From Moscow to Mumbai: Russia turns south for trade

For centuries, trade with Europe was the main pillar of the Russian economy.

The war in Ukraine put an end to this, with Western sanctions and other restrictions increasingly cutting Russia off from European markets. In response, Moscow has expanded ties with countries more willing to do business with it: China in the east, and, via a southern route, India and the Persian Gulf countries.

That southern route has now become a focus of Russian policymakers as they try to build infrastructure for their plans to turn away from the West for good. The effort faces challenges, including questions about funding, doubts about the reliability of Russia’s new partners and the threat of Western sanctions on countries that trade with Russia.

A key part of the southern plan is a 160-kilometre-long, $1.7 billion railway line, which will begin construction this year and would be the final link in a route between Russia and Iranian ports on the Persian Gulf – which would provide easy access to destinations like Mumbai, the trading city of India. capital. Russia has agreed to lend Iran $1.4 billion to finance the project.

“Since Russia’s traditional trade routes were largely blocked, the country had to look at other options,” said Rauf Agamirzayev, a transport and logistics expert based in Baku, Azerbaijan, referring to the southern route.

Russia has found numerous ways to circumvent Western trade restrictions, for example by bringing in machinery from India weapons from Iranas well as a large number of consumer goods – often through the Gulf states and Turkey – that the government considers crucial to show Russians that they can maintain living standards in times of war.

While some consumer goods still enter legally from Europe, a range of limited or difficult-to-obtain items are also available in Russia. Oysters from France, brought in by plane via a detour to a third location, are available at a restaurant in Moscow, as are Italian truffles and French champagne, the export of which forbidden by the European Union, can be found at a luxury supermarket chain.

The Russian government sees the railway project through Iran – and another line it hopes to restore that would provide access to Turkey – as essential to locking down and speeding up the flow of all such imports into the country. It is also seen as crucial for boosting exports of Russia’s natural resources, which are crucial to the economy.

President Vladimir V. Putin of Russia has said the new route will reduce the time it takes for freight to travel from St. Petersburg to Mumbai to just 10 days, from 30 to 45 days now. Russian officials are calling it a “revolutionary groundbreaking project” that will rival the Suez Canal.

It will also complement trade routes from Russia to China, currently its largest trading partner, as they reach overcapacity. Since 2021, just before the large-scale invasion of Ukraine in February 2022, Russian trade with China has increased by 61 percent to more than $240 billion in 2023, according to Chinese figures.

Trade with India is also increasing, reaches $65 billion, more than four times as much as in 2021. Russian trade with both countries in 2023 exceeded pre-war trade with the European Union, which was standing at $282 billion in 2021.

The new railway will connect two Iranian cities, Astara and Rasht, and connect the tracks between Iran and Azerbaijan in the north, and then to the Russian railway network. Once completed – expected to be completed in 2028 – the resulting ‘North-South Transport Corridor’ will stretch uninterruptedly for more than 7,000 kilometers, beyond the reach of Western sanctions.

From Iranian facilities on the Persian Gulf, Russian traders will have easy access to India, as well as destinations such as Saudi Arabia, the United Arab Emirates, Pakistan and beyond.

A trade route via the Caucasus and Central Asia and across the Caspian Sea to Iran has already been important for Russia in recent months. according to to Lloyds List, which specializes in maritime news and intelligence. Russia has also been shipping oil and products like coking coal and fertilizer in the opposite direction.

Gagik Aghajanyan, the head of Apaven, the largest freight forwarding company in Armenia, said its truck fleet often picks up loads of consumer goods, delivered by rail from ports in Georgia on the Black Sea, and then transports them north across the country. border with Russia. Other goods that are more sensitive, such as those banned by Western states, could be sent through Iran, which shares a border with Armenia, he said. From Iranian ports, goods can then travel across the Caspian Sea to Russia.

“The Georgians say: ‘These are sanctioned goods; we will not let you through to Russia,’” Mr. Aghajanyan said in an interview. “And the Iranians say, ‘We don’t care.’”

According to Andrei R. Belousov, Russia’s Deputy Prime Minister for the Economy, trade volumes along the route increased by 38 percent in 2023 compared to 2021, and could triple by 2030.

In addition to the line through Iran, Russia also wants to restore an old Soviet railway line that connected Moscow with Iran and Turkey via Armenia and the Azerbaijani enclave of Nakhichevan. The railway was abandoned in the early 1990s when war broke out between Armenia and Azerbaijan.

Russia hopes to have the railway line operational within a few years, but the project has become entangled in the region’s complicated geopolitics.

Azerbaijan is keen to compete with the link, but Armenia is reluctant to commit to the project due to concerns over who would control the tracks on its territory. In Soviet times they belonged to the Azerbaijani Railway. In 2020, Armenia signed an agreement that relinquished control of it to the Russian security service.

But Russia, once closely allied with Armenia, has become increasingly friendly with Azerbaijan and was essentially on standby when Azerbaijan took full control of the breakaway region of Nagorno-Karabakh, which had been under the control of Armenian separatists for more than three decades. . Now the Armenians want to control their part of the rail link themselves, centered around the city of Meghri, strategically located on the border with Iran.

For now, the train station in Meghri remains a relic of the Soviet past, its rooms filled with old railway maps and tickets hidden beneath withered leaves and dust. The tracks, built more than a century ago by Tsarist Russia, have long since been replaced by vegetable gardens.

The Azerbaijani Railway Company is close to completing its route towards Armenia, through territories it occupied before the 2020 war. From there it can go via Armenia or via Iran, if Armenia decides to stay away from the route.

“Russia can get a railway to the Persian Gulf and Turkey,” said Nikita Smagin, an expert on Russian policy in the Middle East at the Russian International Affairs Council think tank. “It can be done quite quickly, in a maximum of two years.”

Rovshan Rustamov, the head of the Azerbaijani Railway Company, said the Azerbaijani part of the project should be completed by the end of 2024. Logistics, he said, could even replace oil as the biggest driver of Azerbaijan’s economy.

Azerbaijan also hopes that the port of Baku can take advantage of the country’s new position as a strategic hub for goods traveling between Russia and the outside world – and also between Asia and Europe, easily bypassing Russia.

After the Russian invasion of Ukraine began, authorities in Baku accelerated plans to develop a second phase of the port to cope with the expected increase in freight traffic.

“The feasibility study we showed earlier showed that we did not need to rush the expansion,” said Taleh Ziyadov, director general of the Port of Baku. “After the war, we did a new study that showed that we should set that date earlier, perhaps to 2024.”

While Russian officials have praised the new trade routes, some business leaders aren’t so sure.

“This looks like a forced decision that was not made for objective reasons,” said Ivan Fedyakov, who heads InfoLine, a Russian market consultancy that advises companies on how to survive under the current restrictions.

“What is essentially being created is a trade route for the pariahs,” said Ram Ben Tzion, whose company Publican analyzes the avoidance of trade restrictions.