An Inside Look at Obstacles to Tehran-Moscow Trade Ambitions

Despite both countries' best efforts, including high-profile visits and energy agreements, 2022 brought only moderate growth in trade between Moscow and Tehran. 
Russian State Duma Speaker Vyacheslav Volodin stated in January that Iran-Russia commodity imports and exports increased by 15% last year to around $4.6 billion. But these numbers pale in comparison with the shifts in Russia’s trade patterns following the imposition of western sanctions over the Ukraine war, reads an article published by Amwaj.media. The full text follows:
For example, Russian exchanges with China expanded by 29% last year, reaching $190 billion. Trade with Turkey — a neighbor of Iran — jumped by 84%, to over $60 billion. As these figures show, Iran is unlikely to be a panacea to Russia’s financial challenges in the face of western sanctions. 
Yet, Moscow and Tehran continue to demonstrate political will to integrate their economies. In this context, several recent initiatives between the two countries could stimulate growth in trade.

Misleading Data?

It is important to bear in mind that the declared trade data related to Russia may be slightly misleading. 
The western sanctions imposed in the aftermath of the Feb. 2022 invasion of Ukraine have shifted Russian attitudes toward public statistics. Two months after the launch of the war, Russia suspended the publication of full import and export data, viewing it as a matter of national security. As such, the only data available is that which is publicly announced by Russian officials.
Adding to this complication, a Russian diplomatic source said Moscow has for the past five years not included military exports in its official trade statistics. The announced $4.6 billion worth of trade with Iran, therefore, only refers to non-military goods and services.
No independently verified information is available on the current value of exchanges in so-called “secret code” items — exports and imports that Russia has classified as confidential, for example military equipment and dual-use goods that can have both civil and military purposes. But US officials alleged in Dec. 2022 that Russia was providing an “unprecedented level” of military and technical support to Iran.
Total trade, when taking into account often expensive weaponry, could thus be hundreds of million or even a few billion dollars higher than the figure reported publicly. For example, in 2015, a single contract for Iran to buy Russian S-300 surface-to-air missile systems cost Tehran at least $900 million.
In addition, the Russian diplomatic source further said, “Official bilateral trade statistics do not count indirect trade when companies [transfer] goods between Russia and Iran through other [third] countries.” 
The latter was likely an implicit reference to regional states such as Azerbaijan, Turkey, or the UAE. The Russian source further charged that estimates by experts for the year 2020 indicated that although “official customs data showed [around] $2.2 billion for Iran-Russia trade, the real turnover, including indirect trade, was around $10 billion.”
 

Financial Tools

The adoption of new mechanisms to improve connectivity between financial systems offer the prospect of further integration between Iran and Russia. 
In January, Iranian media reported that Iran’s national financial messaging service had been connected to that of Russia. This would replace Swift, a western-based payment messaging service.
Iran has been largely disconnected from Swift since 2018, when then US ex-president, Donald Trump (2017-21), withdrew from the 2015 Iran nuclear deal and reimposed all sanctions. On the other hand, many Russian banks have been cut off from the Belgium-headquartered payment messaging system following the invasion of Ukraine.
Although the new payment messaging mechanism adopted by Iran and Russia holds the promise of easing bank transactions, Russian Deputy Foreign Minister Andrey Rudenko in February said the endeavor only exists on paper so far. Crucial questions also remain over how the alternative financial channel will function.
Iran and Russia already have an operating payment system that has been in use since at least 2015, launched by Mir Business Bank, a Russian branch of Iranian state-owned Bank Melli Iran. But Iran’s multi-tiered exchange rate regime makes this system almost useless for private sector actors in both countries.
A Russian businessman with a long history of involvement in Iranian projects said Mir Business Bank uses the country’s Nima rate — used for imports and exports — and not the open market rate. The businessman said that using the Nima rate fetches clients around 4,000 IRR per ruble, while the open market rate is around 6,500 IRR. Of note, the Nima rate for the dollar is set at 275,000 IRR while the greenback trades for around 500,000 IRR on the open market.
Other Russian actors, including VTB Bank and Sberbank, also use Mir Business Bank as their intermediary for transfers to Iran. A second Russian businessman noted that as of late February, Sberbank offered transfers with a slightly higher exchange rate of 4,840 IRR per ruble. He estimated that customers using this system were losing up to 40% of the value of their transfers compared to channels that provide open market rates.
A business consultant who specializes in bringing Russian companies to Iran believed that the actual problem is Mir Business Bank’s monopoly.
He argued that as there are no Russian banks with a license to operate in Iran, private businesses are not offered competitive transfer conditions. The consultant said the Russian payment system Mir — no relation to the Iranian bank — may soon be operating in Iran. 
Yet, he cautioned that “the system will [also] be working with the Nima exchange rate, leading to a loss of 30-40% for customers,” compared to those using the open market rate.
One proposed mechanism to overcome exchange rate issues is the creation of a common cryptocurrency, backed by gold. This could perhaps be used to circumvent western sanctions and may stabilize trade amid currency fluctuations.
But this would likely only be used for comparatively small-scale bilateral trade that would have little impact on either Moscow or Tehran’s overall economic situation. 
And as Russia’s Ambassador in Tehran Alexey Dedov announced in February, “The process of reaching any specific agreements in this field is still in the working stage.” He also said a legal framework for its use would need to be developed before implementation.
 

Future Free Trade Area

One certain step forward for Iranian-Russian economic integration is the creation of a free trade area between Iran and the Moscow-led Eurasian Economic Union trade bloc. 
Dedov said in early February that negotiations on the deal are in the final stage.
An interim agreement established in 2019 reduced custom duties on hundreds of different categories of goods. This has already proved effective in paving the way for Iranian agricultural products to better reach EEU markets, primarily Russia. As a result, exports from Iran to the trade bloc grew by 51.5% in 2020.
A comprehensive, full-scale free-trade agreement would significantly expand the categories of goods with exempt or reduced duties between Iran and EEU member states. The initiative is unlikely to dramatically alter how Moscow-Tehran trade looks. But a new deal would create further connections and provide both countries with additional leverage.
Increasing Iranian-Russian economic cooperation may not match the efforts both counties have put into the endeavor, nor meet the expectations that are placed on the relationship. Most of the new initiatives will also need time and refinement before becoming effective.
But Iran and Russia are evidently looking to deepen relations across various economic sectors and develop what is for both countries a much-needed relationship. This is where the true value of the integration efforts lie — in the continuing political will of both Moscow and Tehran to foster closer ties.