Russia-Ukraine War: Implications for Asian Geoeconomics

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Russia-Ukraine War: Implications for Asian Geoeconomics

As the war and resulting sanctions redraw trade maps in Asia, Iran stands to be the primary beneficiary.

Russia-Ukraine War: Implications for Asian Geoeconomics

A view of Chabahar port in Iran at night, January 2, 2017.

Credit: Wikimedia Commons/Ksardar1359

The Russian invasion of Ukraine has set off a series of sanctions from Western states and many others that will have broad implications for some time to come, even in the unlikely scenario of a relatively quick end to the fighting. The impact on the global economy and supply chains from both the war and the escalating sanctions regime has already been significant but will have long-term consequences on the geoeconomics of Asia and East-West trade that require closer examination.

The term geoeconomics is poorly defined in academia. It is most frequently used to refer to economies being instrumentalized for national security purposes. Here, I use the term specifically to refer to how countries use geography to achieve their economic ambitions in light of security-related issues. In that sense, my definition is closer to scholars who see geoeconomics as the interplay between economics and geopolitics.

I argue that there are three interrelated and intersecting trends brought about by the Russian invasion of Ukraine and the unprecedentedly fast succession of Western sanctions imposed on Moscow, which redrew trade maps in Asia. Ultimately, Iran stands to be the primary beneficiary of these changes.

The New Eurasian Land Bridge and China’s BRI

The first two implications are closely related to the fact that the war in Ukraine and the associated economic embargoes have created significant blockages with regard to the New Eurasian Land Bridge (NELB). While Beijing grounds its Belt and Road Initiative (BRI) in the mystique of the ancient Silk Road, its primary land route to its target markets in Western Europe goes through the NELB, which passes through Central Asia and Russia to reach the European continent. This route is so important that Chinese officials have in the past worried about overreliance on Russia for their logistical needs.

Now those fears look prescient. As many experts have noted, the NELB route has become increasingly problematic. The security issues brought about by the war aside, Western sanctions have made Russia increasingly difficult to work with. Major logistics firms withdrew from Russia even before they were forced out by sanctions, and European countries like Poland and Ukraine, who once held ambitions of being key hubs for the NELB, have eschewed economic relations with Moscow and championed sanctions as they prioritize security needs. All these factors make it increasingly necessary for China to look toward the lower tier of the “Belt,” going through Iran.

This route has faced various challenges mainly due to the major economic sanctions placed on Iran throughout the vast majority of the BRI’s existence. While the Chinese government has been willing to buck Washington’s edicts not to engage with Iran economically in many respects, the Chinese private sector and even major state-sponsored enterprises that provide most BRI financing are not immune to sanctions pressure.

Asian Countries Look to Iran for East-West Trade Routes

The second trend, which is also closely related to the NELB blockage, is the increased logistical activity of other Asian countries, particularly from Central Asia and South Asia, to reach their target markets in the West through Iran. Over the last number of weeks, there has been a flurry of activity surrounding the expansion of trade access involving Iran and countries to its immediate east.

This is buttressed by the Raisi administration’s ambitions to expand economic relations with countries across Asia and to pay closer attention to diplomatic ties with Central Asia, matters conservatives frequently accused the previous Rouhani administration of ignoring.

Russia Looks Eastward and to the INSTC

The third and perhaps least recognized trend is Russia’s own quasi “look East” strategy to mitigate the effects of sanctions by diversifying its trade away from Western economies that seem increasingly interested in weaponizing interdependence. While Russia’s route to China or Central Asia is straightforward, its land route to India, a key trading partner that has refused to join the Western sanctions coalition, is far more complicated. India, mostly surrounded on land by adversaries Pakistan and China, must be reached by sea. While India-Russia trade is mostly carried out by sea, traveling through the Suez Canal, the absence of a more direct route can become a vulnerability, especially in the current charged political environment.

This enhances the importance of the International North-South Transport Corridor (INSTC), which traverses the Caucuses to connect Russia to the Iranian port of Bandar Abbas on the Strait of Hormuz, from which point a shorter maritime route to India is available. This not only drastically shortens transit time for goods shipped between India and Russia but also avoids narrow maritime routes that are potentially susceptible to political blockages. China, for example, is famously concerned about over-reliance on the Strait of Malacca for its maritime trade (the “Malacca dilemma”).

If the increased need of many Asian countries and Russia results in an expansion of financing and usage of these various trade routes, Iran could become a major global trade hub. Especially if the current talks result in a resumption of sanctions relief under a reconstituted Iran nuclear deal, investment and trade interest would likely expand dramatically. Critically, Russia has also expressed a desire to use the INSTC to connect to Pakistan. This has important implications for the BRI project.

While talking about “Asia” resonates in China and is frequently mentioned in Chinese government pronouncements, the most important areas to the BRI have been the key subregions in China’s near abroad: Central Asia, South Asia, and Southeast Asia. In academic literature, BRI projects in these regions are often spoken of separately and on their own terms. But Chinese officials seeing significant economic potential and trade complementarity between their economic investments and zones in South and Central Asia, seem increasingly interested in connections between the two. This interest is underlined by China’s recent efforts to build a trade route through Afghanistan, which is unlikely to be viable due to both security and economic governance issues. Currently, these two regions are connected through an arduously long route through western China.

This is especially problematic considering that China’s investments in Pakistan are largely located in the western Pakistani province of Balochistan and the port of Gwadar, which is a stone’s throw from the Iranian border, while most of Central Asia’s population and economic potential are in Uzbekistan and Kazakhstan, which border the Caspian Sea.

A much more logical transit route is through eastern Iran. This route is now in a position to receive greater attention due to Russian interest in connecting the INSTC to Pakistan. Somewhat ironically, transportation infrastructure in Iran also happens to be a major point of focus for India, which sees connecting to the southeastern Iranian port of Chabahar as its best trade path to Afghanistan and Central Asia. Indian involvement in the Chabahar port project has largely been suspended since the United States abandoned the Iran nuclear deal in 2018 but it could be revived if a new agreement is struck.

There are major barriers still to Iran achieving its goal of becoming a key trade hub, the most important being the resumption of sanctions relief under the Joint Comprehensive Plan of Action. But Iran also requires more strategic planning and a strategy for turning trade routes into economic corridors that can benefit its own citizens. If Tehran can rise to the challenge, it will have a key role to play in the development of Asia and East-West trade moving forward