In June 2017, I was invited to Moscow by the Institute for Emerging Market Studies at Skolkovo School of Management to conduct a half-day seminar. The objective was to explain the Iranian economy to an audience of Russian executives from public and private companies. At the time, Trump was still certifying Iran’s compliance with the nuclear deal. Russia joined the JCPOA and wanted to carve out a place for itself as international, mainly European, investors struck new deals in the Iranian market. Russian state-owned companies like Lukoil, Zarubezhneft and Rosatom were considering new projects in Iran’s state-dominated energy sector. But the discussions in Skolkovo focused mainly on the private sector.
I remember two things about that morning in Moscow. First, Russian companies had few ideas on the Iranian market. Unlike European companies that had decades of experience in Iran, Russian companies had no track record. The questions posed by the audience were basic, even naive. Second, the concerns expressed by the participating leaders were precisely those of European companies exploring the Iranian market for the first time. The public was curious to know how European companies managed to do business in Iran without the support of their banks. Russian leaders who had begun to look seriously at Iran had already been warned by their bankers.
Once the session was over, a gentleman came to introduce himself. He was responsible for Iran at Sberbank, one of the most important and forward-thinking Russian banks. He told me that its top leadership had made it clear that despite the lifting of JCPOA-related sanctions, Iran must remain off limits. Sberbank was unwilling to invite further scrutiny from the US Treasury Department, especially since Iran had yet to implement its FATF action plan, a set of key anti-money laundering reforms. of money and the financing of terrorism. Iran was too toxic even for Russian banks. Today I looked at the executive of Sberbank. It looks like he now lives in Arizona.
Five years later, as Putin prepares to travel to Iran for his second state visit since the start of the war in Ukraine, US officials are raising the specter of a Russian-Iranian partnership. Biden’s national security adviser, Jake Sullivan, alleged that Iran was about to sell “several hundred” drones to Russia for use in Ukraine. The United States also claimed that Russian officials traveled to Iran to inspect the drones. Sullivan said “Russia deepening an alliance with Iran to kill Ukrainians is something the whole world should consider and see as a deep threat.”
Given the brutality of the Russian invasion of Ukraine, any Iranian arms sale to Russia would be a dramatic and unconscionable move. Iran denied the US claims, and Iranian Foreign Minister Amir Abdollahian called his Ukrainian counterpart, Dmytro Kuleba, to reassure him.
As Abdolrasool Divsallar argued in a recent Twitter feed, there is probably a constituency in Iran that would like to export drones to Russia and US claims should be taken seriously. But there are big questions about whether Iran could achieve this even if the intention was there. Iran has invested heavily in developing its drone capabilities as part of its asymmetric approach to defence, but there is little evidence that it has the capability to produce ‘hundreds’ of drones in a short time. , at least not drones of great technical sophistication or operational value. Iranian drones are not like the Turkish Bayraktar drones currently used by Ukraine.
The US government’s own 2019 assessment of Iran’s military might, produced by the Defense Intelligence Agency, notes that “despite advances in its drone manufacturing capabilities, Iran remains dependent on engines and components manufactured in West to support its drone production. Iran is developing a domestic drone engine but is struggling with quality issues. Unless there has been an unheralded breakthrough in Iran’s indigenization of a key element, there is some inflation of the threat inherent in US warnings of an imminent Iranian arms sale to Russia. .
Now suppose that Iran both intended and the means to produce and export drones to Russia. Even then, there’s plenty to think the deal will go south. The record of arms sales and state contracts between Iran and Russia is dismal. In 2007, Iran signed an $800 million contract with Russia to purchase an S-300 air defense system. Russia suspended the deal in 2010 under UN sanctions and Iran tried to sue Russia for $4 billion in response. The units were finally delivered in 2016, but the S-300 saga confirmed to many Iranian decision-makers that the Russians were untrustworthy – a reputation that dates back to the days of the Persian conflict with the Russian Empire. That reputation has not been tarnished by reports that Russia is essentially allowing Israel to strike Iranian targets in Syria as Russian forces scale back operations.
Of course, lack of trust also works the other way. Russia is the prime contractor for Iran’s only nuclear power plant, located in Bushehr. This is perhaps the star example of ongoing Russian-Iranian technical cooperation, especially given the importance Russia places on the construction and operation of nuclear power plants around the world. But cooperation on this prestigious project was difficult. On Sunday, Chargh, a reformist Iranian newspaper, published a front-page interview with Levan Dzhagaryan, the Russian ambassador to Tehran. In the interview, Dzhagaryan was asked about the recurring shutdowns in Bushehr which hampered power generation. The ambassador bristled and complained that the real problem is that Iran owes Russia “hundreds of millions of euros”. Dzhagaryan has a lot of experience – he was exceptionally assigned to Tehran for more than a decade. His inability to end a simple interview without throwing down a smear makes it clear how little relations exist between Russia and Iran.
The absence of any kind of real partnership between Russia and Iran is also evident when looking at the economic relations between the two countries. In recent months, Russian leaders have visited Iran to explore opportunities and learn lessons from Iran’s economic resilience under sanctions. Officials have recently pointed to the growth of Russian-Iranian trade, citing the opportunities created by the withdrawal of Western companies from the two markets. These officials pointed to an increase in bilateral trade, which rose to $4 billion in 2021. Last year, Russia became one of the top five exporters to Iran.
But this recent growth is misleading and does not represent a real deepening of the economic partnership, at least not yet. First, $4 billion is a miserable level of trade for two economies of such size. For comparison, Iran’s trade with Iraq is about three times greater than its trade with Russia. Russia’s trade with Turkey, an economy similar in size to Iran, totaled $33 billion last year. Second, Russian-Iranian trade is primarily food trade – essentially all Russian export growth in 2021 is driven by a surge in grain exports. On the other hand, the steady increase in Iranian exports to Russia is explained by the growth in sales of fruits and nuts. The food trade is important but does not reflect the kind of economic cooperation that will allow Russia and Iran to resist sanctions. In fact, the food trade is growing precisely because it is the sanctions exemptThis is one of the few areas where Russian banks are willing to handle Iran-related transactions.