There is No Russia-Iran Partnership
Back in June 2017, I was invited to Moscow by the Institute for Emerging Market Studies at the Skolkovo School of Management to convene a half-day seminar. The aim was to explain the Iranian economy to an audience of Russian executives from both state and private sector companies. At the time, Trump was still certifying Iran’s compliance with the nuclear deal. Russia is a JCPOA party and wanted to carve out a place for itself as international investors, primarily Europeans, struck new deals in the Iranian market. Russian state-owned enterprises like Lukoil, Zarubezhneft, and Rosatom, were eyeing new projects in Iran’s state-dominated energy sector. But the discussions at Skolkovo were mostly focused on the private sector.
I recall two things about that morning in Moscow. First, the Russian firms had little clue about the Iranian market. Unlike European firms that had several decades of experience working in Iran, Russian companies had no track record. The questions asked by the audience were basic, even naïve. Second, the concerns expressed by the participating executives were precisely those of European companies exploring the Iranian market for the first time. The audience was curious about about how European firms were managing to do business in Iran without the support of their banks. Those Russian executives who had begun to take a serious looked at Iran had already been warned off by their bankers.
After the session was over, a gentleman came over to introduce himself. He was responsible for Iran at Sberbank, one of Russia’s most important and forward-thinking banks. He told me that his senior leadership had made clear that despite the lifting of JCPOA-related sanctions, Iran was to remain off limits. Sberbank did not want to invite further scrutiny from the US Treasury Department, especially as Iran had yet to implement its FATF action plan, a set of critical anti-money laundering and counter-terrorist financing reforms. Iran was too toxic even for Russian banks. Today, I looked the Sberbank executive up. It appears he lives in Arizona now.
Five years later, as Putin prepares to travel to Iran for his second state visit since the start of the war in Ukraine, American officials are raising the spectre of a Russia-Iran partnership. Biden’s national security advisor, Jake Sullivan, has alleged that Iran is on the verge of selling “several hundred” drones to Russia for use in Ukraine. The US has also claimed that Russian officials have visited Iran to inspect the drones. Sullivan has stated that “Russia deepening an alliance with Iran to kill Ukrainians is something that the whole world should look at and see as a profound threat.”
Given the brutality of Russia’s invasion of Ukraine, any Iranian arms sale to Russia would be a dramatic and unconscionable move. Iran has denied the American claims, and the Iranian foreign minister Amir Abdollahian, called his Dmytro Kuleba, his Ukranian counterpart, to offer reassurances.
As Abdolrasool Divsallar argued in a recent Twitter thread, there is probably a constituency in Iran that would like to export drones to Russia and the American claims should be taken seriously. But there are big questions around whether Iran could pull this off even if the intention were there. Iran has invested significantly in developing its drone capabilities as part of its asymmetric approach to defence, but there is little evidence it has the capacity to produce “hundreds” of drones in short order, at least not drones of great technical sophistication or operational value. Iranian drones are not like the Turkish Bayraktar drones now being used by Ukraine.
The US government’s own 2019 assessment of Iran’s military power, produced by the Defence Intelligence Agency, notes that “despite advances in its UAV manufacturing capabilities, Iran remains reliant on Western manufactured engines and components to support its UAV production. Iran is developing a domestic UAV engine but is struggling with quality issues.” Unless there has been some unheralded breakthrough in Iranian indigenisation of key parts, there is some threat inflation inherent in the American warnings of an imminent Iranian arms sale to Russia.
Now, let’s assume that Iran had both the intention and the means to produce and export drones to Russia. Even then, there is a lot to suggest that the deal will go south. The track record for arms sales and state contracts between Iran and Russia is dismal. Back in 2007, Iran signed an $800 million contract with Russia for the purchase of an S-300 air defence system. Russia suspended the deal in 2010 in compliance with UN sanctions and Iran tried to sue Russia for $4 billion in response. The units were eventually delivered in 2016, but the S-300 saga confirmed for many Iranian policymakers that the Russians were untrustworthy—a reputation that goes back to the days of Persian conflict with the Russian Empire. This reputation has not been burnished by reports that Russia is essentially allowing Israel to hit Iranian targets in Syria as Russian forces scale back their operations.
Of course, the lack of trust goes the other way too. Russia is the primary contractor for Iran’s single nuclear power plant, located in Bushehr. This is perhaps the flagship example of ongoing Russian-Iranian technical cooperation, particularly given the importance that Russia assigns to its construction and operation of nuclear power plants around the world. But cooperation on this prestige project has been rocky. On Sunday, Shargh, an Iranian reformist newspaper, published a front-page interview with Levan Dzhagaryan, the Russian’s ambassador in Tehran. In the interview, Dzhagaryan was asked about the recurring shutdowns at Bushehr that have hobbled electricity generation. The ambassador bristled and complained that the real problem is that Iran owes Russia “hundreds of millions of euros.” Dzhagaryan has a lot of experience—he has unusually been posted to Tehran for over a decade. His inability to complete a simple interview without casting aspersions makes clear how little rapport exists between Russia and Iran.
The lack of any kind of real partnership between Russia and Iran is also made clear when looking to economic relations between the two countries. In recent months, Russian executives have travelled to Iran to scope out opportunities and to draw lessons from Iran’s economic resilience under sanctions. Officials have recently stressed the growth in Russia-Iran trade, citing the opportunities created by the withdrawal of Western firms from both markets. These officials have pointed to a rise in bilateral trade, which increased to $4 billion in 2021. Last year, Russia became one of the top-five exporters to Iran.
But this recent growth is deceptive and does not represent a true deepening of the economic partnership—at least not yet. First, $4 billion is a miserable level of trade for two economies of such significant size. For comparison, Iran’s trade with Iraq is around three times greater than its trade with Russia. Russia’s trade with Turkey, an economy similar in size to Iran, totalled $33 billion last year. Second, Russia-Iran trade is principally trade in foodstuffs—essentially all the growth in Russian exports in 2021 is explained by a sharp rise in grain exports. On the other side, the steady rise in Iranian exports to Russia is explained by growth in the sale of fruits and nuts. Trade in food is important but does not reflect the kind of economic cooperation that will garner Russia and Iran resistance to sanctions. In fact, food trade is growing precisely because it is sanctions exempt—this is one of the few areas in which Russian banks are willing to process Iran-related transactions.
Real sanctions resistance would require deeper industrial cooperation. Looking to customs data for bilateral trade in machinery and vehicles, Russia exported around $115 million of machinery and vehicles to Iran in 2021—just a fraction of total exports. Iran, meanwhile, sold less than $15 million of industrial goods to Russia. Basically, there is no industrial partnership between Russia and Iran. Excluding the rise in food trade, it is clear that Russian trade with Iran has yet to recover following the imposition of financial sanctions on Iran in 2012.
This could change, particularly as Russian machinery and vehicle manufacturers seek new export markets in response to US and EU sanctions. But the first impetus for any such growth in industrial trade came back in 2014, when sanctions were imposed on Russia in response to the invasion of Ukraine. It was also around that time that Russian and Iranian leaders began to discuss a shared vision for a “Eurasian” model of economic development. In 2016, Iran proposed a preferential trade agreement (PTA) with the Russian-led Eurasian Economic Union (EAEU) bloc. The PTA was implemented in 2019. Negotiations are now underway to convert the PTA into a full free trade agreement.
Reducing trade barriers would help open a pathway for a rise in bilateral trade, but the fact that trade relations have floundered tells us a few things. First, sanctions continue to inhibit economic relations between Russia and Iran. The fact that Russia is now increasingly subject to sanctions does not in fact make working in Iran more attractive. The two countries lack sufficient banking channels and logistics networks. Iranian firms do not want to get paid in roubles. Russian firms certainly do not want to get paid in rials. Plus, because of the wide range of designations of Iranian state enterprises, working in Iran exposes Russian firms to secondary sanctions risks at a time when secondary sanctions are not yet a feature of the American and European sanctions on Russia. This jeopardises the ability of Russian companies to work in third countries. Iran’s experience makes clear that once firms or whole sectors are subject to secondary sanctions, foreign suppliers and customers will cut business ties, even in China.
Another problem is that Russia and Iran are similar in their level of industrialisation. There is a similar technical sophistication in the automobiles, home appliances, and consumer electronics produced in both countries to meet the needs of their large domestic consumer markets. The two countries are also both major metals and petrochemicals producers. This means that Russia and Iran are not only competitors in global energy markets, but will also increasingly compete when it comes to the crucial task of developing non-oil exports as part of their respective responses to sanctions pressure.
Over the last few years, Iran has been seeking to grow its export markets in Central Asia, where Russia is the primary trade partner. We can expect Russia to likewise try and take market share from Iran in Turkey. But most importantly, both countries will be engaged in a race to the bottom in China, the buyer of last resort for sanctions-afflicted exporters. Benoit Faucon’s recent reporting from Tehran makes clear that this competition is already heating up. Iranian executives complained to him about Russian competitors dramatically undercutting their prices. In a curious choice of words, one Iranian executive described the competition as “murderous.”
Back in April, Russian journalist Alexey Pivovarov travelled to Tehran to examine how Iranians live under sanctions. His 1.5-hour documentary has been viewed over 7 million times. Pivovarov wanted to know whether experience of Iranian businesses could help Russian firms adapt to sanctions. But he did not need to travel to Tehran to learn the most fundamental lesson. The simple fact that the Russian executives were only now bothering to travel to Iran makes clear just how isolating sanctions really are.
Economic realities mean that Russia and Iran are competitors, not partners, by default. Political coordination could help overcome the competitive dynamics to chart a path for a functional partnership. But Russian and Iranian stakeholders lack the trust, mutual cultural awareness, and incentives to work together. When they meet in Tehran this week, Putin and Raisi will probably sound like they are aligned. But sharing a grudge towards the West is not a sufficient condition for a meaningful geopolitical partnership.
Photo: IRNA
