Iran's Inclusion in the SCO: Implications and Regional Significance

Iran has become 9th full member of the Shanghai Cooperation Organization (SCO) in its 23rd summit held in virtual mode in the first week of July under the presidentship of India. After reproachment with Saudi Arabia it is another good news for Tehran for its economic growth, regional connectivity, and political ambitions. Other member states are Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, China, India, Pakistan, and Russia.

The SCO, which was established in 2001 as the "Shanghai Five," has long been seen as a counterbalance to the West, where China and Russia play major roles. The SCOtalks about the Shanghai Spirit, which is “based on the principles of mutual trust, mutual benefit, equal rights, consultations, respect for the diversity of cultures and aspiration towards common development, its external policy is conducted in accordance with the principles of non-alignment, non-targeting anyone and openness.”^[1] Primarily, the SCO focussed on issues related to security like counterterrorism, combating separatism, religious extremism, and drug trafficking.^[2] It serves as a framework that enables members and partners to expand bilateral relations and engage in dialogue. However, it is evident that the SCO's internal divisions prevent it from being a cohesive organisation. It seeks to foster regional collaboration in the areas of security, economy, and culture. In recent times, the SCO has garnered escalating attention owing to its expanding impact on matters pertaining to the region.

The SCO, although smaller in size compared to the G20 or G7, encompasses a significant portion of the global population, amounting to 40 percent. Moreover, with the inclusion of Iran, the SCO will now possess approximately 20 percent of the world's oil reserves.^[3]

Iran

For Iran, its inclusion in the SCO represents a significant milestone with the potential to generate increased economic, commercial, and strategic opportunities. Following the Look East Policy of the current government, Tehran wants to improve ties with its Asian neighbours on a priority basis. It sees countries like Russia, China, and India with optimism when its economy is facing hardship due to global sanctions and domestic socio-economic problems.^[4] Also, the Raisi government wants to have better relations with regional countries as a means to address Iran's international isolation.

China and Russia are expected to collaborate to strengthen the SCO as a regional bloc serving their interests, and Iran's inclusion signals this intent. It will provide the SCO with greater influence in West Asia, as Iran's substantial oil and gas reserves can meet the energy needs of member countries. Additionally, Iran's diverse industries will expand trade among member countries and attract investment to the Eurasian region. Also, Iran's inclusion will enhance connectivity and facilitate the development of new trade routes between Central and South Asia, fostering technology transfer and cooperation among nations. Security and intelligence collaboration among member states will also be reinforced promoting stability and the fight against extremism and terrorism. That can also lead to collaboration among Iran and other member states in areas including border security, counterterrorism, and intelligence exchange.

This move aligns Iran more closely with China and Russia, as it witnessed a significant increase in non-oil trade with SCO members recently.^[5] Iran's membership in the SCO could lead to improved defence cooperation, including the possibility of enhanced arms supplies, particularly with China. Iran has provided drones to Russia, and they were used in the Ukraine conflict. China's expertise in combat drones is exemplified by its position as the primary exporter of such unmanned aerial systems over the last decade, as stated by the Stockholm International Peace Research Institute.^[6] The inclusion of Iran in the SCO represents a strategic prospect for the country to enhance its regional sway and broaden its foreign policy alternatives. To become a key hub for Eurasian connectivity, Iran is actively pursuing infrastructural initiatives like the International North-South Transport Corridor (INSTC), connecting India and Russia via its territory for enhanced trade and transportation activities.^[7]

Its strategic location and vast energy resources also make it a crucial player in the Belt and Road Initiative (BRI). SCO membership provides more opportunities for Iran to engage in BRI projects, benefiting from enhanced regional connectivity. China, in turn, gains a valuable partner to promote the BRI and expand its influence in the West Asia. Also, it will be a gateway for SCO’s influence in major part of West Asia.

Use of Local Currencies

SCO also promotes the use of local currencies for trade among member countries. This initiative is aimed at reducing the dependence on the US dollar and increasing economic cooperation among the member states. SCO member countries, such as China and Russia, have already taken steps to increase the use of their currencies in bilateral trade and investment. For example, China has signed currency swap agreements with several SCO member countries, allowing them to conduct trade and investment transactions in Chinese yuan instead of the US dollar. The use of local currencies in trade within the SCO is expected to increase in the coming years, as member countries continue to seek ways to strengthen economic ties and reduce reliance on external currencies. To achieve this, the SCO has actively pursued currency swap agreements, facilitating direct currency exchanges between member states' central banks. The organization has also encouraged the development of regional payment systems, exemplified by China's Cross-Border Interbank Payment System (CIPS) enabling the use of the Chinese yuan for cross-border transactions. ^[8]

Bilateral trade promotion, establishment of joint financial institutions, and support for multilateral development banks further strengthen the SCO's efforts to promote local currency trade, aiming to enhance economic ties, reduce exchange rate risks, and assert greater independence from the USD-dominated global financial system.

Also, in his speech in 23rd SCO summit, Russian President Vladimir Putin highlighted that in the last year more that 80 percent of the commercial transactions between China and Russia were done using the Russian rouble and the Chinese yuan. He also urged other member countries of the SCO to adopt a similar approach. By advocating for the increased use of local currencies in trade transactions, Putin emphasized the importance of reducing dependence on external currencies and promoting bilateral economic cooperation within the SCO.^[9]

SCO and Arab Countries

Apart from Iran, there has been an increasing trend among Arab countries to join SCO. During the annual summit of the SCO held in Samarkand in September 2022, Qatar and Egypt were formally acknowledged as dialogue partners. This marked the first instance of these countries attaining such a status within the region, which had previously been granted solely to Türkiye, the only member of NATO with ties to the SCO. In March, the Cabinet of Saudi Arabia officially endorsed the decision to join the SCO.^[10]And during the subsequent months, the Bahrain, Kuwait, and the United Arab Emirates (UAE) were also granted the observer status.^[11]

The SCO's involvement in trade and investment presents appealing prospects for investments. It also provides opportunities for investments and allows partnerships in the implementation of ambitious infrastructure inter-connectivity projects to Arab countries. Furthermore, technology, artificial intelligence (AI), seaports, power, agriculture, and green energy are seen as important areas of investment.^[12]

Due to BRI China’s investment has increased in West Asia and only the Gulf Cooperation Council (GCC) countries alone receiving approximately US$140 billion last year. These investments go to several sectors, including transportation facilities, industrial complexes, artificial intelligence, emerging technologies, and renewable energy.^[13] Also, through it, these countries are inclined to get new in infrastructure projects and gain access to new markets like Central Asian countries which were particularly very less explored. It also shows West Asian countries’ increasing desire to maintain a balance and diversity in their security, economic, and diplomatic activities as well as a higher level of independence in their foreign policy.

Conclusion

Iran's inclusion in the SCO represents a significant step for the country in strengthening regional ties and countering economic sanctions. It aligns Iran with influential partners like China and Russia, providing opportunities for trade, investment, and technology transfer. The SCO's expansion into West Asia enhances its strategic importance and access to vital energy resources. However, concerns remain regarding human rights issues, which warrant attention as Iran becomes an active participant in the SCO's activities. The integration of Iran into the SCO signifies a notable advancement for the organization and further cements Iran's position in the changing world order.

Despite a history of over two decades, the SCO's institutionalization remains low with flexible, non-binding regulations. Unlike NATO, it has primarily a loose political bloc with limited military integration. Complex power dynamics, differing interests, and mistrust among India, Pakistan, and China hinder consensus and unified action, especially after Russia's Ukraine military operation. It also poses a challenge for India as it must now maintain a careful balance between the Western and non-Western world. In fact, it is a test for India's balancing tactics in international diplomacy. Expanding SCO membership risks introducing unresolved bilateral issues and rivalries into the bloc. However, Iran's SCO membership will worry countries like the US which is concerned about Tehran's growing influence and its impact on regional stability. Nevertheless, it remains to be seen that how SCO as a bloc will react on western sanctions and other charges against Tehran.

Endnotes

^[1] “What is the SCO?” Sectsco.org, Retrieved July 31, 2023, fromhttp://eng.sectsco.org/docs/about/faq.html.
^[2]Francesco SalesioSchiavi, "The SCO Expansion in the Gulf: A New Centre of Attraction for the Middle East?" Orient XXI, 22 June 2023, https://orientxxi.info/magazine/the-sco-expansion-in-the-gulf-a-new-centre-of-attraction-for-the-middle-east,6583 [3].
^[3]"Iran Joining SCO Puts India In A Tight Spot; New Delhi Needs ‘Super Balancing’ Strategy To Keep All Blocks Happy," The Eurasian Times, 31 July 2023, https://eurasiantimes.com/iran-joining-sco-puts-india-in-a-tight-spot-new-delhi-needs-super-balancing-strategy-to-keep-all-blocks-happy/ [4]
^[4]https://orientxxi.info/magazine/the-sco-expansion-in-the-gulf-a-new-centre-of-attraction-for-the-middle-east,6583
^[5]Adam Lucente, "Iran’s membership in Shanghai Cooperation Organization further aligns it with Russia, China," Al-Monitor, 6 July 2023,https://www.al-monitor.com/originals/2023/07/irans-membership-shanghai-cooperation-organization-further-aligns-it-russia-china.
^[6]Snehesh Alex Philip, "China has become a major exporter of armed drones, Pakistan is among its 11 customers," The Print, 23 November, 2020,https://theprint.in/defence/china-has-become-a-major-exporter-of-armed-drones-pakistan-is-among-its-11-customers/549841/.
^[7]Vaishali Basu Sharma, "The Political Economics of the International North-South Transport Corridor," The Wire, 30 June 2022,https://thewire.in/world/political-economics-international-north-south-transport-corridor-india-iran-russia.
^[8]Zongyuan Zoe Liu, "China Is Quietly Trying to Dethrone the Dollar," Foreign Policy, 21 September 2022,https://foreignpolicy.com/2022/09/21/china-yuan-us-dollar-sco-currency/.
^[9]"SCO Heads of State Council meeting," President of Russia, 04 July 2023, http://en.kremlin.ru/events/president/news/71578 [5].
^[10]RuxandraIordache, "Saudi Arabia takes step to join China-led security bloc, as ties with Beijing strengthen," CNBC, 29 March 2023,https://www.cnbc.com/2023/03/29/saudi-arabia-takes-step-to-join-china-led-security-bloc-as-ties-with-beijing-strengthen.html.
^[11]Lakshmi Priya, "Gulf Countries and the SCO Expansion," ICWA, 28 September 2022,https://www.icwa.in/show_content.php?lang=1&level=3&ls_id=7986&lid=5341.
^[12]Schiavi, "The SCO Expansion in the Gulf.”
^[13]Ahmad, "The Shanghai Cooperation Organization Gains.”

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