India & Russia plan to open new trade route via Iran despite threat of US sanctions

Opening a long-pending multi-modal transportation corridor via Iran will be a big boost for bilateral trade between Russia and India, but it’s not just the economy at stake. This is a bold move against the threat of US sanctions.

India’s state-owned Container Corporation of India (Concor) and Russian Railways Logistics Joint Stock Company (RZD) have signed a Memorandum of Understanding to transport cargo between India and Russia – based on a single invoice – via the International North-South Transport Corridor (INSTC), a 7,200-km multi-modal transportation network project cutting right across Central Asia, starting in Iran and ending in Astrakhan, Russia. 

“Within three months, traders from India and Russia could move goods between the two countries through Iran,” Concor chairman V Kalyana Rama said last week.

The INSTC is a trilateral project jointly initiated by Russia, Iran and India in 2002. In order to operationalize a new strategic transit route bypassing Pakistan, India connected it to the Iranian port of Chabahar and built a new route connecting four major cities in Afghanistan by the end of 2016. 

In October 2017, in a “pathbreaking” move, India shipped a consignment of wheat from Port Kandla in Gujarat to Afghanistan, via Chabahar.

The US was keen to promote an alternative route to Afghanistan bypassing Pakistan, so India was accorded a waiver for the Chabahar project from the US sanctions against Iran. This all changed suddenly following the unexpected killing of top Iranian General Qassem Soleimani by the US in January, and the imposition of fresh sanctions by the Trump administration against any entity dealing with Iran, particularly in the construction sector. At the time, it seemed unlikely that the INSTC would ever be operationalized without an official waiver from Washington.

Overcoming US sanctions

The sudden signing of the Russian-Indian MoU, just weeks after President Donald Trump’s historic visit to India, suggests that the US may have given just such a waiver for India –  or perhaps that deepening Indo-US strategic ties may have emboldened New Delhi to move forward in activating the INSTC to connect with Russia through Iran.

In any case, trade via the INSTC will benefit exporters and importers in both India and Russia by lowering transit time and cost of transportation compared to the existing route via the Suez Canal. It will also cut down the shipping time sharply, to 25-28 days from the current 40 or so.

Boosting bilateral trade

India and Russia are committed to expanding bilateral trade, shooting for $30 billion in annual trade volume by 2025, up from the current $11 billion, largely based on arms sales to India. The two countries are also working on an ambitious agreement for the long-term import of crude oil from Russia’s Far East region. 

In another significant development, Indian Prime Minister Narendra Modi visited Vladivostok last year to sign a Memorandum of Intent for opening a maritime route to Chennai, on India’s eastern seaboard. The 10,000-kilometer sea route could enable cargo transfers in 24 days, in comparison to the over 40 days it currently takes to ship goods from India to Russia’s Far East. 

Activation of the INSTC would also unlock huge opportunities for landlocked Central Asian countries to trade in both directions. Russia is reportedly facilitating a free trade agreement between India and the Eurasian Economic Union (EAEU), which consists of Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan. 

Access to the EAEU states could offer entry to a market of over 173 million people to Indian companies, particularly producers of generic medicines, tea, canned vegetables, grapes and raisins, rice, coffee and coffee extracts, spices, herbs, and essences. The EAEU has also signed free trade agreements with Serbia and Singapore and is working on improved trade cooperation with the ASEAN, meaning that they too could benefit from the INSTC.

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