Eurasia “turning south”

Yaroslav Lissovolik

The Eurasian Development Bank’s chief economist

This year, Eurasian integration received new stimuli not only from integration processes within the Eurasian Economic Union (EAEU), but also associated with potential free trade area (FTA) agreements with other countries. The EAEU’s first agreement with Vietnam took effect last year and a number of other FTA instruments are being discussed, with Asia acquiring special importance to Russia. While there were many talks about Russia’s turning east in recent years, intensified free trade negotiations with Iran gave a new, important southern vector to Eurasian integration in Asia.

The main focus of negotiations between Iran and the EAEU is a provisional FTA agreement that may become permanent in three years after the effective date. After consultations in early May this year, the parties approved the list of goods to be covered by the FTA, suggesting that the provisional agreement may be entered into as early as before the end of the year.

The agreement will provide Iran with an opportunity to integrate deeper into the Eurasian palette of emerging alliances and enhance cooperation not only with the former Soviet countries, but also China and other key players in East Asia where the EAEU is building trade and economic unions with the ASEAN countries. In addition, Iran may compete for a greater share of the Russian food market freed from Western products as a result of sanctions. It also may expand its presence in the textile market and attract more tourists from the EAEU countries.

Of all the EAEU countries, the trade agreement with Iran will be of particular importance to Armenia that borders Iran and for which the alliance will create additional logistics and transport opportunities. Before the end of the year, a free economic area is expected to be established between Armenia and Iran in order to develop border regions. Armenia estimates that this free economic area will create 2,500 jobs and boost its exports. Intensified relationships with Iran will enhance cooperation in the transport sphere, including the North–South transport corridor.

For Russia, one of the key arguments for establishing a trade alliance with Iran is its considerable market (the country’s population approximates 80 million). Being one of the largest markets in the Near East, it has not been divided yet by major transnational companies from developed countries. In these conditions, EAEU companies have an opportunity to locate new markets and profitable assets for investments. Investment opportunities are associated, to a significant extent, with infrastructure and power projects that could be fulfilled with contribution by Eurasian development institutions.

Another important factor is that after the years of sanctions and restrictions Iran remains a rather closed economy for the outer world in terms of trade. Its average import tariff exceeds 15%, which is almost 150% higher than developing economies’ average and several times higher than in Russia. Therefore, establishing a free trade area with Iran will provide Russia and its EAEU partners with a significant preferential margin compared to countries that do not enjoy preferential trade conditions.

The Ministry of Economic Development reports that trade between Iran and Russia is rising. It grew by more than 70% in 2016 and almost doubled in January 2017. Russian exports increased by 2.7 times and exports of highly processed and mechanical engineering products by almost seven times compared to January 2016. All these factors form a foundation for developing the promising southern vector of Eurasian integration that may be expanded, after the free trade area is established with Iran, with new alliances with key players in South Asia, including India.