The Russian government will be financing a €1.2bn ($1.27bn) project to upgrade and expand an ageing rail line that links north-central Iran to the north-eastern border with Turkmenistan.

The rail route will cater to a planned free zone to be built between Iran and Turkmenistan and connect to Iran’s national rail road grid. “This route will serve as an important gateway to China as well as the rest of the Commonwealth of Independent States (CIS),” a source familiar with the project tells MEED.

The project includes installing power stations, overhead power lines, rails, signals and communications equipment along the 495 kilometre Gamsar-Sari-Gorgan-Inche Boroon route.

The contract, signed between the Islamic Republic of Iran Railways and RZD International, a Russian Railways subsidiary, further includes manufacturing electric locomotives locally and building 32 stations and 95 tunnels along the route.

The existing line is estimated to be about 80 years old, in disrepair, and has very low capacity.

Expansion of the existing tunnels will allow transit wagons to pass through enabling an increase both in passenger and cargo capacity. Once completed, the route should be able to accommodate 8 million tonnes of cargo, according to Iran’s Road and Urban Design Ministry.

Russia’s strategy to finance the project is likely going to be the norm for most projects in Iran due to a severe shortage in funding. Iran’s banking sector is understood to be too short on cash and too long on non-performing loans (NPLs) due to years of sanctions.