Iran and Pakistan recently clinched a barter trade agreement during the meeting of their Joint Economic Committee in Tehran. The Nov. 6 deal appears designed to revive bilateral trade by sidestepping economic sanctions on Iran, which have particularly hit commerce over the past decade.

Pakistan was Iran’s eighth-largest trade partner in 2008–09, prior to the intensification of United Nations and US sanctions on Tehran over its nuclear program. But the bilateral trade of some 1.3B USD at the time could not withstand the negative impact of the sanctions. In a reversal from this trajectory, Pakistan’s Commerce Secretary Sualeh Faruqi is now optimistic that the new barter mechanism will solve enough obstacles to increase annual trade with Iran to roughly 5B USD by 2023.

Announcing that all Pakistani companies will be accommodated, Iranian Industry, Mining and Trade Minister Reza Fatemi Amin stated on Nov. 6, “With the measures taken, the existing barriers will be removed within the next three months and the trade processes will be facilitated. Hopefully, the Pakistani government will provide Iranian companies with the same facilities.” Such comments indicate growing cooperation on the economic front between the two countries.

Sanctions and opportunities

US sanctions on the Islamic Republic have prevented Iran-Pakistan business ties from realizing their full potential, particularly as Iran cannot access international banking. Iran expert and Asia Times correspondent Kourosh Ziabari told Amwaj.media, “Trade ties with Pakistan have been overshadowed by US sanctions, and the two countries, despite being neighbors with enormous historical and cultural bonds, have been stripped of opportunities for mutually beneficial business.”

Noting the decline in economic ties, Ziabari further highlighted, “In 2020, Iran was not in the list of Pakistan’s top 20 trade partners…the value of bilateral trade, standing at 360M USD in 2020, is disappointing. It can be cautiously claimed that the two countries, sharing a border of 960 km (597 miles), are doing almost no trade when considering that the volume of Pakistan’s trade with China amounted to a whopping 17.49B USD in the same year.”

Nevertheless, barter mechanisms could be successful in removing some of the current barriers to trade.

In the view of Ziabari, “There is fertile ground in Pakistan for Iranian investors, and Iran can reciprocally benefit from Pakistan’s industrial and financial edge. Also, Pakistan’s affordable agricultural products can partly offset growing demand in Iran, a country of 85M people.” There is additional potential for collaboration on clean energy. “Pakistan has made notable strides cultivating clean energies and is eyeing to induct 30% of renewable energies by 2030,” Ziabari explained to Amwaj.media, concluding, “If Tehran is determined to curtail its dependence on fossil fuels, Islamabad can be a great partner in the provision of know-how and apparatus for solar and wind power technologies.”

Diverse economic relations

Tehran and Islamabad have enjoyed amicable relations since the 1947 partition of the Indian subcontinent, inheriting a rich legacy of historic and cultural ties. In fact, Iran was the first country to recognize the newly established state of Pakistan in Aug. 1947.

Under Shah Mohammad Reza Pahlavi (1941-79), Iran supported Pakistan during its 1971 war against India. After the conflict, bilateral trade spiked as Islamabad faced an economic crisis. Following the 1979 revolution in Iran, Pakistan in turn became the first state to recognize the new government in Tehran.

Whether under the Shah or the Islamic Republic, Tehran and Islamabad have also participated in various economic mechanisms. This includes the Baghdad Pact of the 1950s. However, many of these agreements have not been implemented smoothly.

Consider the Regional Cooperation for Development (RCD) between the Islamic Republic, Pakistan and Turkey which dissolved in 1979. This was due to structural issues within the RCD and political instability in Iran. Additionally, a Preferential Trade Agreement between Iran and Pakistan was finalized in 2004 but blocked by economic sanctions on Tehran.

The long-stalled Iran-Pakistan natural gas pipeline has also struggled. The initial 1994 deal for Iran to supply its eastern neighbor with gas also included India, but turned into a bilateral project between Tehran and Islamabad in 2009. The project progressed on the Iranian side, but Pakistan backtracked because of new US sanctions on Iran in 2012. As of now, the IP pipeline is slated to be completed in 2024, according to the latest 2019 agreement. The 7.5B USD deal that has been signed will supply Pakistan with nearly 750M cubic feet of gas daily.

Pakistan and Iran are also members of the Economic Cooperation Organization (ECO), a successor of the RCD which seeks to improve transit trade corridors in Central Asia. ECO is made up of ten countries: Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan.

The organization links landlocked Central Asian countries with neighboring regions and facilitates ongoing Iran-Pakistan-Turkey road and rail connectivity projects too. Implementing a 2011 decision in this regard, the Eighth Meeting of ECO Ministers of Transport and Communications led to an announcement on Sept. 24 that the Islamabad-Tehran-Istanbul (ITI) Road Transport Corridor Project would start this year.

Reminiscent of old RCD plans, trucks operated by Pakistan’s NLC reached Istanbul on Oct. 8, cutting travel time by 80% relative to the more commonly used maritime route. Pakistani Ambassador to Turkey Syrus Sajjad Qazi praised the arrival of the convoy, saying, “These are the first drops that will become a river of commerce between and among Pakistan, Iran and Turkey.” Iranian Transport Ministry General Director Javed Hedayati, echoed these sentiments, describing the route as a “good example for doing [business] with other neighbors and regional collaboration.”

The Islamabad-Tehran-Istanbul freight train line offers similar opportunities. Launched in 2009, the project was eventually suspended in 2011 due to infrastructural delays in Pakistan. However, it is slated to restart later this year.

Iran was also on Nov. 24 invited to invest in the China-Pakistan Economic Corridor’s (CPEC’s) Special Economic Zones (SEZs). Pakistani Minister for Railways Azam Swati informed Iranian Ambassador Mohammad Ali Hosseini that a conducive business and investment environment would be provided, especially in the CPEC SEZs.

US sanctions and the future of economic ties

Notwithstanding these positive developments, the removal of US sanctions remains essential for Iran. Sanctions inhibit the full deepening of economic ties between Tehran and its neighbors, as evidenced by the fates of the pipeline deal and Preferential Trade Agreement between Iran and Pakistan.

Ziabari hopes this hurdle will be removed, stating, “If the Islamic Republic leadership is prudent, it will concede that US sanctions are so sweeping and damaging that even a country like Pakistan—in which religious conservatism gives rise to ideological fraternity—is not ready to defy punitive measures to entertain the economic interests of an isolated nation.”

The Iran expert and correspondent concluded, “The most reasonable remedy for Iran is to engage with the international community and ensure sanctions are terminated so its latent economic potentials can be actualized. This can translate into vigorous trade with all neighbors, including Pakistan.”