Nikolay Kozhanov

Prospects for Iranian-Russian Cooperation

Date of publication : August 2, 2018 20:59 pm
Iran's President Hassan Rouhani (L) and Russia's President Vladimir Putin talk during a meeting with the president of Iran ahead of the upcoming meeting of the Council of the Heads of States of the Shanghai Cooperation Organization (SCO) in June 9, 2018

Since 2012, Russia and Iran has been persistently trying to create the solid base for the development of bilateral relations. However, the role of the economic factor in building up of these relations is still substantially underestimated and neglected. Moreover, for the last five years, the volume of trade between the two countries was instable and its dynamics have predominantly been negative. Yet, at the same time the Russian-Iranian economic relations possess certain positive potential. Although the Iranian share of overall Russian trade and investment remains small, the country still holds great interest and, in some cases, even key importance for selected industries including the agricultural and military-industrial complexes, and the petrochemical, space, nuclear and oil and gas industries. Iran retains interest in Russia as an arms exporter.
In 2012–17, cooperation with the Middle Eastern countries in the nuclear sphere became another priority of Russian business. In 2014, Russia signed a package of agreements for the construction of up to eight new nuclear reactors in Iran. The first two are expected to be built at the Bushehr power plant, in addition to the power-generating block previously constructed by Russian engineers and handed to the Iranians in 2013.
Russian cooperation with Iran also aims to offset the negative effects of the Kremlin’s sanctions war with the West. Middle Eastern countries including Iran have acquired additional importance as agricultural exporters whose produce may help to replace European products subject to Russian counter-sanctions. By 2017, Russia had offered Iran the opportunity to use their national currencies as legal tender in bilateral trade instead of euros and US dollars, and invited it to form a free trade zone with the Eurasian Economic Union. The current fall in the oil price forced Russia to pay closer attention to the opportunities existing in the Middle Eastern oil and gas sectors. If Russian companies could obtain access to the region’s resources, this would strengthen Russia’s presence in the energy market as the region would provide its energy majors with additional oil and gas resources for re-export.
These interests are one of the primary determinants of Russian activity in Iran. It is no coincidence that Russian oil and gas exporters were among the first companies to return to Iran after the lifting of sanctions in 2015–16. For instance, currently, Russian experts close to the country’s main oil producers argue that Iran can provide Russia with additional oil to export to China. It is also not a coincidence that Lukoil became one of the first European companies that returned to Iran after the beginning of the lifting of sanctions in 2015–16. Furthermore, in February 2016, Swiss-based Litasco (a company owned by Lukoil) was one of the first European companies to buy Iranian oil after the nuclear deal was signed between Iran and the P5+1 group.
At the same time, Middle Eastern exporters of hydrocarbons are challenging Russia’s positions in the energy market. Iran has never hidden its intention to compete with Russia as a gas supplier to the EU, and in 2015 Saudi Arabia tried to increase its presence in the East European oil market, which is traditionally considered as one of the main destinations of Russian exports. In these circumstances, Russia is trying to create a plan of action to actively protect the interests of its corporations in the region. It is notable that even seeing the majority of the Middle Eastern countries as potential rivals in the energy markets, Russia still prefers cooperation to confrontation. Moscow follows the principle of the judo which implies staying in full contact with your opponent and keeping him close. Consequently, wherever possible, Moscow tries to establish good relations with its regional opponents in order to ensure the flow of hydrocarbons in the direction necessary for itself, or at least to make sure that it has a stake in existing energy projects.
On the one hand, Moscow clearly supports those energy projects that allow the Kremlin either to take under control or to divert the export flows of the Middle Eastern gas from the EU in order to secure Russian interests in the European gas market. As a result, for instance, Russia several times offered Iran and Pakistan its help in the construction of so-called Peace pipeline. The implementation of this project would guarantee that the huge share of Iranian natural gas will be sold to South Asia and further on to China but not to Europe. In 2016, during the Baku summit of the Azerbaijan, Russian and Iranian presidents, Putin called for the necessity of closer cooperation and coordination in the oil and gas sphere particularly over the shared use of existing pipeline infrastructure and joint development of Caspian hydrocarbon resources. He formulated a plan to supply the northern provinces of Iran with natural gas via Azerbaijan in exchange for the Iranian liquefied natural gas that the Russian companies will receive in the Persian Gulf.
Like in the case of the Peace pipeline project, the implementation of this project would also ensure that at least some Iranian gas will not reach Europe but, instead, it will be channeled by the Russian companies to other regions. Yet, in terms of economic cooperation, the Russian-Iranian dialogue also has its limits. Apart from ferrous metals, wood, and petrochemical products, Russia has a very narrow range of goods to offer Iran—and a continually shrinking range, at that.
As officials from the Russian Chamber of Commerce and Industry explain, it is not the international sanctions, China’s growing economic presence in the region, or the Iranian authorities’ intractability that prevent Russian companies from doing business with the country, but rather the growing technological gap between Russia and the West, as well as Russia’s economic problems. Iran currently lacks engineering and technological support, as well as equipment to upgrade and construct oil refineries and liquefied-natural-gas production plants. However, Russia is unable to provide Iran with the required assistance, equipment, and technology. Moreover, it is badly in need of these itself. With Russia’s economic problems mounting, the technological gap will only increase. International sanctions against Iran also severely limit the options for Russian-Iranian cooperation.
© Institute for Regional Studies


Nikolay Kozhanov is visiting lecturer in Political Economy of the Middle East at the European University in St Petersburg.


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