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. Last Updated: 07/27/2016

Iranian Crisis a 'Win-Win Situation'

Editor's note: This is the first of two reports about the energy implications for Russia of the standoff over Iran's nuclear program.

If ever there were a sign of a diplomatic breakdown, this seemed to be it: Iranian President Mahmoud Ahmadinejad rejecting a European proposal before it had even been made.

Ahmadinejad's preemptive rejection this week of Europe's latest diplomatic overture showed why nerves are fraying as the United States and EU push Iran to abandon uranium enrichment -- suspecting its ultimate goal is a bomb -- and Iran continues to announce new nuclear landmarks.

The stakes of the conflict are rising. Beyond concerns about global nuclear security, fears abound that an escalation in Iran could send oil over $100 per barrel, potentially triggering a world energy crisis.

Amid all the uncertainty -- and at least for the moment -- one country has come out a winner.

"Quite frankly, Russia is benefiting from the high price of oil right now," a senior U.S. official said by telephone, speaking on condition of anonymity. "I'm not saying it's driving their policy, ... but the Russians are certainly benefiting."

Russia has stood firmly between Iran and the West in recent months. Russian officials insist they share the West's concerns about a nuclear weapon-armed Iran, but have simultaneously blocked a U.S.-backed push for sanctions in the United Nations -- which Iran has characterized as a vote of confidence.

Foreign Minister Sergei Lavrov reaffirmed on Wednesday Russia's opposition to sanctions or the use of force against Iran. "Before thinking of how to punish Iran ... we need to concentrate on searching for those solutions which would bring Iran into dialogue," Lavrov told journalists.

Analysts said Russia's independent line on Iran was one of the key reasons its relations with the United States had soured. Several added their belief that U.S. Vice President Dick Cheney's recent tongue-lashing of Russia had more to do with Iran than with democratization.

Patrick Clawson, deputy director for research at the Washington Institute for Near East Policy, said many in Washington believed Russia was thinking more about profit than security when it came to Iran.

"There's the sense in Washington that Russia's policy toward Iran is dictated by Russia's energy concerns," Clawson said.

State nuclear construction monopoly Atomstroiexport has nearly completed its work on Iran's $800 million Bushehr nuclear power plant -- in spite of U.S. protests -- and Iran's deputy nuclear minister said last week that Russia was ready to help it build two more.

More worrying, the senior U.S. official said, is Russia's planned $1 billion arms sale to Iran, including 30 anti-aircraft batteries that could be used to counter U.S. air attacks.

"We think having a sale like this is inappropriate and destabilizing," the official said. "It is our strong view that Russia should not go ahead with this deal."

Russia and Iran have a total trade turnover of $2.2 billion per year, according to Yevgeny Yevseyev of the Institute for World Economy and International Relations, a Moscow think tank.

"We have huge economic interests in Iran," said Konstantin Kosachyov, head of the State Duma's International Relations Committee, in a recent interview on Ekho Moskvy radio. "For us that's unquestionably an important theme, but a theme that's subordinate to ensuring the UN's system of collective security."

Curiously, military action in Iran could also bring Russia financial and strategic advantage, said Brenda Shaffer, head of the Caspian Studies Program at Harvard University.

"If the crisis continues and brings military action, oil prices are going to continue to soar ... and Russia is going to emerge as the most important energy player even more clearly than it is now," Shaffer said by telephone from Jerusalem.

Military action would not only threaten Iran's 2.7 million barrels of oil exports per year -- most of which goes to Japan and China -- but could provoke Iran to block oil shipments though the Strait of Hormuz. About 25 percent of the world's oil supplies pass through the Persian Gulf strait.

A resulting super-spike in oil prices would hold a hidden pitfall for most major oil producers.

"A producer like Saudi Arabia has reason to fear very high oil prices, because countries and industries would then move to natural gas and nuclear energy," Shaffer said.

But with Russia holding the world's largest natural gas reserves -- and planning to develop a bank of enriched uranium for developing nations' nuclear energy programs -- a shift in the world's energy balance would still allow it to profit, Shaffer said.

If, on the other hand, Russian diplomatic initiatives help end the standoff, "you can imagine the atmosphere," Shaffer said. "Russia's in a win-win situation with this crisis."

Other analysts said the dangers of a war on Russia's southern doorstep would likely outweigh any potential benefits.

"In terms of energy supplies, Russia will clearly become more important if there's greater instability in the Middle East -- there's no question," said Julia Nanay, head of PFC Energy, by telephone from Washington. "But if there's a military solution to the conflict, everyone in the region loses."

Still, a war in Iran could offer Russia a rallying point in opposing a unipolar, U.S.-dominated world, said Dmitry Trenin, deputy director of the Carnegie Moscow Center. "If there were a war in Iran, Russia would try to gain the strongest possible advantage from the rise in oil and gas prices," Trenin said. "It would take advantage of the weakened position of the United States throughout the world as a result of the war."

Russia would likely cast itself as a friend of the Muslim world -- mindful of the reactions of its own 20 million-strong Muslim population -- as well as "closely coordinating its position with China," Trenin said. Russia's growing energy and military partnership with China has already raised hackles in the West, particularly in light of recent Gazprom threats to redirect gas supplies from Europe to Asia.

Among the many remaining questions about how the conflict will play out, Trenin said, one thing was clear. "We're at the beginning of a new period in relations between Russia and the West -- especially the United States," he said. "Now, it's going to be about competition."