Russia-Iran: with a “road map” towards system cooperation

Iran’s economy is showing signs of recovery. President Hassan Rouhani and his government have managed to put it back on its legs after the West’s crippling sanctions.

The two-digit inflation that haunted Iran for decades has now been reduced to 7.5% (against 40% in 2013). In 2016, the country’s GDP grew by 7% from - 5.8% in 2013, with as much as $9.5bn invested in the Iranian economy during the year.

But we can’t call this a breakthrough as unemployment continues to be very high – 12.7% in 2016 against 14.4% in 2013. Among young people – who account for 2/3 of Iran’s population - it is as high as 30%.

Experts have two reasons for this small economic miracle. The first reason is that unlike his predecessor, Mahmoud Ahmadinejad, Rouhani sticks to higher monetary discipline and lower social-economic populism in his domestic policy. And the second reason is that Iran’s oil has gone back to the European market and some of its assets in the West have been unfrozen (their total sum may amount to some $100bn). And on top of this, after the nuclear deal of 2016, Iran has improved its relations with most of the European capitals.

But the latest developments in the Middle East have been keeping the Iranians on the alert. The biggest threat comes from the United States. Donald Trump is not as neutral towards Iran as Barack Obama was. Iran Air’s deal with Boeing was made before his election and may well be the last such big deal. Trump seems to prefer the language of sanctions and this may have very bad consequences for those in the West wishing to expand into the vast Iranian market.

There is a very small group of great powers that can help Iran to confront this geopolitical turbulence. Russia and China are among them. Europe is still strongly dependent on the United States and will hardly act against its will. So, two months before the next presidential election, Rouhani has one big goal – to improve his country’s economic relations with Russia and China and to show to his people that Iran has allies that can help it to survive Trump.

But Iran’s geopolitical rivals are also on the alert. Saudi King Salman bin Abdulaziz Al Saud visited Beijing in mid-March and signed a package of deals worth $65bn. So, the Iranians must hurry as the Chinese can give them lots of investments. The Russians can help with technologies in nuclear energy, oil and gas, machine building and defense. And this will be a very good gain for Rouhani.

During his forthcoming visit to Moscow, the Iranian president is expected to sign a number of multi-billion deals, particularly, in communications and oil & gas and to adopt a road map for mid- and long-term economic cooperation.

One of the options is “oil for goods and services” program. For Iran, this is a chance to diversify its oil exports, for Russia, this is a good opportunity to get equipment for its oil and gas and transport sectors. Some sources say that the Russians will pay for Iranian oil half in money and half in goods and services – with the latter half amounting to some $45bn a year.

Last year, the Russians decided to lend the Iranians some 1.2bn EUR for a project to build new thermal power units and 1bn EUR more for Garmsar – Ince Burun railway electrification project. This month, Russian, Iranian and Azerbaijani railroaders agreed to halve their tariffs as a way to promote the North-South transport corridor. Iran will gain even more if this corridor is linked to China’s Silk Road Economic Belt (1).

The best thing in Iran for the Russians is that it buys from them goods and services rather than just fuel. But the problem is that their trade with Iran has never been very high so far. The highest level was registered in 2011 - $3.75bn. In 2015, it fell to $1bn. According to experts, last year, it was $1.5bn but Russia’s Economic Development Ministry claims that it was as high as $2.1bn, wherein Russian exports grew by 80% and Iranian imports by 13%.

One more question to be discussed by Rouhani in Moscow is the Russian-Armenian special economic zone project. Mass media say that the zone will be opened near Armenia’s border with Iran with a view to boost Iran’s trade with the Eurasian Economic Union. The Russians have made no official announcements but the Armenians are actively discussing this project on both governmental and expert levels.

The zone is supposed to be opened by the end of this year, to cover some 10-15 h in the southern Armenian town of Meghri and to give residence to as many as 100-120 companies. The Armenian authorities are ready to spend $32mn on this project. According to Armenia’s Economic Development Ministry, in the next 10 years, the zone may receive as many as $350mn-400mn in investments and is expected to give an annual output of $80mn-100mn.

If this project is carried out, it will become the first such project in the post-Soviet area. The beneficiaries of this project will enjoy exemption from VAT, profit tax and property tax. And another good thing about it is that the Russian-Armenian special economic zone will border on Iran’s Aras free economic zone.

Armenia hopes that Iran, Russia and the other members of the Eurasian Economic Union will soon make a list of goods that will cross the border with low or no customs duties. Rouhani’s visit to Moscow will clarify this question. According to Russia’s Energy Minister Alexander Novak, the Iranian President is expected to sign a deal to create a free trade area between Iran and the Eurasian Economic Union. At the initial stage, the area will cover only light industry and agricultural goods. But the only problem here is that Iran is not a member of WTO (2).

Iran’s contacts with Russia may provoke a chain reaction in the West. Some Iranian experts warn their authorities against to active contacts with the Russians. Russian experts say that Russian-Iranian contacts are not stable and systematic enough and are vulnerable to impacts from third states. In any case, both sides are eager to develop their economic relations – especially as the $2bn trade is in striking discord with their consensus in the geopolitics.

One visit will not be able to solve all existing problems. Here the sides need consistent efforts, particularly, a series of effective joint projects in spheres like nuclear energy (3), oil and gas and defense. This may serve as a good basis for turning Iranian-Russian economic contacts into a system.

(1) Russia and Iran: economic restart // vestifinance.ru, 15.03.2017.

(2) Rustem Falyakhov, Armenian zone can bring Russia and Iran closer// www.gazeta.ru, 16.03.2017.

(3) On Mar 14, Atomstroyexport of Russia started construction and assembly operations at Busher 2 NPP in Iran in line with their Nov 2014 agreement with Iran’s Nuclear Power Production and Development Company. In the next 10 years, the Russians will help the Iranians to build two WWER-1000 reactors at Bushehr. The 2nd unit is to be launched in 2024, the third one in 2026. The 1st unit was commissioned in 2011.

EADaily’s Middle East Bureau