On December 25, 2023, members of the Eurasian Economic Union (EAEU) signed a Free Trade Agreement (FTA) with Iran on the sidelines of the Supreme Eurasian Economic Council’s meeting. The FTA will eliminate import tariffs on almost 90% of the product range, which accounts for more than 95% of bilateral trade between the parties. It is expected that the FTA will boost the trade volume as the Interim Agreement between the EAEU and Iran, which came into effect in 2019, was able to double the mutual trade. In particular, total trade increased from 2.4 billion USD in 2019 to 6.2 billion USD in 2022. The FTA provides the EAEU agricultural producers with exclusive conditions for supplying to the Iranian market such essential goods as cereals, corn, cattle, and lamb meat; a duty-free regime will be established for the wide range of industrial goods and the parties made non-tariff arrangements (Eurasian Economic Commission, 2023).
The temporary agreement between the EAEU and Iran covered only 360 commodity items out of 12 thousand. It is expected that the new FTA will increase total trade to 18-20 billion USD over five to seven years. Iran is a closed market and its average import tariff is 30%. Under the FTA, the average tariff will be reduced to 4.5%. This will save 380 million USD a year in duties. For Iranian goods, the average tariff will be reduced from 6.6% to 0.8%. The EAEU provides preferences for more than 120 positions in the agricultural sector, while Iran’s preferences affect only about 100 positions. Iran’s preferences will not apply to the largest import items, including approximately 40% of agri-food products such as barley and corn. The largest preferences are for rice and buckwheat, but their share in Iranian imports is extremely small. At the same time, the EAEU will eliminate tariffs on 40 items, including key ones for Iran (Litvinova, 2023).
Calculations based on data from the International Trade Center (ITC, 2024) show that in 2021 Iran’s total trade with the EAEU amounted to 5041 million USD (Figure 1). Tehran’s exports reached 1620 million USD, while its imports were equal to 3421 million USD. Iran has a positive trade balance with Armenia, Belarus, and Kyrgyzstan. Iran’s trade with Belarus and Kyrgyzstan is insignificant. In 2021, Iran’s exports to and imports from Armenia correspondingly amounted to 438 and 65 million USD. Armenia’s exports to Iran mainly consist of mineral fuels (70%), while its imports remain diversified and include mineral fuels, iron and steel, plastics, inorganic chemicals, agricultural products, etc. Kazakhstan’s exports to Iran increased from 275 million USD in 2021 to 318 million USD in 2022. It is worth mentioning that a share of cereals in total exports amounts to 97%. In the same period, Kazakhstan’s imports from Iran grew from 166 to 210 million USD. The imports are diversified and consist of plastics, agricultural products (fruit and nuts), ceramic products, organic chemicals, etc. Russia’s exports to Iran jumped from 1.2 billion USD in 2019 to 3.1 billion USD in 2021. In 2019, Russia’s exports mainly consisted of agricultural products (more than 80%), including cereals, sunflower seed, soya-bean oils, meat, and edible vegetables. In the same period, Russia’s imports from Iran increased from 391 million USD to 972 million USD. Russia’s imports in 2019 included agricultural products (more than 77%). Product-level data for the later periods of trade between Russia and Iran are unavailable. In the EAEU, Iran mainly trades with Russia (80% of total trade), followed by Armenia (10%), Kazakhstan (8.7%), Belarus (0.6%) and Kyrgyzstan (0.5%). It is important to mention that Iran’s share in total trade of the EAEU countries remains insignificant. For instance, in 2021, the indicator was equal to 0.4% for Kazakhstan and 0.5% for Russia.
Figure 1. Iran’s trade with the Eurasian Economic Union members in 2021, million USD
Source: Author’s calculations and compilation based on the ITC (2024) data.
Thus, can this FTA boost bilateral trade between the EAEU and Iran and positively affect the Eurasian trade? To answer this question, it is important to assess the Iranian market and analyze its import structure. In 2022, Iran’s total imports amounted to almost 59 billion USD. The following Figure 2 shows the agricultural imports of Iran in the same year. The country’s cereal imports reached almost 8.5 billion USD or 14.5% of total imports. Imports of animal and vegetable fats and oils and oil seeds correspondingly amounted to 2.7 billion USD (4.6%) and 2.1 billion USD (3.6%). The Iranian market is also a good opportunity for producers of sugar and confectionery, meat, cotton, vegetables, and many other food products.
Figure 2. Iran’s imports by selected products, million USD
Source: Author’s compilation based on the ITC (2024) data.
Analysis of the structure of the imported cereals and main suppliers (Figure 3) reveals important export opportunities for the Eurasian producers. Besides wheat and meslin, which are a main export product to the Iranian market from Russia and Kazakhstan, Iran imports substantial amounts of maize, corn, and rice. In particular, in 2022, Iran’s maize and corn imports from the United Arab Emirates (UAE) amounted to 2263 million, from Russia – 142 million, from the United Kingdom – 310 million, from Türkiye – 227 million, from Germany – 26 million USD. Kazakhstan didn’t export maize and corn to Iran, but exported wheat and meslin, and barley worth 107 million and 16 million USD, respectively. Iran’s rice suppliers included India (1111 million USD) and Pakistan (668 million USD).
In 2022, Iran imported animal, vegetable, or microbial fats and oils from Türkiye (814 million USD), UAE (522 million), and Malaysia (332 million USD). Exports from Russia and Kazakhstan were equal to 51 million and 4 million USD, respectively. Oil seeds are mainly imported from the UAE, Switzerland, and the United Kingdom. It is worth mentioning that key meat suppliers to the Iranian market are Brazil (55%), Türkiye (22%), and UAE (12%). Russia’s share in 2022 amounted to 1.4%.
Figure 3. Iran’s cereals import by countries in 2022, million USD
Source: Author’s compilation based on the ITC (2024) data.
Iran can also benefit from the FTA as it can become a good incentive for the country’s car industry. According to Iranian media reports (Tehran Times, 2023), the country’s car industry shows promising results. In 2022, the International Organization of Motor Vehicle Manufacturers ranked Iran 6th worldwide in terms of car manufacturing growth. In particular, car manufacturing in Iran increased by 19% in 2022, as the country manufactured 1.064 million vehicles in the mentioned year, while the figure was 894 thousand in 2021. However, the Financial Times (2023) reports that Iran’s car sector buckles under the impact of sanctions. In particular, vehicles are in short supply and prices are high as the country’s biggest non-energy industry struggles to source crucial inputs. It is worth mentioning that Iran’s car industry is the country’s largest sector outside oil and gas, which accounts for 4% of the country’s gross domestic product and employs some 500 thousand workers. The Financial Times reminds that production reached 1.5 million units in 2017, one of the highest levels ever, but from there the number fell below 1 million annually. To address the crisis, which affected the prices in Iran, the country revised its ban on car imports and allowed a limited number of new vehicles from China, and was considering whether to permit the import of second-hand cars. Before the FTA, it was announced that Iran’s second largest automaker SAIPA was set to arrive on the Russian market following the signing of a breakthrough agreement for the export of 45 thousand of its vehicles. Russia’s market remains attractive for Iran’s producers due to sanctions and the exit of many European and Japanese brands from Russia (BNE IntelliNews, 2023a). Later, Iran signed a 450 million USD contract to export 45 thousand SAIPA vehicles to Belarus in the next three years (BNE IntelliNews, 2023b).
Bilateral relations between Russia and Iran are an important factor in driving trade cooperation. According to Tazmini (2021), Russia and Iran share a similar geopolitical worldview challenging the US-led Atlanticist ideological and power systems, and supporting the vision of the international order, favoring sovereign internationalism over liberal interventionism. Russia is an important supplier of sophisticated weapon systems, military equipment, and technology to Iran. Following the conflict in Ukraine, political, military, economic, and technological cooperation between the countries widened and deepened (Gramer and Mackinnon, 2023; Seligman and Ward, 2023). Indeed, Russia and Iran signed many important agreements. On May 17, 2023, a Russian-Iranian intergovernmental agreement was signed on cooperation in financing the design, construction, and supply of goods and services for the creation of the Rasht-Astara railway. The Rasht-Astara railway section in Iran, with a length of 162 km, remains the last unfinished section of the Western route of the international North-South transport corridor. This section will close the railway connection across Russia, Azerbaijan, and Iran from Ust-Luga and St. Petersburg to the port of Bandar Abbas in the Persian Gulf. In July 2022, Gazprom and NIOC signed a memorandum of understanding on strategic cooperation. The document involves an analysis of the possibilities of interaction in the development of gas and oil fields in Iran, swaps for natural gas and petroleum products, the implementation of large and small-scale projects for the production of liquefied natural gas, the construction of main gas pipelines and scientific, technical and technological cooperation (Alifirova, 2023). Thus, the signed FTA is one more step towards a comprehensive political and economic partnership between Russia and Iran.
However, members of the EAEU, in particular Kazakhstan, can benefit from the FTA. Firstly, the volume of agricultural and food imports of Iran is a huge opportunity for Kazakhstan due to the proximity of the Iranian market. Kazakhstan’s producers can use the Kazakhstan-Turkmenistan-Iran railway or ports of the Caspian Sea. FTA preferences and infrastructural connectivity make Kazakhstan’s producers more competitive in the Iranian market. Completion of the North-South international transport corridor is another trade opportunity for the country’s producers. Kazakhstan should diversify its supply of food products, paying attention to corn and maize, oil seeds, meat, and dairy produce. Secondly, the FTA can become an opportunity for increasing mutual trade between Kyrgyzstan and Iran, which is also beneficial for Kazakhstan as a transit country. Thirdly, besides agricultural imports, Kazakhstan should analyze the industrial and technological needs of Iran and focus on developing and supplying high-tech products. Thus, boosting Eurasian trade, penetration of the Iranian market, and full use of the FTA opportunities will require Kazakhstan and other EAEU members to improve competitiveness by investing in the production and technological capacities of their local businesses. Iran’s producers can also benefit from the FTA. It can increase supplies of both agricultural and industrial products such as cars and intensify the competition in the EAEU market. In total, higher volumes of bilateral trade will positively influence both parties and contribute to their economic development.
References:
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BNE IntelliNews (2023a). Iran signs breakthrough deal to export 45.000 cars to Russia. Retrieved from https://www.intellinews.com/iran-signs-breakthrough-deal-to-export-45-000-cars-to-russia-270844/. Accessed on 20.12.2023.
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Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.