Russia has become the largest foreign investor in Iran over the past year, according to Iranian officials, as the two heavily sanctioned nations have stepped up co-operation since Russian forces invaded Ukraine.
Ehsan Khandouzi, Iran’s finance minister, said Russia had invested $2.76bn in the country during the current financial year that ended this week, citing projects in the industrial, mining and transport sectors.
“We define our relations with Russia as strategic and we are working together in many aspects, especially economic relations,” Khandouzi told the Financial Times. “China and Russia are our two main economic partners [and] Iran is going to expand its relations with them through implementing strategic agreements.”
His comments underscore how Tehran and Moscow have ramped up their ties since the west imposed waves of sanctions on Russia after President Vladimir Putin’s invasion of Ukraine a year ago.
Russian business delegations have visited the Islamic republic seeking deals and tips on how to avoid sanctions, while Iran has been keen to develop new trade relationships to bolster its own sanctioned economy.
The US and Europe have accused Tehran of selling armed drones to Moscow that have been deployed against Ukrainian targets. Iran denies its drones are used in the war. Khandouzi said the Ukraine conflict was “unfortunate” for Iran, but did not respond when asked if Tehran received revenues from arms sales to Russia.
The Iranian and Russian central banks signed a deal in January to link their interbank communication systems in a bid to boost bilateral trade. “Russia and some other countries are keen to use mechanisms such as mutual monetary agreements or trade-based swaps. We have negotiated not only with Russia but also with China and other partners, including Turkey, in this regard,” Khandouzi said. “Technically speaking, this financial network is in a better situation between Iran and Russia than others.”
Analysts are sceptical about how far the two can develop trade as both have commodity-based economies producing similar products. But a western diplomat said the fear was that “it’s a dynamic that can become self-sustained”.
Iran has endured decades of sanctions, and has been cut off from the global financial system since former US president Donald Trump withdrew from the 2015 nuclear accord and launched new curbs against the republic.
This has further stymied Tehran’s ability to attract foreign investment — the second-largest foreign investment after Russia was from neighbouring Afghanistan, with £256mn. Chinese investment was just $131mn, behind Iraq and the United Arab Emirates, underscoring how it is not just western companies that are being put off doing business in Iran.
Russia accounted for two-thirds of the total foreign direct investment of about $4.2bn in Iran this financial year, according to finance ministry data. Iran attracted FDI of just $1.45bn in 2021, according to UN trade data.
President Ebrahim Raisi’s hardline government has prioritised developing regional and Asian trade relationships since taking office in 2021 in an effort to counter the impact of sanctions. A Chinese-brokered deal signed this month will restore diplomatic ties between Iran and rival Saudi Arabia, seven years after they severed relations.
Khandouzi said Iran had last month achieved its highest level of oil exports for at least two years, overtaking the previous high of 1.3mn barrels a day, despite US sanctions.
He said non-oil exports of $53bn were also 12 per cent higher in the first 11 months of this year than the same period the previous year. Imports over the same period were $60bn, which combined with the export data showed “Iran’s economy cannot be isolated”, he added.
Yet the government has struggled to contain the economic malaise that has gripped the republic, with inflation soaring higher than 47 per cent and the rial down 60 per cent under Raisi’s watch. Iranian economists blame the authorities for fuelling inflation by excessively printing money.
Tehran in December replaced the central bank governor who had been in the post for just 15 months as the national currency slid to record lows against the US dollar, while the regime battled months-long nationwide protests.
Khandouzi defended the government’s record and said it planned to reform the central bank, which would be “held accountable to meet the inflation targets”. It would also be given the “necessary authority to control the procedures which create money supply,” he said.
“We also managed to decrease the money supply growth rate, which was 39 per cent in the last Iranian year. By the end of this financial year, it is projected to be 30 per cent,” he added. “We are determined to decrease the inflation rate.”
Khandouzi said the government had boosted tax collection and clamped down on evasion to increase non-oil revenue, while at the same time reducing corporate tax by 5 percentage points.
Yet the government’s biggest challenge is easing the economic pressure on ordinary Iranians, with analysts warning that economic grievances are a ticking bomb amid widespread public anger with the regime.
“When the country is struggling with economic problems, officials definitely make more efforts than before and spend more time serving people,” Khandouzi said.
