The ongoing war in Ukraine has had a profoundly destabilizing effect on existing trade arrangements and cooperation between Russia and the European Union. Western sanctions on Russia have escalated to hitherto unseen levels in the aftermath of Russia’s invasion of Ukraine. Russia has incurred very little lasting damage since the sanctions have been imposed. While the Ruble initially nose-dived, an increase in energy prices has resulted in billions of dollars of revenue every month from oil and gas exports. The sky-rocketing price of oil and natural gas has seen Russia make enormous profits on its energy sales. These profits have cushioned the impact of the sanctions while also causing enormous hardship in Europe and stoking unrest, division and a perception voiced by Italy’s former Deputy Prime Minister, Matteo Salvini that the sanctions were causing more harm to those imposing them than their target.
According to Maxim Mironov, a Russian economist working at IE Business School in Madrid, sanctions are having an effect on the Russian economy but at a pace much slower than Western powers were hoping. The European Union and England are heavily dependent on Russia for energy supplies but have shown a strong appetite for sanctions even at the risk of energy shortages for their population. Plans are being drawn up the Group of 7 countries for a price-cap on Russian oil products calibrated at a level that would allow Russia to make a minimal profit, thus incentivizing them to sell at all, while removing Russia’s primary source for financial profit and increasing the potency of Western sanctions.
Russia’s strong position as an energy producer has enabled it to escape relatively unscathed from the initial wave of sanctions. Nonetheless, with plans for a price cap on Russian oil being drawn up and the European Union desperately trying to reduce dependency on Russian imports, sanctions will only escalate from here, requiring Russia to find alternative markets for its major exports. It is in this context that the International North South Trade Corridor (INSTC) provides Russia a critical outlet to re-orient its export strategy around trade in Central Asia.
The INSTC is a 7,200-kilometer route for transporting freight between India, Azerbaijan, Iran, Russia, Central Asia and Europe. The route provides almost a 50% percent reduction in shipping transit times for Russian goods destined for India and bypasses the Suez Canal. The existence of this route is critically valuable for Russia as maritime routes along the European coast are unreliable with political tensions between Russia and the European Union continuing to grow.
The primary limitation of the INSTC in the past has been the lack of ability to handle sufficient volumes of freight. Iran’s primary port Bandar Abbas has historically handled the majority of Iran’s freight and been extremely congested. In addition, the Bandar Abbas Port can receive only 100,000-ton cargo-ships. Most international shipping is carried out via 250,000-ton ships. As a consequence, goods bound for the Bandar Abbas port must be docked at Dubai and transported onto smaller ships. This entire process causes significant delays for Iran as well as a considerable loss of revenue to the United Arab Emirates.
The recent emergence and continued development of the Chabahar Port has allowed Iran to develop as a commercial transit center for the region. Unlike the Bandar Abbas Port, the Chabahar Port is a deep-sea port and able to receive 250,000-ton cargo ships. The Chabahar Port has a current capacity of 2.5 million tons per annum and development is underway with a view to increasing the capacity to 12.5 million tons. The Chabahar Port is vital in reducing transit times due to its enhanced capabilities as well as its favorable location.
Rising political tensions with the European Union have compelled Russia to seek more stable and reliable trading partners. In India and Central Asia, Russia might find the opportunity to build lasting and fruitful trade partnerships. The INSTC and its ongoing expansion is premised on principles of cooperation and mutual benefit. This stands in stark contrast with Russia’s Western trading partners, who have explicitly placed political and ideological concerns above common economic prosperity or the immediate needs of their populace. The prospect of any de-escalation of the ongoing conflict in Ukraine seems remote at the moment, thus necessitating a re-alignment of Russia’s trade relationship.
It is entirely possible that the rising divisions between Europe and Russia develop into a permanent schism that precludes any trading relationship. It is this possibility that has prompted Russia to engage in accelerated efforts to establish deeper trading relations with India and Central Asia. These efforts are facilitated greatly by the emergence and expansion of the INSTC and potentially herald the emergence of a new pole in Central Asia.