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Suddenly, in 2022, Russia became the center of attention for its recent interest in Iran. Media, universities and private companies were all eager to hear about it. The reason was that the war had brought Tehran and Moscow closer together. You’ve probably heard about the Shahed-136 drones that Russia has purchased from Iran and deployed on the borders of Ukraine. But this isn’t just about arms sales. In recent years, Iran has become a crucial political and economic partner for the Kremlin.
The conflict in Ukraine has led to a remarkable similarity between these two countries. Journalists are engaged in calculating who is subjected to more sanctions (spoiler warning: Russia), measuring the gap between the two nations’ isolation, and scrutinizing the complexities of their political systems. Iran and Russia have essentially found each other.
My post will explore how ordinary Iranians responded to the events of 24 February 2022, why Iran has been able to thrive in the full-blown war with Ukraine and who benefits more from the growing closeness between them: Tehran or Moscow?
There are 24,000 characters in this letter, and it will take you about 16 minutes to read it.
It is divided into four chapters. The first chapter explains why Iran decided to support Russia and what happened in the country in February 2022. The second chapter is about how Iran is helping Russia in its war efforts. The third chapter focuses on the Russian-Iranian partnership over the past year and a half. You will learn why Putin visited the country and why doing business in Iran remains a challenge. The final, fourth chapter looks at why the Iranian economy is in crisis and how it has become dependent on Russian loans that may not have to be repaid.
Chapter 1: Why Iran Supported Russia
When the full-scale war broke out in Ukraine, I was working as a correspondent in Tehran. I have noticed that Iranians are always curious about foreigners passing by, leading me to answer questions like “Where do you come from?” multiple times in a day. Previously, when I spoke of “Russia,” it would get lots of nice comments. However, things became different from February 24, 2022. It was then that people started asking questions like: ‘Why did you start the war?'” “Why don’t you like Ukrainians?” and “What has Ukraine done to you?”
Iran’s online community shared a common perspective on the full-scale war. Popular Telegram channels, Instagram influencers, and even Iranian media shared photos of Soviet tanks rolling through Iranian Azerbaijan streets during the years of Soviet time. Russia is commonly perceived as an aggressive imperial power in Iran. The Danish Democracy Support Fund’s 2022 survey found that Iranians had a negative opinion of Russia, with only 15% holding a positive view.
The history of Russia-Iran relations over the last 200 years is riddled with dark chapters. Events like the Treaty of Turkmenchay following the unsuccessful Russo-Persian War in the early 19th century, the shooting of Cossacks from cannons during Iran’s first parliament in 1908, and the occupation of Iran by Soviet and British forces in 1941 are symbols of national humiliation for Iranians.
In late February 2022, even small protests occurred in Tehran. Unknown individuals left anti-Russian slogans on the walls of the Russian Embassy during those days. Someone even jumped on the car of the Russian trade representative and shouted, “Death to Russia!”
However, by the summer of that year, the war in Ukraine had faded from the list of hot topics in Iran. Massive protests erupted in the country in the fall due to the police killing of a young woman who was not wearing a headscarf. This shifted the focus away from Ukraine for Iranians. Even today, some local media outlets support Russia in the war, while others support Ukraine.
For the Iranian authorities, the onset of the full-scale war was unexpected, and they were unsure how to react. On one hand, Iran’s elite shared ordinary Iranians’ views of Russia as an imperialistic power. On the other hand, isolated Russia was actively seeking trade partners anywhere, and cooperation with Iran promised significant benefits. Therefore, the authorities aimed to avoid stirring too much internal dissent while keeping the door open for dialogue with Russia.
They came up with a clever narrative: “We are against the war, but it’s NATO’s fault.” Later, Iran’s Supreme Leader, Ayatollah Ali Khamenei, added, “Ukraine has become a victim of the crisis created by the United States.” This allowed the authorities to play into Iranian anti-American sentiment and align with the majority of the world, calling for an immediate ceasefire.
While Tehran and Moscow had aligned in the conflict in Syria (as covered in Kit’s letter about that war), Iran had not been an enemy of Ukraine. Relations between Iran and Kyiv remained functional in the spring of 2022. As early as mid-April, the Ukrainian ambassador persistently offered Iran grain in exchange for oil, which Kyiv urgently needed at the time.
By the summer of 2022, as it became evident that the war would drag on, Western media reported Russia’s interest in buying Iranian drones. In July, when Vladimir Putin visited Iran, it seems that this matter was resolved. In a conversation with Putin, Khamenei reportedly said, “If Russia had not stopped NATO in Ukraine, the alliance would have soon started a war over Crimea.”
In summary, Iran’s neutral stance shifted to a pro-Russian one, and by August, it was clear that Iran was supplying drones to Russia. By the end of the summer, Sky News presented its version of the deal: Moscow had provided Tehran with “samples of Western weapons” captured in Ukraine in exchange for 160 drones, including around a hundred Shahed-136 kamikaze drones.
Iran and Russia vehemently denied such an agreement, but it no longer mattered. In September 2022, the Russian army launched its first attacks on Ukraine using Iranian kamikaze drones. Over time, such attacks became regular. Russia, to cover for Iran and its official position of non-interference in the conflict, labeled Shahed-136 as domestic developments called “Geran-1” and “Geran-2,” even applying corresponding markings. However, not many believed this rebranding.
Thus, Iran became directly involved in the conflict, and in response, Ukraine gradually severed ties. After the first arrivals of Shahed-136, the Ukrainian Ministry of Foreign Affairs revoked accreditation for the Iranian ambassador and significantly reduced the number of diplomats from Iran. In October, the Ukrainian Ministry of Foreign Affairs announced a complete diplomatic rupture. Although this did not materialize, the head of the agency, Dmitry Kuleba, stated in 2023 that the “decision could be made at any time.”
Chapter 2: How Iranian Drones Gave Russia an Advantage in the War
Iran has provided Russia with a powerful tool in the form of drones, both kamikaze-style and reconnaissance-strike types. These Iranian drones have proven to be a cost-effective solution for Russia, particularly in situations where precision strikes are essential, and resources are limited.
To put it in perspective, one Iranian kamikaze drone costs roughly $20,000, while a relatively less expensive Russian cruise missile like the “Kalibr” can set you back around $300,000 to $350,000. What’s more, the missiles used to intercept these drones are twice as expensive as the drones themselves.
These Iranian drones have transformed the game by allowing Russia to advance swiftly in the winter of 2022-2023 at minimal costs, according to military analyst Sine Ozkarashahin from the Turkish Center for Economic and Foreign Policy Studies. A Russian military analyst, who wishes to remain anonymous, supports this view, emphasizing that Iran’s assistance has significantly broadened and diversified Russia’s striking capabilities.
These drones are versatile, capable of replacing guided missiles, and are commonly used to target thermal power plants, ammunition depots, and other key objectives. They also play a vital role in targeting moving Ukrainian artillery units and serve as a distraction by creating a “decoy cloud” to divert Ukrainian air defenses away from the main attack.
Unlike large and conspicuous missiles, Iranian drones are easily transportable and deployable on the battlefield, often eluding detection by air defense systems. The advantages they offer in terms of cost-effectiveness and adaptability have been instrumental in Russia’s military strategy.
However, Iran’s contribution to Russia’s war effort extends beyond drones. In early 2023, Iran supplied Russia with hundreds of thousands of artillery shells and millions of rounds of ammunition. Russian military personnel have even adopted Iranian body armor and anti-tank guided missiles. Nevertheless, these deliveries, according to military experts, have not significantly altered the overall dynamics of the conflict. The scale of ammunition consumption in the Ukrainian theaters of war remains high, with the supplied materials providing a mere contingency buffer.
Looking ahead, military analyst Sine Ozkarashahin suggests that the collaboration between Iran and Russia may deepen further. For example, a joint Russian-Iranian drone manufacturing facility is currently under construction in Tatarstan. This facility could potentially produce missiles, significantly enhancing Russia’s offensive capabilities. Furthermore, Iran may begin selling long-range ballistic missiles to Russia once the UN resolution limiting the export of such missiles expires in October 2023.
Some experts argue that, over time, Russia’s role as the dominant partner in its military partnership with Iran has diminished. The conflict in Ukraine exposed vulnerabilities within the Russian military, which had previously relied on its experiences in “parade” campaigns like Syria. Additionally, Russian generals who once acted as instructors for Iranians have seemingly transitioned into the role of interns. Western media have reported Iranian specialists being present in Ukraine to train Russian military personnel, and several Iranians have tragically lost their lives due to Ukrainian strikes in Crimea.
Chapter 3: Why Russian Officials Are Increasing Their Presence in Iran
Prior to the full-scale conflict in Ukraine, Russia considered Iran as one among its many international partners. Discussions between Iranian ministers and representatives from Russian oil and gas companies about potential joint projects for oil and infrastructure development were common. However, due to sanctions imposed on Iran, these discussions seldom materialized into concrete actions. For instance, “Gazprom” expressed interest in projects in Iran, but during the 2010s, the Russian Ministry of Foreign Affairs explicitly advised Russian companies not to engage in activities in the country to avoid hindering cooperation with European firms, as shared by sources in the oil and gas industry.
Nonetheless, in the spring of 2022, it became evident that Iran was becoming increasingly important for Russia to conduct trade, especially given its growing isolation. In May, Russian Deputy Prime Minister Alexander Novak arrived in Tehran with a substantial delegation of Russian officials and business figures. He engaged in discussions with local ministers and business representatives about joint trade and construction projects and eventually signed a cooperation agreement between Iranian and Russian petrochemical companies. Subsequently, Russian officials and members of the State Duma began making regular visits to Iran.
Two months later, Vladimir Putin himself paid a visit to Tehran. Iranians were particularly impressed by the sight of Putin’s convoy, which consisted of over forty vehicles. This visit delivered a clear message: Russia was taking its relationship with Iran very seriously.
Iran’s National Oil Company and “Gazprom” reached agreements on investments worth $40 billion in the Iranian oil and gas sector. In November 2022, Iran’s Deputy Foreign Minister Mehdi Safari confirmed that contracts worth $6.5 billion of this amount had already been finalized.
The new approach isn’t solely driven by Russia’s reduced fear of sanctions. From the Kremlin’s perspective, Iran serves as a gateway to global markets, thanks to a scheme where Iran resells Russian gas to Turkey, Iraq, and Afghanistan.
Furthermore, Iran has the capacity to facilitate transit not only for gas but also for oil. Iran boasts a large fleet of tankers capable of transporting hydrocarbons worldwide. Additionally, Iran faces a shortage of gasoline, making Russian petroleum products essential for domestic consumption.
Since the beginning of the full-scale war, Russia’s primary trading partners have shifted to Turkey and China, with trade volumes increasing by $35 billion and $50 billion, respectively. However, these partnerships come with certain risks. Turkey is a NATO member and values its relations with Washington, while China continues to prioritize the United States as its primary trading partner. In theory, significant pressure from Washington could disrupt Moscow’s trade with both Ankara and Beijing.
Therefore, Russian authorities have begun considering the possibility of using Iran as a transit route for not just oil and gas but other commodities as well. Sanctions against Iran ensure that the country is less concerned about Western opinions. Russia and Iran jointly developed a transportation corridor, the “North-South” project, as far back as 1999. Now, construction on this corridor has resumed. Goods will be transported by rail from Russia through Azerbaijan or Kazakhstan, along with Turkmenistan, and by sea through the Caspian Sea. Subsequently, these goods will reach the Persian and Oman Gulfs before ultimately accessing Asian markets.
Over the past year and a half, Moscow has devoted significant effort to this project, expanding Caspian ports, securing transit agreements with Baku and Central Asian nations, and even volunteering to construct the Rasht-Astara railway in Iran. However, the success of this corridor heavily relies on the state of Iran’s infrastructure and its internal stability. Russia effectively needs to bear the financial burden of constructing warehouses and upgrading Iranian railways and ports.
Russia’s choice is driven by necessity rather than Iran’s indispensability. For instance, Russian businesses have not thrived in Iran. Many entrepreneurs traveled to Iran in parallel with officials and politicians in the spring of 2022, attempting to swiftly establish trade links by purchasing tickets to Tehran and figuring things out on the ground. However, most of these enthusiastic individuals quickly grew disillusioned. They encountered Iran’s unique business culture, numerous internal constraints (to be discussed below), and an unstable economic and political situation. Doing business in a country marked by hyperinflation and extensive, prolonged protests has proven to be far from straightforward.
Trading with Iran poses several challenges for various reasons.
→ Challenges with Money Transfer and Inflation
By the year 2022, Iran had been completely isolated from the global banking system for a decade. After Russian banks were cut off from SWIFT, Moscow and Tehran began working on improving interbank relations. In January 2023, the Central Bank of Russia’s Financial Messaging System joined forces with Iran’s similar system, SEPAM. This means that the Islamic Republic is now connected to the system used by Russian banks, as well as 106 other banks from countries like Armenia, Belarus, Kazakhstan, and Kyrgyzstan.
In theory, it’s possible to send money to Iran. However, in practice, individuals face a significant gap between the official exchange rate and the market rate, with the latter being approximately 30% higher. To put it simply, if you send a thousand rubles, the recipient in Iran will get an amount equivalent to roughly seven hundred.
Investing in Iran also comes with its own set of challenges, notably inflation. Over the past four years, official inflation rates have consistently hovered between 40% and 50%. Since 2018, the Iranian rial has lost about thirteen times its value against the US dollar.
→ Logistics Challenges
Regular ferry services between the two countries across the Caspian Sea haven’t been established yet. The railway connecting Russia and Iran through Azerbaijan remains incomplete, and the existing route through Kazakhstan and Turkmenistan is lengthy and complex. As for road transport, trucks often experience lengthy delays at the Azerbaijani border due to insufficient infrastructure. While it’s possible to ship cargo from Iran to Russia, it’s a task that requires considerable effort.
→ Legal Complexities
Iranian business practices often involve short-term deals, mainly because multi-year foreign contracts can be abruptly terminated when new sanctions are imposed. Russian entrepreneurs and diplomats have shared stories of Iranian businessmen frequently engaging in what they refer to as “trickery.” In such cases, the only recourse available is through local courts, as Iranian authorities do not honor rulings made by the London International Arbitration Court.
Regarding economic matters (as opposed to political ones), Iranian courts tend to operate relatively fairly. However, filing claims necessitates having a legal entity established in Iran. This, in turn, requires navigating through Iran’s notoriously corrupt bureaucracy, hiring local staff, and preferably having proficiency in Persian. In essence, swiftly setting up and streamlining business operations in Iran is no straightforward task.
→ Limited Complementary Markets
Both Russia and Iran primarily rely on the export of oil and gas, and both have substantial demand for high-tech products like computer chips and computers, which they produce in limited quantities. Consequently, their ability to offer mutual benefits is restricted to specific areas. For instance, a significant portion of Iran’s land is unsuitable for growing grains due to its scorching climate, which makes Russian wheat highly sought after.
Conversely, Iran can supply Russia with a limited number of cars, affordable pharmaceuticals, and construction materials. However, these quantities are relatively modest. In early 2023, there were discussions about potential exports of up to 20,000 Iranian cars, while China consistently sells hundreds of thousands of vehicles to Russia each year.
In conclusion, the Islamic Republic is unlikely to become a major trade partner for Russia. Nonetheless, it may become reliant on Russian loans.
Chapter 4: How Iran Became Dependent on Russian Loans
Even before the full-scale conflict in Ukraine erupted, there were concerns raised by Middle East expert James Dorsey that, in the event of a Russian invasion, Iran could emerge as an unexpected economic beneficiary. His prediction appears to be coming true.
On May 17, 2023, Russia’s Deputy Prime Minister, Novak, announced that Russia would extend a 1.3 billion euro loan to Iran for the construction of the Rasht-Astara railway, part of the “North-South” corridor project. This isn’t the first time Iran has turned to Russia for financial assistance.
As far back as 2021, Russia provided Iran with a 5 billion euro loan for various projects, including the construction of the Sirik thermal power plant, the electrification of the Garmsar-Inche Burun railway, and the development of the Bushehr Nuclear Power Plant. The repayment of these loans remains uncertain.
Iran, grappling with currency shortages and political instability, faces challenges in meeting its financial obligations. The construction of the Bushehr Nuclear Power Plant has faced delays due to Iran’s inability to pay for services provided by “Rosatom,” the Russian state nuclear energy corporation. In 2021, it was revealed that Iran owed 500 million euros for this project. During Novak’s recent visit to Iran, he mentioned that “debt-related issues have been resolved,” but the specifics of this resolution and whether Russia has received the funds remain unclear.
Russia has been cautious in maintaining its amicable relations with Iran and has refrained from pressing Iran on its debts. However, public information suggests that Iran’s debts to Russia are substantial. In January 2023, Leonid Slutsky, the head of the State Duma’s International Affairs Committee, acknowledged the presence of “significant debts related to Russian agricultural products, which have been increasing each month.” Subsequently, Anatoly Aksakov, the head of the State Duma’s Financial Market Committee, proposed that Iran use a cryptocurrency tied to the value of gold bars to settle its “considerable debt for Russian imports.”
As long as the conflict in Ukraine continues and Iran remains Russia’s primary military partner, it is unlikely that Russia will be able to demand repayment of these debts. Moscow views these external debts as long-term assets, both politically and economically. This approach is evident in Russia’s dealings with neighboring Iraq, where Russia forgave approximately $12 billion in debt in 2008 in exchange for creating a favorable environment for Russian companies. Following this, Russian oil companies secured numerous contracts for oil field development in Iraq.
Russia’s leadership consistently opts for managing what could be considered “problematic debts” in hopes of securing at least some political influence and a stake in the future, even if the repayment process faces challenges. After all, Iran possesses substantial untapped oil and gas resources.
This form of cooperation also benefits the Islamic Republic. Over the past three years, Iran’s economy has shown modest growth (ranging from 2% to 5% in recent years), but it is primarily a recovery from the economic decline brought about by international sanctions. In 2021, Iran’s per capita GDP only reached the level it was at in 2005. In essence, the country’s current level of economic development is roughly where it stood 15 years ago.
Iran’s Economy, a country with the world’s third-largest oil reserves, has been isolated by international sanctions for over 40 years. The United States accused the Islamic Republic of sponsoring terrorism and imposed a ban on importing any Iranian goods in 1987, and in 2011, extended it to exports, essentially signaling that no one in the world should buy Iranian oil for fear of secondary sanctions. The United Nations and EU imposed their own sanctions in the 2000s, suspecting Iran of pursuing nuclear weapons. In 2012, the EU joined the oil embargo. Three years later, Iran struck a “nuclear deal” with Western countries, guaranteeing that it would not pursue nuclear weapons in exchange for the lifting of major sanctions. However, in 2018, President Donald Trump, who pursued a strongly anti-Iranian stance, withdrew from the agreement.
Iran finds itself in a deep economic crisis with no clear way out. Therefore, Western sanctions against Moscow are one of the few positive developments for Tehran. It means that Russian funds no longer have access to Europe and will turn towards the East. In 2022, Russia became Iran’s largest investor by a significant margin, accounting for $2.76 billion out of the total $4.18 billion invested in the country by foreigners.
Moscow has the capability to assist Iranian authorities in withstanding sanctions, significantly bolstering their budget and reviving specific sectors of the economy. There are four potential directions:
- Reform Gas Production: Iran holds the world’s second-largest natural gas reserves, yet its production is so inefficient that during peak seasons, Iran cannot meet its own gas demand. This is due to a lack of necessary technologies, a shortage of skilled personnel, and a subsidy system where gas is sold to the population at reduced prices, often resulting in insufficient revenue to cover gas network maintenance costs.
- Aid with Fuel: Iran artificially keeps gasoline prices low at pumps to contain rising public dissatisfaction with the regime. The price of one liter in the country is approximately $0.05 today. Such a social policy leaves the budget short of substantial sums and leads to frequent gasoline shortages. Authorities are hesitant to remove subsidies, as any attempt to do so triggers mass protests. In February 2023, Reuters reported that Russia had sold Iran thirty thousand tons of gasoline and diesel. This could help Iran address a sudden fuel shortage.
- Use Iran as a Transit Hub: The Islamic Republic heavily relies on earning revenue through the transit of Russian goods via the “North-South” corridor. An economic commentator for the Iranian newspaper “Khorasan,” Mehdi Hasanadzeh, even said, “Transit is our new oil.”
- Stimulate the Defense Sector: The full-scale war in Ukraine has spurred the development of Iran’s defense industry. Within Iran, production of military goods increased by 81% over the past year, primarily due to a threefold increase in exports to Russia. Additionally, Iranian drones’ successes on Ukrainian fronts have made them popular globally, with Iran expecting to sell them worldwide. Iranian military officials claim that 22 countries are already in line to purchase these drones, including European nations.
Overall, despite some local successes, the Iranian economy is at an impasse with no clear prospects. GDP growth in the coming years is projected to hover around 2%, which, given Iran’s circumstances, is akin to stagnation. Sanctions, lack of investment, budget deficits due to extravagant social policies—all these challenges cannot be resolved with a mere wave of a magic wand by Russia. Therefore, the Iranian system needs structural reforms to survive. However, these are unlikely to occur without sanctions being lifted or significantly eased. Closer ties with Russia further complicate the situation. Western countries had plenty of reasons for restrictions, including Iran’s nuclear program, sponsorship of terrorism, and human rights violations. Now, Iran’s involvement alongside Moscow in the Ukraine conflict adds yet another significant reason for Western sanctions.
Even if the Iranian economy manages to endure, the country could be consumed by political turmoil. September 16th will mark the anniversary of the murder of Mahsa Amini, an event that triggered massive protests in 2022. Initially, the authorities made some concessions, loosening control over the wearing of hijabs and considering the abolition of the morality police. However, there has been no genuine thaw; women who refuse to wear hijabs still face the confiscation of their cars, and some individuals have faced charges for violating “moral norms.” While last year’s protest wave has subsided, it doesn’t mean that a new one won’t ignite.