Iran’s Relationships Beyond the Middle East

Iran is adhering to the JCPOA to obtain EU investment and technology, possibly from smaller European companies working through a Special Purpose Vehicle. The EU’s goal is to prevent an arms race in the Middle East. China, Russia and India need stability to protect regional infrastructure investments and secure their interests in oil, arms and nuclear power technology, but their relationship with Iran is transactional. For Iran, the EU is the top priority.

Since it was created, the Islamic Republic has faced several periods of sanctions and crises with major powers. It has struggled also to break out of its isolation and establish meaningful partnerships with actors beyond the Middle East.

Tehran is now entering yet another phase of political and economic turmoil as a result of Washington’s proclaimed policy of maximum pressure. Once again, it is trying to foster and possibly expand a number of recently established, extra-regional relationships, particularly in Europe and Asia. Iran will require support from those partners to withstand US sanctions, avoid isolation and boost its economy to meet the fundamental demands of a deeply dissatisfied population. Tehran might also have to consider entering into sustainable security arrangements with them if it wishes to withstand these rising pressures. Under these circumstances, the current US policy is likely to increase Russian and Chinese influence in Iran. If the nuclear deal falls apart completely, this will not only cement Moscow’s and Beijing’s status, but also negatively affect Iran’s relationship with Europe.

Looking at Europe

The 2015 nuclear agreement opened the way for Iran’s gradual engagement with the European Union and its member states, including regular, high-ranking talks and numerous official visits. On the economic front, the large majority of EU members have been able to boost their trade with Iran, with bilateral trade reaching more than €18.5 billion in value in the first eleven months of 2017. However, the re-instatement of US sanctions will seriously affect these economic ties. Major European companies such as the French oil company, Total, have already left the Iranian market.

Although Iran will not reap the economic benefits of the nuclear deal that were originally promised, it has not yet abandoned the agreement, lest it negatively impact its relations with Europe. Breaking the deal would result in the re-imposition of EU sanctions and open the door for a realignment of US and EU policies on Iran’s nuclear program, so abiding by it can benefit Tehran in a number of ways.

Iran is in dire need of direct foreign investment as well as transfer of technology and know-how. While major European companies will not be able to support the Iranian economy with sufficient investments, some European economists have suggested that small and medium-sized enterprises (SMEs) could provide important technological assistance to Iran’s highly inefficient energy sector. SMEs could use the Special Purpose Vehicle (SPV) that the EU launched as an alternative channel for financial transactions with Iran. If a large number of European SMEs engage in a variety of sectors, economic cooperation could continue in a meaningful way, thus keeping the door open for potential large-scale interaction in the future.

A relationship with the EU is important on two other levels. Solid EU-Iran relations decrease the leverage that Russia and China could exercise were Iran isolated. Given the strategic limitations dependency would impose on Iranian decision-makers and Iran’s deep distrust of Moscow, and to a lesser extent Beijing, such a scenario is not an attractive one to Tehran. Furthermore, Europe could function as an intermediary between Iran and the United States in the future by providing communication channels with Washington and influencing future exchanges.

With this in mind, Iran is interested in enhancing relations with Germany and Italy, in addition to the EU more generally. Italy has enjoyed sound relations with Iran historically and maintained active diplomatic channels even through periods of heightened tensions between Europe and the Islamic Republic. Rome faces fewer constraints than other European actors (such as France and the UK) that are required to balance their relations with Iran and their traditional allies in the Persian Gulf. As Iran’s number one trading partner in the EU, Italy has imported oil and gas condensates worth €3 billion from March 2017 to March 2018. However, in light of US secondary sanctions, no EU member state is likely to make substantial purchases of Iranian oil and gas in the near future. Italy also stands to lose considerable investments in Iran’s energy and railway sectors. Yet, it is determined to pursue trade relations wherever possible.

Germany is Iran’s other major European trading partner, with current German exports reaching close to €3 billion. The Iranian population and its decision-makers generally view Berlin favourably; interest for German products and technology remains high. While Berlin is also concerned about Iran’s ballistic missile program and Tehran’s regional engagement, it has been less outspoken in its criticism than other European capitals like Paris or London, whose relations with Iran remain tense. Tehran will continue to lean on Germany as a driving force within the European Union.

Despite varying assessments of other policy areas concerning Iran, the EU has stayed united with regard to the nuclear deal. EU members are concerned that a collapsing agreement would increase the odds of a regional nuclear arms race and a nuclear-armed Iran in the long run. The end of the deal might also lead to a military escalation that could destabilise the region, facilitate the spread of terrorism and possibly trigger another inflow of refugees. The EU therefore considers the nuclear agreement as critical to protecting its collective security. Instead of giving up on the deal, Europeans are trying to build on it. Italy and Germany, together with France and the UK, have entered into a dialogue with Iran on regional issues. So far, political consultations have been limited to Yemen but could be expanded in the future to include more sensitive security issues such as Iran’s ballistic missile program. If Europeans manage to set up functioning payment channels that allow for continued economic cooperation with Iran, there is a possibility of fostering Iran-EU relations as a whole. If, however, Europeans fail to salvage the nuclear deal, relations might rapidly deteriorate and the EU may lose significant leverage over Tehran.

Turning to Asia

Given that Iran’s economic relations with the EU will be severely constrained by US secondary sanctions and that prospects for security cooperation are limited, Tehran will have to turn towards states that have the capacity to meet the country’s immediate economic needs and better serve its security interests. To this end, Iran is seeking to foster relations with Russia, China and India, countries that view the Islamic Republic as a rising power in the region and a hub for large-scale connectivity projects, as well as a key to the stability of their own neighbourhoods and, in some cases, their energy security.

Oil exports make up over a third of the Iranian government’s general revenue. Tehran therefore needs to maintain significant oil exports to its main markets, most notably China and India, if it wants to withstand US sanctions. Both countries have received US exemptions that allow for significantly reduced imports for a period of 180 days. Given their large energy demands, China and India are unlikely to end their imports. However, in light of India’s close relationship with the United States, it will most likely wind down its economic cooperation with Iran over time.

Apart from exporting oil and petrochemicals, Iran will also have to attract substantial investments, particularly in its energy sector where needs are estimated to be as high as USD 200 billion. With European energy companies such as France’s Total or Germany’s Wintershall out of the picture, China will be in the best position to fill the investment vacuum. Beijing is already involved in small- and large-scale infrastructure projects in Iran, building dams, airports and highways. Two major Chinese energy companies, Sinopec and the China National Petroleum Corporation (CNPC), have invested several billion US dollars in Iranian oil fields in Yadavaran and North Azadegan, with CNPC holding a 30 per cent share in developing phase II of Iran’s South Pars natural gas field. State-owned CNPC could also take over Total’s 51 per cent share in the development of South Pars.

China’s Belt and Road Initiative drives Beijing’s economic engagement in Iran. As part of the China Central-West Asia Economic Corridor, Iran would serve as a land bridge to Europe. India, too, is pursuing its own regional infrastructure project through Iran with the port of Bandar Abbas part of the International North-South Transit Corridor (INSTC). The INSTC will provide India with vital access to Central Asian, Russian and European markets, an initiative also in line with Russian interests. Furthermore, India has invested in the development of Iran’s deep seaport of Chabahar, valued at USD 500 million. Chabahar would allow India access to Afghanistan and Central Asia without having to go through the territory of its rival, Pakistan.

Iran also leans on Russia and China to further develop its nuclear sector. Russia is currently involved in the construction of two new reactor units in Bushehr worth USD 11 billion and the conversion of the Fordow enrichment plant into a research facility. China is also poised to complete two nuclear reactors in Iran in the years to come. Moreover, Russia and China are among the few international sources of arms and military equipment. Moscow and Beijing have shown a willingness to provide Iran with military technology and are likely to become main competitors for Iranian arms deals once the United Nations Security Council weapons embargo that restricts the export of conventional weapons to Iran expires in 2020. They are also stepping up their security cooperation with Iran, including holding joint military drills and naval exercises in the Caspian Sea and the Persian Gulf.

Russia, China and India have an interest in a secure and stable Islamic Republic. A regime collapse or military conflict could have an impact on the entire region where China and India have considerable infrastructure investments. Furthermore, Beijing and New Delhi depend on a secure flow of oil from the Persian Gulf and would be heavily affected should oil prices skyrocket as the result of a military conflict. Russia’s concerns derive from the possible spill-over effects of a destabilised Middle East in the South Caucasus or Central Asia. Furthermore, as long as Russian involvement in Syria continues, Moscow will depend on its military alliance with Iran to preserve its interests on the ground. Lastly, any military escalation in the Middle East would place China and Russia in a difficult position; neither wants to have to take sides and put its relations with any major regional actor at risk.

Tehran, on the other hand, is continually seeking to broaden its options and compensate for its lack of formal security arrangements. This goal has gained urgency as the country faces not only US economic sanctions but also Washington’s efforts to create a Middle East Strategic Alliance (MESA) that would bring together members of the Gulf Cooperation Council together with Jordan and Egypt together against Iran. While serious obstacles exist to forming such an alliance, the creation of MESA and the possibility of greater security cooperation between Saudi Arabia and Israel, pose a serious concern that Tehran must address.

Building on its experience with the so-called Astana process that has allowed for an alliance between Iran, Russia and Turkey to influence the Syrian conflict, Tehran has initiated its own informal mechanism by bringing Russia, China, India and Afghanistan together to discuss the thorny conflict in Afghanistan. The first ‘Regional Security Dialogue’ was held in September 2018 in Tehran. Discussions were not limited to Afghanistan but included economic cooperation, joint efforts to prevent the spread of terrorism to Central Asia and even the Syrian conflict. The fact that all parties agreed to establish a secretariat and hold annual meetings represents a significant success for Iran in its efforts to create a more sustainable platform. Iran is likely to continue informal alliance-building measures while preserving support for regional integration through formal institutions such as the Shanghai Cooperation Organisation (in which Iran’s full membership request is still pending).

Iran is determined to foster its relationships in Asia and enhance its military and defence cooperation in the region. One should recall, however, that Iran’s relations with Russia, China and India are mainly transactional and do not signal the beginning of fully formed strategic partnerships. As major global players, Moscow and Beijing can turn their back on Tehran at any time. Relying heavily on Russia and China presents a risk for Tehran. Without other options, it will try to reduce the impact of this risk by leaning, for as long as possible, on Europe.

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