Iran's economic relations with its neighbors

In recent years, the economic relationships between Iran and its neighboring countries have grown in both complexity and significance. This economic integration is crucial for the development of Iran’s non-oil sector and its broader economic strategy, especially considering the geopolitical challenges that the country faces.

In this article, an effort has been made to explore the current state and future prospects of Iran’s trade with its neighbors, examine key sectors, trade volumes, and strategic partnerships.

As of late 2024, Iran’s non-oil trade with its neighbors has seen a notable increase. Non-oil trade volumes reached US$55.3 billion in the first 11 months of the year, with exports constituting 67 million tons of goods valued at US$25.8 billion and imports amounting to 21.4 million tons valued at US$29.4 billion.

This represents a significant increase in trade flows, driven by an increase in exports of petrochemical products, minerals, and agricultural goods.

Iran’s primary trading partners in the region include Iraq, the UAE, Turkey, Pakistan, and Afghanistan. The UAE and Iraq are Iran’s two largest trade partners, especially in terms of exports.

For example, in the first seven months of 2024, Iran’s trade with Iraq was valued at US$7.6 billion, making it one of the most crucial destinations for Iranian goods. The major exports to Iraq include petrochemicals, cement, and agricultural products, while imports primarily consist of machinery and food items.

Turkey has also maintained its position as a key trading partner, with trade between the two countries amounting to US$9.9 billion in the same period. Iranian exports to Turkey largely consist of natural gas and petroleum products, while imports from Turkey are diverse, including electrical machinery and textiles.

Iran’s geopolitical location, bordered by 15 countries, gives it a strategic advantage in the trade of goods and services. This advantageous position allows Iran to serve as a key transit hub for goods moving between Central Asia, the Caucasus, and West Asia.

In particular, the development of international transport corridors, such as the North-South Transport Corridor (INSTC), which links Iran with Russia, India, and Central Asia, is expected to enhance Iran’s role in regional trade.

Furthermore, the expansion of special economic zones, such as the Lamerd Free Trade Zone, has created new opportunities for businesses to engage in regional trade. This diversification of trade routes and infrastructure investment is expected to foster deeper economic ties with countries in the Persian Gulf and beyond.

Despite challenges, such as global sanctions and regional instability, Iran’s government has focused on expanding its non-oil exports, particularly to its neighbors. This strategy is part of a broader effort to reduce Iran’s dependency on oil revenues and diversify its economy.

The Iranian government’s push for stronger trade relations with Central Asia, Russia, and even countries like Oman and Turkmenistan, is driven by the need for economic diversification and the potential to access new markets. Iran’s trade with Russia, for example, has grown steadily, with recent figures showing a trade volume of US$1.5 billion in 2024.

The economic outlook for Iran’s trade with neighboring countries is promising. The country’s strategic location, combined with increased infrastructure investment and a strong focus on non-oil exports, positions Iran as a key player in the regional economy.

However, the ongoing challenges of sanctions and geopolitical tensions remain factors to consider as Iran continues to navigate its path toward economic diversification.

If these trade relationships continue to strengthen, Iran could significantly enhance its role as a regional economic hub, ensuring long-term stability and growth for its economy.

 

Iran: Transit trade through Chabahar Port

Officials from Iran, India, Afghanistan, and Uzbekistan met in Mumbai to explore strategies for enhancing commercial transactions and facilitating the transportation and transit of goods through Iran’s Chabahar Port.

Hossein Shahdadi, Deputy Director of Port and Economic Affairs of Chabahar, represented Iran at the meeting, which also included senior officials from India’s Ministry of Ports, Shipping, and Waterways, as well as ambassadors and diplomats from Uzbekistan, Afghanistan, and Iran.

Chabahar potential

The discussions centered on leveraging Chabahar’s strategic position as a vital trade and transit hub connecting Central Asia, South Asia, and the Middle East. Participants reviewed the port’s current infrastructure and operational capacity while addressing key obstacles to trade, including bureaucratic challenges, logistical inefficiencies, and infrastructure gaps.

As part of the agenda, the officials also proposed measures to streamline customs processes, enhance multimodal transport connectivity, and expand investment in Chabahar’s development to unlock its full potential as a regional trade gateway.

Chabahar regional role

Chabahar Port, located on Iran’s southeastern coast in the Gulf of Oman, is Iran’s only oceanic port and holds immense strategic significance. It provides a shorter and more secure trade route for landlocked countries such as Afghanistan and Uzbekistan, offering a viable alternative to traditional trade routes through Pakistan.

India, in particular, has invested heavily in Chabahar as part of its broader strategy to bypass Pakistan and enhance trade with Central Asia, Afghanistan, and beyond. The port is seen as a linchpin of India’s International North-South Transport Corridor (INSTC), a multimodal trade route linking India to Russia via Iran and Central Asia.

Chabahar Port and India

India has played a significant role in the development of Chabahar Port, committing substantial financial and technical resources to its construction and expansion. Under a trilateral agreement signed in 2016 between Iran, India, and Afghanistan, India has been granted operational control of a portion of the port. Since then, the country has contributed to improving the port’s infrastructure, including the construction of new terminals, installation of modern equipment, and dredging activities to enhance its cargo-handling capacity.

In recent years, India has shipped essential commodities such as wheat to Afghanistan through Chabahar and has positioned the port as a key enabler of humanitarian assistance and economic collaboration. The development of Chabahar aligns with India’s vision of regional connectivity and underscores its commitment to promoting economic stability in Afghanistan and Central Asia.

Future goals and challenges

The third joint working group meeting also highlighted the challenges faced in realizing Chabahar’s full potential. These include the need for sustained investment in rail and road connectivity, enhancing port efficiency, and addressing geopolitical issues, including US sanctions on Iran, which have hindered the pace of collaboration in some areas.

Despite these hurdles, all four nations reiterated their commitment to furthering cooperation on Chabahar and exploring innovative solutions to promote regional trade and economic integration. The port’s strategic location and growing role in fostering connectivity ensure it will remain central to the economic ambitions of the participating nations.

 

Iran-China railway link via Afghanistan

The head of the Islamic Republic of Iran Railways (RAI), in a meeting with the head of Afghanistan Railway, said the country is eyeing to connect its railway network to China via Afghanistan.

“Due to the proximity of Iran, Afghanistan, and China, this route (Iran-Afghanistan-China) is the only route that can shorten the transit route and reduce the costs, therefore completing the Herat rail route based on the schedule is very important,” Jabar-Ali Zakeri said in the meeting with Mohammad Ishaq Sahibzadeh.

In this meeting, Zakari stated that Iran is determined to support the development of Afghanistan's railways, noting that the existence of a railway line in the northwest of Afghanistan and the proximity to the common border with Iran is a great opportunity for transit between the two countries.

Referring to the training courses held for Afghan railway employees in the past years, the RAI head emphasized, “According to Afghanistan's request, soon the third training course for Afghan railway employees will be held.”

According to Zakeri, many of the problems faced by the Iran-Afghanistan Railway Consortium have been resolved and, currently, three trains a week are running on the designated route between the two countries.

Further in this meeting, Sahibzadeh also pointed to the growing cooperation between the railways of Iran and Afghanistan, while appreciating the training programs for 96 employees of Afghanistan Railways by Iran Railways.

“Due to the successful holding of the first and second courses, we are now waiting for the third course,” he said.

Sahibzadeh stated that the Khaf-Herat railway project depicts the friendship between the two countries, adding, “We hope that with cooperation, we will see an increase in transit, and as a result, the growth and promotion of trade between the two countries.”

 

Deepening relations between Iran and Afghanistan

Iranian Interior Minister Ahmad Vahidi held talks with Abdul Ghani Baradar, the Acting Deputy Prime Minister for Economic Affairs of the Taliban government on Monday. 

Baradar is leading a high-ranking Taliban delegation that arrived in the Iranian capital of Tehran on Saturday. He also met with Iranian Foreign Minister Hossein Amir Abdollahian on Sunday. 

According to Baradar’s office, the two sides discussed political and economic relations, effective coordination between their respective nations, water resource management, transit agreements, and enhancement of Afghanistan’s imports and exports through Iran.

The official and his protégé have traveled to Iran with the aim of meeting and negotiating with Iranian economic officials in order to enhance trade and economic cooperation, develop bilateral relations, and explore more areas of cooperation in transit, transportation, customs, and environment.

The delegation, consisting of 30 Taliban officials, will also travel to other Iranian provinces and are due to be briefed on major economic projects of the Islamic Republic of Iran.

This trip is taking place while according to the latest statistics, Iran's share of the Afghan market amounts to 35%. Afghan investors also account for a considerable portion of foreign investments in Iran.

Iran has repeatedly voiced its support for Afghanistan’s security and prosperity. The country currently hosts a population of more than 5 million Afghan refugees and attaches great significance to its ties with Afghanistan. 

Since taking office, President Ebrahim Raisi’s administration has emphasized the necessity of friendly and comprehensive relations with Iran’s neighbors. 

Afghanistan has been ruled by the Taliban since the United States. hastily withdrew its forces from the country in August 2021. It currently grapples with various security and humanitarian challenges, which are thought to be the results of more than two decades of American occupation.

Iran has repeatedly expressed willingness to work closely with the Taliban while calling for an inclusive government in the war-stricken country. 

 

Iran and Russia to cooperate in transit trade

Iran and Russia have signed a memorandum of understanding (MoU) on transit cooperation. The MoU on tripartite cooperation between the Iran Transportation Development Fund, the International Coordinating Council on Trans-Eurasian Transportation (CCTT), and the Economic Development Center of the Commonwealth of Independent States (CIS) was signed in Moscow.

The MoU was inked in the presence of Iran’s Ambassador in Russia Kazem Jalali, Russian Deputy Transport Minister Dmitry Zverev, Head of Iran Transport Development Fund Davoud Danesh-Jafari, Director-General of the Business Center for Economic Development Center of the CIS (BC CIS) Vadim Ganin, and Secretary-General of International Coordination Council on Trans-Eurasian Transportation (CCTT) Gennady Bessonov.

Based on this MoU, the signatories agree to cooperate with each other to increase trade, transit and storage of goods along international corridors, especially the North-South corridor.

The signatories of this memorandum also emphasized the exchange of information, carrying out joint projects, and exchange of specialized delegations to achieve these goals.

Earlier this month, during a meeting between Iranian Transport and Urban Development Minister Mehrdad Bazrpash and a visiting Russian delegation headed by Igor Yevgenyevich Levitin, a senior aide to the president of the Russian Federation, the two sides emphasized the necessity to boost the transit of commodities through the Caspian Sea.

During the meeting, held at the Iranian Transport and Urban Development Ministry in Tehran on Sunday evening, the two countries emphasized the development of cooperation in the air, sea, rail, and road sectors and multimodal transportation.

In the meeting, the Iranian minister considered the development of transportation cooperation between the two countries to be beneficial for both sides and said while the maritime trade between the ports of the two countries has a very long history, the use of the capacity of the active ports of the two countries in the Caspian Sea can be considered for new cooperation.

The senior aide to the president of the Russian Federation, for his part, summarized the expert meetings and the visit of the Russian delegation to the Rasht-Astara railway route and called for the development of transportation cooperation in all areas.

Iran and Russia reached an agreement last year for reviving the idle section of the International North-South Transport Corridor (INSTC) in Iran for expanding transit ties.

The first Russian freight train arrived at Iran’s Sarakhs railway station in Khorasan-Razavi province on the border with Turkmenistan last July to officially launch the eastern section of the INSTC.

The Russian train was allowed into the Iranian border in a ceremony attended by First Vice President Mohammad Mokhber along with transport, oil, industry, and agriculture ministers as well as the vice president for science and technology.

The second Russian transit cargo for India entered Iran also from the northeastern Sarakhs border in October last year.

Iran and Russia are also cooperating in the maritime sector to use the Caspian Sea to shorten the transit route from Russia to India.

 

Chabahar Free Zone special attraction for investors

In this century, transit and routes for transporting goods and passengers have become extremely important. One of the ways that countries can increase their economic and political power and consequently their national power at a lower cost is the optimal use of the strategic position.

The location of a country next to the open sea, oceans, important straits, etc. provide capacities, if properly planned and used, can help in creating economic prosperity and compensating for many of the country's deficiencies in other areas.

Iran's strategic position enables it to play a role as an important transit route in the transit of goods in the east-west and north-south routes.

This issue causes countries without access to open waters, including Afghanistan and Central Asian countries, to depend on Iran more than before.

The transit of goods from Iran through rail and road transport and then sea transport through the port of Chabahar plays an important role in attracting investment, developing industry, and creating employment, especially in the eastern regions of the country.

Lying on the coast of the Gulf of Oman in Iran’s southeastern Sistan-Baluchestan Province, Chabahar is the country’s only oceanic port and given its strategic location in the North-South Transport Corridor (NSTC) development of the port is of high significance for Iran, so the government has some major projects to create multi-dimensional transportation facilities in this port.

As announced by the managing director of Chabahar Free Zone Organization, US$8 billion of investment was made in different sectors in this zone during the past Iranian calendar year 1401 (ended on March 20).

Amir Moqadam said that the result of the actions taken in the field of investment attraction last year was that the total investments made reached from US$4.9 billion at the end of 1400 to US$8 billion at the end of 1401, and for 1402 it is targeted to reach US$14 billion.

Chabahar port has two significant docks, namely Shahid Beheshti and Shahid Kalantari, which are mostly referred to as ports, i.e. Shahid Beheshti Port and Shahid Kalantari Port.

Development of Shahid Beheshti Port, construction of Chabahar International Airport, and building Chabahar-Zahedan (center of Sistan-Baluchestan Province) railway are three of the major projects to make Chabahar a complete logistics platform.

In addition, Chabahar Free Zone has been suggested as a transit and logistic gateway for Iran's domestic market which, while reducing the cost and time of transportation it has also provided profitable economic opportunities in the development of logistics facilities.

Chabahar Free Zone is a multi-purpose zone with educational, industrial, tourism and transportation sectors.

Considering all the above-mentioned points, making investment in this zone is a necessity.

It is worth mentioning that one of the major potentials of Chabahar free zone, which makes investment in this area very profitable, is the existence of cheap workforce in all fields, especially in the field of industries.

This has caused this area to have a high potential for establishing factories and industrial units.

 

Iran: Container shipping line from Chabahar to Indian ports

Spokesman of Iran’s Valfajr Shipping Company says his company is operating a regular container shipping line from Chabahar port to various ports in India.

According to Abbas Kabousi, 15 voyages have been conducted along the mentioned line over the past three months, ISNA reported.

“The first vessel with a full capacity of 550 TEU arrived in Chabahar from Indian ports a few weeks ago and its cargo has been completely unloaded,” Kabousi said, adding that his company is ready to transport more goods between Indian ports and Chabahar port.

The official noted that his company has also been operating some direct lines from Persian Gulf Arab countries to Chabahar port.

“Valfajr Shipping Company has reduced the time of cargo transportation on the route from the southern ports of the Persian Gulf to Chabahar while reducing the freight rate and improving the schedules,” he said.

Kabousi further said the shipping company is ready to launch a direct line from Oman to Chabahar port.

Back in May 2022, Iran’s Ports and Maritime Organization (PMO) announced that three direct container shipping lines were launched from Chabahar Port to Nhava Sheva and Kandla ports in India as well as Jebel Ali Port in United Arab Emirate.

Iran and India had previously launched shipping lines between Chabahar and the Indian ports of Mumbai, and Mundra.

The first shipping route between the two countries was put into operation in 2017 between Iran’s Chabahar port and Mumbai.

In January 2019, Iran and India inaugurated the second direct shipping route which passes through Mumbai, Mundra, Kandla, Chabahar, and finally Bandar Abbas in southern Iran.

India is using the mentioned shipping routes to transit goods to Afghanistan and Persian Gulf nations as well as the countries in Central Asia.

Through Chabahar port India bypasses Pakistan and transport goods to Afghanistan and Central Asia, while Afghanistan can get linked to India via sea.

Iran has awarded India the project for installing and operating modern loading and unloading equipment including mobile harbor cranes in Shahid Beheshti Port in Chabahar.

The strategic Chabahar port in southeastern Iran is the only ocean port on the Makran coast and it has a special place in the country’s economic affairs.

Back in September 2021, Indian Prime Minister Narendra Modi had called on Central Asian countries to benefit from Chabahar Port capacities for expanding their trade in the region.

 

Iranian port Chabahar handles nearly 2 million tons goods in a year

As announced by a provincial official, nearly 2 million tons of basic commodities were transported from Chabahar port, in the southeast of Iran, to the designated destinations throughout the country in the past Iranian calendar year 1400 ended in March 2022.

Mehrollah Damough, the head of goods transportation office of Road Maintenance and Transportation Department of Sistan-Baluchestan province, where the strategic port lies, said that the mentioned commodities were transported by almost 80,000 trucks.

Chabahar is an important port and a low-cost route for Central Asian countries, which with its strategic unloading and loading equipment has the potential to become a key transit corridor for international transit and transportation, the official further underlined.

As announced by the Deputy Head of Islamic Republic of Iran Customs Administration (IRICA), 30.9 million tons of basic goods worth US$19.6 billion were cleared from the customs in the past Iranian calendar year.

Foroud Asgari, Deputy Head of IRICA for customs affairs, said that the imported goods comprises of 25 commodity groups.

Putting the value of the imported basic commodities at US$19.6 billion in the past year, the official said that the imports showed a 60% increase in terms of value and 32% growth in terms of weight, as compared to the Iranian calendar year 1399.

As Iran's only oceanic port on the Gulf of Oman, Chabahar port holds great significance for the country both politically and economically. The country has taken serious measures for developing this port in order to improve the country’s maritime trade.

In this regard, the Islamic Republic has been welcoming investors from all over the world to take part in the development of this port and benefit from its distinguished position as a trade hub in the region.

Chabahar port consists of Shahid Kalantari and Shahid Beheshti terminals, each of which has five berth facilities. The port is located in Iran’s Sistan-Balouchestan Province and is about 120 kilometers southwest of Pakistan’s Baluchistan province, where the China-funded Gwadar port is situated.

In May 2016, India, Iran, and Afghanistan had signed a trilateral agreement for the strategically-located Chabahar to give New Delhi access to Kabul and Central Asia.

Based on an agreement with Iran, India is going to install and operate modern loading and unloading equipment including mobile harbor cranes in Shahid Beheshti Port in Chabahar.

Tehran-Baku ink MoU for constructing bridge over Astarachay River

Iran and Azerbaijan have signed a memorandum of understanding (MOU) for cooperation in constructing a bridge over the Astarachay River. The MoU was signed by Iranian Deputy Transport and Urban Development Minister Kheirollah Khademi and Azerbaijan’s Deputy Minister of Digital Development and Transport Rahman Hummatov in Baku.

As reported by IRNA, the project for the construction of the mentioned bridge was commenced in a ceremony attended by Iranian Transport Minister Rostam Qasemi and Azeri Deputy Prime Minister Shahin Mustafayev.

Qasemi, who is also the head of the two countries’ Joint Economic Committee, traveled to Azerbaijan with a delegatio to visit the country’s economic areas and explore avenues of mutual cooperation.

Iran and Azerbaijan had earlier announced the total investment made in the project to be 4.7 million euros.

The construction of Astarachay Bridge is going to be a positive step in completing the North-South Corridor and is expected to open a new gate for the development of all-out relations between the two neighbors.

Speaking at the ceremony, Mustafayev said the construction of the bridge is scheduled to be completed by the end of the current year.

"The president and the government of the Republic of Azerbaijan attach special importance to the development of relations with the Islamic Republic of Iran, and the presidents of Iran and Azerbaijan expressed interest in further developing relations between the two countries in a cordial meeting in Ashgabat," the official said.

Azerbaijan and Iran have established deep relations in various areas including trade, economy, energy, customs, and investment, he said: "There are good opportunities between the two countries to implement joint projects in these fields."

Mustafayev further mentioned the upward trend of trade between the two countries and said, “Despite the Coronavirus pandemic in the last two years, the trade turnover of Iran and the Republic of Azerbaijan in the first 11 months of 2021 increased by 30% as compared to the previous year and the amount of road transport also increased by 62.5%.”

“During this period, the transportation and transit of goods between the two countries have not stopped for a single day,” he stressed.

Qasemi for his part called Azerbaijan the closest neighbor to Iran and said, "We hope that after the meeting of the presidents of the two countries, relations between the two nations will develop as much as possible."

He pointed to the development of relations with neighbors as one of the priorities of the Iranian government and, referring to Iran's participation in the implementation of projects in Azerbaijan’s liberated territories in Karabakh, said, "Cooperation between the two countries in this area can accelerate the reconstruction of these regions.”

Qasemi noted that the development of transport and transit in the region is in the interest of both countries, and said that the two countries’ Joint Economic Committee could help deepen economic relations between them, as well as provide the necessary facilities for businessmen and entrepreneurs.

Khademi termed the construction of the Astarachay Bridge as an effective step in completing the north-south corridor and said, "The construction of this bridge will lead to economic, tourism, industrial and transportation development of the two countries due to the cultural, social and religious commonalities of the two neighboring countries."

“The Astarachay border bridge will lead to the development of transit trade between the two countries, which, in parallel with the existing railway bridge, will lead to the comprehensive development of the region,” he said.

Fall of Kabul and implications for Pakistan economy

Taliban which had been making rapid advances across Afghanistan in the wake of US evacuation, were finally able to take control of the capital, Kabul, in what was a rather swift, seamless and somewhat peaceful transition. The development finally puts an end to the uncertainty over the political future of Afghanistan.

In contrast to what had been feared, Taliban seek to present a moderate face by offering general amnesty to masses, preserving the infrastructure deployed in the past 20 years while remaining mostly in compliance with agreements forged with the international community, opening up possibility of international recognition of the new political setup. Further, China, Pakistan and Iran are on the same page on maintaining stability in the Afghanistan region.

Rise of new power in Afghanistan

Major regional powers, China, Iran and Pakistan have all showed a willingness to work with the new setup in Afghanistan and help maintain peace in the region. The geographical and political dynamics have changed significantly since the last time Taliban government was in power in Afghanistan with China establishing its strong presence in the region through economic corridors in Pakistan and also in Iran.

The economic corridors in Pakistan and Iran connect landlocked Afghanistan and the central Asian Republics to the sea ports, thus giving them access to global markets. The integrated economic interests of major powers in the region will help bring these players closer and work together and potentially bring peace and economic prosperity in the region.

Implications for Pakistan

From Pakistan’s vantage the peaceful transition has so far has ended concerns for a civil war that could have resulted in unrest on Pakistan’s western border, increasing law and order risks and potentially putting projects under CPEC into jeopardy. Moreover, the threat of an influx of refugees that could further put pressure on already strained fiscal side has been allayed, somewhat.

Further, with Pakistan likely being the preferred partner for the west amongst the Russia-China-Pakistan-Iran quartet to keep its influence, strengthening of relationship could unlock some concessions in med-to-long run while improving prospects of Pakistan’s status with global agencies (IMF, FATF etc.).

Pakistan’s net trade for FY21 with Afghanistan is reported around US$804 million mostly consisting of food related items while cements, pharma, and aluminum cans (PABC) occupy a minimal share. Analysts do not expect any material impact on cements given the strong robust domestic demand and coal alternatively imported through sea while PABC could witness neutral to negative impact given Afghanistan occupying a significant share in sales mix. The company has ventured into other markets to neutralize the impact. Lastly, with the tight border controls in the near term, Pakistan could witness inflow of smuggled products subsiding, opening up prospects for local players (such as in auto parts tyres, and consumer items).

Investment perspective

The fall of Kabul in the hands of Taliban may not turn out to be as negative as feared earlier, especially if the major powers in the region show willingness to work together. Though, still early at this point, a stable and peaceful Afghanistan will have positive spillover effects for Pakistan and the region at large. The potential positive idiosyncrasies related to lasting peace in the region may help expand market multiples in the medium and long term.