Economic Statecraft
Iran’s Dilemmas in the Aftermath of the Ukraine Crisis

There is no doubt that Russia’s military operation in Ukraine has shifted geopolitical realities across the globe. Iran is directly connected to the crisis on multiple levels: it is not only a neighbouring state to Russia, but also one that has been developing a long-term partnership with its northern neighbour. Furthermore, Russia has been a key stakeholder in the ongoing talks to revive the Iran nuclear deal, also known as the Joint Comprehensive Plan of Action (JCPOA). In addition, as a key player in the global energy market, especially the country with the second largest natural gas reserves in the world, Iran is bound to be impacted by the emerging energy-related geopolitical shifts, writes Bijan Khajehpour, managing partner at Eurasian Nexus Partners, with a closer look at the strategic dilemmas that Tehran will face in light of the ongoing conflict and their potential impact on Iran’s international relations. 

Background

In the past decade, a number of geopolitical developments had changed the nature of Iran-Russia relations, most importantly the fact that the two neighbouring powers have simultaneously been targets of extensive western sanctions. Prior to the Russian operation in Ukraine, Moscow and Tehran were working on promoting relations through increased regional trade. The two powers even engaged in negotiating a 20-year agreement to consolidate ties. To show the interest of the current Iranian government in deepening ties with Russia, President Ebrahim Raisi even travelled to Moscow in January 2022 and termed the visit as a “turning point in the bilateral relations”. 


Even prior to Raisi taking office, intense western sanctions since 2018 – when the US withdrew from the JCPOA – had compelled Tehran to focus its international relations on regional and Eastern trading partners. Clearly, security, political as well as economic considerations in mitigating the impact of external sanctions, were core drivers of this policy. Incidentally, Russia occupied a special position in this strategy, as it is both an Eastern power and also a neighbouring state to Iran. Though Iran-Russia bilateral trade has increased significantly in the past few years – exceeding $4 billion in 2021, compared to China – Iran’s most significant trading partner with an annual bilateral trade of more than $25 billion – Russia has not yet fully realised its potential as a strong trading and investment partner. The bilateral trade is well below its true potential, partly because none of the two offers a market for the main export commodities of the other, i.e. oil, gas and petroleum products. The mentioned 20-year agreement was designed to change the relationship and boost trade and investment over time.

While focusing its attention on regional and Eastern powers, Tehran has also been following a strategy of getting rid of the external sanctions. Consequently, new rounds of negotiations were commenced in Vienna in the spring of 2021 with the aim of finding a way to restore the JCPOA. With Tehran and Washington negotiating indirectly – as the US had left the JCPOA structure – Russia and also the European Union (EU) played a key role in pursuing the talks. Furthermore, Moscow’s cooperation was also significant as one of the world powers with direct technical and operational responsibilities in Iran’s nuclear program. As such, it is evident that the current crisis will have a direct impact on the future of the Vienna talks.

Iran’s Strategic Dilemmas

In early 2022, there was a sense of optimism in Iran that there would be a deal in Vienna and that Iran’s pivot to the East would allow the country to reduce its vulnerability to Western pressure. However, the Russia-Ukraine conflict has unleashed a number of strategic considerations that need to be appreciated:

Impact of the Ukraine crisis on the JCPOA talks: In early March 2022, the so-called Vienna Talks seemed to be in their final stages, but the post-Ukraine crisis dynamics in international relations seemed to derail the emerging agreement, leading to a grim outlook for a final deal. The question for Tehran is whether it should show more flexibility and find a path to the lifting of sanctions. 

Opposition to war: The initial reactions in Tehran were inherently anti-Western and pro-Kremlin: However, in his first reaction to the Ukraine crisis, Iran’s supreme leader Ayatollah Ali Khamenei, in a carefully worded statement, said: “We are against wars and destruction anywhere in the world …”. This statement put the country’s political elite at ease in their urge to criticise Russian actions. In fact, a number of intellectual and media voices warned that Russia should not be trusted. The perceptions of the Iranian public are also distrustful towards Russian intensions. Therefore, the strategic challenge is whether Tehran should maintain its partnership with Russia or take some distance in order to pave the way for closer ties with western powers.

Energy sector opportunities: The current tensions between Russia and the EU have undermined the future outlook of Russian gas export to the EU. Fact is that in terms of natural reserves, Iran is the top candidate to become a substitute for Russia with regard to exporting gas to Europe. Petroleum minister, Javad Ouji, outlined on 23 February that Iran would have the capacity to export gas to Europe. Evidently, it won’t happen overnight, but it is a capacity that can be built through targeted investments. It could also start in the short-term with Iran exporting gas-based commodities such as petrochemicals, steel and cement to Europe. However, to achieve this short to medium term goal, the external sanctions would have to be lifted. The strategic question for Iran would be whether it should trust western governments and invest politically and economically in such a scenario.

There are also other strategic issues such as the implications for food security and global shortages as a consequence of the current crisis, but those are not unique to Iran and won’t be discussed here.

Potential Iranian Strategy

Iran is a country with many competing mindsets and agendas, however, in such challenging national security decisions, the final policy is always devised by the Supreme National Security Council (SNSC). It is obvious that the decisions on the above challenges are interrelated. Evidently, in order to become a long-term energy supplier to Europe, Iran would have to take some strategic distance to Russia.

In order to understand how the SNSC members will try to make these complex decisions, one needs to appreciate the key drivers in their strategic thinking. These are:

  • Deep distrust towards the West, especially the United States: Apart from the historical distrust that has shaped Iran-US relations since the 1979 Islamic Revolution, Iranians at large have also witnessed how the US exited the JCPOA and put the country under its so-called “maximum pressure” since 2018. The fact that the Biden administration has continued Trump’s failed policies in the past year, underlined once more for Iranian decision-makers that Washington could not be trusted and that US policies would remain anti-Iranian, no matter how much flexibility Tehran shows.

  • National security imperatives: For Iran, a sense of insecurity has led to the prioritization of national security over economic well-being. Clearly, as the US and Israel are seen as the main sources of external pressure and attacks, a security-cantered alliance with Russia would be deemed significant to be able to fend off external pressures, especially if Washington continues its maximum pressure policies.

  • Independence: The foreign policy guideline that emerged from the 1979 Revolution focused on the concept of independence from Western and Eastern powers. This can clearly work against a policy that relies too strongly on Eastern powers. In fact, Hossein Amirabdollahian, Iran’s foreign minister, provided an important nuance on this topic in January 2022 when he said: “We are looking for a balanced relationship with all powers, Eastern, Western and the whole world.”

  • Desire to improve economic conditions: Iran has suffered economically since the intensification of sanctions. This has not only led to discontent in the society, but also increased insecurity caused by petty crime, poverty and other socio-economic phenomena. As such, a core consideration for SNSC will be a path towards improving economic conditions which could be achieved through the lifting of sanctions and attraction of foreign investment.

Tehran knows that the effectiveness of its strategic decisions will depend on the goodwill of other players. For example, if Iran opts to pave the way for a new relationship with Europe, then the EU and the US would also have to be prepared to facilitate investments and long-term agreements that are needed to export Iranian gas to the EU. Therefore, as long as the outcome of the Vienna talks remain uncertain, the SNSC will continue its strategic ambiguity.

In other words, the SNSC members would want less complexity in their choices: For example, if the Vienna talks produce a new deal and Iran can rely on a period of sanctions-free trade with the EU, then it may be easier to take steps to distance Iran from Russia. A lot will also depend on the behaviour of the Biden administration. Tehran’s main worry is that a restoration of the JCPOA will be short-lived as a future Republican administration will return to the Trump approach of putting Tehran under new pressure. On the other side, if the hopes for a positive outcome in the Vienna talks fade, then Tehran will hold on to its relationship with Russia as the two countries would be able to help each other in mitigating the impact of external sanctions. This collaboration would not only include trade, but also develop solutions to circumvent to growing banking sanctions.

Conclusions

Many experts talk of the emergence of a new world order after the start of the Russian operation in Ukraine. If true, then all states, including Iran, will have to define their position in that new order. It would be a mistake to believe that Tehran’s foreign policy orientation is a foregone conclusion. However, what is known is that Tehran’s modus operandi is to react rather than act. As such, western powers could incentivise Iran by paving the way to a lifting of sanctions and presenting Tehran a path of long-term reliable interaction, especially with Iran supplying energy to the EU. In the absence of such initiatives, Iran’s option will be to align itself with Russia in order to push back against western, especially US aggression against Iranian interests.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.