The Iranian and Russian Foreign Affair ministers, Hossein Amir Abdollahian and Sergei Lavrov. (AFP)
Sami Erchoff August 1, 2022
Over the past few months, Russia and Iran have repeatedly expressed their wish to develop their economic relations. However, this strategy will remain largely within the scope of an anti-Western discourse, insofar as the Russian and Iranian economies produce similar merchandise, and are even competing in Asian markets.
Just as the invasion of Ukraine brought Western countries together, the flood of sanctions imposed on the Russian economy has prompted Moscow to reconnect with the other two arch-nemeses of the West: China and Iran.
Russian President Vladimir Putin and his Iranian counterpart Ebrahim Raissi during a meeting around the Kremlin’s famous anti-Covid table
In an interview with the Iranian national radio station in early July, Kremlin spokesman Dmitry Peskov praised the situation of bilateral Russian-Iranian trade, which grew by 31% during the first half of 2022. He also announced that the two countries will no longer account for their bilateral transactions in dollars, but in their respective currencies.
Along the same line, the big Russian hydrocarbon company, Gazprom, has signed a memorandum of understanding with the Iranian National Petroleum Company for an investment of 40 billion dollars in the Iranian gas and oil sector. This announcement came hours before Russian President Vladimir Putin’s visit to Tehran, during which the leaders of the two countries expressed their intention to develop their economic relations.
A necessary economic rapprochement to counter Western sanctions
The Russian-Iranian trade that used to be insignificant, has greatly expanded recently, thanks to the reinstatement of US sanctions on the Iranian economy as of 2018: the numbers jumped from 1.6 billion dollars in 2018 to 4 billion in 2021, according to the figures of the Russian customs service. An impressive growth that has propelled Russia into becoming the fifth-largest supplier to Iran.
The Tehran summit, which took place on July 19 between Turkey, Russia and Iran, led to several agreements between Moscow and Tehran. This trade with Iran is largely beneficial for Russia: Russian exports amount to 3.1 billion dollars against imports worth 976 million dollars. The two countries mainly trade agricultural products, including cereals, oils, vegetables and dairy products.
According to Bernard Hourcade, a distinguished researcher at the CNRS and a specialist in Iranian affairs, Russia was able to take advantage of the abandonment of Iran by European companies since 2019 to recover market shares. “The unilateral suspension of the Iranian nuclear agreement (JCPOA) was a real death-wish for trade between the West and Iran. Even if it becomes implemented once again, European companies won’t be able to come back easily” Hourcade explains to Ici Beyrouth.
As soon as the nuclear agreement was rejected by Donald Trump, Iran was forced to adopt a new strategy that favored the development of relations with China, Central Asia and Russia. Previously, Iran used to be a major importer of Western products.
Some of the steps that were negotiated between the administrations of the two countries were special privileges granted to Iranian exporters, development of an alternative to the SWIFT international payment system, and introduction of the Russian credit card system in Iran.
In addition, Western sanctions that are affecting the two economies are at the heart of bilateral discussions. Russian Foreign Minister Sergei Lavrov himself, has acknowledged last March that “Moscow will work with Tehran to take necessary precautions to avoid these illegal sanctions”.
Economies that do not complete each other
As a result of this diplomatic enthusiasm, President Raissi had set a goal of increasing the value of Iranian-Russian trade to $10 billion. Last June, the Iranian Minister of Oil exceeded all expectations by setting this goal to 40 billion dollars within a year and a half.
According to Thierry Coville, research specialist in Iranian affairs at IRIS, these figures are totally unrealistic. In an interview with Ici Beyrouth, he stated: “We are talking about two countries that depend on hydrocarbons, even though Iran has recently developed its non-petroleum exports. Trade opportunities are limited to the food industry, manufactured products with low added value, as well as weapons and nuclear energy”.
“We are talking about a very low volume of trading. These are mainly advertising effects which have little impact on the figures”, adds Thierry Coville. “Another undeniable fact is that Russia is not at the forefront of technology, and as a result, cannot bring much in terms of innovations to Iranian industry”, as he adds.
Despite recent growth, Russia represents only 3% of Iranian foreign trade, positioning itself far behind China with its 26% market share. Russia’s reduced trade is limited to agricultural products. In terms of trade in industrial products, Iran only exports $15 million worth of industrial goods to Russia, as currently, there is no industrial partnership between the two countries.
American sanctions constitute a considerable obstacle to Russian investment in Iran. Historically, banks and companies have always been reluctant to face Western sanctions in Iran, in addition to those already applied on the Russian economy. This obstacle could be overcome by current discussions regarding a common financial framework, which does not solve the real problem: the incompatibility between the two economies, both dependent on hydrocarbons and a low technological value industry, except for Russia, and for spatial and industries related to space and weapon industries.
Fierce competition in Central Asia and China
To make matters worse, the economic competition between Russia and Iran has intensified since the beginning of the war in Ukraine and the sanctions on Russia.
The heavy water reactor in Arak, Iran. The Iranian nuclear program was launched thanks to the technological contribution of Russia.
According to Bernard Hourcade, this competition is mainly based on the export of oil: “The Chinese are taking advantage of the Western sanctions and the competition with Russia to buy oil from the Iranians at a much lower rate than the market price”, he explains. He adds that “Russia is highly dependable on the Chinese market, now that the West has planned a total embargo on Russian oil by the end of 2022”. Consequently, Russian oil exports to China increased by 55% in May 2022 compared to last year.
Regarding the gas issue, Iran is not in a position to export it, although the country owns the world’s second proven reserves of natural gas. It even imports it at certain times of the year, as its gas infrastructure requires tens of billions of dollars of investment to be able to produce at its full potential.
Iranian industrialists have thus complained about the “brutal” price competition waged by the Russians to obtain economic outlets in Central Asia and China, to the detriment of Iran. This rivalry does not only apply to oil, but also to petrochemicals, steel, and even to light industry.
Under these conditions, it would be difficult to foresee an economic integration between these two regional giants, that would go beyond declarations of principle.