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BUSINESS & ECONOMY

Russia-Iran Trade Cooperation: A New Route with Convergence of Interest

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By  Aishwarya Sanjukta Roy Proma

Russia and Iran are collaborating to establish a new trade channel as a means to circumvent existing restrictions. The proposed route is anticipated to span from the eastern periphery of Europe, namely Ukraine, to the Indian Ocean, including a distance of around 3,000 kilometers. Both nations are investing significant amounts of capital in the construction of road, maritime, and railway infrastructure along the designated pathway. This development aims to facilitate market entry for Russian enterprises into regions such as Iran, India, Asia, and the Middle East. It is anticipated that the sea, river, and rail networks will be expanded to connect Iranian centers located on the Caspian Sea, ultimately extending to the Indian Ocean.

Numerous Russian and Iranian motives and goals, which in turn have significant geopolitical significance, are behind the establishment of this trade route. Initially, both nations encountered severe sanctions, resulting in a profound adverse effect on their economies. This is particularly relevant given Russia’s ongoing war in Ukraine and Iran’s use of Iran’s nuclear goals. Iranian authorities frequently discuss the act of turning their attention eastward, whereas the Russian government has prioritized this strategic move to forge closer ties with its neighbors and the Asian region. The Russian government has committed to allocating a substantial investment of €1.6 billion towards the development of the railway route, with an anticipated completion timeline of 48 months. The cities of Moscow and Tehran have agreed to collaborate in providing financial support for the design, development, and procurement of products and services. The North-South International Transport Corridor (ITC) serves as a crucial link between Russia and the nations situated in the Caspian basin, the Persian Gulf, Central, South, and Southeast Asia. The western corridor, including Russia, Iran, and Azerbaijan, had a geographical discontinuity of 162 kilometers  between the cities of Rasht and Astara.

There are several possible reasons why Russia and Iran are building a transcontinental trade route that connects the eastern edge of Europe to the Indian Ocean. Firstly, both nations want to defy Western sanctions and create sanctions-proof supply chains. Both countries are under tremendous pressure from sanctions imposed by the United States and its allies over issues such as Iran’s nuclear program, human rights violations, support for terrorism, Russia’s invasion of Ukraine, and the annexation of Crimea. By building a trade route that is beyond the reach of any foreign intervention, both countries can maintain their economic and political sovereignty. Secondly, both countries want to diversify markets and increase their trade with Asian countries such as China, India, and the Middle East. The new trade route would allow them to shave thousands of kilometers off existing routes and reduce transportation costs and time. It would also provide them with new opportunities to export their energy resources, agricultural products, and manufactured goods to Asian countries and import technology, consumer goods, and investment from them. Lastly, both states want to strengthen their strategic partnership and regional influence. They have a similar worldview that opposes the United States and the liberal international order and supports multipolarity. They have also cooperated on shared interests such as supporting the Assad regime in Syria, countering terrorism and extremism, and stabilizing Afghanistan.

From an economic perspective, The Russian change is mostly motivated by need, as Moscow endeavors to seek solace in the Eastern region, particularly in China, as a means to counteract Western endeavors aimed at isolating Russia and challenging Western-imposed sanctions. Russia and Iran have recognized that a land corridor presents more challenges for Western surveillance and monitoring compared to marine routes. Consequently, this corridor offers both nations a means to transit weapons and commodities between each other and to other markets while minimizing the impact of sanctions. Furthermore, the Russian, Iranian, and Chinese governments challenge the established Western order and actively pursue modifications to the existing rules and norms.

Iran is strategically positioning itself between Russia and China in a calculated manner to mitigate Western pressures and endeavors to compel its compliance with a new nuclear agreement. Iran wants this trade route to protect commercial ties and corridors from Western influence and interference while establishing economic infrastructure that facilitates connectivity between the economies of Asia and Central Asia, with Russia and China assuming central roles. Due to its geographical closeness and inherent connections with several economies, Iran is poised to assume a crucial role in the establishment of novel trade networks and linkages. Also, Iran’s export of drones and medium-range missiles to Russia in support of its military operations in Ukraine is expected to intensify via this established trade channel since the Western powers lack effective means to prevent this escalation. Consequently, Moscow and Beijing are expected to significantly depend on Iran as a pivotal component of their overarching geopolitical strategy.

From a geopolitical lens, this route contributes to this objective by establishing a corridor that is autonomous from the Western region, effectively connecting Asia and Central Asia. The Russia-Iran-China triangle, despite its intricate nature, poses a significant risk to Western interests in the Middle East, Asia, and Central Asia, hence making it a perilous axis for the West. Such developments would challenge the existing Western order and its established frameworks. Furthermore, the establishment of this corridor will serve to enhance the bilateral ties between Russia and Iran, as both countries find themselves mutually dependent for many reasons, particularly in the realm of addressing the challenges of international isolation. Based on the current trajectory of diplomatic interactions, it is probable that regional and international endeavors aimed at addressing Iran would encounter significant obstacles due to Russia’s backing of Tehran in global arenas. Furthermore, Russia perceives Iran as an integral component of its geopolitical landscape. Consequently, any detrimental actions against Tehran are expected to have adverse consequences for Russia’s geopolitical ambitions.

Some of the potential challenges that Russia and Iran might face while building this transcontinental trade route The trade route passes through some of the most volatile and conflict-prone regions in the world, such as the Caucasus, Central Asia, and the Middle East. Conflicts over territory, religion, and ethnicity, as well as the presence of armed groups, terrorists, and separatists, plague these areas. The trade route could also become a target of sabotage or attack by hostile actors who oppose the interests of Russia and Iran. Additionally, the trade route competes with other established or developing corridors that link Europe and Asia, such as China’s Belt and Road Initiative, India’s International North-South Transport Corridor, and Turkey and Azerbaijan’s support for the Trans-Caspian International Transport Route. These corridors offer alternative or complementary options for trade and transit that could undermine the attractiveness or viability of the Russia-Iran route.

This trade route could affect relations between Russia and Europe in the event of a further confrontation. The trade route could increase tensions and mistrust between Russia and Europe, especially in the context of the ongoing crisis in Ukraine and the recent Russian invasion. The trade route could be seen as a challenge or a threat to Europe’s interests and values, as well as to its alliances with the United States and NATO. Europe could impose more sanctions on Russia and Iran or even take military action to disrupt or block the trade route. This could lead to a spiral of escalation and conflict in the region. Also, the trade route could intensify the competition between Russia and Europe for influence and markets in Eurasia. The trade route could also create divisions or rivalries among European countries or regions, depending on their level of dependence on or engagement with Russia or Iran.

In conclusion, this trade route represents a notable advancement, as it will serve as a crucial means for Russia and Iran to circumvent Western sanctions and revitalize their economies. Additionally, it will serve as a platform for both countries to increase their defense cooperation and economic cooperation and enhance their existing strategic ties.

Aishwarya Sanjukta Roy Proma is a Research Associate at the BRAC Institute of Governance and Development (BIGD).

Courtesy: Modern Diplomacy


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A Labour Government Should not Frighten the Horses

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The UK general election is likely to mean changes, but Gulf citizens need not be too worried.

By James Drummond

If the tension was killing you, now you know. If it wasn’t, then be aware that a general election in the United Kingdom will be held on July 4 – less than six weeks away.

For the hapless Rishi Sunak, it looks like a case of “If it were done when ’tis done, then ’twere well it were done quickly.” Polls indicate that after 14 years of conservatism, real or imagined, voters are likely to elect a new Labour government.

What does this mean for us here in the Gulf?

The six Gulf states are certainly exposed to Britain. The extent of GCC holdings in the UK is enormous, ranging from Qatari ownership of the Shard building in London, stakes in the Sainsburys supermarket chain and Barclays bank, to Sheikh Mohammed bin Rashid’s Godolphin stables in Suffolk.

Manchester City and Newcastle United football clubs are owned by Emirati and Saudi interests, respectively. Kuwait’s wealth is managed by the Kuwait Investment Office near St Pauls Cathedral.

Labour has been careful to detail very few policies (or hostages to fortune, as its strategists may see it), but last week, David Lammy, the likely new foreign secretary, outlined a further campaign against dirty money.

Britain is a “corruption services centre”, while London is a “hotbed of kleptocracy”, Mr Lammy said. He said that he wanted to reward whistleblowers and clamp down on “enablers” of financial crime.

Given the paucity of public announcements, Lammy’s speech is significant, because it implies that the incoming government is likely to act. Fighting financial crime is relatively uncontroversial and attracts cross-party support – although in the UK’s case with limited success.

British politicians have made similarly grandiose statements before. But after Russia’s invasion of Ukraine, London has moved particularly against Russian dirty money, and sanctioned individuals. It finally introduced an obligation mandating the disclosure of beneficial owners of property.

Overseas trusts are also now required to disclose their ultimate beneficial owners, and there is now greater transparency when registering entities at Companies House.

This seems to have had only limited effect, however. Last week Andrew Mitchell, the deputy foreign secretary, cited estimates that 40 percent of the world’s dirty money still passes through London.

Spotlight on Corruption, a non-governmental organisation, wrote in October last year that “major reform is needed to how lawyers and accountants, the property sector and company formation agents are regulated for money laundering.” Lammy may choose to take further action against these and other professionals.

Other so-called enablers include retired politicians, some of them in the House of Lords, who work as advisors to unsavoury actors. Labour could move to tighten disclosure, although several of its senior former members are likely to lobby against further transparency.

It is also possible that Labour will go further in taxing expatriates. In its limited public commitments, the party has promised to clamp down on “tax dodgers”.

Those with property in the UK already pay tax on rental income they receive, and worldwide assets are subject to Britain’s inheritance tax. Some Gulf Arab families with UK property have been caught by inheritance tax.

A government led by Sir Keir Starmer, the Labour leader, could go further, as the US does, in taxing worldwide income of its citizens, more than 200,000 of whom live in the UAE alone. The argument is that if you have the privilege of carrying the passport, you have an obligation to pay tax.

Another question surrounds nationalisation. Labour is committed to re-nationalising the railways for one, although the infrastructure is already under central government control.

But another target may – may – be England’s water supply network, which was privatised in 1989. Shareholders in various of the rump companies include the Qatar Investment Authority and Adia of the UAE.

The water companies have been the subject of a vociferous campaign, for allegedly paying their shareholders high dividends while neglecting maintenance and investment. It is possible that an incoming Labour government will nationalise the industry.

All that said, the primacy of the rule of law and respect for property rights remain strong in Britain.

Barratt, a mass housebuilder, reported earlier this week that London remains the top choice among world cities for UAE investors looking to buy overseas. The holdings of Gulf states and rights of Gulf citizens in the UK remain secure, even with a Labour government.

James Drummond is Editor-in-Chief of the AGBi

Courtesy: The AGBI.Com


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Kuwait’s Political Crisis Adds to Economic Uncertainty

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Kuwait’s latest standoff is deeply concerning for both the near and long term, writes Andrew Cunningham

The decision by Kuwaiti emir Sheikh Mishal Al-Ahmad to dissolve the country’s recently elected parliament just days before its inaugural session on May 14 presents overseas investors and Kuwaiti citizens with more uncertainty.

The situation raises concerns about the country’s economic prospects over both the short and long term.

Disputes and stand-offs between Kuwait’s emirs and its boisterous parliament are nothing new. Parliament has been dissolved, and the constitution suspended, numerous times over the past 40 years. The country has held four elections in the past four years.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

In March this year, rating agency Fitch described Kuwait’s fiscal and external balance sheets as among the strongest of any of the governments it rates.

But when we look at long-term trends, the picture is more complex and less secure.

Kuwaiti government spending remains overwhelmingly dependent on oil and gas revenues. The government has made almost no progress, over many decades, in diversifying the economy away from oil, or in reducing the huge burden of government salaries and welfare payments.

Oil and gas revenues currently account for nearly 70 percent of total income and, according to IMF projections, will continue to do so for the rest of the decade.

These revenues have served the country well in the past, despite the volatility of oil prices, but such overwhelming dependence looks foolhardy when consumers worldwide are striving to reduce consumption of oil and gas and investors and energy firms have pivoted towards renewables.

Nearly all of the Kuwaiti government’s non-oil and gas revenue arises from overseas investments and from dividends from state-owned companies. Tax revenues account for less than 1 percent of total government income.

Looking beyond the fiscal imperative to diversify the economy is the need to provide employment opportunities for Kuwaiti citizens.

No less than 84 percent of the Kuwaiti workforce was employed by the government at the end of 2022. It is hardly surprising that nearly half of government expenditure is allocated to the salaries of public employees.

Pressure for social spending will increase in the years ahead. A World Bank report, published last year, showed that levels of obesity and Type 2 diabetes were higher in Kuwait than in any of the other GCC countries and nearly double the average in OECD countries.

Partly as a result of this, the World Bank estimated that Kuwait’s old age dependency ratio – the number of people over 65 years old in relation to those of working age – will be nearly double that of its neighbours by 2040.

Kuwait is also a country that is being significantly affected, even today, by climate change. Temperatures during the summer can exceed 50 degrees, making Kuwait one of the hottest places on earth.

These are difficult and complex challenges, both economic and social, but they are hardly unique to Kuwait. That they are, in some cases, more acute in Kuwait than elsewhere is due to decades’ long procrastination and political paralysis.

The government’s General Reserve Fund, which held most of its liquid assets, was entirely depleted in September 2020, according to Kuwait’s own ministry of finance. With AA ratings, the obvious solution was to borrow money – Kuwait’s debt-to-GDP ratio is less than 5 percent. Yet the parliament has still not passed a so-called ‘Liquidity Law‘ that would allow modest issuance of foreign currency debt.

The parliament also held up the introduction of Value Added Tax (VAT), making Kuwait one of two of the six GCC countries not to fulfil a joint commitment to implement a minimum VAT of 5 percent.

Over the past four years, all three of the big international credit rating agencies have downgraded the government of Kuwait.

In their rating reports, all agencies cited a dysfunctional and slow-moving political environment that was reducing the country’s financial flexibility and delaying much needed economic and financial reform.

Politics matters.

It is unrealistic to think that after decades of enmity the ruling family and the parliament will soon form a harmonious working relationship.

But they do need to find some common ground that will enable them to start addressing fundamental economic and social issues while the country still has large financial reserves and strong credit ratings.

Time is running out.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems


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ICD and JSC Ziraat Bank Collaborate to Boost Uzbekistan’s Private Sector

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At the 3rd Tashkent Investment Forum, the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan took a significant step forward in their partnership to empower small and medium-sized enterprises (SMEs) and foster economic growth in Uzbekistan. The forum, held in the capital city of Uzbekistan, brought together key stakeholders from the public and private sectors to discuss investment opportunities and economic development strategies for the region. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is aimed at boosting the private sector in Uzbekistan.

During the forum, ICD and JSC Ziraat Bank Uzbekistan formalized an expression of intent to collaborate on various initiatives aimed at supporting SMEs. One of the key elements of this collaboration is the provision of a Line of Financing (LoF) facility by ICD to JSC Ziraat Bank Uzbekistan. This LoF facility will enable the bank to fund private sector projects as an agent of ICD, thereby providing SMEs with access to the necessary capital to initiate and grow their businesses.

The partnership between ICD and JSC Ziraat Bank Uzbekistan is expected to have a significant impact on the SME landscape in Uzbekistan. By equipping entrepreneurs with the resources they need to succeed, this collaboration will not only support the growth of individual businesses but also contribute to the overall economic development of the country. SMEs play a crucial role in driving economic growth, creating jobs, and fostering innovation, and this partnership will help strengthen the SME ecosystem in Uzbekistan.

JSC Ziraat Bank Uzbekistan, as a strategic partner for ICD, brings a wealth of experience and expertise to the table. As a prominent commercial bank with foreign capital, JSC Ziraat Bank Uzbekistan has a strong track record of supporting SMEs and promoting economic development. The bank’s partnership with ICD further underscores its commitment to advancing the private sector in Uzbekistan and its dedication to supporting the country’s economic growth.

ICD, for its part, is a leading multilateral development financial institution that focuses on supporting the economic development of its member countries through the provision of finance and advisory services to private sector enterprises. By partnering with JSC Ziraat Bank Uzbekistan, ICD is furthering its mission of promoting economic development and fostering entrepreneurship in Uzbekistan and across the Islamic world.

The LoF facility provided by ICD to JSC Ziraat Bank Uzbekistan is just one example of the many initiatives that the two entities are undertaking to support SMEs in Uzbekistan. In addition to providing financial support, the partnership between ICD and JSC Ziraat Bank Uzbekistan will also include capacity-building initiatives and technical assistance programs to help SMEs succeed in today’s competitive business environment.

Overall, the partnership between ICD and JSC Ziraat Bank Uzbekistan represents a significant step forward in supporting SMEs and fostering economic growth in Uzbekistan. By working together, these two institutions are helping to create a more vibrant and dynamic private sector in Uzbekistan, which will ultimately benefit the country’s economy and its people. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is expected to have a far-reaching impact on the private sector in Uzbekistan.


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