Iran’s plans to speed up its accession to the EEU, recently announced by the country’s leadership, look like a spectacular geopolitical declaration

Iran's plans to speed up its accession to the EEU, recently announced by the country's leadership, look like a spectacular geopolitical declaration

Iran’s plans to accelerate its accession to the EEU, recently announced by the country’s leadership, look like a spectacular geopolitical declaration, behind which is another attempt to save the rapidly deteriorating situation in the economy of the Islamic Republic. Having lost most of its oil exports due to U.S. sanctions, Iran is looking for any new markets for its other goods, and the hypothetical accession to the EAEU would certainly facilitate this task. But whether Iran will be able to stabilize its economy in general and its financial system in particular due to its membership in the EEU is a big question: compared to the other EEU member countries, the Iranian economy exists in a completely different reality, which is unlikely to change fundamentally in the foreseeable future. However, Iran is successfully increasing its trade turnover with the EAEU even without formal participation in this alliance, which will inevitably require long and complex technical negotiations.

Preparations for Iran’s permanent membership in the EEU will be carried out within two weeks, parliament speaker Mohammad Baqeri Qalibaf said February 10 – after returning from Moscow, where he held a meeting with the chairman of the Eurasian Economic Commission (EEC) Mikhail Myasnikovich. Such a question sounded sensational, to say the least, considering that, until recently, Iran’s full membership in the EEU had not been discussed-it was only about preparing a free trade agreement as part of the development of the Interim Iran-EEU Agreement, signed back in May 2018. At that time, it was said that a free trade area (FTA) agreement could take three years, and last December, at the final meeting of the Supreme Eurasian Council, the heads of the EAEU countries approved the start of negotiations on the issue. According to Iranian sources, in the process, the sides are to discuss the terms of trade for 862 goods, including 360 goods that Iran exports to the EAEU countries.

The first reaction of the EEU leadership to the Iranian parliament speaker’s statement was restrained. At a briefing on February 17, Assistant to the Chairman of the EEC Board Iya Malkina, answering a question about Iran’s prospects of joining the EEU, reminded that the EEU Treaty, as well as the procedure for admitting new members to the association, requires that the state concerned to submit an appeal to the chairman of the EEU Supreme Council. Such an appeal from Iran has not been received, said Malkina, adding that the cooperation agenda of the EEU with Iran is “exclusively trade-related.

The volume of this trade is not too large yet. The other day, the Tehran Chamber of Commerce, Industry, Extractive Industries and Agriculture reported that Iran exported about 2.2 million tons of non-oil goods worth $824 million to the EAEU in the 10 months since the beginning of the current Iranian year (March 20, 2020) – 18% by weight and 4% by value less than in the same period a year earlier. Iran’s imports from the EAEU amounted to about 2.7 million tons of goods worth $ 956 million, but because imports were decreasing faster than exports, Iran managed to improve its trade balance with the EAEU by $ 106 million. Total trade turnover in the 10 months of this Iranian year decreased by 8.4%, to $ 1.8 billion – now the EAEU accounts for about 3% of the Islamic Republic’s total foreign trade.

Iran wants to increase this figure by at least an order of magnitude. In late January, announcing the upcoming start of FTA negotiations, the head of the Iranian Trade Promotion Organization, Hamid Zadboum, said that Iran and the EAEU have the capacity to increase bilateral trade to $20 billion. In turn, Iranian First Vice President Eshak Jahangiri in his speech last week called multilateral agreements with Eurasian states one of the best options to increase Iranian exports.

Russia is undoubtedly seen as the main market in this case, and here Iran’s far-reaching plans are well supported by current statistics. According to the Federal Customs Service, last year Iranian imports to Russia increased by 36.2% to $796 million, while in contrast exports from Russia to Iran decreased by 6.1% to $1.425 billion. However, for Russia, the balance of trade with Iran is consistently positive, while the Islamic Republic’s share in the total foreign trade turnover is only 0.4%.

To a large extent, further expansion of trade is hindered by the removal of infrastructural constraints. Although the North-South international transport corridor project, which is supposed to connect Iranian ports on the Indian Ocean with Russian Baltic ports, has existed on paper for more than two decades, real progress in this direction has been visible only in the last couple of years, after Iran completed in early 2019 the construction of the railroad from Resht, the center of the Caspian province of Gilan, to the city of Qazvin, where the mainline goes to Tehran. It took 13 years to build this 164-kilometer stretch.

Initially, the volume of cargo that could be transported along the North-South corridor was estimated at about 25 million tons by 2015, but in fact only 364,000 tons of cargo passed through Azerbaijan’s Astara at the border with Iran in 2019. This year alone, Iran plans to complete the railroad from its largest port on the Caspian Sea, Enzeli, to Resht, while the long-announced construction of a branch from Resht to Astara is apparently a matter of several more years. Besides, all these undertakings are connected with a number of other regional subjects. For example, Armenia, a member of the EEU, is left out of the North-South corridor, and Azerbaijan, which is not a member of the EEU and is not friendly to Armenia, will benefit as a transit country. As for Iran, the Islamic Republic has not yet ratified the Convention on the Legal Status of the Caspian Sea, adopted back in 2018, citing the fact that the principles of the delimitation of territorial waters need to be clarified.

Another important motive for deepening cooperation with the EAEU in Iran is the possibility to increase the volume of turnover in national currencies. This point was emphasized by Mohammad Kalibaf during his recent visit to Moscow. “New approaches are needed, especially in financial settlements, and we want Iranian exporters to have access to trade in national currency, which will facilitate the process,” he said.

This approach is generally in line with Russia’s longstanding policy, but it is much more important for Iran, given the desperate situation the country’s financial system has found itself in under U.S. sanctions. Soon after their imposition, Iran was forced to fix the rial exchange rate and restrict transactions in foreign currencies for individuals, resulting in two currency markets: the official exchange rate was available to authorized agents, such as exporters, while the “street” exchange rate took on a life of its own. Last year’s drop in oil prices and the coronavirus pandemic led to a further devaluation of the Iranian currency: in the second quarter the “street” rial lost a quarter of its value, setting a new anti-record – 200 thousand for one dollar, and in October it fell to 300 thousand for one dollar. The official exchange rate is still at 42 thousand points.

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As noted in a World Bank bulletin released late last year, another surge in Iranian demand for currency and other safe assets has been fueled by high inflationary expectations, as well as geopolitical and economic uncertainty. The constant depreciation of the rial led to a rise in the price of first imported goods and then of food and housing – as a result, last November inflation in Iran reached a 16-month high of 46.4%. For the EAEU countries, this level of inflation has long been a thing of the past, even if we proceed from a category that is more reflective of the real picture of the rise in prices of essential goods, such as inflation expectations – in Russia, for example, they are at about 10% per annum.

Ongoing financial problems are putting chronic pressure on the Iranian budget. To cover the growing deficit, the Iranian authorities decided last May to issue 1,500 trillion rials in domestic debt bonds, in addition to the 900 trillion rials issue already approved under the current budget. In addition, a sale of state assets on the stock market began, and funds from the state wealth fund had to be withdrawn to cover emergency expenditures. The EEU countries last year also faced the need to build up debt, but their obligations are at least “in the market” – Iranian domestic bonds with a declared rate of 14.5% per annum clearly do not cover inflation.

The Iranian economy has entered its third consecutive year of recession after the triple shock of sanctions, the collapse of the oil market and the coronavirus, and Iran’s economic prospects remain very uncertain, the World Bank said late last year. Analysts estimate that Iranian GDP will shrink by 3.7% in 2020/21, a still rather optimistic scenario (a year earlier the economy fell by 6.8%), since Iran relaxed quarantine measures rather early last spring. But in November, because of the new wave of the pandemic, restrictions had to be imposed again, and now the country ranks 15th in the statistics of the incidence of coronavirus (more than 1.6 million cases since the beginning of the pandemic), and by the number of deaths (about 60 thousand people) is at the 11th position in the world.

Finally, another worsening problem in Iran is poverty. Years of recession and high inflation have eroded household livelihoods and halted poverty reduction while rising living costs have reduced the value of Iranians’ remittances from abroad and labor income in real terms, World Bank experts say. In 2018/19, the national poverty rate, the number of people with incomes below $5.50 a day, was 12.3 percent, up 1.5 percent over the year. In response to the pandemic, authorities announced cash transfers and consumer loans for low-income people and households without a steady source of income, but the effectiveness of these measures may below. In the World Bank’s “shock” scenario, the percentage of Iranians living below the poverty line could rise to 21%, and new government spending would further exacerbate budgetary problems.

The sanctions and the devaluation of the rial have undoubtedly had a positive impact on the Iranian economy, as a number of the Islamic Republic’s export products, especially agricultural and manufacturing products, have become more competitive in international markets. But without Iran’s return to the global oil market, it is unlikely that other sectors of the economy will be able to compensate for its falling income in the foreseeable future. Last year Iran’s oil production fell to a three-year low of 2 million barrels a day, of which 600-700 thousand barrels were somehow managed to be exported to circumvent the sanctions imposed by Donald Trump.

At first glance, the change of leadership in the White House was good news for the leadership of the Islamic Republic, since Joe Biden spoke during the campaign about his readiness to return to negotiations on the Iranian nuclear deal, hinting at the possibility of easing sanctions. Already in mid-December, following the Biden team’s announcement of a possible U.S. return to the nuclear deal, Iranian President Hassan Rouhani announced his readiness to dramatically increase oil production. A few days later, he announced plans to increase it to 4.5 million barrels per day in 2021, exporting just over half that amount, which would almost match pre-sanctions levels.

But so far no concrete steps have been taken by either side to restart nuclear negotiations, and worse, the Americans are constantly letting Iran know that they cannot expect the sanctions to be lifted or at least eased any time soon. Recently, for example, a large batch of Iranian “sanctioned” oil intercepted during its sea transportation was sold on the US market, and another such operation may take place soon. After Biden took office as US President, the Achilleas tanker, flying the Liberian flag, was delivered to a port on the coast of the Gulf of Mexico with 2 million barrels of oil, which, according to American authorities, belonged to the Islamic Revolutionary Guard Corps and was transported in circumvention of sanctions. The Iranian leadership has already qualified the seizure of the ship as piracy, and the strike of the American military on the pro-Iranian forces in the Syrian province of Deir ez-Zor which was made on February 26th has become another hint that there will be no equal talks, and besides the order of the US Department of Defense was given by Joe Biden personally.

In this context, Iran’s forcing into the EAEU looks primarily as a geopolitical gesture: the Islamic Republic demonstrates its readiness to deepen cooperation, primarily with Russia, the implication of which is easy to read as a consolidation of anti-American efforts. But there remains the purely procedural side of the issue, which involves the coordination of hundreds of parameters of economic integration with all the EEU participants, and how long this process will take is very difficult to guess – a single political decision is clearly not enough here. For the microscopic and heavily dependent on Russian economy, Kyrgyzstan’s entry into the EEU took over four years from the decision of its leadership to join the Customs Union made in early 2011, and for Iran, which is one of the world’s top three economies by absolute GDP size, it may take much longer.