Russia and Iran Are Building a Trade Route That Defies Sanctions

 

Russia and Iran are building a new transcontinental trade route stretching from the eastern edge of Europe to the Indian Ocean, a 3,000–kilometer (1,860–mile) passage that’s beyond the reach of any foreign intervention.

The two countries are spending billions of dollars to speed up delivery of cargos along rivers and railways linked by the Caspian Sea. Ship–tracking data compiled by Bloomberg show dozens of Russian and Iranian vessels—including some that are subject to sanctions—already plying the route.

It’s an example of how great–power competition is rapidly reshaping trade networks in a world economy that looks set to fragment into rival blocs. Russia and Iran, under tremendous pressure from sanctions, are turning toward each other—and they’re both looking eastward, too. The goal is to shield commercial links from Western interference and build new ones with the giant and fast–growing economies of Asia.

Trade Routes From Russia to Asia

New routes via Iran will save thousands of kilometers

Trade Routes From Russia to Asia

“This is about establishing sanctions–proof supply chains all the way through,” says Maria Shagina, an expert on sanctions and Russian foreign policy at the London–based International Institute for Strategic Studies.

The emerging trade corridor would allow Russia and Iran to shave thousands of kilometers off existing routes. At its northern end is the Sea of Azov, which is bracketed by the Crimean Peninsula, Ukraine’s southeastern coast—including the Russian–occupied port of Mariupol—and the mouth of the River Don.

Earlier this month, listing his country’s gains from the war in Ukraine, President Vladimir Putin said the Sea of Azov “has become an inland sea” for Russia.

From there river, sea and rail networks extend to Iranian hubs on the Caspian Sea and ultimately the Indian Ocean. Putin has flagged the importance of that end of the corridor, as well.

At an economic forum in September he underlined the need to develop the ship, rail and road infrastructure along the route that “will provide Russian companies with new opportunities to enter the markets of Iran, India, the Middle East and Africa, and will facilitate supplies from these countries in return.”

Shagina estimates Russia and Iran are investing as much as $25 billion in the inland trade corridor, helping to facilitate the flow of goods the West wants to stop. “The two countries are playing a cat–and–mouse game,” she says. “They will explore all loopholes to transport banned products and weapons.”

Ship passing through a gate on the Volga-Don Shipping Canal. Photographer: Vladimir Zapletin/Alamy
Ship passing through a gate on the Volga-Don Shipping Canal. Photographer: Vladimir Zapletin/Alamy

That alarms the US and its allies, as they seek to block transfers of Iranian drones and other military supplies they say are aiding the Kremlin’s war in Ukraine.

“It is an area we’re watching carefully, both that route and more generally the Iranian–Russian connection,” said the Biden administration’s top sanctions official, James O’Brien, after announcing new punishments last week that target executives at Russian Railways. “We are concerned with any effort to help Russia evade the sanctions.”

Robert Malley, the Biden administration’s Iran envoy, says any new trade corridor needs scrutiny, as part of what’s become his top priority: stopping arms shipments between the countries. “That’s an extraordinarily damaging, reckless decision they’ve made,” Malley says. “It’s important to put the spotlight on it, to try to show the world that they can’t hide.”

Beyond any arms trade between the countries, there are compelling economic reasons for the new transit route.

Ships sailing the Don and Volga rivers have traditionally traded energy and agricultural commodities—Iran is the third-largest importer of Russian grain—but the range is set to widen. The two countries have announced a raft of new business deals that cover goods including turbines, polymers, medical supplies and automotive parts. Russia also supplies nuclear fuel and components for Iran’s reactor in Bushehr.

Russia needs to compensate for the sudden breakdown of its commercial ties with Europe, which before the war was its biggest trade partner, as well as finding workarounds for US and European Union sanctions.

“With European transport networks getting closed off, they’re focused on developing alternative trade corridors which support Russia’s turn to the East,” says Nikolay Kozhanov, a Gulf expert at Qatar University who served as a Kremlin diplomat in Tehran from 2006 to 2009. “You can impose controls over sea routes, but land routes are difficult to watch. It’s almost impossible to track them all.”

There are plenty of obstacles, and both Russia and Iran are spending heavily to overcome them.

Russia is finalizing rules that would give ships from Iran right of passage along inland waterways on the Volga and Don rivers, according to Iran’s Maritime News Agency.

Ship movement data compiled by Bloomberg already show at least a dozen Iranian vessels, some operated by the US–sanctioned Islamic Republic of Iran Shipping Lines Group, plying waters between the country’s Caspian coast and key Volga River ports.

Ship Activity Between Russia and Iran

The Tehran–based IRISL made a $10 million investment in a port along the Volga, the semiofficial Iranian Labour News Agency reported last month. The aim is to almost double cargo capacity at the Solyanka Port in the Russian city of Astrakhan, to 85,000 tons a month.

Inside its own borders, Iran is pouring money into terminals where cargo can be rolled off ships and onto railroads that crisscross the country from the Caspian to the Persian Gulf. It’s also expanding a rail network that already runs some 16,000 kilometers and is part of the Unesco World Heritage List.

Trade delegations are shuttling between Iran and Russia with growing frequency—and trade is rising, too. Officially it surged by almost half through August this year. The annual figure likely will soon exceed $5 billion. There’s a “clear path” to reaching $40 billion once a free–trade agreement is in place, Sergey Katyrin, the head of Russia’s Chamber of Commerce and Industry, told a conference in Tehran last month.

Iran’s Expanding Rail Network

Russia is sending grain to India via Iran’s port in Bandar Abbas

For Iran the pivot has become more urgent amid faltering efforts to restore the 2015 deal with world powers, which lifted sanctions in exchange for restrictions on the country’s nuclear program. Tehran’s support for Moscow, along with its deadly crackdown on nationwide protests, has left its hard–line government increasingly cut off from the West.

Iranian officials say they’re fully focused on what they call “the Eastern axis”—scrapping any plans to revive economic ties with Europe and instead pursuing a slew of trade and energy agreements with Russia, China and Central Asian nations.

Largely beneath the radar of Western governments, a concerted effort has been under way for years to knit together that whole Eurasian territory. China and Russia are already members of the Shanghai Cooperation Organization, an economic–security body that is making Iran its ninth member. China and Iran are both close to gaining membership in the Eurasian Economic Union, which will make free trade across the countries possible. Another institution that links economies in the region and beyond it the BRICS group. Initially made up of Brazil, Russia, India and China, it now also includes South Africa and is poised to expand further.

In all of this, some analysts see echoes of an idea that dates back more than a century and is reckoned to be the foundation of geopolitical thinking. It focused on the struggle between an oceangoing world power—the UK then, the US today—and the land giants of Eurasia.

For both Russia and Iran, India is a crucial node in the networks they’re trying to build.

A first 12 million–ton shipment of Russian grain bound for India has already transited Iran, the semiofficial Mehr News Agency reported last month. Trade flows could increase if Iran manages to connect the unfinished and much–delayed Chabahar Port complex on the Indian Ocean—a project that India has invested in—to its long–distance train network. Chabahar has so far been exempt from US sanctions, but it may draw fresh scrutiny from Washington.

“If any entity is involved in violation of our sanctions with regard to assistance to Russia, or any of the other areas in which Iran has been sanctioned, they too will be subject to sanction,” says Malley, the White House Iran envoy.

That illustrates what’s perhaps the biggest threat to the Russo–Iranian gambit to evade sanctions, according to Bharath Gopalswamy, executive director at District Consultancy LLC, a Washington–based trade adviser.

Success or failure is beyond the control of the two countries themselves. It will hinge on whether other countries, from India to the Middle East—which are all being urged by the US and its allies to comply with sanctions—agree to do so or opt to defy the pressure.

“For such an infrastructure to be built, used and sustained it would need not only the cooperation of both Russia and Iran but also all the other nations that are part of this corridor,” Gopalswamy says. “Any change in geopolitical circumstances, or relations between these countries, will affect the trading corridor’s outcome.”

Source: Bloomberg

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