Iran's share of the historical gap in the Russian market

In the short term, the Russian government has been able to control the value of Ruble and inflation beyond expectations, but this process will not last forever.

Date: 2023-11-05
Subject:Iran Russia

Author: Ghodrat Shafiei, Senior expert on Eurasian issues


SHARIFEXIM Editorial - I recently visited Moscow on a business trip. It was still the same vibrant city, and the behavior of ordinary people did not indicate an emergency state of war, but the first thing that was different from the past, was the local market. some stores and restaurants on the streets were vacant. Obviously, many Western and even Chinese brands have left Russia under the pressure of US and European Union sanctions, and their vacant place is clearly visible. These days, my mind is constantly occupied with the question of whether Iran, as a friend of Russia has been able to take advantage of the vacuum created in the market of the largest country in the world?

What happened to the Russian economy?

In the short term, the Russian government has been able to control the value of Ruble and inflation beyond expectations, but this process will not last forever. The Russian economy has shown a strong foundation up until now, but according to the report of the Russian media "Vedomosti", macro parameters such as the country's GDP have decreased by 2.5% at the end of 2022. The prediction of the Russian media is that in the best case, in 2023, it will witness a decrease of up to 1.6%, and in the worst-case scenario, even a decrease of up to 4%.

Of course, Russia's foreign trade has increased by 8.1% and reached $850 billion. Meanwhile, Russia's exports increased by 19.9% to the amount of $591 billion and were mainly energy resources (65%), while its imports decreased by 11.7% and reached $260 billion. This shows that countries have less desire to export to Russia and have only bought goods that have no other alternative.

The wave of migration of Russian professional work force and young people from this country is another negative parameter. According to EU data, nearly 1.3 million people left Russia in 2022 alone. However, we don’t know how many of them left Russia permanently. In the meantime, according to the Russian government, more than 100,000 experts in the field of information technology left this country after the beginning of the war. Even nearly 20 thousand people applied for asylum in European countries. In addition to this initial wave, at least 200,000 people fled from Russia after the partial mobilization was announced. This trend does not bode well for a country that is struggling with demographic problems and lack of skilled manpower. In addition, more than $300 billion of capital of the Russian government and individuals are blocked in Western countries, and there will be no new investment or technology transfer from these countries. the withdrawal of capital by some Russian oligarchs from this country is another negative indicator.

Iranians are also familiar with sanctions and isolation. Although Russia has more resources and apparently manages them better, the prolongation of the war in Ukraine (Some Russian experts talk about 10 years or more), definitely complicates the situation for Moscow, because in addition to the costs of the military operation, some of the country's industries will be given over to military production and will be left out of the GDP cycle.

Even if the war in Ukraine ends this year, the sanctions or their impact will not be shattered any time soon. therefore, there is practically no positive outlook for the Russian economy in the coming years. Perhaps, in the best case, economic growth can be brought from negative to zero.

What about foreign trade?

On the other hand, in the last 19 months, Russian trade has made a sharp turn towards Eurasia and has prioritized cooperation with countries such as China, India, Iran, Turkey and Central Asian neighbors. A look at the statistics of the trade exchanges of these countries with Russia in the recent years is indicative of the new conditions.

According to expectations, China is reaping most of the benefits from Russian sanctions. As stated by the Russian RBK channel, the commercial exchanges between Moscow and Beijing have almost doubled in the first two months of 2023 and reached $73 billion! Meanwhile, China's exports have increased by 67% and Russia's exports by 25%. It means that Russia's trade with China have increased more than any other country. The trade exchanges of these two countries witnessed a 30% growth in 2022 and reached $190.27 billion.

Some might argue, but I can say that for the first time, New Delhi has in recent months refused to follow the approach dictated by the United States and Britain. India has refused to condemn Russia for the war in Ukraine or cut off trade relations with Moscow. The total volume of trade between Russia and India in 2022 has increased almost 2.5 times and reached more than $30 billion. The largest amount of these exchanges is the export of discounted Russian oil to India.

Türkiye is perhaps the most interesting case. The amount of trade between Russia and Türkiye doubled in 2022 and reached $45 billion. The two countries have targeted $60 billion this year. In addition to plans to become Russia's gas hub, Türkiye tries to help Ukraine export grain, sells military weapons to Kiev, denounces the Kremlin for the war, and at the same time scores concessions from NATO. In addition to the UAE, the Russians do most of the economic bypassing through Türkiye.

A look at the volume of commercial exchanges of other countries with Russia in 2022 could better explain the situation:

Germany: $57 billion

Netherlands: $46.4 billion

Belorussia: $38.4 billion

USA: $34.4 billion

Kazakhstan: $28 billion

UAE: $9 billion

Iran: $4.6 billion

Source: Vedomosti

Iran-Russia trade under the spotlight

The above three examples were from countries that have followed Western sanctions as much as possible and despite political and banking restrictions, they are making huge money from Russia's isolation.

In this situation, the Islamic Republic of Iran has a special place for Russia. It’s the only country that is also heavily sanctioned, and in addition to not having any political and bureaucratic obstacles for economic cooperation with Russia, it has many products that are welcomed by Russians. The leaders of the two countries talk about the expansion of relations at the highest possible level, and several documents have been signed in this direction in the past years. Iran is now one of the few countries that implicitly supports Russia's military campaign in Ukraine and even according to some international observers, its weapons are used in the war. In recent years, Iran has agreed to partner with the Eurasian Economic Union, the Shanghai Cooperation Organization and the BRICS, where Russia has an important position.

Although the official statistics indicate the growth of commercial cooperation between the two countries, it does not match the existing potentials or other aspects of Tehran-Moscow relations, including political and security areas.

According to Vyacheslav Volodin, the speaker of the Russian State Duma, trade exchanges between Iran and Russia increased by 15% in 2022 and reached $4.6 billion. He expects this amount to reach $40 billion in the coming years. In fact, during the pandemic, the aforementioned documents expanded the commercial relations between the two countries, but considering the sanctions imposed on Russia in recent months, we should have witnessed a sharp increase, maybe up the promised $40 billion!

In recent years, so many documents were signed between Russia and Iran to facilitate mutual trade. The most obvious one was the cooperation with the Eurasian Economic Union, which started in 2017. Based on this document, Iranian businessmen could export 500 goods with preferential or zero tariff to the member countries of this union. The signing of the green customs corridor agreement in 2015, the preferential tariff for the export of Iranian fisheries to Russia in 2014, the establishment of the green customs corridor between the two countries and the mutual investment protection law in 2015 are also important documents. Iran's membership of the Shanghai Cooperation Organization can also facilitate business cooperation with Russia.

Does Russia really matter for Iran?

According to official statistics, the volume of Russian foreign trade will reach $1 trillion in the next two years! The largest country in the world with a GDP of more than $2 trillion in 2022, which has now completely opened its market to Iranian businessmen. This means that the volume of foreign trade of Russia is almost 8 times more than that of Iran!

The importance of the Russian market for Iran is that no country in the region is as eager and waiting for the arrival of Iranian investment and products as Russia! This is perhaps the first time in history of both countries, that both at the same time are willing to expand bilateral relations without any obstacles, and the Russian market is completely receptive to Iranian goods.

The Russian economy after sanctions showed that it still has a long way to learn how to deal with economic isolation and localization of industries. In fact, now Russia is facing serious challenges, especially in the industrial field, from small parts such as car pads, sensors and chips, to large industrial machines.

Many Iranian products, both in the field of agriculture and food, as well as small and large industries, are proper to enter the Russian market, especially price-wise. Some of these products are even cheaper than Chinese ones.

Geographical proximity to Russia is another advantage for economic cooperation with Iran. The experience of large Iranian economic and industrial holdings shows that if a company can supply only one specific product to the Russian market in a significant volume, its financial benefit is so remarkable that it will no longer need to enter the market of any other country in Iran's neighborhood. But despite all these aspects, there is no sign of a huge change in the direction.

When Iran signed a free trade zone with the Eurasian Economic Union, the exchange volume was supposed to reach $10 billion within 5 years! Now the deadline is here, the situation has become more favorable and the Russians need economic cooperation with Iran much more willingly, but the results are not desired! There is no news of Iran's historical use of this opportunity! Despite the all-round political support from Russia in the last year, Iran has not been able to take advantage of the economic opportunity that has arisen even to the extent of the UAE, let alone Turkey or India! The volume of American trade with Russia is still several times that of Iran’s. It is clear that official statements cannot grow these numbers for Iran. If They plan to move towards a serious economic partnership, an inter-governmental mechanism must be established as soon as possible. A reasonable method must be introduced to facilitate banking payments between the two countries with less commissions. Also, the Iranian fleet and ports in the Caspian Sea should be strengthened. the north-south corridor must also start working after years of promises. It is only then that economic partnership would also match the strategic level of political and security cooperation between the two nations.