ALACO DISPATCHES: Russia makes big play for Iranian trade

ALACO DISPATCHES: Russia makes big play for Iranian trade
Hassan Rouhani and Vladimir Putin meet in 2015.
By Yigal Chazan of Alaco February 1, 2017

Russia has been ramping up trade and investment with Iran following the lifting of nuclear-related international sanctions early last year, stealing a march on Western companies still hesitant about striking deals with the Islamic Republic.   

Isolated by the West, Russia sees Iran as an increasingly important market and a strategic ally in the Middle East, while Iran hopes Russia’s commercial muscle will help bolster its economy, whose recovery has been hampered by remaining US sanctions, which include measures linked to terrorism, human rights violations and ballistic missiles.

In December, a large Russian trade delegation to the Iranian capital, comprising representatives of 180 firms, signed a series of initial agreements in a range of sectors that could lead to $10bn worth of business. The deals included memorandums of understanding with several Russian energy firms for the development of seven Iranian oil fields, and a $2.5bn contract for the construction of a thermal power station and the electrification of a railway line. The two countries also agreed a five-year road map on industrial cooperation covering more than 70 projects.

Assad assistance

The growing commercial relationship has emerged amid their strategic cooperation in the Middle East focused on preserving the Assad regime. In August, Russian planes used Iranian airbases to launch raids on Syrian targets, and in November it was reported that they were in talks over a multi-billion-dollar arms deal that would see Russia delivering a host of military equipment, including advanced tanks and planes, to Iran.

Although relations between the two countries came under strain in the past, Russia and Iran have maintained economic links, even during the nuclear-related sanctions regime. These ties were strengthened in 2014 after the imposition of US and EU sanctions on Russia over the Ukraine crisis. That same year, Iran and Russia reportedly discussed power-generation and Russian goods-for-Iranian oil deals, the latter of which was implemented the following year. In 2015, Moscow played a significant role in negotiations that led to the nuclear deal, under which Iran agreed to rein in its atomic energy programme in exchange for the lifting of nuclear-related sanctions.

While the volume of recent Russian-Iranian bilateral trade has been relatively small – dropping from $1.7bn to $1.3bn between 2014 and 2015 – last year it leapt by 80% following the lifting of the nuclear-related sanctions in January 2016. In August, Russia’s ambassador to Tehran, Levan Dzhagaryan, said the removal of the measures had triggered a surge in interest among Russian firms in doing business with Iran. His remarks came several months after the speaker of the Iranian parliament, Ali Larijani, announced that Russia had been given priority in terms of investment in infrastructure and other sectors of Iran’s economy.

One of Moscow’s main areas of interest is the Iranian energy sector. According to a paper by the US-based think-tank the Middle East Institute, “Russia sees in Iran a vast yet underdeveloped hydrocarbons sector that lacks sufficiently advanced production, refining and distribution technology and expertise”. Russian companies are well-placed to fill the gap.  

Lack of competition

The Russians are assisted, for the moment, by the lack of competition. Western investors continue to be wary of doing business in Iran, many of whom are concerned about residual American sanctions that ban dollar transactions processed by US financial institutions, and the possibility that President Donald Trump might adopt a tough stance on Iran – although it seems he is unlikely to carry out a pre-election threat to scrap the nuclear agreement.

Consequently, while there has been no shortage of western business delegations to Iran, few deals have been struck. This has put pressure on the country’s reformist President Hassan Rouhani, who has promised Iranians that the rapprochement with the West would deliver economic dividends. A poll in August showed that his popularity has dropped significantly since the nuclear deal was ratified. Fortunately for Rouhani, Russian firms seem to have fewer reservations about signing contracts, as Russia’s banks are less constrained by the remaining American sanctions.

At the same time, economic engagement is likely to be enhanced by two key regional developments. The Russian-dominated Eurasian Economic Union is to begin talks on establishing a free trade zone with Iran, Egypt, India and Singapore. Additionally, Russia, Iran and India have been developing a new Eurasian trade route, which includes Caucasian and Central Asia countries. By bypassing the Suez Canal, the North-South Transport Corridor – a combination of road, rail and maritime connections stretching from Mumbai to St Petersburg – will markedly reducing shipping times to Western Europe.

While Russia and Iran are talking up their growing relations, there are likely to be limits to the partnership. The two countries’ military interests have converged in Syria, but commentators suggest Moscow will not want its cooperation with Shia Iran to hinder relations with other key players in the region.  While Russia is keen on building up the Iranian energy sector, other observers suggest its attitude may change if they begin to compete for a share of the European gas market or if Iran’s race to achieve pre-sanctions levels of oil production squeezes Russia’s market-share.

President Trump’s policy towards both could well be key. A mutual sense of isolation has seemingly drawn Russia and Iran together. That dynamic might change if, as some predict, Trump warms to Moscow and maintains a tough line on Tehran.

Yigal Chazan is an Associate at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.