In recent weeks, reports of a potential 25-year, $400-billion deal between Iran and China have dominated the conversation about Tehran’s options for freeing itself from the punishing U.S.-imposed sanctions regime on the country. Only time will tell if this so-called strategic agreement can live up to the hype, but China is not alone in seeing an embattled Iran as a major geopolitical and commercial opportunity. Russia too has ambitions of strengthening ties with Iran and its plans for closer economic cooperation appear to revolve around three main drivers at present: Russian arms sales, joint oil and gas projects, and Iran’s role as a transit hub for Moscow’s broader transportation projects connecting Russia to South Asia. Any substantial progress in joint Iranian-Russian ventures to improve pan-regional transportation links will clearly indicate plans for longer-term economic cooperation. If so, this will be a departure from the past, as such cooperation has previously tended to be short term and focused on limited transactional exchanges. Meanwhile, on the political level, Iran’s 81-year-old supreme leader, Ayatollah Ali Khamenei, is paving the way for closer Iranian-Russian relations to last long after he has passed.
A new Russian port on the Caspian?
According to Tehran Times, Moscow plans to build a new port near the town of Lagan on the Russian Caspian coast. The $1.6 billion port, with a reported capacity of 12.5 million tons, is said to be chiefly aimed at increasing Russia’s trade with Iran and India. As Tehran Times put it, “Container traffic is planned to operate mainly from India and the Persian Gulf countries, through Iran.” Along the same lines, Iran and Russia have announced that a permanent shipping route between the two countries will be launched in September 2020. Russia’s port of Astrakhan will be linked to two ports in Iran’s Caspian Sea town of Bandar-e Anzali.
In the short term this new shipping route is aimed at increasing trade between Russia and Iran, which is a top priority for sanctions-hit Iran. A lack of shipping options, including for container ships, has badly hampered bilateral trade. According to Iranian officials, the new shipping route will include cargo ships capable of carrying refrigerated containers, which will enable trade of perishable goods. The announcement of a new port on Russia’s Caspian coast and the launch of a new Iran-Russia shipping line come as Moscow and Tehran prepare to hold the 16th session of the Joint Commission on Trade and Economic Cooperation, a bilateral economic forum, in September. In recent years, Tehran and Moscow have made waves of promises to push ahead with economic cooperation, and while some progress has been made, the reality has often fallen short of the rhetoric.
Trade ties
Nevertheless, trade between the two countries has been increasing in recent years, especially following the reimposition of U.S. sanctions in late 2018, as Russia is less concerned by their impact than some of Iran’s other trading partners. Total bilateral trade rose from $1.74 billion in 2018 to $2 billion in 2019, driven by exports of machinery, steel, and agricultural goods from Russia and fruits, vegetables, and dairy products from Iran. In the first five months of 2020, Russian exports to Iran were up a further 31 percent, which suggests trade volumes between the two countries are experiencing a major transformation. But Iran’s ambassador to Moscow, Kazem Jalali, notes that economic relations between the two countries still fall far short of their potential. Jalali remarked to a group of Iranian businessmen living in Moscow that Iran and Russia have close diplomatic and security cooperation, but this relationship cannot become strategic unless they increase their economic cooperation as well. Between March 2018 and March 2019, Iran’s exports to Russia represented $533 million of the $1.8 billion in bilateral trade. While Iranian exports to Russia are not experiencing the desired growth levels, Iran’s trade volume with the Eurasia Economic Union states (Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia) has increased by 14 percent since Tehran joined the economic bloc in April 2018.
Transportation and regional integration
In fact, Tehran has always hoped that closer ties will help not only in integrating Iran economically with Russia but also with its other northern neighbors in Central Asia and the South Caucasus. Take for example the International North-South Transport Corridor (INSTC), a 4,500-mile-long transportation system involving rail, road, and shipping routes connecting India to Russia through Iran. The INSTC continues to be depicted by its supporters as a game-changer that will shorten the distance and lower the cost of transportation from South Asia to Europe through Iran and Russia. The project’s most enthusiastic supporters even speak of it as a serious rival to the Suez Canal for East-West trade.
Russia, Iran, and India signed the INSTC agreement in 2002 and while progress has been slow, incremental development is under way. Azerbaijan is also involved in the INSTC, providing a critical part of the rail route. Baku has already supplied $500 million toward the $1.1 billion cost of linking the rail networks of Iran and Azerbaijan from the towns of Rasht to Astara. Iranian authorities are also eager for the rail route’s completion but are evidently still grappling with financial and contractual obligations on their end. Among the Central Asian states, Kazakhstan has been the most eager to push for such pan-regional transportation projects, which will give Nur-Sultan much-needed additional international transportation options.
Overall, countries in Central Asia and the South Caucasus suffer from chronic underutilization in trade potential and economic integration. It is no surprise they welcome attempts to foster greater economic interdependence that can boost the fortunes of the entire region. As far as the INSTC is concerned, the big unknown at the moment is the future of Indian-Iranian relations and Delhi’s ability to remain an integral stakeholder in the project. An important part of the INSTC has always rested on India financing Iran’s deep-sea port of Chabahar, a commitment the Indians are lukewarm toward these days as a result of American pressure. Even if India abandons Chabahar, the Iranians and the Russians will probably continue with the effort.
Khamenei’s advocacy for Russia
An increase in bilateral trade and commitment to projects such as the INSTC are certainly indicative of Moscow and Tehran’s seriousness about forging closer ties. There have long been strong signals that this is what the highest political authorities in Tehran would like to see happen. In one of his first acts as Iran’s president in September 2013, Hassan Rouhani met with Russian President Vladimir Putin on the sidelines of the Shanghai Cooperation Organization (SCO) summit in Bishkek, Kyrgyzstan and formulated a plan to strengthen ties, starting with a focus on the economy. Suggestions by Iranian officials to increase trade from $1-2 billion in 2013 to $15 billion per year were overly unrealistic, even then. But the scope for growth in trade was as undeniable then as it is now.
Most importantly, Rouhani has always enjoyed the approval of Supreme Leader Ayatollah Khamenei to proceed on this path with Russia. Putin, who had not visited Tehran since 2007, travelled there in November 2015, a moment advertised as the beginning of a new era in relations. For Khamenei, closer economic ties with Moscow are seen as an important factor that can reinforce political relations. This has been doubly true since the beginning of the Trump administration and the launch of the American “maximum pressure” campaign against Iran. Officials in Tehran make no secret of the fact that they want to use trade and inward investment as a way of turning key states — Russia, EU countries, Japan, and others — into stakeholders in the Iranian economy, thereby making any future U.S. sanctions policy against Tehran that much harder to implement.
Furthermore, it is also no secret that foreign policy at a strategic level is mostly shaped by the Office of the Supreme Leader in Tehran. A number of voices close to Khamenei, such as senior advisors Ali Akbar Velayati and Gen. Yahya Safavi, have advocated the idea of pushing for closer strategic and economic ties with the East, including China, other Asian countries, and Russia. Russia remains a sensitive issue in Iran for historical reasons, however, and this has obliged Tehran to defend Moscow at times. When criticism was leveled against Russia for absorbing Iran’s oil export market share following the imposition of American sanctions in late 2018, senior regime figures had to respond to allegations that the Russians were systematically exploiting Iran’s isolation.
Iran’s give and take with Russia
Velayati, probably the closest advisor to Khamenei on foreign policy matters, knows full well that Russia is indeed taking advantage of the sanctions and wants to replace Iranian oil in markets where Tehran has historically been a major supplier. But in an interview with Tasnim, a media outlet close to the Revolutionary Guards, Velayati stated that Russia still gives Iran more than it takes. He argued that anti-Russian voices in Tehran should not just focus on certain issues (i.e. Russia absorbing Iran’s oil market share in Asia or playing a double game in the Syrian conflict against Iran), but should look at the overall picture of Russian-Iranian relations.
Velayati specifically pointed to Russia’s decisions in favor of Iran at international bodies such as the UN Security Council (UNSC) and the International Atomic Energy Agency. At the latter, Moscow once again, along with Beijing, recently vetoed an American effort to refer Tehran to the UNSC for violating its nuclear commitments. As Velayati put it, China has economic power but Iran needs Russia’s hard, military power as well as its diplomatic influence on the international stage. Indeed, Russian-Iranian relations are complicated, but according to this senior Iranian official, Tehran has no choice but to put up with Moscow.
Just glancing at the pledges made by both sides gives the impression that the expansion of Iranian-Russian relations is largely a case of much talk and little action. Take the Caspian Sea as an example. A large-scale barter deal agreed in 2014, whereby 500,000 barrels a day of Iranian crude oil was to be swapped for Russian goods and services, quickly proved to be an unworkable trade mechanism for two large energy-exporting states. And yet, a recent uptick in interest among countries around the Caspian Sea in pan-regional economic projects is both undeniable and driven by a fast-changing geopolitical environment where Iran and Russia still believe they have a fair amount to gain from closer cooperation. This reality could soon be more visible should various plans to better connect the region and facilitate trade start to take shape around the Caspian Sea.
Alex Vatanka is the Director of MEI’s Iran Program and a Senior Fellow with the Frontier Europe Initiative. The views expressed in this piece are his own.
Photo by Iranian Presidency/Handout/Anadolu Agency via Getty Images
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