Russia builds new Asia trade routes to weaken sanctions over war

By Henry Meyer

Russia is pressing ahead with construction of two new transport corridors linking Asia and Europe, seeking to weaken sanctions over its war in Ukraine at the same time as Middle East turmoil is disrupting global trade.

The shipping and rail networks via Iran and an Arctic sea passage could strengthen Moscow’s pivot toward Asian powerhouses China and India and away from Europe. They have potential to embed Russia at the heart of much of international trade even as the US and its allies are trying to isolate President Vladimir Putin over the war.

The routes could cut 30 per cent-50 per cent off transit times compared to the Suez Canal and avoid security problems plaguing the Red Sea as Houthi rebels attack international shipping over Israel’s war against Hamas in Gaza. Iran’s missile and drone strikes aimed at Israel have added to the regional turbulence.

While the US and its Western allies are shunning the Russia-backed routes despite potential cost savings, major Asian and Gulf economies have shown interest.

Still, significant hurdles remain.

Outdated Iranian infrastructure is holding up development of the International North South Transportation Corridor connecting India to the European part of Russia. And even as accelerating climate change melts Arctic ice to make the Northern Sea Route, or NSR, a more viable option, formidable logistical challenges remain along Russia’s remote coastline.

Russia is preparing to invest more than $25 billion to upgrade the route via Iran and improve facilities along the Russian Arctic shoreline, including a fleet of domestically manufactured ice-breakers. It also plans to patrol the NSR route with a network of drone bases, Izvestia newspaper reported, citing an unidentified Defense Ministry official.

Russia issued a 1.3 billion euro ($1.4 billion) loan to Iran last May to build a vital missing rail link that will stretch 162 kilometers (101 miles) to connect the city of Rasht along the Caspian Sea coast to Astara on the border with Azerbaijan. Once completed, the railway will allow cargo supplies from St. Petersburg to Bandar Abbas, Iran’s main export port on the Persian Gulf.

“Its construction will allow us to create direct and uninterrupted railway transportation along the entire length of the North-South route,” Putin said during a videoconference with Iranian counterpart Ebrahim Raisi. “This will help considerably diversify global transport flows.”

Transportation capacity along the north-south route, which includes a longer rail link via central Asia and a Trans-Caspian Sea network, could increase by 85% to 35 million tonnes a year by 2030, according to the Eurasian Development Bank. It will connect Russia with Iran and India as well as potentially the rest of South Asia, the Persian Gulf and Africa. Last August, Russia sent its first direct cargo train to Saudi Arabia.

“If the other routes are interrupted, this one will continue working because it’s sanctions-proof,” said Nikita Smagin, an analyst at the Kremlin-founded Russian International Affairs Council. “That’s the main idea.”

Driven by Russian oil sales and purchases of electronics, industrial equipment and cars, trade with China hit a record $240 billion in 2023, more than double the $108 billion reached in 2020. Trade with India grew to almost $64 billion last year, versus around $10 billion three years earlier, as New Delhi’s purchases of Russian oil have soared since the war in Ukraine began.

Russia’s growing trade with China is already spurring the Kremlin to spend billions to upgrade its vast eastern railroads to expand capacity on the Trans-Siberian and Baikal-Amur Mainline by 2030.

Neighboring Turkey’s trade boom with Russia is faltering, however, as the US and the EU crack down on so-called dual-use goods that could provide the Kremlin with a vital lifeline for its military offensive in Ukraine. Preliminary data published earlier this month from Turkey’s Trade Ministry showed exports to Russia fell by a third in the first quarter from a year earlier.

Development of the Northern Sea Route has been slowed by Western punitive measures over the invasion of Ukraine that have stalled a Russian plan to export liquefied natural gas from the Arctic LNG 2 plant to Asia as key foreign investors froze their participation. The sanctions also upended contracts for the plant to get specialized icebreaker vessels needed to navigate the freezing waters.

Chinese shipping company Cosco stopped using the route from 2022, even though a trip from Dalian, China, to Rotterdam in the Netherlands along the NSR takes around 33 days, compared to 48 days via the Suez Canal. All transit between Asia, North America and Europe through the Arctic that in 2021 represented 40% of shipping volumes has stopped amid concerns over falling foul of sanctions.

That’s despite continuing attacks since late last year by Yemen’s Iran-backed Houthi militants on vessels in and around the Red Sea, which is forcing Western shipping firms to avoid the Suez Canal and take a longer route around the southern tip of Africa.

“International transit traffic through the NSR was considered risky because of changes in the geopolitical situation,” said Mikhail Grigoryev, an Arctic expert who is the co-owner and director of consulting company Gecon.

Still, the United Arab Emirates’s DP World port operator in October signed an agreement with Russian state-run Rosatom nuclear operator to develop container shipping along the route between Vladivostok and Murmansk.

In January, Putin attended a keel-laying ceremony for the fifth of seven nuclear-powered icebreakers Russia is building for service on the Northern Sea Route, calling the fleet “an enormous competitive advantage” for the country.

At the launch of two earlier vessels in November 2022, Putin said the ships would “help Russia more fully unlock its export potential and establish efficient logistics routes, including to Southeast Asia.”

India meanwhile is investing in Chabahar, the only Iranian port with direct access to the Indian Ocean, after getting a waiver from US sanctions.

The Russian-backed rail connection via Iran opens the way to central Asia — including crucially Afghanistan — and “offers a shorter route to Europe,” said Vaishali Basu Sharma, a former consultant at India’s National Security Council Secretariat.

“Emerging markets are finally breaking free from the hegemony created by developed countries,” she said.