Iran Needs a Cushion, and Europe Needs Gas

The Russian invasion of Ukraine has been a watershed moment on so many levels for so many countries. Existing political, economic, energy, and transportation channels are being affected across western Eurasia. Countries are maneuvering to minimize the war’s detrimental impact while new trade synergies are being formed at a rapid pace. Most recently, Germany and Qatar signed a long-term energy partnership for the delivery of Qatari natural gas as the Germans look to reduce dependence on Russian supplies. Qatar’s reserves are located in the world’s largest gas field, which it shares with its northern neighbor, Iran.

The Iranians, too, have the option to harness the new economic opportunities that are emerging from Russia’s international isolation. But unlike in Qatar, the Islamist ruling class in Tehran is not driven by commercial common sense. Instead, it is captive to a set of anti-Western ideological priorities that means Iran will probably once again miss the train. But to be fair, it is not only Iran that is responsible for this situation. In the last 30 years, the United States and Europe have systematically marginalized the country from all major energy trade and transit projects that linked the broader Middle East to European markets. Perhaps the gravity of the Russian invasion of Ukraine will give the United States and Europe a reason to reconsider Iran’s economic ostracization. Even so, Tehran would have to play ball for a new Iranian-European energy and transit symbiosis to have any chance to succeed.

The last time Iran missed an opportunity like this was in the mid-1990s. Following the collapse of the Soviet Union, a new great game ensued. Oil and gas producers from newly independent states in Central Asia and the South Caucasus looked for the best routes to European markets while avoiding Russia. Tehran was eager to play a part. Within a few weeks of the collapse of the Soviet Union, Iran and Ukraine signed a deal for 4 million tons of petroleum and 3 billion cubic meters of natural gas a year. They also signed an agreement with Azerbaijan for three natural gas pipelines that would run from Iran through Azerbaijan to Ukraine via a port on Georgia’s Black Sea coast. There was also talk of two separate oil pipelines that would take the same route. Not only could Ukraine be an end user of Iran’s oil and gas exports, but the country would also be a transit route to European markets.

Moscow was not pleased about being cast aside in such pipeline projects, but it was ultimately Tehran’s troubled relations with Washington that prevented its pipelines from traversing the Black Sea littoral states. The use of Iranian territory as a transit corridor for world markets—a commercially solid southern route—was never seriously considered either, again due to U.S. opposition. For Washington, Iran’s foreign policy had to radically change before it would give a greenlight to major international oil and gas firms to seriously consider Iran as a commercial partner. The United States set the stage, and Europe by and large echoed this U.S. position. Nor is this reality only limited to oil and gas. Iran was comprehensively excluded from major panregional transportation projects, such as the Transport Corridor Europe-Caucasus-Asia project, which was launched in 1993.

The trend of marginalizing Iran continued in the years that followed. The European Union has not viewed Iran as integral to its future plans for energy and transportation projects spanning the Caspian and Black seas. In fact, in a 2015 assessment and policy recommendation report by the European Commission, dubbed “Black Sea Synergy: review of a regional cooperation initiative,” Iran was not mentioned once, despite energy and transportation constituting key parts of the report on how to bring about greater integration in the region.

This lack of European interest in involving Tehran in any panregional economic schemes, together with Washington’s policy of pressure against Iran, effectively rendered the country an economic outcast. But its geography, which serves as a land bridge between east and west and north and south—combined with the fact that it sits on the largest combined oil and gas reserves of any nation—will always make it relevant.

As the United States in the last 30 years has only increased its pressure on Iran economically, including by imposing some of the most severe sanctions in history, Iran’s top political leaders have been unrepentant. The course is set from the highest level. As Iran’s most powerful political figure, Supreme Leader Ayatollah Ali Khamenei, has said, Tehran should focus on building ties with countries in the East, such as Russia and China. Pinning hopes on the West or Europe would only belittle Iran, as he put it.

This view is ultimately Khamenei’s biggest strategic mistake as far as the future of the Iranian economy is concerned. Limiting economic relations to a handful of countries poses serious risks. China, in a good year, accounts for one-third of Iran’s overall trade and is the largest foreign investor in the country. But Iran’s economy is still performing way below its potential, and Khamenei himself this week admitted that that state of affairs will not improve anytime soon. Expanding its roster of economic partners will serve the Iranian national interest.

Khamenei’s highly selective approach to cultivating economic partners is no doubt a reflection of Iran’s ostracization by the West in the last few decades. But Iranian leaders know full well that a more balanced foreign and economic policy—which is an aspiration of sorts for many in the lower ranks of the regime in Tehran—is a prerequisite even for Tehran’s less ambitious plans involving its immediate neighbors. Tehran is, for example, presently pushing hard to sell itself as an energy and transit hub. This policy is articulated at the highest level in Tehran. Iran has a history of gas swaps, but the record has been mixed and trade focused on Iran’s immediate north. The war in Ukraine and the resulting sanctions imposed on Russia provide an opportunity for Tehran to work with its other gas-exporting neighbors—in this case, Turkmenistan and Azerbaijan.

In December 2021, Iran and Azerbaijan began to implement a gas agreement with Turkmenistan. Turkmen gas would arrive in Azerbaijan via Iranian territory. Azerbaijan is already well connected to European markets via pipelines that go through Turkey. This is the latest effort in various Iranian attempts over the last 30 years to make the country a supplier and hub for the trade in natural gas in and around the Caspian Sea with the intention of supplying markets farther afield, most notably in Europe. But for this game plan to be realistic, the politics of such a project need to be in much better sync with its commercial logic.

Two different but overlapping developments can now put some wind in Iran’s sails. The first is a push by European countries to find alternative energy sources to punish Russia for its invasion of Ukraine. Iran has plenty of potential as a major oil and gas exporter. It will take time and require capital, but the crisis over Ukraine is hardly likely to go away anytime soon. The second factor is the likely imminent signing of a new nuclear deal between Iran and world powers. Such a new agreement will create space for Iran to tout its potential once again as an economic partner for Europe.

This does not mean that Iran will deprioritize its preferred economic partners in the East but simply that it will add to them, providing an economic cushion for Tehran. European countries, perhaps backed by the United States, would have two reasons to want to be receptive. They need alternative energy suppliers, and this sort of partnership just might help incentivize Iranian leaders to rethink the aspects of Tehran’s foreign policy that Western powers consider the most objectionable. As Khamenei openly admits, Iran’s Achilles’ heel is the state of its economy. The Russian invasion of Ukraine and the possibility of a new nuclear deal present Tehran—and the West—with an opportunity to charter a new course in relations.