How Are Russia and Iran Carving Trade Routes That Defy US Sanctions?

Russia and Iran are building a new transcontinental trade route stretching from Europe’s eastern edge to the Indian Ocean, a 3,000-kilometer route beyond the reach of foreign interference, defying Western sanctions on both countries, according to an extensive report published by Bloomberg.

The two countries are investing more than $20 billion to facilitate and speed up the passage of goods along the waterways and railways linking the Caspian Sea.

Ship-tracking data shows dozens of Russian and Iranian vessels—including those under sanctions—already on the route.

Besides the main goal of protecting economic ties under harsh Western sanctions, the new road represents a new approach to great-power competition by rapidly reshaping trade networks in a global economy that seems poised to split into rival blocs, at a time when Moscow and Tehran are moving eastward to integrate with the fast-growing giants of Asian countries.

 

Saving Distances

The emerging trade corridor between Russia and Iran will shorten thousands of kilometers from existing routes.

At its northern end is the Sea of Azov, which is located in arcs of the Crimea and the southeastern coast of Ukraine—including the Russian-occupied port of Mariupol—and the mouth of the Don River.

The journey via the new route takes 25 days instead of 40 days, as it avoids the longer route of the Suez Canal. Reducing shipping costs by 25% is important in light of high inflation figures.

Earlier this month, Russian President Vladimir Putin drew attention to the purpose of the corridor when listing his country’s gains from the war in Ukraine. He said the Sea of Azov had “become an inland sea” for Russia.

It is precisely from there that river and railway networks extend to Iran’s axes on the Caspian Sea and eventually the Indian Ocean.

During an economic forum last September, Putin stressed the need to develop ship, rail, and road infrastructure along the route that “will provide Russian companies with new opportunities to enter the markets of Iran, India, the Middle East, and Africa, and in return facilitate supplies from these countries.”

 

Circumventing Sanctions

Maria Shagina, an expert on Russian sanctions and foreign policy at the London-based International Institute for Strategic Studies, estimated that Russia and Iran are investing up to $25 billion in the domestic trade corridor, helping to facilitate the flow of goods that the West wants to stop.

“The two countries are playing a cat–and–mouse game,” she said, adding that they “will explore all loopholes to transport banned products and weapons.”

This in turn worries the United States and its allies as they seek to block the transfer of Iranian drones and other military supplies that they say are aiding the Kremlin’s war in Ukraine.

James O’Brien, the Biden administration’s top sanctions official, said after announcing new sanctions last week targeting executives at Russian Railways: “It is an area we’re watching carefully, both that route and more generally the Iranian–Russian connection. We are concerned with any effort to help Russia evade the sanctions.”

Robert Malley, the Biden administration’s Iran envoy, says any new trade corridor needs scrutiny as part of what’s become his top priority: stopping arms shipments between the countries.

“That’s an extraordinarily damaging, reckless decision they’ve made,” Malley says. “It’s important to put the spotlight on it, to try to show the world that they can’t hide.”

 

Search for Markets

In addition to overcoming sanctions and maintaining a regular flow of weapons between the two countries, there are compelling economic reasons for the new transit route.

Iran is the third largest importer of Russian grain, and Russia is currently looking for new markets in order to compensate for the sudden collapse of its trade relations with Europe, which before the war was its largest trading partner.

For Iran, the eastern axis has become more urgent amid stalled efforts to restore the nuclear deal, which lifted sanctions in exchange for curbs on the country’s nuclear program.

For both Russia and Iran, India is a crucial point of contact in the networks they are trying to build. The semi-official Mehr news agency reported last month that the first shipment of 12 million tons of Russian grain bound for India had already transited Iran.

Trade delegations between Iran and Russia are moving at an increasing pace, and trade is also on the rise. It officially rose by almost half in August, and the annual figure is likely to exceed $5 billion soon.

Sergei Katyrin, head of the Russian Chamber of Commerce and Industry, told a conference in Tehran last month that there was a “clear path” to reach $40 billion once the free trade agreement was struck.

The success or failure of the mega project is beyond the control of the two countries themselves.

It will depend on whether other countries, from India to the Middle East—which the United States and its allies have all urged to comply with sanctions—agree to do so or choose to defy pressure.

That illustrates what’s perhaps the biggest threat to the Russo–Iranian gambit to evade sanctions, according to Bharath Gopalswamy, executive director at District Consultancy LLC, a Washington–based trade adviser.

“For such an infrastructure to be built, used, and sustained, it would need not only the cooperation of both Russia and Iran but also all the other nations that are part of this corridor,” Gopalswamy says. “Any change in geopolitical circumstances, or relations between these countries, will affect the trading corridor’s outcome.”