CC BY
6:4S» Matjaz Razdrih
Research Assistant, Faculty of World Economy and World Politics, Laboratory for Contemporary Iranian Studies, National Research University Higher School of Economics
20, Myasnitskaya str., Moscow, 101000, Russian Federation
E-mail: m.razdrih@hse.ru
O Andrey I. Evgrafov
Junior Research Fellow, Faculty of World Economy and World Politics, Laboratory for Contemporary Iranian Studies, National Research University Higher School of Economics; Research Assistant, Center for Arab and Islamic Studies, Institute of Institute of Oriental Studies of the Russian Academy of Sciences
20, Myasnitskaya str., Moscow, 101000, Russian Federation;
107031, Moscow, Rozhdestvenka Street, 12 E-mail: aevgrafov@hse.ru
Economic diplomacy of the Russian federation in the sphere of international trade: The case of Islamic republic of Iran in context of geopolitical changes
This article is a case study of trends in the economic diplomacy of the Russian Federation towards the Islamic republic of Iran. It represents a contribution in the discussion of inter-contentedness of economic and political goals. Due to the conditions in contemporary political economy — sanctions, protectionism and reemergence of state capitalism in geoeconomic projects, it is difficult to draw a clear line between economic and political goals. Economic diplomacy is thus defined by the authors in its broad sense: as a nexus of political and economic tools to achieve the political and economic goals. In the case of Iranian-Russian relations, the western sanctions and perception of military threat, as well as threat to the stability of the governments, also played a role in expansion of economic relations, as well as structure of trade, as the two states seek solutions to develop their economies under external pressures and keep access to key markets. The article defines the main areas of action in Russian economic diplomacy towards Islamic Republic of Iran: trends in the scale of trade, as well as its structure and implications of this data for the Russian-Iranian relations. It then attempts to discern the main trends in a timeframe from 2014 to 2023 and define the main factors influencing the change of structure and scale of trade between two partners, as well as make predictions for the future, based on the actions of Russian Federation and the signing of free-trade agreement between the Eurasian economic union (EEU) and Islamic Republic of Iran.
Keywords: economic diplomacy, Russian Federation, Islamic republic of Iran, geoeconomics, trade, economic integration, sanctions.
JEL Classification: F13, F23, F53
For citation: Razdrih M., Evgrafov A.I. Economic diplomacy of the Russian federation in the sphere of international trade: The case of Islamic republic of Iran in context of geopolitical changes. Economy of the Middle East, 2024, vol. 1, no. 1, pp. 34-47. DOI: 10.24412/2949-6470-20240030
Раздрих Матяж
стажер-исследователь, факультет мировой экономики и мировой политики, научно-учебная лаборатория исследований современного Ирана, Национальный исследовательский университет «Высшая школа экономики»
Российская Федерация, 101000, Москва, ул. Мясницкая, 20 E-mail: m.razdrih@hse.ru
Евграфов Андрей Ильич ©
младший научный сотрудник, факультет мировой экономики и мировой политики, научно-учебная лаборатория исследований современного Ирана, Национальный исследовательский университет «Высшая школа экономики»; лаборант-исследователь, Центр арабских и исламских исследований, Институт востоковедения РАН
Российская Федерация, 101000, Москва, ул. Мясницкая, 20; 107031, Москва, ул. Рождественка, 12 E-mail: aevgrafov@hse.ru
Экономическая дипломатия Российской Федерации в сфере международной торговли: случай Исламской Республики Иран в контексте геополитических изменений
Статья является исследованием тенденций в экономической дипломатии между Российской Федерацией и Исламской Республикой Иран. Она направлена на обсуждение взаимосвязанности экономических и политических целей в международной экономике. В условиях, диктуемой современной политической экономией, к которым относятся санкции, протекционизм и возрождение государственного капитализма в геоэкономических процессах становится трудно провести четкую грань между экономическими и политическими мотивами акторов. Вследствие этого в рамках работы экономическая дипломатия определяется авторами достаточно широко: как совокупность политических и экономических инструментов для достижения политических и экономических целей. В случае ирано-российских отношений санкции со стороны Запада, военные риски, а также угроза стабильности для правительств сыграли свою роль в расширении экономических отношений и структуры торговли. Оба государства ищут решения для развития своих экономик в условиях внешнего давления и сохранения доступа к ключевым рынкам. В статье определяются основные направления действий российской экономической дипломатии в отношении Ирана: тенденции в двусторонней торговле, ее структура и влияние на развитие российско-иранских отношений. Также в рамках исследования предпринимается попытка определить основные тенденции за период (2014-2023 гг.) и выявить ключевые факторы, влияющие на изменение структуры и масштабов торговли между двумя партнерами, а также дать прогнозы на будущее, основываясь на действиях России и подписании соглашения о свободной торговле между ЕАЭС и Иран.
Ключевые слова: экономическая дипломатия, Российская Федерация, Исламская Республика Иран, геоэкономика, международная торговля, экономическая интеграция, санкции.
Для цитирования: Раздрих М., Евграфов А.И. Экономическая дипломатия Российской Федерации в сфере международной торговли: случай Исламской Республики Иран в контексте геополитических изменений // Экономика Ближнего Востока. 2024. Т. 1. № 1. С. 34-47. DOI: 10.24412/2949-6470-2024-0030
Introduction
The issue of international trade and economic cooperation in general represents a classical topic of discussion in the sphere of International Relations and International Political Economy. The main points of contention remain the reasons for economic cooperation, best ways to achieve mutual benefits from economic transactions and also the issue of security of the global economic connections. The last issue prominently features in the contemporary discussions due to the shift from uni- to multipolar world. Since 2014, tensions rose between the West and the Russian Federation, mainly due to the issue of Ukraine, and the tensions have escalated especially after the beginning of the Special Military Operation. These new challenges, as well as an economic blockade and sanctions from the world's leading power, force Russian Federation to accept counter-measures and to build and economy resistant to sanctions and foreign intervention, meaning that the trade routes to its partners, mainly in Asia, must be kept open, secure, and capable of sustaining a continuing competitive ability of Russian economic subjects in these markets. In order to achieve its objectives, which are key to the survival and development of the state, it must use all the available instruments, including that of economic diplomacy and regional political and economic integration. Islamic Republic of Iran found itself in the situation of foreign pressure and isolation way before, so the growing tensions between the West and Russia signified increased potential for cooperation between the states with a common adversary.
Common projects began to gain momentum: in May 2023, two parties signed the agreement to complete the Rasht-Astara Railway, with 1.3 bln USD investment from the Russian Federation, that represents a part of the plan to increase the capacity of the International North-South Transport Corridor to 100 mln metric tons per year [Ravandi-Fadai, 2023]. In September 2023 Russian state corporation "Rosatom" signed an agreement with the Iranian atomic agency to build the second reactor of the nuclear power station in Bushehr [Rosatom, 2023], which signals continuing cooperation between the two countries in the sphere of nuclear energy. For the first time since the 1990s, Iranian air force received new military aircraft from a Russian company "Sukhoi" [Pakstygal, 2023], in a move that demonstrates increasing military cooperation despite the issue of S-300 air defense systems, that soured the relations between the countries nearly a decade earlier. Russia also entered the group of ten biggest Iranian trade partners [Tass, 2023], with the volume of trade growing every year. Despite these developments, the relations between the Russian Federation and Islamic Republic of Iran remain on a level that can be substantially improved. There are several issues, such as low level of trust between the two nations, even sometimes expressed by parts of Iranian elites, underdeveloped institutions (business clubs etc.), problems of transfer of funds, as well as lack of physical infrastructure and asymmetry of size and specifics of both economies. All these problems warrant a solution that needs to be developed within the framework of economic diplomacy, taking both political and economical aspects into account.
This article represents a case study of economic diplomacy of the Russian Federation towards the Islamic republic of Iran, that has been recognized as an important partner, included even in the article 56, paragraphs 1 and 4 of The concept of foreign policy of the Russian Federation (approved by the President of the Russian Federation V. V. Putin on March 31, 2023) [President of the Russian Federation, 2023]. Economic diplomacy is defined broadly as political means to achieve economic goals, as well as economic means to achieve political goals. The authors consider this wide definition key, because in the current geopolitical landscape, it is becoming harder to distinguish political and economic goals from one state's actions. The Chinese Belt and Road initiative is a great example: one could argue that such a fundamental goal of such a project is to establish a model of economic collaboration with mutual gains and shared development via the expansion of connections across numerous industries [Dunford, Liu, 2019]. Others might claim that these investments could then be used as a political tool to exert pressure, but they also play a role in security of trade routes and the resistance of the trade infrastructure to foreign sanctions and interventions. The authors also wish to draw attention to the idea that promotion of expansion of international organizations and regimes represent an important tool of economic diplomacy. We base this claim on the fact that the institutions and regimes by definition represent a set of rules, norms and values, that the state agrees to adhere to upon accession, as well as being symbolic. The leading states that have a de facto key role in accepting the applicant states and promoting their integration into a regime, can use this as a key leverage — an instrument of economic diplomacy.
Methodologically and theoretically, the article rests on neoliberal assumptions, that international politics are anarchical in their nature, and that the states follow primarily their interests. However, the practice shows that the external pressures, namely sanctions and threat of foreign intervention, create the conditions for mutually beneficial cooperation, as in the case of the Russian Federation and Islamic Republic of Iran. In the articles, the authors use the center-periphery model, that lays upon marxist 36 assumptions about the countries' production capabilities and the effect of economy upon the balance of power between them. This is not done to imply that the both researched countries developed or are
developing any sort of dependent relationship, but to point out another issue of Russian-Iranian relations, which lies in the relative balance of economic power between the two. We use the theory of political regimes as a secondary theory, as a set of rules and norms that help the states manage their relations. The Russian Federation, the most sanctioned country on the planet at the time of writing [Wadhams, 2022], is searching for alternative trade routes and willing partners. It found a willing partner in Islamic Republic of Iran, a country sanctioned for almost half a century, despite low level of trust and even historical animosity. The article is based on the case study research design. The methods used in the article are historical comparative analysis, analogy, analysis of trade flows and structure and instrumental observation (document analysis).
Historiography
The field of economic diplomacy and integration is well researched in general, with handbooks and some analytical frameworks existing, especially works by Okano-Heijmans [2011], but the current issues that come with the changing of times and the international system must be addressed. The political aspects of economic cooperation between the Russian Federation and Islamic Republic of Iran, especially after the 2022 Special Military Operation remain modestly researched. In the field of economic diplomacy, Peter A.G. van Bergeijk is without doubt a key author with his research of political economy and trade, as well as the editor of the monograph Economic Diplomacy: Economic and Political Perspectives [Bergeijk, Okano-Heijmans, Melissen, 2011]. The book contains contributions defining economic diplomacy, and then transitions to analyzing individual concepts on the basis of case studies. Among Russian authors, we need to especially mention D. A. Degtyarev and his book Economic diplomacy: economics, politics, law [Degtyarev, 2010], which serves as a fundamental russian-language handbook on the topic. It also covers institutional aspects, as well as provides concrete cases of emergence of individual concepts.
Scientific material about the trade relations, especially material centered around the political factors of cooperation, is unfortunately lacking. A lot of secondary material is available in form of the reports of the mass media and official statements of government offices, but there is a notable absence of scientific sources and analysis. This may be due to the quick pace of development of bilateral relations. Some work in the sphere of cooperation of the Islamic Republic of Iran with Eurasian Economic union was done by I. V. Zeleneva in the article Cooperation Of Iran And EAEU: Problems And Perspectives [Zeleneva, 2022]. M. N. Sineok [2021] provided analysis of the 2018 trade agreement.
Economic diplomacy as the dichotomy of politics and economics
In the recent decade, the world is transforming by moving away from a unipolar world, dominated by one state or one block of states. This order came into being after 1991, when the Western countries achieved a de facto monopoly over the international political institutions and rule-making, something that the Western politicians describe as "rule-based world order" [Levchenko, 2023]. For a short time it appeared that the liberal institutionalism and free market neoliberalism would triumph, but this era came to an end somewhere in the second decade of the 21st century. The reasons are several: ex-colonies and other states, once destined to play the role of the global (semi)periphery, now had an opportunity to lead a more assertive and sovereign foreign policy. The governments of these emerging nations generally employ economic means and actively seek new commercial contacts to boost their standing in international politics because they are faced with the turbulence of global governance and international political and financial institutions [Okano-Heijmans, 2011. P. 8]. New powers emerged, such as China, which replaced the USA as the principal trade partner for many states [Rajah, Leng, 2018].
With this new change in the economic landscape, the world became more fragmented, and security issues became more and more important, as sanctions and geopolitics made old trade routes less viable, or put them under pressure of potential foreign interference. It is becoming obvious that in order for a state to survive and thrive, foreign economic policy must also be considered from a political point of view. The experts talk increasingly about political factors, and employ concepts such as friendshoring in the analysis of the geopolitical tendencies, which is also related to this particular case. There are few better cases for study of political interference with economic tools (sanctions) than Russian Federation and Islamic Republic of Iran. Both have their specifics: Islamic Republic of Iran was sanctioned for so long that it developed mechanisms to survive the economic isolation, mainly relying on a strong internal market and import substitution.
The Russian case is different, as not only the sanctions are in place for just under a decade, but it is also a leading country in the scope and number of sanctions imposed against it. Regarding the opinions of international academics, the first set of analysts forecasts disastrous outcomes for the Russian economy. Some point out that the impact of the sanctions relies on how long Russian Federation's erstwhile allies 37
can sustain them, maybe at growing expense [Aalto, Forsberg, 2016. P. 5]. Some, however, think that the sanctions may only have a limited effect because the Russian Federation's economy is so resilient that more export-dependent industries like energy, which are backed by the Russian Reserve Fund, coexist with numerous non-globalized sectors. As a result, the Russian Federation can sustain significant short-to medium-term economic losses, and President Putin's reactions to the sanctions are expected to be supported by the ruling class as well as the general public [Aalto, Forsberg, 2016. P. 5]. The success of this "pivot to the east" is thus heavily dependent on the success of Russian economic diplomacy, as the sanction regime changed many previously existing relations and eroded the Russian Federation's position in many ways, but also provided opportunities to redesign and rethink the country's external relations.
Defining economic diplomacy and its application in International Relations
The economic diplomacy is not a frequently discussed term in the domain of International relations. This reflects especially in the lack of consensus about a definition of economic diplomacy itself and who is the main driver of the formation of the strategy. It is too limiting to say that economic diplomacy is limited to the activities of the ministry of foreign affairs. There are several interpretations of the term that we can broadly divide into more broad definitions and more narrow ones. It is also of utmost importance to distinguish economic diplomacy from other correlated terms, such as trade policy, foreign economic policy etc.
We can divide the attempts to define economic diplomacy into two groups. First one is more broad, and defines economic diplomacy as political means to achieve political goals, but also as economic means to achieve political goals. The narrower definition is usually employed in the context of economy, as purely the diplomatic effort to achieve economic progress. The broad definition is also interpreted through the observation of Hans Morgenthau's work. He claimed that "it is necessary to distinguish between, say, economic policies that are undertaken for their own sake and economic policies that are the instruments of a political policy — a policy, that is, whose economic purpose is but the means to the end of controlling the policies of another nation [Okano-Heijmans, 2011. P. 10]." Although the term controlling may be a little too restrictive, the core of Morgenthau's idea still applies, as we could redefine controlling as influencing. In the case of Russian policy towards Islamic Republic of Iran, we could argue that we can observe friendshoring, the term that is becoming increasingly popular in the scholarly literature and analytics. It signifies "rerouting of supply chains to countries perceived as politically and economically safe or low-risk, to avoid disruption to the flow of business [Ellerbeck, 2023]". Friendshoring also has an additional political effect, as increased trade and investment also reduces the risk of severe inter-state conflict.
We also use the terms as defined by Okano-Heijmans, who define economic objectives as increasing economic prosperity, economic instruments as denying someone access to goods and money as political leverage and economic incentives as advancing one's own industry [Okano-Heijmans, 2011. P. 9]. The more general definition is more useful for the research of contemporary processes, due to the increased interconnectedness of political and economic factors. In practice this means that the political considerations sometimes overrule the economic concerns due to such factors as political risk or security.
Political factors are key in shaping international trade
This article represents an attempt at analyzing the trade patterns between Russian Federation and Islamic Republic of Iran and placing it in the context of international relations, that is, to include political consequences of economic relations, as well as political factors of the development of inter-state relations. We also do that due to our theoretical assumption about economic diplomacy, as it represents, by definition, a mix of political and economic instruments. We can analyze these connections with the analytical framework of political economy. Politics influence trade in several ways. The first is the obvious connection to security; the states want to minimize costs of trade, but also provide security to the flows of goods. Importance of strong navies is key in this aspect, and it is clear that every modern great power also exercised substantial power at sea. The states also want to maximize their gains from trade, as the strong economy is also translated into a strong state.
A state without a strong and diversified economy can not fulfill its geopolitical ambitions, so in order to achieve this, the states must sometimes balance between protecting their own market, but at the same time gain access to foreign markets. The use of state interventionist measures is widely debated, but limiting foreign access to the domestic market means more expansion opportunities, as protectionism gives local industry a head start on the worldwide market until they can compete with more established businesses. It also helps to decrease imports and enable the nation to improve its trade balance. Increased
workforce levels by domestic companies lead to higher employment rates and often result in an increase in domestic production, which raises GDP.
The negative aspects could be defined as stagnation of technological advancements, because domestic producers are not concerned with overseas competition, they are not motivated to invest in research and development or innovation to create new products. Restrictions on imported items mean that consumers have less options available to them, and without a discernible improvement in the product, consumers will have to pay more. The last effect is political, as protectionist measures frequently result in cultural and political exclusion, which exacerbates economic isolation. Discrimination of foreign imports is thus also a political obstacle to closer cooperation. From this we can conclude that the states in modern, multipolar world order, also face this dilemma: what is a good balance between protecting a domestic market and developing local products, and how to expand political relations between states. This dilemma is particularly important to the states that have a specific economic model, such as Islamic Republic of Iran, which was forced to adapt its economy to a hostile international environment.
Trends in development of trade relations between Russian Federation and Islamic Republic
of Iran (2010-2021)
In 2010 total trade between Russian Federation and Islamic Republic of Iran amounted to $4.5 billion (constant 2021), of which $4.1 billion accounted for Russian Federation's exports to the Islamic Republic and $335 million for imports from there, then by 2021 it was equal to $4 billion ($3 billion for exports, $972 million for imports). Due to the lack of published statistical information, it is impossible to access the trade turnover values in subsequent years, however, according to Russian officials, the trade turnover between the two countries in 2022 amounted to $5 billion, and in 2023 it returned to $4 billion ($2.7 billion — exports, $1.3 million — imports) [Interfax, 2024].
Figure 1 shows how the shares of both countries in bilateral trade changed during 2010-2021. It can be seen that, as a rule, Islamic Republic of Iran's share in Russian exports fluctuated, but did not exceed 1% in Russian exports. The Russian Federation, in turn, occupied the same position in Iranian world exports (there is no available data on Islamic Republic of Iran for 2010 and 2012).
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Figure 1 — Shares of Russian Federation and Islamic Republic of Iran share in mutual trade (2010-2021) (in % of total values)1
Source: Compiled by authors [World Integrated Trade Solution (WITS)].
The data implies several trends in the Russian-Iranian economic relations. Imports of Iranian products to the Russian Federation also remained low and did not exceed 0.4% of the total import value. The Russian Federation was relatively more important to Islamic Republic of Iran as a trading partner than the other way around, as the imports of Russian goods averaged 2% and steadily increased. This can be explained by Islamic Republic of Iran's isolated position that severely limits its economic possibilities, while the Russian Federation had better access to larger markets. Islamic Republic of Iran
1 Left (Exports), Right (Imports).
is also not an importer of petrochemical products, as it is naturally endowed with these ressources, that represent a large share of trade with some of Russian Federation's other partners. We can discern other trends: the spike in Russian export to Islamic Republic of Iran in 2016 is connected with the abolition of sanctions under the Joint Comprehensive Plan of Action (JCPOA) agreement, and we can see that the share of export of Russian Federation to Islamic Republic of Iran declined to previous level in 2018 with reinstatement of sanctions against Islamic Republic of Iran. After 2019, the rise of shares of export of both countries, especially Iranian to Russian Federation, is connected with increased Russian activity in the sphere of economic diplomacy, most notably the free trade agreement between Islamic Republic of Iran and Eurasian Economic Union (EEU). The same trends are reflected in the import data, with relative decline being attributable to COVID-19 epidemic.
Changes in the structure of trade between Islamic Republic of Iran and Russian Federation
(2010-2021)
Structurally, Russian Federation's exports to Islamic Republic of Iran are not the result of scaling global Russian exports, but represent a specific product mix. As part of the analysis, the standard Harmonized System (HS) sector classification was used, based on the HS 1988/1992 commodity nomenclatures. As can be seen in Figure 2, on a global scale, a significant share of Russian Federation's exports were goods from the oil and gas and metalworking industries, as well as a very diverse category of Miscellaneous goods, which includes both high-tech optical and electronic devices, furniture, toys, as well as military products and classified commodity items.
In the case of Russian trade with Islamic Republic of Iran, the largest share is occupied by agricultural products. At the same time, in contrast to the static structure of Russian Federation's global exports, exports to Islamic Republic of Iran have undergone significant changes, where the supply of ore and metalworking products has been replaced by an almost complete switch to agro-industrial products. For the Russian Federation, the values for 2020 and 2021 in the World Integrated Trade Solution (WITS) database are not presented in a structural distribution, and all products are recorded as a Miscellaneous category. Nevertheless, if we consider the hypothetically mirrored data on Islamic Republic of Iran's imports from Russian Federation, we can see that in reality the sectoral structure of Russian Federation's exports to Islamic Republic of Iran in 2020 and 2021 had a similar appearance to previous years.
Figure 2 — Structure of Russian Federation's global Exports (Left) compared to Exports to Islamic Republic of Iran (Right) (2010-2021) (in % of total values)
Source: Compiled by authors [World Integrated Trade Solution (WITS)].
In the Russian Federation's global imports (Figure 3), products from the industrial and chemical sectors, as well as vehicles and the Miscellaneous category, occupy significant shares. At the same time, imports from Islamic Republic of Iran were concentrated on agricultural products, which sufficiently repeats the structure of Russian exports there. The data for 2020 and 2021 are mirrored statistics of
Islamic Republic of Iran's exports to the Russian Federation (as in the case of Russian exports, they are presented in the form of Miscellaneous), and demonstrate an increased share of products made of plastic and rubber. In general, unlike exports, imports on both a global and Iranian scale have a much higher level of sustainability.
Figure 3 — Structure of Russian Federation's global Imports (Left) compared to Imports from Islamic Republic of Iran (Right) (2010-2021) (in % of total values)
Source: Compiled by authors [World Integrated Trade Solution (WITS)].
A similar picture is presented by United Nations Conference on Trade and Development (UNCTAD) statistics, which, among other things, classifies trade flows according to the degree of processing of a particular product. Thus, during the period under review, the products exported by the Russian Federation to Islamic Republic of Iran were either raw materials or intermediate goods (and if the share of the latter in 2010 was 91%, then by 2019 it had decreased to 45%). In the case of imports, 70% were consistently occupied by commodities.
If we consider the structure of Russian-Iranian trade by article (in this case, the three-digit classification Standard International Trade Classification, Revision 4 (SITC Rev. 4)), then if Russian Federation's exports to Islamic Republic of Iran in 2010 were formed at on the base of product categories 672 (Ingots and other primary forms, of iron or steel; semi-finished products of iron or steel), 673 (Flat-rolled products of iron or non-alloy steel, not clad, plated or coated), 931 (Special transactions and commodities not classified according to kind) and 676 (Iron and steel bars, rods, angles, shapes and sections (including sheet piling)), in the years until 2019 the bulk of the export was composed of 421 (Fixed vegetable fats and oils, «soft», crude, refined or fractionated), 044 (Maize (not including sweet corn), unmilled), 043 (Barley, unmilled) and 248 (Wood, simply worked, and railway sleepers of wood). In the case of imports of Iranian products to Russian Federation in both 2010 and 2019, the most traded product categories were 057 (Fruit and nuts (not including oil nuts), fresh or dried) and 054 (Vegetables, fresh, chilled, frozen or simply preserved (including dried leguminous vegetables); roots, tubers and other edible vegetable products, n.e.s., fresh or dried). The mirrored data on Islamic Republic of Iran for 2021 give a similar result on the composition of product categories in Russian trade, however, they demonstrate the increasing role of category 041 (Wheat (including spelt) and meslin, unmilled) in Russian Federation's exports to Islamic Republic of Iran.
Structure of trade is a reflection of inter-state relations
From historical examples and theory of political economy, we know that the structure of trade provides a lot of information about the relations of the states. For example, the export of raw materials and import of finished, capital intensive products is a tell-tale sign of semi-colonial relations, as the trade relations are heavily tilted towards benefiting one country. While the trade relations between two analyzed countries can not be described as such, the difference in economic development and place in global value chains of both countries can not be understated. Using the UNCTAD, we can place the
Russian Federation in the developed world and Islamic Republic of Iran into the developing world [UNCTAD, 2024]. The difference is also in productivity per capita, with Russian PPP GDP per capita in 2017 US dollars being $27,450 (2022) and Iranian $15,461 (2022) [The World Bank, 2024], and in the Human Development Index (HDI) with Russian Federation taking 52th place globally in HDI with 0.822 and Islamic Republic of Iran being 76th with 0.774 [United Nations, 2024].
These differences also reflect on the competitiveness of different classes of products of Islamic Republic of Iran in the Russian Federation. Other factors of trade, such as barriers, accessibility of information about the markets, secondary sanctions and government activities in promoting trade are all equally important. Islamic Republic of Iran was also sanctioned for a long time and developed a specific economic model, resistant to sanctions. We can clearly see that the change of structure reflects the attempts of both governments to promote trade, expand its volume and add new products into the trade structure. Iranian products seem to be mostly competitive in the agricultural sector, which is not surprising given the country's endowment in agricultural lands, relative labor price and climate. After 2019 however, we can see that the share of agricultural products in imports of the Russian Federation from Islamic Republic of Iran fell relatively, and other imports, such as rubber and textiles, began to emerge. This tells us about the relative comparative advantage of Iranian companies that was boosted in this field as a result of the 2018 temporary agreement of free trade between Iran and Eurasian Economic Union [EEC, 2018].
Figure 4 — Number of product types under each chapter of nomenclature based on Harmonized System 2017 (HS17), where the EAEU reduced tariffs towards Islamic Republic of Iran
Source: Compiled by authors [Eurasian Economic Commission...].
From the Figure 4 we can see that the main areas of reduction of tariffs towards Islamic Republic of Iran were in the HS17 nomenclature categories of 07 (Edible vegetables and certain roots and tubers), 20 (Preparations of vegetables, fruit, nuts or other parts of plants), 27 (Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes), 39 (Plastics and articles thereof), 57 (Carpets and other textile floor coverings), 73 (Articles of iron or steel) and 84 (Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof). This seems to be consistent with the change in trade structure after 2019, since textiles and plastics start to feature prominently in Iranian exports to the Russian Federation.
Figure 5 — Number of product types under each chapter of nomenclature (HS17), where Islamic Republic of Iran reduced tariffs towards EAEU
Source: Compiled by authors [Eurasian Economic Commission...].
In comparison to EEU, Islamic Republic of Iran opened its market for a more diverse range of products (Figure 5), and there are more distinct focuses on product groups, such as 02 (Meat and edible meat offal), 48 (Paper and paperboard; articles of paper pulp, of paper or of paperboard), 72 (Iron and steel), 73 (Articles of iron or steel) and 84 (Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof).
However, despite significant reductions in tariff restrictions, it cannot be said that the free trade agreement with the EAEU has significantly affected the structural characteristics of trade between the Russian Federation and Islamic Republic of Iran. The tariff lift affected the most traded product chapters (based on HS17) (Figure 6), which form up to 90% of the trade flow.
Figure 6 — Share of "tariff-lifted" goods in Exports flows (2017-2021) (in % of total values)2 Source: Compiled by authors [World Integrated Trade Solution].
Although the agreement did contribute to an increase in the absolute values of exports of the two states (Table 1).
2
Left (Russian Federation's Exports to Islamic Republic of Iran), Right (Islamic Republic of Iran's Exports to Russian Federation).
Table 1 — Exports of both countries (2017-2021) (constant 2021) (mln USD)
2017 2018 2019 2020 2021
Russian Federation 1,495,586 1,299,251 1,607,144 1,487,481 3,068,188
Islamic Republic of Iran 315,210 302,265 485,755 523,641 578,521
Source: Compiled by authors [World Integrated Trade Solution].
Likewise there is a notable absence of more sophisticated products, such as machinery and machine-building parts, like those that fall under the EEU nomenclature's sections XVI and XVII. This is reasonable, as Islamic Republic of Iran maintains its production of these types of products, most notably cars, where liberalization of import of foreign cars causes economic damage to domestic producers. Protectionist measures are typically implemented by economies to promote domestic investment in a particular sector. Tariffs imposed on cars imported from abroad, for example, would incentivize indigenous manufacturers to increase their resource allocation towards car production. This protection of the local producers is not a result of particular economic dogma, but a consequence of sanctions and limited access of Islamic Republic of Iran to foreign markets, as well as political risks in the past, that forced the country to adopt the so-called resistance economy. The idea of a resistance economy appeared after 2005, they first appeared in relation to Iran's 2005 announcement of its 20 Year National Vision [Anderson, 2019. P. 656]. Its key component, as defined by the Supreme Leader of the Islamic Republic of Iran, is dependence on national capabilities and talent [Anderson, 2019. P. 657].
Key tendencies and trends of Russian economic diplomacy after the beginning of special
military operation
The main obstacle for the research of the post-2022 period of cooperation between both states is the lack of information, as the empirical data has not yet been made available by the time of writing. This period is also characterized by the lack of coherent, quality information, which is a consequence of the information war raging between the parties. After the beginning of the Special Military Operation in 2022, economic cooperation between countries came under increased scrutiny from mass media and think-tanks that tried to define the newly-developing relations as either a positive or negative development. Russian media and experts began demonstrating that the Russian Federation is still capable of upgrading alliances and finding new partners despite Western pressure. Pro-Western analytics try to paint the Islamic Republic of Iran as a party to the conflict in Ukraine and thus overestimate the scope of cooperation, so the data provided by these sources is also unreliable. This gap will probably require further research as quality empirical data appears.
Trade relations between the states were most probably improved in 2022. The total trade reportedly reached 4,9 bln USD, which represents a 20 % increase according to the Russian Chamber of Commerce (RCC) [Kommersant, 2023]. The speaker of the Russian Duma V. Volodin talked about 4,6 bln USD of trade exchanged, which would represent a 15 % year over year increase in trade volume [Interfax, 2023]. The difference between the numbers is substantial, but the RCC data is probably more reliable, since Volodin was making his remarks already in January of 2023, and it is highly unlikely that all information was available at that time, which was also mentioned in the official communique [MDDCMC RF, 2023]. According to the same source, the structure of trade also did not change significantly, as the officials noted that Russia supplies grain and oilseeds, lumber, inorganic chemicals, machine-building equipment, paper, cardboard and measuring instruments to Iran, while vegetables and fruits, nuts, dairy products, plastics, ferrous metal products, building materials and stone, plumbing products are imported from Iran [MDDCMC RF, 2023].
The data for 2023 is even more cryptic due to time distance and lack of available information about the trade structure. According to the deputy prime minister of the Russian Federation the trade fell by 17,3 % to approximately 4 bln USD [Interfax, 2024]. While the sharp fall represents and interesting deviation from the trend, it is even more interesting that the change affected the trade balance between the countries: Exports from Russia decreased by 27,1% to 2,7 bln USD, all while imports from Iran increased by 15,8% to 1,29 bln USD [Interfax, 2024]. What is also interesting is that machinery, equipment and vehicles represented a relatively higher share of Russian exports to Islamic Republic of Iran compared to previous years with 240 mln USD or 8,8% of total export [Interfax, 2024].
The 2023 trends probably represent an echo of the events in 2022, as the Russian economy experienced a short term shock of sanctions and changed business environment. Iranian companies improved their competitiveness in the Russian market, but it is hard to attribute this to a single factor.
44 Most likely the share of Iranian exports in trade would increase naturally, but it got a boost by replacing some sanctioned suppliers as well as increased relatively due to decreased Russian exports. The most
important Russian activity in economic diplomacy is without doubt the negotiations about the Free Trade Agreement between the EAEU and the Islamic Republic of Iran. The agreement was signed in december 2023 in Sankt Peterburg as a logical extension of the temporary agreement that was in force before [Government of Russia, 2023]. The importance of this achievement of Russian economic diplomacy can not be overstated, as it will remove more than 90 % of import tariffs for both sides, while the previous temporary treaty was focused mainly on export of raw materials and agricultural products [Kagaltynov, 2023]. The analysis of the effects of this agreement falls beyond the scope of this text, as it was just recently signed and did not enter into force yet.
Future prospects for Islamic Republic of Iran-Russian Federation trade relations and employment of tools of economic diplomacy
Russian-Iranian relations are specific in many ways: both economies are very sanctioned, they search for alternative trade partners and must survive in the increasingly polycentric world. It will take a lot of serious work to manage trade relations between the countries due to several obstacles: first is the aforementioned disbalance between countries in terms of development and relative comparative advantage, where both countries must take measures to avoid the asymmetric relations in trade and politics. In Islamic Republic of Iran, there is already some skepticism in the highest circles about cooperation with the Russian Federation [Belenkaya, Chernenko, 2021], and the feeling of unfairness could easily signify an obstacle in both countries' aspiration for bigger economic cooperation.
As seen in the previous paragraphs, the trade relations between Islamic Republic of Iran and Russian Federation are developing, but there are several obstacles to the development of trade, namely the delay of construction of key infrastructure, such as the International North-South Corridor (INSC) and subsequently higher costs of trade between the two countries, which will be fixed by improvement and expansion of the corridor, that will make the route competitive with traditional trade routes [Russian Railways, 2024]. Both countries should also take into account the concept of product space. A network of items with different levels of connectivity between them is called product space [Baliamoune, Mijiyawa, 2020. P. 9]. It is one of the more modern instruments created to examine how nations are changing structurally. Certain nations focus mostly on extremely peripheral production activities, such the production of cotton or oil. However, production in other nations is centered on more essential product-related industries like packaged foods and forests. Due to the strong connections between these sectors, the participating countries have greater flexibility in transitioning from these operations to a variety of other activities [Baliamoune, Mijiyawa, 2020. P. 9].
According to similar research done on the change of economic structures in other cases [Baliamoune, Mijiyawa, 2020. P. 9], It is a positive change, that the structure of Islamic Republic of Iran-Russia trade is changing and becoming more diversified. Both countries can use the entry into such markets as plastics and textiles as a starting point to increase the volume of export and also introduce new, connected items into the market. As discussed, trade also has the characteristics of friendshoring, meaning that both countries profit from reduced foreign pressure and bigger security of trade connections. It is also hard to ignore the importance of international organizations, especially regional ones, for the economic strategy of states. The international organizations and treaties provide several benefits, and signify an establishment of a common framework of rules, norms and processes, that are accepted by the members. From this fact, we can deduce that the inclusion (or exclusion) of members to such organizations is a tool of economic diplomacy, as countries achieve the desired economic outcome based on the political support towards applicant nations. This is even more relevant for cases such as the EEU, where a country like the Russian Federation plays a key role due to its leading role in the organization. The EEU, whose role in the article is mainly analyzed as a signatory of a tariff reduction agreement with the Islamic Republic of Iran, is no exception. It is thus correct to label the signing of the tariff reduction treaty and the development of relations between the EEU and the Islamic republic of Iran as a tool of economic diplomacy of Russian federation, that will not only have short-term effect of improved trade, but also strategic political ramifications of attracting the Islamic republic of Iran into the bloc.
Conclusions
We have demonstrated that the trade between the Russian Federation and Islamic Republic of Iran is undergoing severe change, both in terms of quality and quantity. New product classes began emerging in the trade between the states, but we must be careful in attributing all those changes to a single or main cause. The relations between two countries are developing on the basis of a strong support of both states, which in the area of trade was most notable in the facilitation of international agreements, such as the Interim Agreement leading to formation of a free trade area between the EEU and its Member States, of the one part, and the Islamic Republic of Iran, of the other part [EEC, 2018], a document that the authors 45 also analyzed in the text. The development of the trade relations is beneficial to both states, but special
attention in administering these relations must be given to the fact that the trade between the Russian Federation and Islamic Republic of Iran is under heavy influence of disparity in economic development. The disparity is not only quantitative, but also qualitative, as the Iranian economy is structured around the concept of resistance economics, and this system has its own particularities, strengths and weaknesses. This thus restricts trade, because too hasty liberalization could lead to the damaging of some industries with lower levels of competitiveness.
There are also several factors that will limit this effect, especially, as demonstrated by the 2016 removal of sanctions, Islamic republic of Iran has immense potential for economic growth, both due to educated labor force and vast deposits of natural resources, most notably arable land, oil and natural gas. Low level of development of infrastructure, characterized by the delay in completion of the INSC, also prevents trade from reaching the levels set by government officials soon. The solution will emerge with time, as Islamic Republic of Iran will be able to attract new investment from the Russian Federation and similar states, regardless of secondary sanctions from the West. The Russian Federation already achieved the status of the biggest foreign investor in Islamic Republic of Iran [Zlobin, 2023], with economically isolated Afghanistan taking the second place, demonstrating that the potential of Islamic Republic of Iran to attract foreign direct investment to areas such as energy, manufacturing and transport is far from exhausted.
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