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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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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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BUSINESS & ECONOMY

10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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