During a trip to Africa last summer, Iranian President Ebrahim Raisi also made a stop in Zimbabwe – his highest-ranking visit in a long time to the country, which is also under US and European sanctions. As a thank you, the now re-elected host, President Emmerson Mnangagwa, launched a call for solidarity: all states boycotted by the West should stick together.
The Islamic Republic of Iran has long since taken this to heart. Above all, Tehran has recently moved much closer to Moscow, where Vladimir Putin is looking for allies in the war against Ukraine in order to circumvent sanctions. Tehran’s regime, which seeks regional dominance in the Persian Gulf and the Middle East, is paying a high price for the development of its threatening nuclear program. More than a thousand individual sanctions from the USA as well as punitive measures from the UN and Europe have caused lasting damage to the national economy.
Iran’s axis with Russia and Syria, which is complemented by China in the oil business, serves the Islamic Republic as a welcome counterweight to its increasing isolation in the neighborhood, where Arab states have recently sought more diplomatic accommodation with Iran’s hated arch-enemy Israel. A week after the bloody terrorist attack on Israel by the radical Islamic Hamas from the Gaza Strip, President Raisi spoke to Putin about the situation in the Middle East. Iran’s leaders have praised the attack but denied direct involvement.
When Chancellor Olaf Scholz declares that without support from Tehran, Hamas’s attacks on military and civilian targets in Israel would not have been possible, he is pointing to the connection with a number of violent militias: they are provided with training, weapons, technology, money and knowledge supports. Tehran is waging so-called “proxy wars” from Yemen, Iraq, the Gaza Strip and Lebanon that are destabilizing the region. A multi-front war against Israel depends on Iran’s influence.
Hezbollah, which threatens and fires at Israel from the north, is considered the most powerful organization militarily. She is also supported financially by Qatar. The currently frequently asked question of whether there is a risk of conflagration in the Middle East could be decided on Israel’s “northern front” – but also on the question of whether the mullahs’ regime in Tehran wants to risk an expansion of the conflict between Israel and Hamas. And whether this could also be done economically.
If you take the oil business, which according to the US government contributes “significantly” to government revenue, Iran is exporting maximum quantities again. Tehran’s foreign office confidently declares that Iran is working resolutely to neutralize Western sanctions, adding that Iran has “maintained its position as an oil exporter despite isolation.” Countless governments wanted to expand cooperation, it was said, and the entire energy sector, which was increasingly oriented towards Asia, with its refineries, petrochemical and plastics industries, was flourishing.
Judging by independent analysis by energy consultancy SVB International, which tracks tanker routes, oil production actually appears to be on track to catch up to pre-embargo output. Accordingly, oil production reached 3.15 million barrels (159 liters) per day in late summer, and exports just under two million barrels per day. The average 1.14 million barrels per day reported for December 2022 was already considered a preliminary export high. If, according to the US agency International Energy Administration, Iran’s oil companies earned around $40 billion net in 2021 (after $15 billion in 2020), then far more impressive sums have probably been poured into the Iranian state coffers since then.
The leading buyer is – hardly surprisingly – China, with large quantities apparently being re-declared and reshipped in Malaysia. Russia’s oil industry also circumvents Western sanctions in a similar way to Iran by shipping cargoes via “shadow fleets” of older and smaller tankers. Russian emissaries are said to have consulted in Tehran after the Kremlin saw its trade restricted. What’s more, the two embargoed economies have become so close that Russia has now become the leading foreign investor in Iran, as Finance Minister Ehsan Khandouzi revealed to the Financial Times in March. At $2.76 billion in sectors such as industry, mining and transportation in the past fiscal year, about double all foreign direct investment (FDI) in Iran in the previous year.
According to Western findings, the Islamic Republic is also supporting Moscow in its war of aggression against Ukraine with so-called kamikaze drones. Tehran denies this. But economically, Russia now ranks on the same level as China as a “strategic” partner. Since Iran and Russia are cut off from the international payment system, the two central banks have created channels for mutual currency and trade transactions. Russian Prime Minister Mikhail Mishustin expects the creation of a free trade zone between the Russian-dominated Eurasian Economic Union and Iran by the end of the year. Trade had already grown to a record value of over 350 billion rubles (around 3.5 billion euros) in 2022.
But the axis should not be overrated, observers warn. Both economies have a similar profile in world trade as oil and gas producing countries and could easily come into conflict with each other – see oil exports to China. They are also more likely to be competitors when it comes to their investment needs for modern technologies in the energy sector. But Iran is gratefully seizing the opportunity to diversify, especially since the hardliner Raisi has seen the priority since 2021 in deeper relations in the region and with Asia. Tehran hopes to make a name for itself with another major project that also serves Russia’s commercial interests.
It is about the completion of the “International North-South Transport Corridor” (INSTC), which is being negotiated. The expansion of the transport route is intended to give Russia access to the Indian Ocean via Iran. Iran expert Alex Vatanka from the Middle East Institute in Washington quotes representatives of the Iranian economic elite in the magazine “Foreign Policy” who rave about a “change in the geometry of goods transit in the region”: Thanks to INSTC, Iran could become Russia’s transshipment point for agricultural export goods which are intended for different markets in the Middle East.
Russia reaches its most important grain customers – Egypt, Algeria, Iran, Israel, Libya, Pakistan, Saudi Arabia, Sudan and Turkey – only through the Turkish-controlled Bosphorus Strait. Since it is on NATO territory, Moscow fears that the alliance could at some point deny passage, just as Ankara does not allow Russian warships from the Black Sea into the Aegean. “If using the Bosphorus becomes too risky, Iran could make many of these markets much more accessible to Russia via rail connections,” said Vatanka. “Iran wants to export agricultural goods through the INSTC and thus compete with Turkey on the Russian market.”
The corridor thus presents itself as a win-win solution that is beneficial for everyone involved. At the same time, expert Vatanka warns: A new “strategic cooperation agreement” has probably just been concluded between the partners. But past agreements have not really boosted the trade volume, which has hovered around $1.5 billion for years. Iran’s first trading partners remained China, India, Iraq, Turkey and UAE.
At the same time, Tehran’s expectations for more intensive economic relations with China have not been fulfilled. Since President Donald Trump’s withdrawal from the nuclear deal and the revival of the embargo in 2018, this trade has become more important for Iran. But China sees its partner primarily as an oil supplier. Its oil purchases have provided Iran with “enough revenue to stay afloat,” Vatanka said in the “Iran Primer,” a platform of the United States Institute of Peace. According to tanker trackers, China took in up to 1.7 million barrels a month in 2023. But beyond that, the expansion of trade remains disappointing. In 2022, Iran exported $6 billion and imported $9 billion, according to IRNA news agency and Chinese customs data.
There was no lack of strategic declarations of intent here either – most recently for trade, transport, technology, tourism, agriculture and crisis response – but China’s companies are clearly wary of the risk of being placed on the blacklist of extraterritorial sanctions by Washington due to violations. They are too entangled in the world market and, above all, with their leading trading partner, the USA. Even China’s initiative of the new Silk Road, contrary to Iran’s hopes, largely bypassed the country. China is investing more in other oil-producing countries such as Saudi Arabia, the UAE and Iraq. It covers more than half of the region’s oil needs.
The Islamic regime likes to boast about strategic partnerships, but these do not really lead Iran out of isolation. Citing exports of $53 billion (excluding oil) and imports of $60 billion, Finance Minister Khandouzi asked: Is this what an isolated economy looks like? But he cannot sugarcoat the investment backlog and poor macroeconomic values that are weakening the country. A million jobs were lost in the Corona crisis, and due to a lack of FDI, hardly any new ones are being created. Inflation of almost 40 percent is eating up wages and savings for the fourth year in a row. Under President Raisi, the national currency lost 60 percent of its value. Domestic economists accuse the government of doing nothing about it, but of just printing more money, which further drives devaluation.
Promises to bring them under control came to nothing. It is estimated that a third of the population lives in absolute poverty. Resentment against the regime’s mismanagement and its inability to meet at least basic needs is growing. In addition to countless human rights violations, this paves the way for protests. After a recession in 2019, GDP returned to growth rates of around three percent. The International Monetary Fund and World Bank only expect an increase of around two percent by 2025.
In any case, the 85 million population only generates a GDP the size of Denmark. Various academic papers on the effect of sanctions, especially in the last decade, agree that economic growth was slowed by around one or two percentage points. One study concluded that the sanctions caused an aggregate loss of wealth of 15 percent, with rural households hit twice as hard as urban households. Finally, the state treasury lost 40 to 50 percent of its income. Higher and diversified exports outside the oil sector, as well as the rise of a fast-growing high-tech sector, are cited as positive factors. But the military industrial complex also experienced an upswing.
Current developments show that Western sanctions have definitely failed to achieve the goal of correcting political course among Iran’s elites. Iran upgraded its weapons technology with the production of missiles and drones for surveillance, reconnaissance and combat missions, especially under President Hassan Rouhani (2013-21) – according to a defense minister, by a factor of a hundred, analyzes “Iran Primer”. Tehran also seeks and finds solidarity with Russia politically and militarily.
The White House is eyeing a “full-fledged defense partnership” that is as damaging to Ukraine as it is to Iran’s neighbors and the international community. By 2023, more than a thousand Iranian drones are said to have been delivered to Russia, as well as artillery and tank ammunition for the war in Ukraine. There is now talk of a drone factory that will be built near Moscow by 2024 using Iranian know-how. In return, Tehran is said to be seeking Russian air defense, fighter jets and helicopters and radar equipment worth billions of dollars. Iranian pilots to train in Sukhoi Su-35 jets in Russia.
The Swedish SIPRI Institute, which measures defense budgets worldwide, has revised its figures for Iran downwards due to incorrect calculations of dollar values. Accordingly, military spending in Tehran fell from 11 to 3 billion dollars from 2018 to 2020 and rose again to almost 7 billion dollars by 2022 – which amounts to 2.3 percent of GDP, according to the SIPRI figures from spring 2023. Also the observation platform United However, Against a Nuclear Iran estimates that the hardliners in Tehran have invested $15 billion in the past two years, thanks in large part to bubbling oil revenues, into their own military capabilities – and into the militias that serve in its proxy wars.
In the end, observers say, Iran’s behavior in the current confrontation with Israel is likely to be decided by tactical motives. But in an economically battered country, the willingness of the population to go to war for the Palestinians, Hamas in Gaza, or Hezbollah in Lebanon is extremely low. And a much-feared closure of the Strait of Hormuz to Gulf oil tankers would also block Iran’s own largest oil loading terminal.
