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Russia and Iran Edge Closer

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

Though it has received minimal world attention, there is now confirmation that Russia has granted Iran a $5 billion credit line.

This is a credit line rather than a loan (earlier media reports referred to it as a loan). 

That Russia was willing to lend $5 billion to Iran was confirmed during President Putin’s visit to Iran last November.  Completion of the loan was however then delayed due to unspecified legal reasons.  However in April it was confirmed that the legal problems – whatever they were – had been resolved and that Russia was pressing ahead with the loan.

The fact that the loan takes the form of a credit line rather than cash may be the clue to the delay. Though part of Iran’s nuclear deal was the lifting of sanctions on Iran, the US is dragging its heels in doing that so that the bulk of the estimated $30 billion of Iranian funds frozen in Iranian  accounts in Western banks have still not been released to Iran.

Possibly Russian banks involved in the loan were worried they might be targeted by the US with further sanctions if they became involved.  By substituting for the loan a credit line – presumably guaranteed by the Russian state – such concerns would have been allayed.

A credit line also tends to allow the borrower more flexibility in how the funds are used.  Iran might therefore have preferred a credit line to an outright loan, which would have come with more stringent conditions.

At least half the $5 billion will be used to upgrade Iran’s infrastructure, which has suffered badly from neglect because of the sanctions.  Modernising and electrifying the Iranian railway system will be the major priority.  Money will however be also used to upgrade Iran’s ports and oil industry.

By today’s standards the amount involved is relatively small.  However it should be seen as a first step in an evolving relationship. 

A common condition for such lending is that the borrower imports any necessary technology or equipment from the lender.  It is a virtual certainty that this is so in this case.  The credit line will therefore give Russia a stake in the Iranian railway and oil industries and in other parts of Iran’s infrastructure.

Historically Iran and Russia have not been close friends.  During the Cold War the Shah of Iran aligned Iran closely with the West.  Following the Shah’s overthrow Iran also kept a certain distance from Russia.  Russia – or more properly the USSR – for its part during the Iran Iraq war of the 1980s sought to maintain a certain balance between Iran and Iraq, increasing supplies of arms to whichever side appeared to be losing as it sought to force the two sides to compromise.

Going back before the Cold War, there is a long history of conflict between Iran and Russia, with the two countries often in conflict with each other in the eighteenth and nineteenth centuries and with the Russians seeking to establish zones of influence in northern Iran prior to the First World War and during and immediately after the Second World War.

Iran and the USSR even fought each other briefly in a short and bloody though now largely forgotten war in the summer of 1941.  This war, which was fought following the German attack on the USSR and which should be treated as a part of the Second World War, resulted in Iran’s decisive defeat by the USSR and the Soviet occupation of northern Iran.

Over the last decade Russia and Iran have however grown significantly closer, though not without serious setbacks along the way.  The Iranians were for example incensed by the Russian decision to cancel delivery of S300 surface to air missiles previously bought by Iran from Russia.  This happened following the imposition of UN sanctions on Iran for which Russia had actually voted.  What infuriated the Iranians especially is that these sanctions did not in fact prevent Russia from supplying the S300 missiles to Iran since they were not covered by the sanctions.  The Russians actually cancelled delivery of the S300 missiles following intense US and Israeli lobbying, using the sanctions as a cover.

Some Iranians are also known to feel that Russia unduly and deliberately protracted work in completing the nuclear reactor at Bushehr, though the sheer complexity of that project – which involved grafting Russian technology onto a reactor originally designed and partly built with German help during the rule of the Shah – actually makes that unlikely.

Russia and Iran have however more recently found themselves in close agreement on the Syrian conflict with both countries providing strong support to the embattled government of President Bashar Al-Assad.  Their two militaries have been cooperating closely with each other in Syria – with the Russians providing air cover and the Iranians ground troops – in a way that can only increase the level of contacts between them.

Russia also played a key role in brokering the nuclear deal, which led to at least some of the sanctions on Iran – and crucially those sanctions which limited development of the Iranian oil industry – being lifted. 

A key event in the lead up to the nuclear deal was a provisional “oil-for-goods” agreement between Russia and Iran – a barter deal whereby Russia agreed to supply goods to Iran in return for Iranian oil.  That agreement threatened the sanctions regime the UN had imposed on Iran to such a degree as to threaten to make it unviable, and was a major factor in forcing the US to agree to the nuclear deal.

Since the nuclear deal Russia has reversed its decision to cancel sale of the S300 missiles to Iran and it seems these missiles have now been delivered.  There is also talk of further arms sales by Russia to Iran, including of T90 tanks and of SU27 fighters, though such talk regularly elicits denials from both sides.  The sensitivity of further arms sales may however explain the denials, and they should not be taken as conclusive.

The latest credit line agreement now seals what is likely to be a burgeoning economic and trade relationship underpinning the still sometimes prickly but nonetheless growing political and military relationship that is evolving between the two countries.

For the future some Iranian and Russian officials – including especially former Iranian President Ahmadinejad – have spoken of forging even closer relations, with talk of Iran even joining such Russian-led institutions as the Eurasian Union and the CSTO. 

Whether relations ever develop to that point remains to be seen.  In the meantime Russia and Iran, whilst not exactly allies or even partners, are moving closer together.  Perhaps one day they may become partners or even allies.


The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

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