Russia and Iran Have High Hopes for Each Other

One of Russian President Vladimir Putin’s special envoys keeps visiting Iran. Igor Levitin, Putin’s advisor, has visited Tehran twice in 2023, totaling five visits in the last six months. During his latest visit, Levitin met with top Iranian figures, including Mohammad Mokhber, first vice president and top economic coordinator, and Ali Shamkhani, secretary of the Supreme National Security Council. Levitin’s repeated visits are linked to negotiations between Tehran and Moscow to complete the International North-South Transport Corridor (INSTC), a new trading route connecting the Indian Ocean to Russia through Iran.

Much hope is presently invested in Iranian-Russian economic relations as an emerging axis of sanction-busters. Shamkhani characterized the INSTC as a project that could play a “decisive role in changing the geometry of goods transit in the region.” According to Mokhber, the INSTC could turn Iran into Russia’s export outlet for agricultural goods destined for markets in the broader Middle East. To this end, Mokhber called for a new committee to push Iran and Russia toward closer coordination on infrastructure projects such as railroads and highways. But the Iranian regime has a history of exaggerating foreign economic partnerships to counter perceptions that Tehran’s foreign policy—and the sanctions it provokes—is undermining the country’s economic potential.

Circumventing Western sanctions has been the biggest push factor for closer economic ties between Russia and Iran. Goals include facilitating bilateral trade, expediting the completion of the INSTC, and linking the two countries’ banking systems to facilitate financial transactions. But there are deeper challenges for Iran-Russia economic relations. Both countries need financing and technology for their gas and oil industries, sectors in which they are rivals. This rivalry is especially painful for Iran given its unfulfilled expectations for investment from China.

Russia’s biggest grain customers are Algeria, Egypt, Iran, Israel, Libya, Pakistan, Saudi Arabia, Sudan, and Turkey; and it must reach them through the Turkish-controlled Bosphorus Strait. The strait is technically in NATO territory, and Moscow worries that the alliance could limit its access to it. Turkey has already barred Russian warships from accessing the Aegean Sea from the Black Sea. If using the Bosphorus Strait becomes too risky, Iran could allow Russia to reach many of these markets more effectively—via rail links. Iran is also keen to use the INSTC to export its agricultural goods to the Russian market, where they could compete with Turkish agricultural goods. The INSTC is hence depicted as a win-win proposition.

But the plan is not just a quick fix for Bosphorus snags. During his March 29 visit to Moscow, Iranian Foreign Minister Hossein Amir-Abdollahian announced the finalizing of a “long-term strategic cooperation agreement.” During the 2001-21 lifespan of the last strategic cooperation agreement, Iranian-Russian economic ties hardly blossomed, with trade volumes persistently hovering around the $1.5 billion mark per year between 2016 and 2022. Iran’s top trading partners have for some time been China, India, Iraq, Turkey, and the United Arab Emirates; and though trade between Russia and Iran reportedly increased by 20 percent last year (to $4.9 billion), Russia still lags behind other trading partners.

The two countries’ economic ties have struggled to blossom, in part, because each depends on hydrocarbon export revenue. Reports on Iranian-Russian competition for oil markets surfaced as soon as Russia had to replace its European buyers after the West imposed sanctions. Tehran ground its teeth as it watched Russia sell oil to an investor Iran unsuccessfully courted for years: China. Iran’s long-time isolation in global markets is one of the main reasons China has invested far below Tehran’s expectations.

In 2021, Iran and China signed a 25-year, $400 billion strategic agreement, which resulted in much fanfare but not much action. China is Iran’s biggest trading partner, mainly because Tehran sells Beijing crude oil imports at a discount, but it lags far behind as a long-term investor, which is what Iran wants it to be. Data shows that since the beginning of Iranian President Ebrahim Raisi’s government in August 2021, the Chinese have invested in 25 projects in Iran, worth only $185 million dollars. Taliban-ruled Afghanistan is, after Russia, the second-largest investor in Iran, while China ranked sixth.

When Raisi visited Beijing this February, he signed some 20 agreements on trade, tourism, and the sale of communication equipment from China to Iran, but glaringly omitted investment projects. Meanwhile, China is investing more in oil providers such as Saudi Arabia, the United Arab Emirates, and even Iraq—choices that are often part of Beijing’s Belt and Road Initiative (BRI). Given Iran’s geographic location and its ostracization from the West, Tehran had hoped to be a top BRI priority for Beijing, becoming a land and sea bridge linking east and west Eurasia.

China has been reluctant to invest in Iran for two reasons. First, unlike Russia, China is fully integrated in the world economy and has to perform careful cost-benefit calculations when it comes to ignoring U.S. sanctions on Iran. The United States remains China’s biggest trading partner, and Beijing needs to be careful not to undermine its economic interests by moving too close to Iran. Also notable, and less openly raised in Iranian debates, is the fact that unlike the regimes in Saudi Arabia or the United Arab Emirates, Iran just does not have serious economic plans for the future, which would bother any investor.

Both factors played out in Iran’s struggles to build its only deep-sea port in Chabahar, a city on the Arabian Sea. The project has been underway for over 30 years. Tehran first signed a number of agreements with Indian firms to finance and build the project. Despite contractual commitments, the Indian firms by and large stayed away once U.S. sanctions on Iran became too burdensome. Disappointed, the Iranians turned to the Chinese, but the pitfalls of sanctions also deterred Beijing. The United States exempted India from certain sanctions on Iran, allowing it to remain in Chabahar in an effort to keep Beijing out, but the project has mostly been left in the lurch; China has not taken the relay.

This sort of lackluster investment performance from Beijing is why Moscow became Tehran’s investor, as well as trading partner, after 2022. Russia might act differently from China and help make Chabahar into a real regional point of transshipment; in fact, the country has now become the biggest foreign investor in Iran, albeit with a modest figure of $2.76 billion. If it chooses to deepen this approach, Russia’s investment in Iran, including in Chabahar, may seem counterintuitive: If the two countries are energy rivals, why would Russia invest in Iran’s energy sector?

In fact, Russia’s investments in Iran’s hydrocarbons are a net gain for Moscow. Given that sanctions heavily cap how much oil Iran can sell (and Iran can’t increase sales much more than their current levels), higher oil and gas production in Iran does not mean a market share loss for Russia. In addition, by investing in Iran’s infrastructure projects, Russia can then influence Iran’s oil and gas sectors and exports—significant since the two countries hold some of the largest oil and gas reserves in the world.

The two countries may compete on oil and gas, but Russia is winning, at least for now. And, given the anticipated win-win boost to trade provided by the INSTC, Moscow’s overall scorecard on Russia-Iran economic relations is higher than Tehran’s. Russians—with not much more left to fear from the United States given the all-time low in relations—are effectively gaining a free hand to integrate Iran into the Russian sphere of economic influence whatever way they see fit.