How Should We Equip the North-South Corridor?

_ Alexander Karavayev,  Researcher at the Institute of Economics, Russian Academy of Sciences. Moscow, 9 July 2019.

The Valdai Club’s Third Russia-Iran Dialogue discussed not only politics and the actual state of bilateral relations but also the specifics of trade and economic cooperation. Both countries have a stake in climbing to a qualitatively new level of relations that implies joint modernization. This event is a major expert forum discussing the agenda of the trilateral Russia-Iran-Azerbaijan summit scheduled for mid-August in Sochi.

The anti-Russian and anti-Iranian sanctions are the reason behind the two countries being entrenched on the same side of the “front.” The developments that have taken place over a period of the past 30 years show that they have been effectively sidelined and now have the status of semi-periphery with regard to the world’s biggest technological and investment donors. The job at hand is to understand what is needed to form a nucleus of our own and whether we can make a breakthrough jointly with our neighbors in the region. Another problem is how to use EU and PRC economic capacities without increasing dependence on the two. At the same time, we have a record of important achievements that can help us address common objectives.

These include Iran’s ability to develop economically for decades amid all sorts of restraints. Experts estimate the Iranian market capacity in general and the prospects for various industries from power production to transport as rather high. We can recall the brief period when sanctions were lifted in October 2015 only to be reintroduced in May 2018, when major international companies like Airbus, Total, Ferrovie dello Stato, Alstrom, and Russia’s TransMashHolding, to name just a few, both outlined their interest in Iran and managed to sign a number of lucrative contracts.

What attractions does Russia have for Iran? Despite intense rivalry, Russia continues to lead as both an energy supplier as well as a manufacturer of hi-tech arms, space technology, vehicles, plus communications equipment. Although Russia’s gravitational pull is significantly weaker than that of the USSR, it continues to be attractive for both neighbors and CIS partners. In its relations with Russia, Iran has an opportunity to interact with the entire EAEU-CIS space that is currently much more cohesive than just a sum of Tehran’s bilateral relations with post-Soviet states.

Thus, despite their semi-peripheral status and shortage of outside investments, Russia and Iran are still capable of forming firm trans-regional ties between themselves. Some cases in point are the gradual expansion of EAEU legal infrastructure (after Tehran ratified the provisional FTA agreement), emergence of several permanent interagency cooperation formats (Russian-Iranian Commission for Economic and Trade Cooperation made up of several ministerial working groups on transport, water resources, power, etc.), growing cooperation between the Russian regions and Iran (the leaders are Dagestan and the Astrakhan, Volgograd and Saratov regions), and trade cooperation by businesses and export centers (“Business Caspian” International Business Cooperation Council of the Chambers of Commerce and Industry of the Caspian region countries). We see that the network of organizations and venues supporting our relations is rather dense but it also needs to be improved. One of the priorities is developing the North-South trunk transit infrastructure TTI), which may form the pivot for other trans-regional projects. The thing is that the overwhelming share of Russia-Iran trade and economic cooperation would immediately focus on a “third party” from the Caspian region, which is an advantage in that it involves our most important partners and neighbors. TTI development implies several simultaneous steps to launch trans-regional transit of commodities and to create industrial clusters along the North-South corridor.

The first set of measures includes organizing a system of payments and customs Green Corridors. One crucial thing to expediently carry out right now is to launch interbank payments, since the INSTEX mechanism, the January 2019 initiative by Berlin, London and Paris for dealing with the eventuality of Iran being suspended from the SWIFT system, is still inoperative. The fate of an alternative set of measures is also unclear. Iran has signed bilateral currency agreements with Turkey, Russia, China, India and Azerbaijan, but dependence on the dollar is a major domestic problem in these countries themselves, for even in Russia a lot of deals are still calculated in dollars. Transiting to national interbank payments systems will incentivize NS TTI participants to move towards a FTA. A step in this direction is the introduction of a trade and economic preferences regime and a customs Green Corridor for joint production and export within the TTI. It will obviously be reinforced by a network of FTA agreements between the participants in the corridor and the EAEU. The provisional (three-year) agreement between the EAEU and Iran came into force after it was ratified on June 10, 2019, by the Iranian parliament. The next job is to draft a similar agreement with India.

The second set of measures includes plans to establish a pool of investors to modernize the entire trunk infrastructure (possibly in the form of an international foundation to develop the NS TTI). There is a clear chance that the foundation will coordinate its activities with the SCO Development Fund. The fruitful cooperation between Iranian Railways (RAI) and Russian Railways, as well as Indian and Chinese projects in Iran seem to suggest that modernization can be a self-reliant project. Specifically, the electrification of the tricky Garmsar-Inche Burun railway line is planned for the fall; it will require more advanced equipment that Russian suppliers have started to manufacture. But these efforts may prove insufficient. Iran is planning to expand its railway network in a comprehensive manner (from 15,000 to 25,000 kilometers), which will require nearly $50 billion in investments over a decade.

A broad pool of investors is required to make centralized investments in the construction of additional railway lines in the countries participating in the corridor project, dealing with congestion, create an infrastructure for multi-modal transportation of goods, purchase ferries, and introduce advanced logistics technologies.

But quick returns on investments can hardly be expected. The most lucrative segment, road-tank oil trade, does occupy its niche, but it is yet to become a driving force behind TTI development. Specifically, Russia’s “oil-for-goods” program is marking time, with zero supplies under this scheme recorded in 2019.

Sociocultural tasks 

People, for whom these communications are being developed, are more important than transport and logistics. We need to organize an environment that would generate a demand for the creation of an entire spectrum of communications and ties between the public in NS TTI countries.

What is required for us is to face each other and not only as part of media fact-finding trips (that are really important) or support for tourism (subsidies to carriers and tour operators). It is necessary to increase the number of educational programs aimed at studying our countries. As part of the “pivot to Asia,” Russian universities need to train more experts savvy in Iran’s economy and law as well as the Farsi language. More grants for Iranian students are a must too. We should hold modern culture and movie industry festivals. In general, this is a well-known set of events, which make it possible for us to get to know each other better. It is not so much a matter of trust as that of resolve to take the first step.

Source: http://valdaiclub.com/

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