the US, to lift their sanctions against Iran (2).
With the ending of sanctions and formation of cross-border relations, Rostec and its subsidiary company Tekhnopromexport will build a 1.4 gigawatt power station in the port of Bandar Abbas. According to Russian newspapers, the plant will have “four 350 megawatt generators and a seawater desalination plant with a capacity of 200,000 cubic meters per day” (1). Though development will be handled by Rostec, ownership will vary, as 85% of the money will come from “a Russian state loan at 2.77 percent interest, with the difference provided by Tehran” (1). This desalination plant will take five years to construct, and will be the third largest Russian power plant in Tehran (1). The USSR began the power house projects in the 1980’s, using the country as a mule for energy.
As the devaluation of the ruble continues, development and attraction of foreign projects have become much more difficult to contract. Russian investment remains minimal, as foreign banks provide loans for projects and ultimately reap the benefits. According to Vladimir Sklyar from Renaissance Capital, the plant is “a totally political project, and the construction margin in very low” (1). Ignoring the environmental hazards of desalination, the projects alone cost an astronomical amount of money. It costs roughly $1 million per 1,000 cubic meters of water, only factoring usage costs and excluding overhead costs (4). With plans for ‘200,000 cubic meters’ of water per day, that roughly translates into a $200 million plant, withholding costs of infrastructure, management, and water distribution.
Indeed, public image and perception of Eastern European relations will better, as Moscow profits and investments are limited in this project. The project is built by Russian contractors and funded by Russian loans independent from the government. Desalination plants have low profits, and with Rostec funding 85% of the project from banks using the weak ruble, paying back notes will be difficult for the company. Very little return on investment to the Russian economy is expected, as most of the revenue will go towards maintaining the plant and paying back borrowings. From a numbers standpoint, the plant is not a financially sound development project, and could potentially create more harm than good. Nevertheless, this project could become a milestone in international projects and inspire other countries to overcome longstanding political differences to better their economies and their people.
(1) "Russia Lands First Major Deal with Iran Post Sanctions - Report." RT International. 1 Aug. 2016. Web. 23 Aug. 2016.
(2) “Both Russia and Iran Benefit from Lifting Sanctions against Tehran.” Sputnik News. 1 Janurary 2016. Web. 23 August 2016.
(3) Gvosdev, Nikolas. “From Iran to Russia, Trade Links Promise Protection Against Future Sanctions.” 12 August, 2016. 24 August 2016.
(4) McGovern, Ronan. “How much does a water desalination plant cost?” Quora. 19 May 2015. 25 August 2016.
Image: © Id1974 | Dreamstime.com - International Military Salon Photo
Bradley Woolf is a current Junior at the University of Southern California in the Marshall School of Business. He is majoring in Business Administration with an emphasis in Real Estate Finance and minoring in Real Estate and Development. Bradley has worked in both the real estate and financial sectors, where he interned at City National Bank as an underwriter, interned at Strategic Development Advisors, and most recently as a financial advisor for New York Life. He hopes to go into commercial real estate brokerage and is attempting to gain financial experience through Global Intelligence Trust.