Why Russia Is Bankrolling Iran’s Infrastructure?

The International North–South Transportation Corridor, a planned railroad that will connect Russia to the Indian Ocean via Iran, is gaining relevance as a means for Moscow to move goods around freely. 
However, despite its prospects, the project depends heavily on the state of affairs and infrastructure in Iran, and that’s problematic for the Kremlin. 
Iran is unable to finance the project, and the corridor won’t be able to function without investment. Russia will, therefore, need to invest over and over again: in roads, ports, depots and additional infrastructure, reads an article published by Carnegie Endowment for International Peace. The full text follows:
When Russian President Vladimir Putin called on Russian businesses in mid-March to invest in constructing the Rasht–Astara line — part of the INSTC between the Iranian city of Rasht and the Azerbaijani city of Astara — there was little doubt that entrepreneurs would heed his advice. Yet it was revealed in May that the Russian government would instead be funding the project itself, by issuing a €1.3 billion loan to Iran.

Struggling Project

The Russian government’s decision is the latest development in a project that has been struggling for almost 20 years. 
Russia, Iran and Azerbaijan first signed an agreement in 2005 to build a railroad connecting existing lines in Iran to Astara. Given that routes between Azerbaijan and Russia were already in place, just 350 kilometers of additional track were needed to connect Russia to ports on the Indian Ocean. Construction was expected to take about two years.
Iran only began the construction of its portion of the railroad in 2009, however, and just half of it — between the cities of Qazvin and Rasht — has been completed in the past decade. The second half — from Rasht to Astara — turned out to be more technologically demanding, requiring additional funding.
A cash-strapped Iran began courting foreign investment. In 2017, Azerbaijan agreed to loan its neighbor €500 million — around half the total cost of construction — only to have second thoughts in 2018, after the United States imposed fresh sanctions on Tehran.
Work on the Rasht–Astara section is ongoing, at least on paper. But Iran clearly lacks the funds and technical resources. It’s now up to Russian budgetary funds to put the project back on track.
That might be easier said than done, as numerous issues loom. Firstly, a return on Russia’s investment remains a long way off: Even if everything goes according to plan, the 162-kilometer Rasht–Astara railroad will only become operational in 2027.
Goods will also have to pass through Azerbaijan at a time when its relations with Iran are strained. It’s far from certain that Baku will facilitate the corridor’s smooth operation. Furthermore, INSTC might find itself competing with Baku’s own pet project, the Zangezur Corridor: a controversial, hypothetical transport route linking Azerbaijan (and possibly Russia) to the Mediterranean Sea via Armenia and Turkey.
Legitimate questions have been raised about whether Rasht–Astara will be cost-effective compared with Iranian road transport. Not only is gasoline heavily subsidized in Iran, road infrastructure is significantly better than its rail network. It’s clearly no coincidence that the Russian government had to step in to finance the project amid a lack of interest from private investors, but given Iran’s near-empty coffers, the chances that Russia will get its money back are slim, indeed.

Cooperation via Loans

The cooperation via loans is becoming the backbone of Russo-Iranian relations. In 2021, for example, Russia loaned Iran $5 billion for infrastructure projects. That same year, it emerged that Iran owed €500 million ($591.5 million) for the construction of the Bushehr Nuclear Power Plant. Iran’s debts for Russian agricultural products are also rising by the month.
Russia continues to provide loans despite Iran’s ballooning debt from previous projects. Given Tehran’s financial constraints and ongoing political crisis, it’s doubtful that those loans will ever be repaid.
Of course, none of this negates that Russia sorely needs alternative transport routes, having been cut off from its traditional Western ones following its invasion of Ukraine. In terms of sanctions, a corridor through Iran looks like the safest option.

Alternative Routes

Alternative routes go through China and Turkey, but with them would come uncertainty. 
Despite Putin and Xi’s “no-limits partnership,” the United States remains China’s largest economic partner, and China has proven unwilling to risk sanctions in the past. Turkey is a NATO member and is even more closely economically integrated with the West. It has resisted many demands to crack down on Russian sanctions evasion so far, but may not remain a reliable partner for Russia for long. Heavily sanctioned Iran, on the other hand, has nothing to lose by working with Russia.
Russia has additional options requiring less coordination with intermediary countries. It could expand its Caspian cargo fleet, for example, which would be faster than building a railroad. After arriving in Iran, goods could be transported across its territory via road or existing railroad.
Iran’s largely single-track railroads would have to be expanded, and new ports constructed on the Caspian Sea, Persian Gulf and the Sea of Oman, to say nothing of building support infrastructure. It cannot accomplish that on its own, but Tehran is well aware of the situation Russia now finds itself in and why it wants the North–South Corridor. Iran’s goal, therefore, is to modernize its own infrastructure using Russian money.
Russia, for its part, seems resigned to footing the bill. In mid-May, Deputy Prime Minister Marat Khusnullin said Russia would spend 250–280 billion rubles (about $3.5 billion) on the North–South Corridor by 2030. In all likelihood, that is a major underestimation. But Russia has no choice: It needs the North–South Corridor and no one else is willing to invest in it.