Russia and Iran – 2023 Bilateral Trade and Investment Dynamic
By Emil Avdaliani April 13, 2023
Russia and Iran have experienced a boom in bilateral relations. From closer military cooperation to a more general geopolitical alignment during the Ukraine conflict, the two Eurasian states have experienced an exponential growth in trade and investment areas.
Between January-July 2022, bilateral trade was up by some 44.9% compared to the same period in 2021 and amounted to US$2.8 billion. Overall in 2022 trade turnover between Russia and Iran increased by 20% and reached some US$4.9 billion. Moscow expects the trade to rise to US$40 billion in coming years. This is set to take place amid seemingly successful connections between Iran’s SEPAM national financial messaging service with Russia’s Financial Messaging System of the Bank of Russia (SPFS) which means both countries can bypass the SWIFT banking network. As both are heavily sanctioned by the United States in particular, there is little Washington can do to prevent this.
In previous years, up to 80% of the Russian-Iranian trade turnover accounted for agricultural products and foodstuffs, with these categories dominating in both Russian exports to Iran and vice versa. However, in recent months, a major shift has taken place – Iran has increased exports of industrial goods to Russia by 30% (polystyrene, pumps, auto components, machine tools for metalworking, and similar products) and, as a result, these deliveries for the first time exceeded the import of Russian manufactured goods to Iran.
A critical role in the expansion of bilateral trade between Russia and Iran is the growth of cargo transportation via the Caspian Sea. The route is a middle branch of the International North-South Transport Corridor (INSTC), which in the ideal scenario will be connecting Russian ports with the Persian Gulf and the Indian ports. The growth of Iran-Russia trade has taken place amid the expansion of the INSTC.
The INSTC is important for Iran as it opens up export markets for it not just to Russia but also to Turkiye and the Middle East – of note is the new detente between Iran and Saudi Arabia. The INSTC also links Iran with markets to India and Southeast Asia. It is expected to be fully operational by late 2023.
Therefore, the trans-Caspian maritime trade between Iran and Russia plays an important role in the overall expansion of bilateral commercial relations. For instance, throughout 2022 the shipment of export container cargo in the Caspian Sea increased by 120% in the first seven months of 2022. Iran and Russia have several active ports in the northern and southern parts of the Caspian Sea – Makhachkala, Olya, Astrakhan, Solyanka and Lagan are the main Russian ports; on the Iranian side of the Caspian Sea are Astara, Enzali, Caspian, Nowshahr and Amirabad.
In 2022 the Shipping Line Group of the Islamic Republic of Iran bought a 53% stake in the Solyanka port in the Astrakhan region and invested US$10 million in it. Part of this investment, financed by Russian banks, was spent on the purchase of a vessel with a capacity of 270 containers. The berths and internal roads of the port were also restructured. If Solyanka port throughput, prior to IRISL Group’s investment, stood at 50,000 tons per month, this figure is estimated to rise by 70% and reach 85,000 tons per month after the investments. In early 2023 Iran and Russia have reportedly signed a contract to build a cargo vessel for the port of Solyanka. The Russian side will make a cargo vessel for Iran to be used at Solyanka,
It should be noted that the envisioned expansion of Solyanka is an important step in the trans-Caspian trade. So far, the main part of Iranian maritime trade has gone through Astrakhan and a smaller part of this trade takes place in the port of Makhachkala. Iran’s attention to the Astrakhan port is not new: Iran has a consulate general in the city and a branch of Mir Business Bank, which, along with branches in Moscow and Kazan, is of great importance for banking and financial transactions between Iran and Russia.
There are however impediments to the trans-Caspian shipping between Russia and Iran. The small size of the Iranian shipping fleet in the Caspian Sea. Although there are 53 Iranian freight vessels ships operating in the Caspian, given the trend towards increasing exports and imports between Iran and Russia, at least 100 ships are needed. In this regard, on December 10, 2022, eight new vessels were added to the fleet of Khazar Sea Shipping Lines, which increases the number of Iranian vessels to 61.
However, the trade turnover between Russia and Iran is still somewhat modest. Official data is not disclosed, but, according to Russian State Duma Speaker Vyacheslav Volodin, in 2022 it increased by almost 15% and amounted to US$4.6 billion. This is incomparable with the volume of Russian trade with other countries such as, for example, with China (US$190 billion). Even if the existing forecasts for the growth of trade turnover are correct, it will still be less than 1% of the total volume of foreign trade of the Russian Federation. Iran is still very far from the performance even of much smaller countries such as Turkey, with which Russia’s annual trade currently stands at about US$30 billion a year.
An important component of the bilateral trade Russia and Iran also aim at the so-called swapping supplies of oil and gas – in the amount of 5 million tons of oil and up to 10 billion cubic meters of gas per year. Swap deliveries are exchange transactions. Within their framework, countries seem to change sales markets in order to reduce logistics costs, save time and money for customers on delivery speed. Moreover, Russia has already started fuel exports to Iran by rail for the first time and In February-March period Russia supplied up to 30,000 tonnes of gasoline and diesel to the Islamic Republic.
Russian Investments in Iran
According to the results of the 2022 financial year in Iran, (which ended on March 22, 2023) Russia became a leading foreign investor in the Islamic Republic: in monetary terms, the Russian investments amounted to US$2.76 billion (covering three big projects). According to the Ministry of Economy and Finance of Iran, the volume of foreign direct investment in the country over the past fiscal year reached US$4.2 billion, of which two-thirds fell on Russia. The second largest investment in Iran after Russia is Afghanistan (US$256 million). China, with investments of US$131 million, ranks fifth after Iraq and the UAE.
Gazprom is expected to invest US$40 billion in Iran’s oil and gas sector. In November 2022 Iran’s Deputy Foreign Minister Mehdi Safari said that US$6.5 billion out of this amount had already been committed. Yet there also are reports which also hint at the problems, namely, Russia’s unwillingness to invest into Iran’s oil and gas industry.
This happens at a time when Gazprom is going through hard times. Gas exports to its traditional European market have fallen sharply, while the tax burden on the company, on the contrary, has increased. Already, Gazprom is paying additional Rubles 416 billion (US$5 billion) to the Russian state budget in taxes every month, which can be increased by another Rubles 50 billion rubles, and the payment period has been extended until the end of 2025.
It will also not be easy to implement large-scale Russian state projects in Iran. The weak point is the return on investment. Tehran is experiencing a shortage of foreign currency and is struggling with a budget deficit year after year. This has already created problems for Moscow in the past. For example, the issue of Iranian debt to Russia for the construction of the Bushehr nuclear power plant, which in 2021 amounted to at least US$500 million, has not yet been resolved. New initiatives, such as the construction of the Sirik power plant or the electrification of railways, were planned to be financed with a US$5 billion Russian loan.
Yet there are significant challenges too. It is doubtful that the work on two major Iranian deposits that Russia is due to help develop—South Pars and Kish— will be eventually carried out. Some details (tubing) need to be imported from Japan or elsewhere and given the Western sanctions this will be difficult to do. Iran also intends to construct its own LNG terminals with Russian financial support. Yet given their technical isolation, to build fully functional LNG terminals is also much questioned.
Moreover, it is also not entirely clear why Russia would be willing to help Iran modernize its gas industry. The Islamic Republic has the second biggest gas reserves (only after Russia), but in 2021 the country exported meagre 17 billion cubic meter of gas. Therefore, any serious technical improvement in Iran’s gas industry will seriously hamper Russia’s ability to remain a major source of gas, especially at the time when Moscow lost its Western customers.
Overall though, Russia and Iran have entered into enduring partnership. This convergence is increasingly of a long-term nature powered by the war continuing war in Ukraine, US-China tensions and Russia-West confrontation. Tehran and Moscow might squabble over investment details, and each might harbor suspicions against the other. Yet larger, Eurasia-wide geopolitical trends will incrementally push Moscow and Tehran closer.
Emil Avdaliani is a professor of international relations at European University in Tbilisi, Georgia, and a scholar of silk roads.