The Backbone of Russia: Russian Railways Turns to Iran

11 Aug 2022 01:37 PM

As its trade with the West is impacted by international sanctions, Russia is looking to reinvigorate efforts to improve rail links with its southern neighbourhood.

Russian President Vladimir Putin’s visit to Tehran alongside his Turkish counterpart Recep Tayyip Erdogan in July was touted as an opportunity for the three countries to demonstrate their relationship as pitted against the West and for Russia to show that it is not diplomatically isolated, as well as a sign that there are still countries who are willing to accept Russia’s worldviews. But one of the least discussed yet possibly most significant angles of the summit was Putin’s announcement that Russia will construct a section of the Rasht-Astara railway in Iran, with the aim of linking up the network between Iran, Azerbaijan, India and Russia. International sanctions mean Russia is no longer able to guarantee that the Western rail network will freely transport its goods, and an over-reliance on China for rail trade creates a power imbalance – so identifying new partners in the south will be key for its economic development.

Longstanding Plans

This planned railway route has been under discussion since at least 2000, when it was first mentioned during the second International Eurasian Conference on Transport in St Petersburg. The International North-South Transport Corridor (INSTC) is a route around 7,200 km long, designed to connect India and the Persian Gulf to the Caspian Sea and Russia via Iran by rail, road and ship. The INSTC is intended to provide a cheaper transport route, running from St Peterburg to the port of Mumbai in India and offering an alternative to the sea route around Europe through the Suez Canal.

There are clear geopolitical reasons for Russia to have resurrected this plan now, both symbolic and practical. Completion of the track would physically link up a transport corridor between Russia, Azerbaijan, Iran and India, highlighting the fact that even as the Ukraine war continues, Russia is still able to call upon other political allies that are prepared to engage with it. Iran already has a preferential trade agreement with the Russia-dominated Eurasian Economic Union – an alliance of mostly former Soviet states that envisages a free trade zone and lower tariffs – which is in effect for three years and is due to expire in October. There are ongoing negotiations to upgrade this to a free trade agreement before the current agreement expires, which has likely spurred the project back into action.

For Russia, the railways are a vital civilian and military means of transport, particularly for the extractive industries upon which the Russian economy depends

In practical terms, the corridor seems likely to boost trade between Russia and potential economic allies, at a time when the Russian economy is under restrictive international sanctions. For example, in 2015, around 7.3 million tonnes of traffic flowed through the North-South line, and it is thought this could increase to 10 million once the final track is laid. Putin also recently discussed the route with Azerbaijan’s President Ilham Aliyev on the side-lines of the Caspian Sea Summit in June, noting that most of the track has already been laid, with just 146 km remaining. But Russia has its own motives for the deal.

The Backbone of Russia

For Russia, the railways are a vital civilian and military means of transport, particularly for the extractive industries upon which the Russian economy depends. The Kremlin views the powerful Russian Railways conglomerate, controlled by Oleg Belozerov, as one of the backbones of the country, responsible for driving forward a key aspect of Russia’s political economy, and therefore of its national security. Its military is also reliant on railways to move troops and hardware, and much of Russia’s trade with China depends on the use of the Trans-Siberian and Baikal Amur Mainline. But these routes are already overloaded, and while a new tunnel was constructed last year and parts of the line upgraded, an over-reliance on China for rail trade puts Russia on the back foot in the partnership, beholden to act as a supplier to its client.

Western sanctions have also complicated the picture for Russia. In July 2022, Lithuania banned the transit of sanctioned goods including steel and other ferrous metals from Russia across its territory to the exclave of Kaliningrad. Although Lithuania subsequently lifted the ban, it highlighted to Russia the potential vulnerabilities of relying on the West’s rail network. Reinvigorating discussions on rail trade with partners such as Iran is likely part of this picture.

Sanctions and Strategies

But there are several practical and political issues that will impact on Russia’s plans to use Iran as a transit country.

The first is that Iran and Russia are both under international sanctions. This makes financial transfers between their two banking systems challenging, constraining private investors, and so most infrastructure projects must be state-supported. Russian Railways has been working with Iranian Railways for years: Belozerov has often touted the importance of developing cargo flows through Russia’s southern Astrakhan region (a major transport hub) into Iran, and in 2018 announced a project to electrify Iran’s Garmsar-Inche Borun route to double its speed, in the hope of quadrupling transport cargo. But in 2020 Russian Railways withdrew from that project after the US introduced sectoral sanctions on Iran, nervous of falling under sanctions itself. But since the Ukraine war began in February, Russian Railways has in fact been sanctioned by the EU and US, which is likely to remove that particular constraint.

If transport is the backbone of the Russian political economy, Iran could be the supportive brace that Russia requires

Although none of the other countries party to the INSTC are likely to be concerned about falling foul of international sanctions, these latest measures have hit Russian rail exports particularly hard and will impact on the entire supply chain. While Russian Railways does not publish its cargo projections, Belozerov has admitted a likely conservative decline in cargo traffic of around 5% this year. The subsequent exodus of Western players from the rail market – such as Germany’s Siemens, which services and maintains Russia’s high-speed railways – was another blow, and Russian Railways will be forced to manufacture the components that Siemens supplied elsewhere, all of which could stymie the INSTC.

The Kremlin’s development strategy for its Caspian Sea ports up to 2030, which was signed in June 2019, specifically refers to integration with Iran and India and linking up this strategy with the INSTC. Although Russia’s three Caspian Sea ports only account for around 0.5% of total throughput at Russian ports, the strategy envisages boosting this through new port construction. It appears that Russia’s southern Makhachkala port has been developing good links with its Iranian counterparts: a delegation from Iran travelled to Makhachkala in April 2022 to discuss the role the port could play in improving Russia–Iran bilateral relations, and Iranian companies have controlling stakes in both the Makhachkala and Astrakhan ports on the Caspian Sea.

Makhachkala offers a strategic advantage as the only deep water ice-free port on the Caspian Sea, but allegations of corruption at the port, including a tussle for control over terminals among powerful local businesspeople, create an additional obstruction to trade there. It is also not clear that Iranian ports have the capacity to accept a significant increase in cargo, should the INSTC come to fruition. Many of Iran’s port operators have been specifically designated under international sanctions, which would make it a challenge to attract private investment to upgrade and expand the port system.

Notwithstanding these practical and political shortcomings, it is clear that Russia is factoring Iran into its official strategy to diversify away from a reliance on the West’s transport network. If transport is the backbone of the Russian political economy, Iran could be the supportive brace that Russia requires.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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