EEU-Iran free trade agreement poses acute threat to Central Asian nations

TASHKENT -- The Kremlin's efforts to increase trade ties with Iran will have dire ramifications for Central Asian members of the Russian-led Eurasian Economic Union (EEU or EAEU), say observers.

A free trade agreement between the EEU and Iran could be signed in the first half of 2023, according to Mikhail Myasnikovich, chairman of the board of the Eurasian Economic Commission (EEC), the executive body of the EEU.

"We'd like to sign the agreement in the first half of 2023 so we can start the ratification procedures immediately," he told TASS on December 30.

The Iranian Ministry of Industry and Trade in December said that the agreement could be inked as early as January 18, but that failed to happen.

Russian motives

The deal, which has taken two years of negotiations, was largely pushed by Russia, according to analysts like Alisher Ilkhamov, director of the London-based organisation Central Asia Due Diligence.

Russia drew up and initiated the agreement on the free trade zone with Iran and lobbied for this document in the EEU, he told Caravanserai.

The Kremlin's motives are obvious and connected to three of its main priorities, he said.

The first is to use parallel imports to bypass the Western sanctions slapped on Russia due to its invasion of Ukraine. In pursuing this goal, Russia is improving trade with the Asian states, said Ilkhamov.

"In theory, Central Asian countries would be interested in this kind of tariff-free trade with Iran, though to a much lesser extent than Russia is. But in this case it's crucial not to cross any red lines so as to avoid violating the sanctions regime against the two countries," Ilkhamov said.

Russia's second objective is to have the countries make reciprocal payments with Iran using their own currencies rather than the US dollar, according to Ilkhamov.

This system requires rather cumbersome cost-accounting procedures for imports and exports, and keeping track of the amounts spent in the respective currencies, he said, adding that Central Asian countries are not interested in these types of payments and would prefer a simpler and more reliable mechanism relying on the US dollar.

It is much more profitable to trade in hard currency and accrue it in international bank accounts rather than store the rarely converted and very unstable Iranian rial, he noted.

"On this matter we can expect Russia to pressure Central Asian countries so as to force them to follow a payment system that doesn't benefit them," Ilkhamov said.

The third priority is to use EEU systems to control the trade and transport routes that Central Asian countries are trying to develop in order to bypass Russia in light of the Western sanctions.

"In this case Moscow's logic is simple: since we can't prevent the establishment of alternative routes, we'll try to lead the process and take control of it, then perhaps direct them through Astrakhan [in southern Russia] and then through the Caspian Sea," Ilkhamov said.

Central Asian countries do not gain anything from Moscow's plans, he said. After all, even without the EEU's involvement, they can use an already-existing railway route that passes through Uzbekistan, Turkmenistan and Iran, and then to the Iranian port of Bandar Abbas if they want an outlet in the Persian Gulf.

"As a result [of the agreement], the Kremlin will gain another ally in both the Shanghai Co-operation Organisation and the EEU," according to Farhad Tolipov, a political analyst in Tashkent.

Last year Iran became a full-fledged member of the SCO, making it the ninth country in the organisation.

Consequences

The initiative to link Iran to the EEU was developed by Russia and Iran together, according to Fikret Shabanov of Vancouver, Canada, president of Consultations on International Policy and Economy.

The main objective is to create an economic space for both Moscow and Tehran to bypass the sanctions, he told Caravanserai.

"They need to fill this sanctions vacuum," Shabanov said.

Moscow will dial up the pressure on the Central Asian states in order to keep them in its orbit of economic influence, he added.

The free trade agreement will have both political and economic ramifications, according to Shabanov.

Including Tehran will harm the farming and industrial sector of the region's countries severely because labour in Iran is cheap -- the workforce includes many Hazara Afghans -- and because the cost of extracting energy, namely Iranian gas and oil, is low, he said.

It also forces Central Asian nations to choose between the West on one side and Iran and Russia on the other.

For Central Asia, "this could lead to the creation of a two-sided mess, where on one side you have the [Central Asian] political elites' dependence on the Kremlin and Tehran for raw materials and transport."

"Then on the other side are the threats of secondary sanctions imposed by the West for co-operating with the aggressor country [Russia] and its closest allies," Shabanov said.

Two countries in the EEU, Russia and Belarus, are already the targets of sanctions, noted Meruert Makhmutova, director of the Public Policy Research Center in Almaty.

Membership in the EEU is becoming toxic as its member states bear the burden of delivering gray market goods and of skirting the sanctions against Russia, Makhmutova told Caravanserai.

"I think pressure on the Central Asian countries will build."

"The media have mentioned on more than one occasion that Russia has threatened Kazakhstan for complying with the sanctions. From an economic perspective, countries that violate the sanctions regime could find themselves facing secondary sanctions," Makhmutova said.