Trade and economic cooperation between the EAEU and Iran

Chekhlyaeva Sabina Saidumarovna student; Department of Theory and History of International Relations; Peoples' Friendship University of Russia 6 Miklukho-Maklaya str., Moscow, 117198, Russia sabinachekhlyaeva.saidova@gmail.com Other publications by this author

Sokolov Vladislav student; Department of Theory and History of International Relations ; Patrice Lumumba Peoples' Friendship University of Russia 142701, Russia, Moscow region, Vidnoye, Lenin Komsomol ave., 13, sq. 42 vladlens@inbox.ru

Introduction

In accordance with the stable traditions of geopolitical competition and the new principles governing economic competition, Iran is influenced by the formation of the Eurasian Economic Union. Another key potential of Iran's economic cooperation is its proximity to the EAEU member states. Iran has a land border with Armenia and a maritime border with Russia and Kazakhstan.

The Treaty on the Eurasian Economic Union (EAEU) was signed on May 29, 2014 by the leaders of Belarus, Kazakhstan and Russia and entered into force on January 1, 2015. The agreements on the accession of Armenia and Kyrgyzstan to the EAEU were signed on October 9 and December 23, 2014. The Agreement on the accession of Armenia entered into force on January 2, 2015, and Kyrgyzstan — on August 6, 2015. In January 2015, the EAEU officially began its activities in full. The main goal of the Single Economic Space is the development of a single market and the achievement of the "four freedoms", namely the free movement of "goods", "capital", "services" and "people" within the single market. The EAEU has an integrated market with a population of 184 million people and a gross domestic product of more than $5 trillion.

A significant event in the development of trade and economic relations between the EAEU and Iran was the signing and ratification in 2024 of a full-scale Free Trade Agreement, which replaced the 2018 Interim Agreement, which opens up new prospects for deepening economic integration and expanding mutually beneficial cooperation.

Fundamentals of relationship formation

A year after the formation of the EAEU, in 2016, Iran proposed to the Eurasian Economic Commission to create a free trade zone between itself and this economic bloc. After two years of negotiations, an interim agreement was concluded, which was signed on May 17, 2018 within the framework of the Astana Economic Forum. This was followed by the "Law on the Interim Agreement on the establishment of a free trade zone between the Islamic Republic of Iran and the Eurasian Economic Union and its member States", adopted by the Iranian Parliament in June 2019. The importance of this agreement was further emphasized by the participation of former Iranian President Hassan Rouhani at the EAEU Summit in Yerevan, Armenia, on October 1, 2019. Shortly thereafter, on October 27, 2019, the Preferential Trade Agreement between the EAEU and Iran (PTA) entered into force, offering lower tariffs on 862 types of goods, of which 502 are Iranian exports to the EAEU.

This agreement has significantly increased the volume of trade between Iran and the member states of the Union. Between October 2019 and October 2020, the volume of trade increased by more than 84%. However, the coronavirus crisis, which has led to border closures and health restrictions, has significantly curbed this growing trend. After the start of vaccination in Iran and the EAEU member states and the resumption of borders, the volume of trade gradually increased, and the volume of trade between Iran and the EAEU members exceeded $1.957 billion in the first five months (March 21 - August 22, 2021), which is 96 percent more compared to the same period of the previous year.

The analysis of trade relations between Iran and the EAEU in 2022 and 2023 demonstrates steady growth and strengthening of economic ties. In 2022, the total volume of trade between Iran and the EAEU countries reached 5.6 billion US dollars, which is 66% higher than the previous year. Iran's exports to the EAEU countries amounted to $ 1.17 billion, an increase of 12% compared to the previous period.

In 2023, the positive dynamics continued, and the total trade turnover between the EAEU and Iran reached 5.2 billion US dollars. This indicates a steady growth in trade relations, despite global economic challenges. It is important to note that over the five–year period since the entry into force of the Interim Trade Agreement (2019-2023), the volume of trade increased more than 2 times - from $ 2.4 billion in 2019 to $5.2 billion in 2023.

The positive dynamics of trade between Iran and the EAEU in 2022-2023 confirms the effectiveness of the measures taken to liberalize trade relations and creates a solid foundation for further expansion of economic cooperation within the framework of the new Free Trade Agreement signed in December 2023 (Table 1).

Table 2. Key stages in the formation of relations between the EAEU and Iran

Source: compiled by the author on the basis of data from the Official website of the Eurasian Economic Commission, the Eurasian Economic Commission, the Official Internet Portal of Legal Information and the Eurasian Development Bank.

The analysis of the dynamics of trade turnover between the EAEU and Iran shows significant growth in recent years. During the period from 2019 to 2023, during which the Interim Trade Agreement was in effect, trade turnover increased by more than 2 times: from 2.4 billion US dollars in 2019 to 5.2 billion US dollars in 2023. It is important to note that the positive trend of trade growth continues in 2024, which indicates the effectiveness of the measures taken to develop economic cooperation between the EAEU and Iran.

Since the agreement was designed for 3 years, it expired on October 5, 2022. In this regard, Iran and the EAEU held their first round of negotiations on updating the Interim Agreement to a free trade agreement in Tehran on July 19, 2021. According to Hamid Zadboum, former head of the Trade Promotion Organization of Iran, the two sides have agreed on most of the terms related to the outline of the Interim Agreement; the partner countries have reached an agreement on the gradual removal of tariffs and duties on most imports and exports in the near future to expand business opportunities.

On March 18, 2022, the EAEU and Iran extended the interim free trade agreement and agreed to intensify the preparation of a permanent agreement. This was received extremely positively in Tehran.

An important stage in the development of trade and economic relations between the EAEU and Iran was the ratification of the Free Trade Agreement. On June 12, 2024, the President of Russia signed a Federal law on the ratification of this agreement, which was signed in St. Petersburg on December 25, 2023. The agreement is aimed at liberalizing and simplifying trade in goods between the parties, reducing or eliminating tariff and non-tariff barriers, as well as supporting economic and trade cooperation. It is expected that this agreement will contribute to the significant expansion and diversification of trade between the EAEU and Iran, opening up new prospects for economic cooperation.

The current state of trade and economic relations

After the new Iranian government led by Ebrahim Raisi came to power in August 2021, the negotiation process between Iran and the EAEU accelerated. The new Iranian president has declared "neighborhood policy" and "economic diplomacy" to be the two main priorities of Iran's foreign policy vector. The change of Iran's membership from the main observer in the Shanghai Cooperation Organization (SCO), which took place at the summit in Tajikistan in September 2021, led to the promotion of this approach by the new Iranian government. As for the EAEU, a new round of negotiations between Iran and the Union took place in Armenia on November 1, 2021. Mir Hadi Seyedi, head of the International and Trade Affairs Department of the Trade Facilitation Organization (TPO) of Iran, said that Iran and the EAEU had previously held seven rounds of virtual meetings to discuss a potential free trade deal, and at this meeting, the two sides reached an initial agreement to extend free trade agreements to 80 percent of goods covered by the PTA. signed in November 2019.

An important point is that if the preferential trade agreement between the EAEU and Iran is updated to a free trade agreement, the number of points of the agreement will increase to at least 8000, which will undoubtedly lead to a significant increase in the volume of trade between Iran and the Union. This could attract most of Iran's economic and trade potential to the Union. The total population of Iran is about 80 million people who live in a total area of 1,648,195 square kilometers; approximately 74% of the population lives in urban areas with an annual growth rate of 1.97%, making it the main consumer market for the member States of the Union. Iran shares fifteen land or water borders with neighboring countries. Numerous Iranian ports in the Caspian Sea in the north and in the Sea of Oman and the Persian Gulf in the south, as well as an extensive network of roads and railways, provide a convenient location for the transit of goods between Iran and the Eurasian Economic Union. In this regard, Iran occupies a very good position for the North-South corridor, the Persian Gulf-Black Sea corridor and the One Belt, One Road initiative.

The rapprochement between Iran and the EAEU fits perfectly into Tehran's strategy of turning to Asia and its markets. This step began to take shape back in the 2000s and was mainly motivated by economic trends, namely, the growing demand for energy resources from rapidly developing Asian economies such as China and India. Sanctions followed, and after the US withdrawal from the nuclear deal in May 2018, the pressure increased significantly. All this has made Iranian elites disillusioned with the idea of strengthening economic ties with Europe, as businesses in the EU have proved to be the most sensitive to the restrictions imposed by Washington.

It would seem that cooperation with the EAEU gives Iran the opportunity to mitigate the consequences of the US sanctions policy. The fact that several EAEU countries are under Western sanctions certainly helps in this regard. On February 7, 2021, Prime Minister of Belarus Roman Golovchenko said that the EAEU is striving to develop a mechanism to counter sanctions in order to give reason for optimism.

Moreover, Iran is interested in abandoning the US dollar in settlements and switching to national currencies. This tool became even more relevant after Iran was cut off from the SWIFT international settlement system as a result of US pressure. The EAEU has repeatedly stated that it is consistently moving towards this goal. Such comments and practices are evident in the bilateral relations between individual EAEU member states and Iran.

Finally, Tehran is trying to break out of its political isolation. Thus, rapprochement with the EAEU can contribute to improving its status in the international arena. In general, the creation of an interim FTA with its subsequent transformation into a full-scale agreement should be considered in the broader context of Iran's desire to strengthen regionalism and enhance Eurasian cooperation.

A significant part of Iran's trade turnover with the EAEU countries consists of agricultural products. The same thing is observed in the case of Armenia. It is interesting to see what place Iran occupies in the import of agricultural products, in particular fruits and vegetables of Armenia. In general, in 2019, Armenia imported vegetables and fruits from Iran in the amount of $ 15.6 million (including the cost of fruits amounted to $ 10.6 million, and vegetables – $ 5 million), which put Iran in second place after Russia in terms of the indicator. For certain types of fruits and vegetables, Iran is a monopolist (more than 95% of the import value): cucumbers, kiwis, dates.

The structure of trade in 2022-2023 retained its main characteristics: Iran continued to export mainly agricultural products, fruits and vegetables to the EAEU countries, while it imported industrial goods, metals and cereals. Russia and Kazakhstan remained Iran's key trading partners within the EAEU, but there was also an increase in trade turnover with Armenia, Belarus and Kyrgyzstan.

Trade and economic relations between Russia and Iran in 2022-2023 showed significant growth, especially in the field of agricultural products. In 2022, the total trade turnover between the two countries reached a record level of 4.6 billion US dollars, which is 15% higher than in 2021. Russian exports to Iran in 2022 amounted to $3.69 billion, an increase of 27.1% compared to the previous year (Table 2).

Table 2. Dynamics of trade turnover between Russia and Iran (2019-2023)

Source: compiled by the author on the basis of data from the Federal Customs Service of Russia, RIAC, TASS, Ru-Stat, as well as the Ministry of Economic Development of Russia.

It should be noted that Russia accounts for more than 80% of Iran's trade with the EAEU^[30]. For this reason, direct rail links between Iran and Russia can increase the volume of trade between the two countries, especially in the west and south of Russia, such as the North Caucasus Federal District, the Volga Federal District and the Southern Federal District. Russian exports to Iran in 2019 amounted to 72.7% of the turnover of agricultural products between Russia and Iran.

The positive dynamics continued in the following years. In 2022, the volume of mutual trade in agricultural products, raw materials and food between Russia and Iran increased by 31% and reached 1.59 billion US dollars. Russian exports of agricultural products to Iran amounted to $ 1.39 billion, which is 43% more than in 2021. The main exports were cereals, in particular wheat and barley, as well as vegetable oils and products of the fat and oil industry.

The year 2023 was marked by further strengthening of trade relations in the field of agriculture. The trade turnover of agricultural products between Russia and Iran reached 1.83 billion US dollars, which is 15% higher than in 2022. Russian exports of agricultural products to Iran increased to $ 1.62 billion, an increase of 16.5% compared to the previous year. In addition to the traditional export categories, in 2023 there was an increase in the supply of meat and dairy products, as well as confectionery.

It is important to note that the growth in the turnover of agricultural products between Russia and Iran in 2022-2023 took place against the background of a general increase in trade between the EAEU and Iran. This trend reflects the effectiveness of trade liberalization measures within the framework of the Interim Free Trade Agreement and creates a solid foundation for further expansion of cooperation in the agro-industrial sector.

Iran is developing active cooperation with Kazakhstan, more than twenty Kazakhstani companies present products of the machine-building, food, pharmaceutical industries, and production of building materials to the country.

The trade turnover between Kazakhstan and Iran in January–August 2021 amounted to $ 318.2 million, which is twice as high as in the same period of the previous year ($157.3 million) In 2020, the trade turnover amounted to $ 237 million, which is 37.2% lower than in 2019 (in 2018, the volume of mutual trade between Kazakhstan and Iran amounted to $ 519.1 million). Last year, covid restrictions had a negative impact on mutual trade between Kazakhstan and Iran, reducing it by 37%. But already in 8 months of this year, we were able to exceed the volume of trade turnover of the entire last year.

Kazakhstan's exports to Iran in January–August 2021 amounted to $ 218 million. The main export products are barley, wheat, rapeseed and flax seeds, dried legume vegetables, rapeseed oil, waste obtained from the extraction of other vegetable oils, mutton or goat meat, animal products and others. As well as copper and copper cathodes, ferrous metal waste and scrap, seamless pipes, tubes and profiles made of ferrous metals.

In 2022, the trade turnover between the two countries reached a significant mark of 500.6 million US dollars, which represents a significant increase compared to previous periods. Exports from Kazakhstan to Iran amounted to $323.6 million, while imports from Iran to Kazakhstan reached $177 million. The year 2023 was marked by further strengthening of trade relations. During this period, the trade turnover between Kazakhstan and Iran increased by 21.2% compared to 2022, reaching 606.9 million US dollars. Kazakhstan's exports to Iran increased by 17.3% and amounted to 379.5 million dollars, while imports from Iran increased by 28.4%, reaching 227.4 million dollars.

The structure of trade between the two countries remained relatively stable in 2022-2023. The main items of Kazakhstan's exports to Iran were cereals, especially barley and wheat, as well as metals and mineral products. Iran, in turn, supplied mainly fruits and vegetables, construction materials and industrial goods to Kazakhstan.

It is important to note that the growth of trade turnover between Kazakhstan and Iran in 2022-2023 took place against the background of a general increase in trade between the EAEU and Iran, which indicates the effectiveness of trade liberalization measures under the Interim Free Trade Area Agreement. This positive trend creates favorable conditions for further expansion of economic cooperation between the two countries in the context of a new permanent Free Trade Agreement.

The analysis revealed the potential for increasing exports to Iran of Kazakhstani goods from the metallurgical industry, food, machine-building chemical and pharmaceutical industries in the amount of $ 162.3 million. During the five months of 2021, the main directions of Iranian exports to the EAEU were:

· Russian Federation (USD 222.743 million),

· Armenia (99.683 million dollars),

· Kazakhstan (USD 63.677 million),

· Kyrgyzstan (USD 26.981 million),

· Belarus (USD 7,738 million).

This volume of trade was achieved at a time when the United States withdrew from the Joint Comprehensive Plan of Action (JCPOA) in May 2018 and adhered to a policy of "maximum pressure" on Iran.

In 2022, the volume of trade turnover between Iran and the countries of the Eurasian Economic Union (Russia, Belarus, Armenia, Kazakhstan and Kyrgyzstan) increased by 66% over the year and amounted to $5.6 billion. Iran's exports of goods to the EAEU countries increased by 12% from March 21, 2021 to March 20, 2022, to $1.17 billion. Iran exported the most goods to Russia - in the amount of 583.658 million dollars (an increase of 15%). Supplies to Belarus amounted to the least - $ 14.813 million (an increase of 20% over the year). Imports from the EAEU amounted to 4,472 billion dollars. The indicator jumped by 90% compared to the previous year. Russia supplied the most goods to Iran - in the amount of $ 4.053 billion (an increase of 91%), Kyrgyzstan the least (reduced exports to the country by 35%, to $ 1.664 million).

As for the interests of the EAEU, it should be said that Iran represents a serious potential for the expansion of the Union. Among the economies of the EAEU member states, observers and partners, the Iranian economy ranks second only to Russia. As for economic cooperation, Russia and Kazakhstan will benefit most from reducing tariff barriers. In addition, the project is of particular interest to Armenia, which is the only member of the EAEU that has a land border with Iran — currently under partial blockade. Thus, Armenia can be used as a transit country for Iranian imports and exports. A free trade agreement with Tehran would also do wonders for Moscow's integration policy.

Enabling Iran's participation in the EAEU, along with its participation in the Russian-Chinese alliance in the south (as well as the DPRK in the east), strengthens security throughout this arc of potential instability, contrasting its regional alliances with American alliances. They are important not only militarily, but also politically, and also economically and commercially.

In connection with the ratification of the Free Trade Agreement between the EAEU and Iran in 2024, there is an intensification of joint projects and initiatives. Special attention is paid to the development of transport infrastructure, in particular, work continues on the project of the international transport corridor "North-South", which is designed to significantly reduce the time and cost of cargo transportation between the EAEU countries and Iran. In the energy sector, new projects are being discussed for the joint development of oil and gas fields and the development of technologies in the field of renewable energy sources. In addition, cooperation in the field of digital economy is actively developing: negotiations are underway on the creation of a single platform for electronic commerce between the EAEU and Iran, as well as on the introduction of blockchain technologies to simplify customs procedures. These initiatives are aimed at deepening economic integration and creating favorable conditions for the development of trade and investment between the EAEU and Iran.

Problems of trade and economic cooperation

In addition to the mentioned possibilities, there are also problems that may negatively affect the process of updating the Interim Agreement to a free trade Agreement and, therefore, should be addressed in the process of updating the agreement (Table 3).

Table 3. Key issues of trade and economic cooperation between the EAEU and Iran

Source: compiled by the author on the basis of data from Rasulinejad E., Shkarupeta E.V., Chekudaev K.V.; Karapetyan A.G., Mnatsakanyan A.G.; Guliyev I.A., Mehdiyev E.T.; Trade Representative Office of the Russian Federation in the Islamic Republic of Iran; Eurasian Development Bank.

The first problem is the restrictions on money transfer operations between the banking systems of the five member states of the Union and Iran due to unilateral US sanctions against the country. This has created serious restrictions for businessmen and merchants on both sides, especially for the submission of letters of credit (LC). Currently, only Mir Business Bank in Russia is engaged in the creation of LC for Iran, which is a Russian bank with 100% participation of foreign capital; its founder and sole shareholder is Bank Melli Iran. Mir Business Bank has three branches in Moscow, Astrakhan and Kazan. But in the other four EAEU member states, Belarus, Armenia, Kazakhstan and Kyrgyzstan, money transfers by exporters and importers are problematic and are carried out mainly through exchange offices.

The second problem is the underdeveloped railway connection between Iran and Russia in the Caucasus region. Unfortunately, Armenia, although it is a neighbor of Iran and a member of the EAEU, does not have a common border with Russia. In such circumstances, the railway network is very important to bridge this geographical gap, especially since the volume of goods transported by rail far exceeds the volume of land and road transport.

In December 2014, the 920-kilometer East Caspian Railway was opened between Iran, Turkmenistan and Kazakhstan in December 2014. Currently, it is an important trade artery that plays an important role in the export and import of products from Iran to Kazakhstan and the eastern regions of Russia. But there is no such railway network in the Caucasus region, between Iran and Russia, yet. As a result of the First Nagorno-Karabakh War, unlike Turkey and Russia, Iran lost railway communication with the Caucasus. Under these conditions, the Astara-Rasht-Qazvin railway was formed as part of the North-South Transport Corridor (NSTC). The Astara (Iran)-Astara (Azerbaijan) railway was officially opened at a ceremony held on March 29, 2018; the Rasht-Qazvin section was opened on March 6, 2019. Thus, the 164 km long railway route from Rasht to Astara in the Iranian province of Gilan, located on the southern shore of the Caspian Sea and adjacent to the Republic of Azerbaijan, is the only remaining railway section in the NSTC between Iran, the Republic of Azerbaijan, the Russian Federation and India.

Since the railway route between Astara and Rasht inside Iran has not yet been built, freight trains at the Astara railway station (Iran) will be transferred to trucks or vice versa. Therefore, the completion of the Rasht-Astara railway, which costs about $500 million, should be given more attention as an important priority for three countries – Iran, Azerbaijan and Russia.

The third obstacle to increasing the volume of trade between Iran and the EAEU, especially in the form of free trade, is the shortage of trucks and wagons equipped with refrigerated containers. This is important because more than 60% of Iran's exports to the EAEU are agricultural and livestock products. On the other hand, Iran imports products such as meat from the Union, which also require refrigerated containers. The long overland route and very cold weather in winter in Kazakhstan, Armenia and Russia, as well as very hot weather in Turkmenistan in summer, have created conditions in which it is impossible to export and import agricultural and livestock products without refrigerated containers. Currently, the number of trucks and wagons equipped with refrigerated containers does not cover the large volume of exports and imports of agricultural and livestock products between Iran and the EAEU. Therefore, this issue should be given serious attention in the process of converting the Interim Agreement into a free trade agreement.

The fourth problem is the low capacity of Iranian ports in the Caspian Sea, although the country shares a maritime border with Kazakhstan and Russia. The capacity of the Turkmen port in Golestan province, the ports of Novshahr and Amirabad in Mazandaran province, as well as the ports of Anzali and Astara in Gilan province is more than 40 million tons of cargo per year; however, only 6 million tons are currently in operation. Despite the existence of trade links between the ports of Astrakhan and Makhachkala in Russia, as well as the port of Aktau in Kazakhstan, the current capacity is far from its potential. The intensification of commercial shipping in the Caspian Sea, a regular and long-term shipping plan that is predictable and planned for traders and businessmen, and especially the development of Roll-n/Roll-off shipping (RORO) are one of the measures that can increase the volume of trade between Iran and the EAEU.

The fifth — and perhaps the most important — is the lack of practical experience of Iran and the EAEU member states on each other's markets and economic and trade opportunities. Although the situation has improved significantly since the introduction of the Interim Agreement in October 2019, the problem of information asymmetry persists. To solve this problem, it is necessary to highlight the economic and trade opportunities of the two sides in the media, and regularly hold specialized exhibitions with the participation of Iranian businessmen, traders and participating countries. The Chambers of Commerce of Iran, Russia, Kazakhstan, Kyrgyzstan, Belarus and Armenia should work to strengthen their cooperation. In this regard, the opening of the Iranian Trade Representative Office in Astrakhan in October 2017 and the holding of the first exclusive Eurasia Expo exhibition in Tehran on July 9-13, 2021 are useful and effective actions that need to be encouraged in the future. In this process, it is very important that businessmen and chambers of commerce are clearly explained the new conditions that will be created after the renewal of the EAEU-Iran FTA to the FTA.

Conclusion

In general, the implementation of the EAEU-Iran PTA is a very important event that has occurred in recent years in Iran's relations with Eurasia. This agreement has had a very positive impact on increasing the volume of trade between the two sides. But at the same time, it made the weaknesses and problems of this path clear to both sides. Therefore, in the process of updating this agreement to a free trade agreement, due attention should be paid to its problems and solutions. Obviously, until the banking, transit and trade infrastructure is established, the proposed agreement will be nothing more than words on paper.