How can Iran survive the invasion of Ukraine?
Wars must be condemned, particularly the ones for the purpose of economic expansion. Unfortunately, more often than not, wars in human history have been about gaining power via land and/or resources than any ideology. Soldiers losing their lives, civilians losing their lives, family members, lands or homes in plans mapped out by investors. Those investing in a war or an invasion have benefited from the results, either during or at the end.
Wars bring along major changes and many have to adjust accordingly. Therefore, I’d like to take a look at the current ongoing invasion of Ukraine by Russia from an economical point of view as it has an indirect impact on Iran.
Russia and Ukraine are both among the biggest producers and exporters of grains and steel. On top of that, Russia is one of the biggest oil exporters. In the last decade, the Russian economy has faced negative growth since 2015, particularly after the Crimea conflict, fluctuation, and slow growth thereafter. Additionally, a significant drop in oil prices in 2020 showed that the Russian economy depends heavily on oil export and direct foreign investment.
It’s worth noting that Russia was able to recover their 15% inflation rate in 2015 by submitting new regulations that increased the interest rate. This was done through adjusting interest rate and inflation by the flexibility that their central bank provided, resulting in 6% economic growth in 2021. Similar to all oil-dependent countries, the Russian economy is vulnerable to changes in the oil and gas market. Such changes result in national currency devaluation, lack of direct foreign investment, capital flee, higher inflation, and ultimately slow growth.
Now, speaking of those countries that need to adjust due to close-by wars and invasions before they become the next target, Iran is indirectly affected by three aspects of transportation, cereals and oil due to the invasion of Ukraine.
Transportation
On February 6th, 2022 Polish president Andrzej Duda took part in the opening ceremony of the Beijing 2022 Olympic Winter Game at “Great Hall of the People”. His trip to China was not only to support Polish athletics but also had more to do with holding ties with China to support Poland reach its vision of becoming the gate to Europe. Poland is one of the major routes for trains full of Chinese products reaching the European market. In 2021 more than 14K trips worth $75 billion USD products were taken through Kazakhstan, Russia, Belarus and Poland. This railway corridor is part of China Belt and Road Initiative which revitalizes ancient silk road and benefits mostly Chinese factories to deliver their products directly to end consumers. However, Putin has probably put an end to President Duda’s dream. Companies like DHL may not use the routes going through Russia anymore.
But China’s dream to become the biggest economy of the world in 2030 is still alive. And in order to facilitate it, the Chinese have to keep an annual growth of up to 6%. That means China needs to emphasize and invest in other routes besides Russia. This situation could potentially benefit Iran the most. China needs Iranian ports, roads and railways to keep the Chinese factories open.
Grains
Since the start of this invasion, the price of grains have gone up by 70% as both Ukraine and Russia are major wheat producers. That has directly affected wheat importing countries like Iran. Iran will face supply chain issues and has to look for new producers like Argentine, Brazil or Canada to procure wheat even at higher costs.
It might be inevitable that Iranian government soon faces a hard time feeding 83 million people; but this situation has opened up a critical window for Iran. Russia for sure has to export most of its products through the Caspian Sea and the only way to reach the Persian Gulf and Sea of Oman is through Iran. Iran’s Project Funnel, a 7,200 km multi-modal ship/rail/road cargo network that links India, Iran, Afghanistan, Azerbaijan, Russia and Central Asia all the way to Europe is Russia’s best alternative transportation corridor to the Suez Canal. Therefore, making Iran a suitable host to re-export Russian wheat by repackaging it under Iranian brands to help balance the global grain shortage.
Oil
Russia exported more than $337 billion worth of goods in 2020, of which at least half of it was fossil fuels and 20% raw materials such as steel. Russia produces 12% of oil and 17% of global gas. According to JPMorgan’s head of strategic investments, more than 40% of gas and 27% of oil consumed in Europe is procured from Russia and passed through pipelines planted in Ukraine. Imagine the impact of accidental or intentional explosion of those pipelines on the oil market and the benefit that oil-exporting countries outside of this conflict would earn.
Brent oil prices have hit $130 USD per barrel which is a new record since 2008, another direct impact to oil importers. Gradually 17% of production lines in the UK have stopped, steel makers have closed factories and car producers have part supply issues.
Iran and Qatar are producing 10% of global gas and are considered direct competitors of Russia, therefore benefiting mostly from a competitor to go under embargos. Iranian pipeline transferring Qatar gas to Turkey and Europe will cover European energy risks. Moreover, a regional competition between Iran and Qatar to export to India and Pakistan will ease up due to further European supply cooperation.
But Iran doesn’t welcome Russia entirely into the sanction league. Restricted Russia through US and European sanctions will disembark its oil in China, resulting in a rivalry among Russia, Iran and Saudi Arabia in the limited Chinese oil market.
Consequences
Experts believe this invasion will have three definite consequences:
1. slowdown of global economic growth
3. And rise of inflation by destabilizing global financial markets
As Russia is controlled by a semi-dictatorship regime, it will be Russia who determines how and when it is going to stop the invasion. However, the global embargo on the Russian economy may not end right after Putin has made his decision. This situation will result in a condition similar to the Arab Spring which toppled a few monarchs or heads of states.
As unfortunate as all of that is, this has created an opportunity for Iran’s isolated economy. Iran has to take advantage of such situations to be able to survive the turmoil, otherwise a new rival will soon destabilize the Chinese market for Iranian oil. And at the end, Iran will be left with no oil customers and expensive wheat.
