Institute for War and Peace Reporting | Giving Voice, Driving Change

South Caucasus Hopeful for Closer Ties with Iran

The Islamic Republic's re-entry into international markets may inject new life into the region’s economy.
By Regina Jegorova-Askerova, Arshaluis Mghdesyan, Nurgul Novruz
  • The Grand Bazaar in Tehran: the end of sanctions brings hope for economic growth. (Photo: Regina Jegorova-Askerova/IWPR Georgia)
    The Grand Bazaar in Tehran: the end of sanctions brings hope for economic growth. (Photo: Regina Jegorova-Askerova/IWPR Georgia)
  •  Iran is one of the world's leading producers and exporters of dried fruit and nuts. (Photo: Regina Jegorova-Askerova/IWPR Georgia)
    Iran is one of the world's leading producers and exporters of dried fruit and nuts. (Photo: Regina Jegorova-Askerova/IWPR Georgia)
  • With the end of embargo on Iranian goods, Persian carpets may become more easily available on the global market. (Photo: Jegorova-Askerova/IWPR Georgia)
    With the end of embargo on Iranian goods, Persian carpets may become more easily available on the global market. (Photo: Jegorova-Askerova/IWPR Georgia)
  • Growing market: Iran is a major producer of fruit. (Photo: Regina Jegorova-Askerova/IWPR Georgia)
    Growing market: Iran is a major producer of fruit. (Photo: Regina Jegorova-Askerova/IWPR Georgia)
  • Opening up: Shiraz, the city known as the capital of Persian art and culture. (Photo: Regina Jegorova-Askerova/IWPR Georgia)
    Opening up: Shiraz, the city known as the capital of Persian art and culture. (Photo: Regina Jegorova-Askerova/IWPR Georgia)

Experts in Azerbaijan, Armenia and Georgia have expressed guarded optimism about the potential economic benefits that the end of sanctions against Iran may bring to the South Caucasus.

A flurry of activity between the capitals greeted the January 16 lifting of sanctions, with all three republics looking to boost their struggling economies amid currency crises and low oil prices.

The media in Azerbaijan, Georgia and Armenia have all been preoccupied with the possible benefits of the end of Iran´s international isolation. 

But wedged between Russia to the north, Iran to the south and Turkey to the west, the countries of the Caucasus have always had to bear their powerful neighbours in mind when determining economic policies and strategies.

Finding a balance between domestic needs and the geopolitical pressures from adjacent countries, which are often not on good terms amongst themselves, is always a challenge. 

In recent years, Azerbaijan has established closer ties with Turkey, Armenia has drawn closer to Russia and Georgia turned more to the West.  All three maintain economic ties to Russia, to varying degrees.

Iran has built relations with each of the three states, but it remains to be seen whether its interest in the Caucasus will continue as before now it can reach out to bigger international markets.

CLOSE RELATIONS, BUT NOT ALWAYS TROUBLE-FREE

At first glance, Azerbaijan would appear to have the closest ties with Iran.  The two countries are both predominantly Muslim with a Shia majority, have sizeable Azeri populations (around 20 million in Iran, where they are the second largest ethnic group, and twice as many as in Azerbaijan itself) and are oil and gas-driven economies.  They cooperate in the sphere of energy, transportation and trade and are currently working on joining their railway systems to develop the North-South corridor.  

Azerbaijan´s president Ilham Aliyev is already scheduled to visit Iran at the end of February to meet with President Hassan Rouhani.  They are expected to sign several agreements on economy and energy.

Even so, relations between the two countries have not always been trouble-free.  Iran considers Azerbaijan, Iranian territory until the 19th century, to be firmly in its sphere of interest.  One of Tehran´s main concerns is the threat of separatism in its northern regions, in so-called Iranian-Azerbaijan, where many Azeris live.

 In the late 1980s and early 1990s, the supporters of the radical wing of the Azerbaijani Popular Front movement were heavily promoting the idea of a unification of Azerbaijan with Iran´s four northwestern regions with a predominant Azeri population to a “North and South Azerbajian.”  The chairman of the APF and later president, Abulfaz Elchibey, periodically supported such ideas, but only unofficially. 

Nonetheless, this stance was not welcomed by Tehran, and tensions around this subject remain. In February 2013, during an Asian Champions League football match in the city of Tabriz between the teams of Traktor from Iranian Azerbaijan and Al-Jazeera from the United Arab Emirates, fans of the Iranian-Azeri club held up a banner reading, “South Azerbaijan is not Iran.”

Nationalists in Iran, meanwhile, think of Azerbaijan as Iranian territory.  In April 2013, Iranian legislators drafted a bill calling for a revision of the 1828 Treaty of Turkmenchay, which separated the territory of contemporary Azerbaijan from Iran and made it part of the Russian Empire.

Elman Fattah, deputy head of Azerbaijan´s opposition party Musavat, hailed the end of sanctions as Iran´s biggest foreign policy achievement in recent years, but was doubtful about its possible consequences. 

He warned that “the strengthening of Iran [constitutes] a threat to the sovereignty of Azerbaijan”.

Iran is also a theocratic state, while Azerbaijan is officially secular. Baku is incensed over Iran´s support of religious radicals in Azerbaijan and the dissemination of propaganda through mosques.  The village of Nardaran, located about 25 kilometres northeast from Baku, where six people died in clashes between police and Shia Muslims last November, is a case in point. (See also Deadly Clashes Between Police and Shia Muslims in Azerbaijan).

Iran and Azerbaijan also disagree over the proposed division of the Caspian Sea, which has been in dispute since the breakup of the Soviet Union in 1991.  The emergence of three new countries bordering the Caspian – Azerbaijan, Kazakhstan and Turkmenistan – required a new agreement on how the seabed and the potential oil and gas riches beneath it were shared.  But the five littoral states, including Russia and Iran, are still unable to agree.

An equal division of the Caspian Sea, as supported by Iran, would give each country 20 per cent of the sea floor and surface.  The other option, as supported by Azerbaijan, Russia and Kazakhstan, would be the application of a median line between the claimants.  This would leave Tehran with only 12-13 per cent of the sea and exclude it from offshore oil fields that would then fall to Azerbaijan and Turkmenistan.

Despite these long-standing tensions, the two countries actively engage in trade.  According to the State Customs Committee of Azerbaijan, the trade turnover between Azerbaijan and Iran between January and October 2015 amounted to 98.8 million US dollars, of which 72 million dollars went to the import of Iranian products.

If both prices and the standard of living in Iran rise following the lifitng of sanctions, as is likely, this could have a negative impact on Azerbaijan´s border population. 

“If previously the border residents of Azerbaijan, Armenia and Turkmenistan enjoyed cheap products on the Iranian market, this will be harder to do now,“ said Ilham Shaban, director of Azerbaijan’s Oil Research Centre.

OPPORTUNITIES FOR TACTFUL COOPERATION

Another irritant for Azerbaijan is the ongoing improvement of relations between Iran and its long-standing foe Armenia. 

While sanctions were in place, relations between these two countries were partly based on their respective international isolation.  Armenia can only trade with the neighbouring countries of Iran and Georgia, as the borders with Azerbaijan and Turkey are closed due to a blockade by Baku and Ankara.

This means that Yerevan´s approach to Iran has long been highly pragmatic and goal-oriented.  The two countries already have a number of economic agreements in place.

According to experts, the lifting of sanctions will give Armenia an opportunity to intensify this commercial and energy cooperation.  But its effectiveness will depend on the flexibility of Armenia´s leadership, which has to be careful to avoid giving its powerful northern ally Russia the impression that its security concerns are being disregarded.

The Armenian authorities and experts view the field of energy as the most promising for increased bilateral cooperation, especially against the background of Georgia´s interest in importing gas from Iran through Armenia´s pipeline infrastructure.  This would turn Armenia into a gas transit state.  

(See also Shifting Energy Politics in the Caucasus).

Armenia currently buys Iranian gas via a barter scheme in exchange for electricity. 

“The capacity of the Iran-Armenia pipeline is 2.2 billion cubic metres per year,” Yervand Zakharyan, Armenia´s energy minister, told a press conference on January 21. “We now receive less than 400 million cubic metres from Iran [per year].  Consequently, this can be a transit pipeline, if necessary.  Economically, we benefit from this deal.”

He added that ongoing discussions focus on about 500 million cubic metres per year.

 “This is a promising project since here Armenia has an opportunity to step up energy cooperation with Iran and in this way import more Iranian gas to its market and supply Iran with more electricity,“ Vahe Davtyan, an energy expert, told IWPR.

Another auspicious project is the planned construction of a hydro power plant on the Araks river near Armenia´s southern border town of Meghri, which was signed by Yerevan and Tehran in 2007. The 323 million dollar project was to be financed and operated by Iran and to be transferred to Armenia´s ownership after 15 years of operation. 

Construction was started in 2012, but has not been completed; its implementation required funding which Armenia and Iran could not afford in the era of sanctions.

Armenia and Iran now want to start a new round of negotiation over the project, for which dates have yet to be announced.

There are some other proposed joint ventures that may not come to fruition despite the end of sanctions.  The two most noteworthy are the planned construction of a border refinery and the Iran-Armenia railway, which both require major investment. 

“The Iran-Armenia railroad remains an Armenian project, for the implementation of which the Armenian side needs to find financing.  Iran is interested in it, but not enough to make huge investments,” Tigran Jrbashyan, president of the American Chamber of Commerce in Armenia Council, told IWPR. 

Moreover, Tehran will soon have a north-south rail connection through Azerbaijan, which will likely make the Armenian route redundant.

Jrbashyan also noted that building a joint refinery in Armenia was no longer relevant. 

“With the lifting of sanctions and Iran´s access to technological advances, the situation has changed.  Iran can now build a refinery on its own territory,” he said.

Instead, Jrbashyan is convinced that Armenia has a good chance of becoming an administrative hub for the Iranian economy.

“According to many international indices, whether the Global Information Technology Report, Networked Readiness Index or Doing Business, Armenia is ahead of Iran.  Armenia’s advantages create a fertile ground for international companies wishing to work in the Iranian market to choose Armenia for their office location,“ said Jrbashyan.

International corporations seeking to work in the Iranian market will be more comfortable in Armenia, he said, not only because of its attractive business climate, but because of specific features of Iran´s financial system such as Islamic banking and Shariah law.

“Iran is attractive as a market, but it is not a place to service business,” Jrbashyan said. 

This could become a niche opportunity for Armenia, “but whether this scheme will work depends on the potential and initiative of the Armenian side,“ he added.

When it comes to the sphere of trade, Armenian experts are less optimistic. 

The trade balance between Armenia and Iran is not significant.  Between January and November 2015, the total volume of Armenian-Iranian trade fell by over 5 per cent to 250 million dollars, representing less than 6 per cent of Armenia´s overall foreign trade, according to the National Statistical Service of Armenia (NSS).  The volume of exports from Armenia to Iran amounted to around 70 million dollars and imports from Iran to Armenia stood at an estimated 180 million dollars.

Economist Artak Manukyan said that he did not expect high trading activity between the two states following the opening up of the Iranian market.

Iranian manufacturers are being subsidised by the state, and energy in Iran is much cheaper than in Armenia, he told IWPR.  He noted, however, that there were a number of other areas, such as tourism and the processing of mining products, where Armenia and Iran could enhance cooperation following the era of sanctions.

STRENGTHENING TIES, WHILE KEEPING AN EYE ON RUSSIA

Georgian experts are also cautious about the prospects of deepening relations with Iran, given Tbilisi’s long-term aspirations of joining NATO and the European Union.  However, strengthening ties with Iran could serve as a form of protection against any further deterioration of relations with Russia in the future.

Unlike Armenia and Azerbaijan, Georgia does not share a border with Iran.  It started to actively develop its economic ties with the Islamic Republic after the Tbilisi government was ousted in the so-called 2003 Rose Revolution. 

The volume of imports from Iran then grew from 40.3 million dollars in 2006 to 129.7 million dollars in 2013, mainly consisting of agricultural products and household appliances. 

However, reportedly under pressure from the international community, the Georgian authorities cancelled the visa-free regime with Iran in 2013, when about 150 bank accounts of Iranian companies and individuals were also frozen.  (See also Georgia: US Didn't Force Tougher Visa Rules for Iran).

The volume of imports in 2015, according to preliminary data, dropped to 91.9 million dollars.  

Georgian experts believe that although much is still unknown about the features of the Iranian market there are still potential benefits to reap.

“I am confident that the lifting of economic sanctions against Iran will mean a lot of new opportunities for Georgia, for example, in the energy sector.  Also, Iran is very interested in the use of Georgian sea ports, which could mean excellent opportunities for Georgia to capitalise on the transit of Iranian products,“ said Kornely Kakachia, director of the Georgian Institute of Politics (GIP). 

Iran is seeking access to the ports of Batumi and Poti on the eastern coast of the Black Sea, which would facilitate its exports to European markets. 

There is also interest in the construction of a new deep-sea port in Anakia, near the border with the de-facto republic of Abkhazia.  On February 8, Georgia´s ministry of economy and sustainable development announced the award of a contract to a Georgian-owned consortium to build this port, which will have more cargo capacity than either Batumi or Poti.

Georgia has consistently used the east-west corridor and has entirely forgotten about the north-south, Kakachia continued.

“Now is the right time to consider this course of action, since Georgia has a chance to become an important transit corridor in this direction,” said Kakachia.  “Still, much depends on the political relations and relationship between the two countries. Future opportunities will particularly depend on the conduct of the Iranian authorities.“ 

In the future, he said, Georgia might import electronics and cars from Iran.  At the same time, the situation with Iranian investments is not yet clear, as much will depend on Georgia´s western partners.

After a telephone conversation between Georgia´s prime minister Giorgi Kvirikashvili and Iran´s president Rouhani on February 8 in which trade and economic cooperation were discussed, Georgia announced it would restore visa-free travel with Iran as of February 15.

The two parties said they hoped this would bring tourism and trade between the two countries back to its pre-2013 level, and increase it further.

Kvirikashvili assured Rouhani that Georgia was ready to start a new chapter in bilateral relations and to develop ties with Iran in all fields, especially economic.

According to Rouhani, Georgia could be the corridor for trade exchanges between Iran and the Black Sea countries.

The Georgian prime minister, who is to visit Iran in the near future, also invited Rouhani to Tbilisi.

TEHRAN REACHES OUT

Kakha Gogolashvili is director of the Centre of EU Studies at the Georgian Foundation for Strategic and International Studies. 

He said that the South Caucasus market, with a combined population of just over 16 million, is not very significant for Iranian exporters. The purchasing power of the three states is also relatively low.

Azerbaijan, like Iran, is an upper middle-income country, whereas Armenia and Georgia are lower middle-income countries.

“Iran has the opportunity to trade with large partners, such as China and India, which are close to Iran.  And, of course, western Europe,” he said.  The Caucasus region can only be considered as a supplementary option for Iran or as a transit route.

However, the Caucasus may also prove to be an alternative market should Iran´s relations with Turkey worsen.

“No one knows what tensions might develop in Iranian-Turkish relations in the future due to the situation in Syria and Iraq,” Gogolashvili said.  “The transport corridor through Armenia and Georgia will then be good for Iran and a much needed alternative.  Although Iran has the Persian Gulf and the Suez Canal for trade with the West, additional routes are always attractive.” 

Regina Jegorova-Askerova is IWPR´s web editor in Georgia, Arshaluis Mghdesyan is an independent journalist in Armenia and Nurgul Novruz is a freelance journalist in Azerbaijan.