Jahangir Karami

The Future Prospect of Economic Ties between Iran and Russia

Date of publication : April 1, 2016 23:27 pm
The Future Prospect of Economic Ties between Iran and Russia

Economic relations between Iran and Russia since 1991 and following the collapse of the Soviet Union increased from about 400 million dollars to 4.5 billion dollars in 2007. However, with the ratification of UNSC sanctions the volume of bilateral trade gradually reduced and between the years 2007 and 2013, this figure reached about 1 billion dollars. This situation was mostly due to the six UNSC resolutions on sanctioning Iran. Russia abstain from delivering S-300 missiles to Iran and also implemented monetary and banking sanctions against Iran.

Economic cooperation between the two countries during the past two decades has been centered upon trade, energy, nuclear power plant, and transportation. In the field of trade, the volume of trade between Iran and the Soviet Union in 1991 (a short time before the Soviet collapse) was about 1.4 billion dollars. But, following the Soviet collapse when pro-Western forces were too influential in Moscow, namely, from 1992 to 1995, trade volume between the two countries reduced from 723 to 200 million dollars. In 1995, a Russian delegation arrived in Tehran to expand industrial and technical cooperation between the two countries based on their common interests and past experiences. Following this visit, bilateral exchange saw a significant increase.

In 1996, the Joint Commission of Economic Cooperation was formed in Moscow. In this Commission, relevant issues were studied within five committees: economic and trade, electricity, transportation, communications, and coordination of activities. The largest agreements related to trade and economic cooperation. According to the signed memorandum of understanding, the two sides agreed to cooperate in the fields of industry and mining, machinery, atomic energy, post and telecommunications, metro, shipping, and railway. Also, they agreed to establish a joint shipping company to increase the capacity of sea freight in the Caspian Sea and to enhance the exchange of goods between the two countries. On the other hand, they declared a plan for linking Moscow and Bandar Abbas (called North-South link) through telecommunication systems.

The value of bilateral trade in 1996 was 400 million dollars, this figure reached 450 in 1997, and in the years 1998 and 1999 exceeded 500 million dollars. Trade volume between the two countries in 2000 was 700 million dollars which exceeded one billion dollars in 2001.

However, most of these exchanges were devoted to Iran's imports from Russia, so that, for example, in 1998, Russia's import from Iran amounted to 70 million dollars which suggests Iran's negative balance of payment. The major Russian export items to Iran included iron rolling mills, steel semi-finished products, seamless honed tubes, and other pieces. In 1999, the value of this part of Russia's experts amounted to 147 million dollars. Equipment for atomic energy (47 million dollars), floating platforms and docks (40 million dollars) and paper and carton (36 million dollars) are respectively in the next ranks.

Iran exports fruit, pistachio, processed fruit and vegetables products, tobacco and mineral stones. In 1999, Russia's import of land vehicles from Iran reduced to 18 million dollars; while in earlier years, this figure had even reached up to 133 million dollars. In the years after 2000, with Putin's coming to power, Khatami's visit to Moscow and the conclusion of 10 year cooperation agreement, economic relations between the two countries expanded; so that in 2005, Russia became the seventh largest Iran's trade partner, accounting for 5.33 per cent of total exports to Iran. In the first quarter of 2007, the value of trade between the two countries amounted to 2.294 billion dollars. During these years, the largest share of Iran's imported goods from Russia belonged to armaments, steel, iron, and wood. Iran's exports to Russia, especially in 2006 and afterwards, included car, cars spare parts and foodstuff. The volume of imports from Russia to Iran was 1.5 billion dollars during 2001-2005 and reached about 3 billion dollars in 2007.

Also, in 2007, Russians declared their willingness for investing in Iran's petrochemical industry. In 2008, an agreement for buying and assembling Tupolev 204 and 214 airplanes was concluded between the two countries, according to which Iran will buy 100 aircraft worth 2.5 billion dollars in the next 10 years.

In energy sector, Iran and Russia intend to regulate their policies of production and export to influence the price and supply of these resources in the world market. It should be noted that Iran-Russia relations in the field of energy involve competition, overlapping and commonalities. However, the two sides, despite their divergent goals can benefit from these relations if they cooperate with each other. For example, they can cooperate in the framework of Gas Exporting Countries Forum and in specific investment projects. Russia participates in the operations of "South Pars" gas field in the Persian Gulf and the construction of Asaluyeh gas pipeline. Also, major Russian oil companies such as Lukoil, Yukos, Slavneft, and Tatneft are interested in participating in the development of Iranian oil industry. Along these lines, the officials of Gazprom have expressed hope that after the removal of sanctions, this company can cooperate with Iran on joint venture investment.

In nuclear energy sector, many analysts have presented the construction of Bushehr nuclear power plant as the symbol of cooperation between the two countries. The importance of this project is not limited to its economic aspects, rather it has geopolitical dimensions. Also, the prospect of the development of peaceful nuclear energy in Iran paves the way for the active participation of Russian companies involved in this field in the related projects.

In electricity sector, there are vast opportunities for cooperation with Russian companies, given their rich experience in the construction and renovation of power plants. The Iranian side is interested to cooperate with Russians in developing Shahid Mohammad Montazeri and Ramin thermal power plants. Also, a joint workgroup has begun its preparatory activities for constructing a thermal power plant in Tabas.

The project of North-South Corridor signed by Iran, Russia and India in 1999 laid a basis for cooperation between regional countries to achieve the goal of regional development. This transportation route links India to Europe via a safer and shorter path.

The coming to power of a new government in Iran and pursuing a more active diplomacy based on interacting in a constructive way with the rest of the world and adopting a more positive approach to Russia which led to the increase in the level of interactions with the Russians have contributed to boosting trade relations between Iran and Russia and increased it about a half billion dollars in the last year creating hope for further expanding them.

However, UNSC sanctions, especially banking sanctions which Russian banks could not circumvent them due to their extensive transactions with the Western banks, have had a limiting impact on economic relations between Iran and Russia. Now, with the prospect for the removal of sanctions, it is predicted that the two countries can expand their cooperation in the fields of trade, military industry and technology. Thus, there is much hope that trade exchanges between the two countries would exceed the level existed before imposing sanction on Iran that was 4 billion dollars. Undoubtedly, economic interdependency underpins political and security relations. Under current circumstances and given economic pressures exerted on Russia by the West following crisis in Ukraine, Russia's strained relations with Turkey and the necessity of struggling against terrorism and extremism in Syria, expanding economic ties between the two countries would be of great importance and serve their respective national interests. 

Jahangir Karami, an associate professor at University of Tehran, is the senior fellow at The IRAS Institute.

ID: 1124
Author : Jahangir Karami