In spite of repeated memoranda signed between Iran and Russia in recent years, trade dramatically declined by the end of 2023, according to new data released by the Russian Federation.

After two years of effort, the basic problems of Russian exports remain unsolved. The structure of exports has not changed, and volumes remain unstable. Meanwhile, Iran continues to snap at the heels of its competition in the market, with Iranian goods expanding their presence in the Russian market.

Following Russia’s invasion of Ukraine and against the backdrop of mounting Western sanctions pressure, Iran appeared in Russian news as a new alternative market for Russian business. Iranian business tours flooded Moscow, hoping to bag a contract as its economy also suffers under the second strongest sanctions regime in history, now only superseded by that on Russia.

Russia concluded several high-profile agreements with Tehran, including a memorandum on Gazprom investing up to $40bn in Iran's oil and gas sector. The results of 2022 showed an increasing trend: Russian-Iranian trade turnover grew by 20% to $4.9bn.

It would seem that 2023 should have consolidated this trend. In March of last year, it was reported that the two countries' banking payment systems had been connected and by September Sberbank had begun direct transfers, Russia had become Iran's largest foreign investor for the second year in a row, and test cargo had been run to Saudi Arabia via the North-South transport corridor. However, the result was the opposite: trade between the two countries declined by 17% to $4bn by the end of 2023.

However, it should be noted that this statistic does not include military-technical cooperation, as this will not be logged in any official trade statistics due to the sensitivity for both countries amid the ongoing war in Ukraine. Iran has repeatedly denied it has been sending Russia weapons, despite Kyiv showcasing several “Made in Iran” drones and rockets, Nikita Smagin, an expert of the Russian Union on International Affairs, wrote in Forbes.

At the same time, it is clear from the first glance at the results of 2023 that the situation with the decline is not so unambiguous. Imports from Iran to Russia grew by 15.8% to $1.29bn, according to Russian data. That is, Iranian goods continue to strengthen their positions in the Russian market. These include FMCG, auto parts, and many other industries, to name a few.  

The problem lies in Russian exports to the Islamic Republic, which fell by 27.1% to $2.7bn, which caused the overall decline in trade. But why is that?

Rains in Iran

Data shows that in 2023, food products and agricultural raw materials accounted for 81.1% of Russia's total exports to the Islamic Republic. But this has been the case for several years. What makes this last year any different? Weather, it seems, or rains, to be more specific, which are becoming more erratic each year in the wider South and Central Asian region due to climate change.

"The basis of Russia's exports is corn, sunflower oil and barley. From time to time, wheat breaks through, usually when there is a crop failure in Iran," said Dmitry Rylko, CEO of Russia’s Institute for Agricultural Market Studies, alluding to the changing weather dynamics of the region.

According to him, in the 2023-2024 agricultural season, Russia did not supply wheat to the Iranian market: "When Iran has a more or less normal harvest, Iranians are not interested in our wheat."

According to statements made by Tehran representatives, it has been confirmed that they are reducing their wheat imports due to a successful harvest. In September 2023, Hossein Yazdjerd, president of the Iranian Association of Flour Millers, stated, "However, we will purchase corn, barley, vegetable oil, meal, and sunflower seeds."

Alexander Sharov, the CEO of RusIranExpo group of companies, stated that the reasons for the decline in wheat imports to Iran may be more complicated than previously thought. He explained that the harvest in Iran varies between 12-14mn tonnes each year, and the country needs to import an additional 5-7mn tonnes per year (tpy) of wheat. However, Sharov believes that the grain imports to Iran happen through unclear schemes, and wheat from Russia likely entered Iran through such schemes, but it was not reported.

"For example, the goods are loaded in Novorossiysk, purchased by some unnamed trader, and goes, say, to the Iranian port of Bandar Abbas," he explains. In this case, Russia's customs statistics would not reflect the sale of products to Iran.

One of the key reasons for refusing open purchases of Russian wheat may be the new policy of the US company Cargill, one of the world's largest suppliers of agricultural products, which has stopped exporting grain from Russia since 2023. "The Iranians involve Cargill in their import schemes, and this company has stopped operating in Russia," Sharov added.

At the same time, Rylko is sceptical about this version.

"If Cargill had anything to do with it, then Russia would have also encountered problems exporting corn to the Islamic Republic. But Iran has become the largest importer of Russian corn this year," he points out.

At the same time, experts agree that wheat caused the decline in Russian exports to the Middle Eastern country. "Iran used to buy 3-4mn tonnes of wheat from Russia, on average paying $200-250 per tonne, so that's about $1bn that exports have fallen," Sharov added.

Banking problems

In reality, the problems in mutual trade are much broader than just difficulties with wheat supplies. Russia's exports to the Islamic Republic in 2023 turned out to be lower than not only last year, but also the year before that, when this figure reached $3.08bn.

Following the Ukraine war commencing in 2022, with its many visits to Tehran and loud statements about developing cooperation, did not lead to the emergence of new categories of Russian goods in the Iranian market and did not change the structure of exports from Russia – still the same 80% of grain with unstable wheat.

According to Rylko, the critical problem for Russian exporters remains the lack of an effective system for settlements of trade transactions.

"I know Russian businesses that want to export corn to Iran, but this year they decided not to work with the Iranians because they cannot offer anything other than 'suitcase schemes' for settlements," the expert said.

Russian banks have been transferring funds to Iran for a long time through the Mir Business Bank, which is a branch of Bank Melli. VTB and Sberbank have also started cooperating but have been hesitant to confirm reports about their new offices in Tehran. However, it all comes down to the fact that Iran has two exchange rates: the state rate and the market rate. And Mir Business Bank is oriented towards the state rate.

As a result, with each transfer the Russian businessman loses 20-25%. All current settlement services go through Mir Business Bank – there is no other way yet. It is clear that at such rates, carrying cash is more profitable than transfers, which Iran tries to avoid as it worsens its rial crisis.

Sharov says work is being done to solve the situation, but it's mostly for show. Representatives from Russia and Iran sign new agreements, but nothing really changes. Sharov suggests recalculation at the gold equivalent or creating a Russian bank in Iran that offers competitive transfer rates.

Logistics is a challenge when transporting goods to Iran. Shipping via the Black Sea increases freight rates by up to 20% due to fleet restrictions. The Caspian Sea has fewer ships and seasonal fluctuations that complicate shipping. These challenges need to be addressed in logistics for Iran. Also, land transport is suffering due to the lack of direct rail communication and high Kazakh transit rates, reducing the profitability of supplies.

Green shoots

Despite the challenges faced by Russian exporters in trade with Iran, there is still hope for a brighter future. Logistics companies have complained about the high cost of transit due to inspections and checks, leading to increased bribes and fines for road transport. However, there have been positive shifts in the trade relationship between the two countries, with imports from Iran expanding for the second year in a row.

These shifts are qualitative and significant, with the flow of other goods like chemicals, industrial materials, spare parts, and construction materials increasing. Large Russian holdings have even started purchasing ceramic granite, catalysts, and spare parts for turbines, and Russian airlines are now repairing their planes in Iran. Meanwhile, Iranian companies are moving into locations like Astrakhan and bringing with them modern technologies and know-how that Russians need to keep ticking over.

Trade turnover is gradually becoming more balanced, and the free trade agreement between Iran and the Eurasian Economic Union (EEU), signed last year, is expected to boost this growth further when ratified by Russia.

But despite all the pomp and ceremony attributed to the new “Axis of the Sanctioned”, trade hurdles continue to play havoc on the growth and the lack of a cohesive trade controls including bribery and poor phytosanitary conditions, at least in the case of Iran, have made the issue particularly difficult to break the market.