Russia-Iran economic ties remain underdeveloped

The growing economic ties between Russia and Iran, driven by mutual interests in various sectors, notably energy, have become a focal point in recent discussions. Both nations want to strengthen their economic relations, with plans to increase trade, direct investments and financial agreements. A comprehensive strategic agreement is anticipated to be signed soon, which would mark a new phase in their collaboration, particularly in economic affairs. However, there are critical questions to consider regarding the current state of economic relations between the two countries, their historical background and how these ties might evolve.

Looking back to the period before the Islamic Republic of Iran was established, trade between Iran and the then-Soviet Union was relatively limited, especially compared to Iran’s trade with Western countries such as the US, Europe and Japan. The Soviet Union offered Iran some assistance, such as helping to establish the Esfahan Steel Company in exchange for Iranian gas. But this economic relationship remained constrained.

After the 1979 Iranian Revolution, the economic relations between Russia and Iran did not see significant growth. Over the past four decades, the trade volume between the two countries has remained modest, despite a slight increase in recent years. It is insignificant when compared to the major trading partners of either nation. In 2022, Russia’s global trade volume reached nearly $800 billion, while its trade with Iran amounted to less than $3 billion. This highlights the relatively insignificant role of Iran in Russia’s overall trade relations.

From 1992 to 2018, Iran’s exports to Russia never exceeded $500 million annually. The peak of Iran’s exports to Russia was recorded at about $920 million in 2021. Similarly, Russian exports to Iran were inconsistent. In 1993, they were valued at less than $190 million, which increased to $730 million in 2006 and a little over $1 billion in 2010, before decreasing to about $750 million in 2013. The highest they reached was $1.7 billon in 2021. However, by 2022, Russian exports to Iran had dropped to just $1.15 billion. These figures show that, even when bilateral trade between the two nations saw growth, it only represented a small fraction of their respective global trade volumes.

The trade volume between the two countries has remained modest, despite a slight increase in recent years

Dr. Mohammed Al-Sulami

The political alliance between Russia and Iran has not translated into significant economic gains. Even the peak of trade in 2021, according to data from the International Monetary Fund, did not exceed $3 billion. By 2023, trade volume had declined to under $2 billion, placing Iran in 41st position among Russia’s trading partners. For perspective, Iran’s trade with India alone reached nearly $17 billion in 2018, though India is not even among Iran’s top three trading partners. Iran’s global trade volume was about $80 billion in 2022, whereas Russia’s trade with the world was 10 times that figure.

Energy, especially gas, remains a critical sector of interest for Russia in Iran. Iran requires massive investments to develop its oil and gas industries, with estimates suggesting the need for at least $200 billion. However, despite Iran’s need for foreign investment across various sectors, such as agriculture, infrastructure, aviation, automobiles and petrochemicals, Russia has not been a significant investor in the country compared to the likes of China, Turkiye, Afghanistan, India and the UAE. These nations are the top five investors in Iran, though their investments have been relatively modest, totaling only $4 billion during Iran’s 2023-24 fiscal year. Russia was not among the top five investors, except for once in 2022-23, when it invested about $2.8 billion. However, even this exceptional investment, primarily in the energy and mining sectors, is far from sufficient to meet Iran’s broader economic needs.

The announcement of a new strategic agreement between Russia and Iran may not bring about a significant change in their economic relationship. The two nations signed a 20-year strategic agreement in 2001, which focused on security and energy projects. This agreement was automatically renewed in 2020 for an additional five years. In 2020, both countries also began working on a new agreement to replace the old one. However, the existing agreement failed to deepen their economic ties significantly, in contrast to their military relations. Even a 2022 memorandum of understanding signed by Russia’s Gazprom with the National Iranian Gas Company, worth $40 billion, has yet to yield any concrete results.

Both nations continue to face sanctions, which have severely hindered their ability to expand trade or transfer technology

Dr. Mohammed Al-Sulami

Therefore, the expected signing of a new comprehensive strategic agreement may not drastically change the economic outlook between Russia and Iran, especially since both nations continue to face American and international sanctions, which have severely hindered their ability to expand trade or transfer technology in recent years. Despite attempts to create joint financial payment systems, these sanctions remain a significant barrier to deepening economic cooperation.

On the other hand, both Russia and Iran have sought to break out of their forced international isolation by joining organizations and alliances with security, political and, to a lesser extent, economic goals, such as the Shanghai Cooperation Organization, the Eurasian Economic Union and the BRICS bloc, which includes China. Through these alliances, the two nations hope to create economic coalitions that can help mitigate the impact of Western sanctions in the future.

Nevertheless, political differences between Russia and Iran surface from time to time, particularly in the realm of geopolitical issues. Trust between the two countries may not be as strong as it seems, with their relationship being more of a transactional partnership. Iran, for example, may seek to improve relations with the West at the expense of its ties with Russia, depending on various factors. However, this topic requires a separate, in-depth analysis.

In conclusion, despite the political alignment between Russia and Iran, their economic relationship remains underdeveloped and the prospects for significant growth are limited due to both internal challenges and external pressures. While energy, particularly gas, remains a key area of cooperation, the broader economic relationship between the two countries is unlikely to see substantial progress in the near future, unless they can find ways to circumvent sanctions and foster greater trust in their economic partnership.

• Dr. Mohammed Al-Sulami is the founder and president of the International Institute for Iranian Studies (Rasanah). X: @mohalsulami