Russia and Iran Team Up Against The West

and from the West is dried up. Of course, that's the whole point to exert pressure on Iran to abandon its nuclear program, among other things, and on Russia to stop its war against Ukraine. But the sanctions also led to something else. Russia and Iran have now united to create a new eighteen hundred mile long trade route that lets them defy some of the sanctions by moving products over land and water that's beyond the reach of Western law enforcement. Since they're shunned by the West, the two

countries are now looking to the East. They're spending billions of dollars to ease the delivery of cargo to quickly growing economies in Asia. My Bloomberg colleagues, Golnar Matavali in London and Jonathan Tyrone in Vienna have written a deeply reported story for Business Week about this new alliance of convenience between Russia in Iran, and they're here to help us understand what to make of it. Goldner and Jonathan, thanks for being here. Thank you, thanks for having me.

You have written this fascinating story about how Iran and Russia have created this complicated new trade route to get around sanctions by the US in the EU. You, Jonathan, maybe I'll start with you. Can you describe this trade route and what it's trying to circumvent. We began noticing arise in trade between Iran and Russia to the most heaviest sanctioned countries on Earth, and started looking at how

that trade is being conducted. And obviously there's a lot of moving boundaries right now because of Russia's invasion of Ukraine, including taking what's called the Sea of as of which is extension of the Black Sea located in between the Peninsul of Crimea, which Russia took over in the city of Maripol, which Russia took over in April May, and that creates new inland transport corridors for Russia to send

goods to Iran and vice versa. Russia can ship goods down the Vulgar River, up the Don River, two rivers and southern Russia that lead into the Caspian Sea, which is shared with Iran. And so it's not just the traditional Russian deliveries of grain and energy flowing down this

southern corridor. Suddenly now it's also Iranian products that are flowing north because Iran also wants to escape sanctions, and so we're they're signing deals to ship turbines and plastics, and of most concerned for Western policymakers, drones and other weapons that can go over the Caspian c into Russia directly without the possibility being interdicted on international waters. Golnar. It used to be that a lot of these goods could just travel on open waters and goods were delivered

in this way. Of course, they are that way all around the world, but the sanctions cut them off, and so instead Iran and Russia have created a whole new overland trade route which is not subject to inspection or enforcement by U S sanctions. Can you describe that route? They've had this idea for a long time Russia and Iran.

It's something that Iran has been really pushing for. It's always looking to circumvent sanctions and bypass sanctions and specifically US and EU penalties by using different pathways and roots and various different types of disguises to try and foil its trade with countries, particularly countries like China and other

countries around the world. And so what they've wanted to do for a long time in Tehran is to link their ports in the Caspian Sea, which historically have always been very accessible to Russian markets, obviously to the Persian Gulf, because the Persian Golf, as we know, is kind of like it's the choke point for global energy supplies. It's a hugely significant for oil trade, and it's a massive,

huge importance for Iran's economy. Making sure that the Persian Golf and the Strait of Horribles specifically is open and that Iran has ready access to that and that it can kind of bypass any perceived threats from the US, for instance, because of the U s military obviously has quite a strong presence also in the area, and Iran has difficult and tense relationships with its neighbors. And has had for the past ten years. Now the Russian leader wants to bypass the blockade with the help of new

partner countries. Russia's answer is the new north south route from St. Petersburg, Moscow, Azerbaijan, Iran and to Mumbai. Russia hopes this new route could replace some of its last

trade with the West. The idea is that using a land corridor, so going from the northern coast of Iran on the Caspian Sea, cutting through the country, using railway lines to link effectively these ports to the southern Persian Gulf coast where they have these major trade terminals like Bandar a Boss, which they're using now at the moment, and they've used Bandara Boss to pilot this corridor so far and send some goods to Russia, and more recently what they want to try and do is also used

the port of Chabahar. Chabahar is much closer to Iran's border with Pakistan, and so the importance and significance of that is that it comes east of the Strait of Hormones. So if goods come from Bandarabos, they have to pass through the Strait of Hormones using a port like Chabahar as an alternative to Bandar a boss again bypasses that political risk as well, and it can get goods straight into the Indian Ocean and through to markets into Asia

like India, for instance China. What's very unique by Chabahar is it's exempt for U S sanctions. It's speculated that it was originally granted a because the US wants to keep India on sides and be Chabahar was seen as a potentially strategic link to supply US troops in Afghanistan back when they were still there. And whether the sanctions exemption remains or not is one of those open questions. And this is also quite an expensive venture. What has

it cost to expand this trade route so far? The headline numbers about twenty five billion dollars more or less evenly split them either side. The Russians are spending billions, have committed billions to dredge and expands river ways and lynn river ways so bigger and bigger ships are able to pass some of these narrow waterways exactly. The capacity

constraint is the weather. Parts of it frees up right now, Parts of it are too shallow, so there needs to be significant investment to increase the capacity, to make it internationally competitive with longer routes. The bigger ships comply carrying

bigger loads. Do the US and the EU have any way of limiting or enforcing sanctions in this route with the rail line, with the railroad, No, I don't see how they could possibly do that the Persian Golf, or we've seen how quickly crises can erupt in that waterway. We had it under Trump, we had effectively a second

tank a war. If they choose to then swoop into the Persian Golf like a US vessel and wants to circumvent a ship which it suspects, for instance, of carrying maybe some some kind of goods from Russia that it's destined to go to China or India that's come bya Iran that is sanctioned, then that potentially can happen if they do it in international waters inside the Persian Gulf. But doing that obviously really elevates the kind of risk

scenario in the Persian Golf. I'll continue my conversation with Goner and Jonathan in just to bit but to understand why Iran and Russia are going to such great lengths to avoid these Western sanctions is we're taking a moment to talk about the sanctions themselves and what it is that they do, or at least are supposed to do. So let's bring in someone who knows this subject. Cold.

Dr Maria Shagana joins me now from Berlin. She's a senior fellow who studies economic sanctions at the International Institute for Strategic Studies, a British think tank. Maria, thanks for being here. Thank you for inviting me. Maria. The U S and the European Union have imposed a lot of sanctions on many individuals and companies and other entities. Exactly what did these sanctions cover? Indeed, there has been a

truly a barrage of sanctions. We heard on a number of times that we see no unprecedented sanctions, not just in terms of their scope, but also in terms of how quick they have been imposed. And the main blocks of the sanctions boils down to the expert sanctions that nothing from the u US comes into Russia from strategic sectors. Then we have deal used technology such as semiconductors are no longer allowed to be exported to Russia. The recent

development is the the oil embargo the price cap. On top of this, we have also unintended consequences which came was a positive impact is volunteerily that companies withdrew from Russia and that has amplified the impact of sanctions on the run. We have sanctions from two thousand and twelve early all as well, so it has been quite comprehensive as well. We have energy sector again do used technologies,

also strategic sectors, aviation technology. So the two can trees, as they said, are naturally pivoting to each other because they are both isolating countries. More with Maria Shagina when we come back, Maria, you've spelled out what the Western sanctions and Russia in Iran are supposed to do it. They're supposed to isolate them and pressure them. How effective

our sanctions are doing that. The g c po A deal, which is nuclear deal, which is linked to to the Iranian sanctions regime, is usually cited as this positive example where sanctions pressure was positive during the Obama administration. The Iranian elites were interested in signing that agreement and then lifting sanctions. Now we have to say there are not

many positive examples like that. That agreement unfortunately has failed with the Trump administration withdrawing from unilaterally, and with Russia, we have sanctions from two thousand fourteen and we haven't had really a behavioral change. Now with the recent sanctions from twenty twenty two, the objective is rather moderates, not a behavioral change, but actually to curs Russia, to compel it to withdraw from Ukraine as much as possible to your road its ability to fund the work. So you

can judge that effectiveness as you want. If you have the maximalist objective, the Russia has to withdraw from Ukraine, that is not happening at the moment. But if the objective is to road in the long term and to signal the norms to constrain Russia's ability, that part is unfolding. I suppose one measure of the success of sanctions is that it's squeezing around in Russia enough that they do wanting to embark on this very expensive arrangement to create

an entirely new trade route to circumvent the sanctions. Indeed, so one side to look at the effectiveness of sanctions is to make it much more cumversome, much more expensive for these countries to circumvent them, and that's what's happened in both in Iran and in Russia. And we see that Iran and Russia are exchanging and goods that both can trade because they have achieved that some certain degree

of self sufficiency due to sanctions circumvention. And here the story on chips, I think, is this exemplary that Russia is using Iranian drones. Russia attached the Ukrainian capital of Key with thirteen in Iranian made drones. Ukraine has it managed to shoot them down? Those several buildings were damaged. Uranian drones eight to five dependent on Western semiconductors. So we have that exchange of convenience, that partnership of convenience,

but it has its limits. In order for this new trading route to work, it depends on the cooperation of a lot of other countries, including India, including other countries in Asia and in the Middle East, which puts them in an uncomfortable position. Do you anticipate that these countries, some of them, will be willing to fly out the United States and all of Europe in order to accommodate

Russia and Iran. So when it comes to sanctions their convention, we have to distinguish between these heavily sanctioned countries like Iran, North Korea, Venezuela, and also the Black Nights. This is the academic term that is used to describe thoad countries like China, India or Haven't the lined with sanctions. They don't want to violate sanctions outright, but they are willing

to capitalize to exploit the loopholes. So the access to this Black Nights, to China, to Turkey, to India is key for they have a lest sanctions countries because as I said, by default, they're very much limited and what they can exchange, how they can conduct their financial transactions. So they're very much dependent on access and willingness of the third countries, these Black Knights to engage with them.

China is surprisingly not very much eager to violate the Western sanctions outright again, but we see that Turkey is more willing to maybe step in in some areas and to help Russia to re explore deal used technology that is no longer accessible when it comes to India, also similar to China, that they're again using that cheap Russian commodities and particularly in the oil sector. So each country in this Black night category has its own motivation to

engage with those countries. The US and the EU are much more able to police shipping lanes when it goes into the traditional trade routes. Russian around have created these alternative trade routes that are in sort of friendlier waters but also rely on over land routes. What ability does the West have to control or limit the transport of goods over these new routes. I think it depends on

the commodity. So when we talk about oil, the sanctions the oil embargo only concerned seaboard and oil shipments, so they don't talk about anything that goes through landline routes. So here, by default it's not part of that design. When it comes to seaboard shipments. Here the asymmetrical dependence of Russia on Western insurance comes in because about of insurance on for big oil tankers come from places like London. So it's relatively easy to implement because you have these

nodes of dependence that you can exercise. You can leverage against Russia and you can police it in coordination with those insurance companies who have been heavily engaged in the design of that oil embargo and the price gap. Overall, we have to say that there are clear limitations when it comes to enforcement. The US is obviously a big elephant here. It has much more capacity, expertise and experience with that. Us IS is tracing that that development. It

has backed up its capacity information sharing. They have also now created sanctions Envoy who would police all of the sanctions or convention. So a lot has changed in the EU when it comes to sanctions enforcement, because that's really the do main, big game now for Brussels to enforce. But ultimately we have to keep our expectations throughout the modest because it's impossible to track all sanctions or convention.

We're already seeing a big increase in the number of ships and number of training shipments going along these new routes. Is there a danger that the sanctions could work a little too well, that Russia and run other countries create an entirely new trading arrangement that cuts out the West and therefore they no longer fear being cut out by the West. So these countries again they are dependent on stood countries. So a large majority of these stood countries

has now been excluded with sanctions. So what they can do together is rather limited. They can't substitute that loss, that trade that has been lost with being decoupling from the West. So we're talking about some smaller percentage of what can be substitute, what can be alleviated, but they will never be hundred two. Is there a game of survival. It's not a game of thriving, right, They're not going to thrive on that. There won't be much economic growth

and that, but they will survive. Their economy will be smaller, the economic pie will be much narrower, and that will be maybe fine. There will be aligned with the overall decoupling, with overall isolation of their economies, but that's not the striving economies we're talking about. Dr Maria Shagina, thanks so much for taking the time to talk to me. Thank you very much. We'll be right back after the break. I'm back now with my colleagues Goldar Mota Ali and

Jonathan Tyrone. Gonner and Jonathan. We spoke earlier about some of the goods that are moving along this trade route, things like microchips on one hand, and drones and the other obviously two very different kinds of products, but products that couldn't move if this new trade route weren't in place. What are some of the other goods that are now being redirected along this new trade route. There's been a radget deal signed in the last you know, six months.

There's been a medical products, pharmaceuticals, turbines, industrial products. Another big one is food and agricultural products wheat, barley, other grains, cooking, oils. These all commodities have obviously been heavily affected by Russia's invasion of Ukraine, and Iranian ships are some of the most kind of prolific taking up Russian wheat and grains in the Black Sea, and some of that is finding

its way already over that trade route. So part of this is run getting goods into Russian, Russia getting into around. But the larger desire is also to move goods from both of these countries and sell to other nations. What are the country's buying because they need buyers for this in each of the buyers for these goods risk incurring the wrath of the EU and the US on their own.

So how is that working well? India designed a deal to transport twelve million tons of green over this route, and obviously India has a strategic interest in Chabahar because they were one of the principal financiers on India and Chabahar. I think, you know, it's worth also pointing out that that investment plan has lagged behind quite a lot. It's been delayed by a good few years, and that's partly

because of again sanctions. And even though Jonathan mentioned this very important point that Chabahar Port is exempt from U S sanctions, India has still been very reluctant to kind of roll up its sleeves and really get started on that investment. And one of the reasons is because there are other sanctions that it can't violate. So there are financial sanctions that affect Iran's financial and banking sector, which

means that it's very difficult for countries to try for money. So, for instance, if India wants to make this investment and it needs to kind of like needs to move money from India to Iran, it's very very difficult to do that while sanctions are still in place. Those sanctions on Iran's access to banking facilities and financial transactions internationally are

still in place. The government of the Islamic Republic has always wanted to kind of maintain a very pragmatic approach to who it trades with because it has no trade relationship with the United States. It's trade relationship with Europe and the EU specifically, you know, has been very healthy and strong at times, but obviously in the past few

years it's been pretty bad. And now there's been a very deliberate, concerted effort by the hardline administration that's run by Ibrahim Race, who's this very ultra conservative cleric, to to kind of turn east in Iran. In parlance, that means, let's work with China and Russia and countries in the region, like smaller countries and smaller markets in the region that they have easy geographic access to where they can easily

circumvent sanctions. This administration, led by Race seems much more content to kind of focus on Moscow and even to in a lesser extent, Beijing. I mean, you know, Iran had this big twenty five year, multibillion dollar long term strategic investment plan with China, which was a big story at the time. We don't hear anything about that anymore. It's totally kind of just sort of disappeared off the radar,

and Russia has kind of come to replace China. Having said that, obviously China, for anyone that produces oil, is a big deal. Like, you know, China is the one country that's always going to be there for you, that's

always going to be hungry for crude oil. And another weird and kind of interesting aspect to this whole relationship is that since Russia was sanctioned by the US and the EU to the extent that it has been, it's kind of now entered this market that Iran sort of dominated and monopolized, which was a market for sanctioned oil, and the only customer in that market is China officially, And now Iran finds itself in this position where it both wants to kind of totally kind of thrown its

a lot with Russia economically, but it's also aware of the fact that Russia is now moving into this market that it's kind of like had to itself. I spoke earlier with Dr Maria sha you know, who said that despite all the efforts to build this alternative trade route to essentially replace trade with the West, it won't be enough that they can subsist on it. That in a crisis, it's enough to just get them through. But it's enough too,

as she put it, survive but not thrive. When you look down the road in this agreement five years, ten years from now, what do you see. Do you see this as something that becomes durable or something that is

a relationship of convenience that dissolves when things change? Well, I mean, I guess you can never have enough redundancy in international trade, and so you want to build redundant trade routes, particularly if you're a sanctioned country, And the fact that you can ship then prohibited material like drones, like missiles, like explosives without being detected makes this particularly

convenient in time of war. It's not gonna replace the workhorse trade routes going through the Black Sea and down the Suez Canal with massive grain ship mints to you know, the Middle East, But in a pinch, when India wants that twelve million tons of grain and has booked capacity across Iranian railways might come in handy. I'm kind of quite pessimistic actually in the long term, I think because Iran and Russia don't have a great track record when

it comes to kind of long term agreements. My sense and perception is this is much more of a relationship of convenience for Russia, and it's a relationship of absolute necessity for Iran, and I think that's where there's an essential imbalance. Iran doesn't have the kind of investment clout and capital needed to fund these massive infrastructure projects nowhere

near as much as Russia still has. Politically, the Islamic Republic is under a huge amount of pressure right now at home, and the more it seems to come under that kind of pressure, the safer it seems to feel floating closer or just drifting much closer towards Moscow, because Putin is in a similar situation. But my question is how long is PU seeming to be in that situation?

For how much longer is Russia generally going to be in this situation given the way that the war and their invasion of Ukraine is going Goldermata Valley, Jonathan Tyrone, thanks so much for talking to me you today, Thanks for the invitation. Thank you very much. You can read more from Golder, Matta Vali and Jonathan Tyrone at bloomberg dot com. Thanks for listening to us here at the Big Take, the Daily podcast from Bloomberg, and I heart Radio.

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