The South Caucasus and Iran in The

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The South Caucasus and Iran in The Introduction Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Comments The South Caucasus and Iran in the Post-Sanctions Era WP S Pursuing Greater Interconnectedness amidst Continuing Constraints and Scaled-down Expectations Andrea Weiss and Yana Zabanova The lifting of international nuclear-related sanctions on Iran in January 2016 was en- thusiastically welcomed by the Islamic Republic’s neighbours in the South Caucasus. Armenia, Azerbaijan, and Georgia have hoped that Iran’s rapprochement with the West and the unfreezing of some hundred billion dollars worth of assets abroad would lead Iran to step up its trade and investment activities in the Caucasus, especially in the energy and transport sectors. However, the anticipated benefits have been slow in com- ing, as Iran has shown reluctance to fund infrastructural projects in the Caucasus. On the other hand, there have been positive developments in trade and tourism flows and the power transmission sector. On the whole, although Iran is interested in closer economic cooperation with the South Caucasus, it relies on the region’s countries to provide the momentum and secure the resources necessary to achieve this goal. The lifting of the sanctions on Iran on 16 proliferation of meetings at the ministerial January 2016 gave rise to varied expecta- and presidential levels, accompanied by tions in the South Caucasus. As congratu- the signing of numerous memorandums of latory messages flowed to Tehran from the understanding in key sectors. In a symbolic region’s capitals, pundits and observers gesture, in 2016 Georgia and Armenia lifted debated what Iran’s emergence from inter- the visa requirement for Iranian citizens. national isolation and its comeback to the In official statements, Iran and the South global economy implied for the South Cau- Caucasus countries often emphasise their casus. According to one widespread view, historical and cultural ties and friendly with Iran and Europe growing closer to- relations. The territories of Armenia, east- gether, the South Caucasus could use its ern Georgia, and most of Azerbaijan were geographic position to transform itself into under Persian rule until the 19th century. a transit corridor for flows of goods and Iran is home to the world’s largest popu- energy resources between the two. In the lation of ethnic Azeris, numbering up to 25 past 1.5 years, the region has witnessed a million, as well as smaller populations of Andrea Weiss and Yana Zabanova are former research fellows in the EU-funded project ISSICEU (Intra- and Inter- SWP Comments 24 Societal Sources of Instability in the Caucasus and EU Opportunities to Respond), which was completed in December 2016. July 2017 The views expressed in the article do not necessarily reflect the views of the European Commission. 1 ethnic Georgians (up to 100,000) and Arme- Armenia: nians (ca. 65,000). It was quick to recognise Iran’s complementary neighbour the three newly independent republics in Iran’s relations with Armenia – its closest 1991 and has been able to maintain a work- partner and ally in the South Caucasus – ing relationship with each of them. Iran’s remained largely unaffected by the in- policy in the South Caucasus has been prag- creasingly stringent international sanc- matic and stability-oriented, in sharp con- tions, which were progressively introduced trast to its ideology-driven policy in the from 2006 onward. Armenia refrained from Middle East. criticising Iran’s nuclear programme, using Despite the media attention generated regular mutual high-level visits as occasions by ambitious cooperation plans, it is impor- to push for the expansion of bilateral ties. tant to keep in mind that Iran does not have Landlocked Armenia is under blockade significant economic clout in the South from two of its four neighbours, Azerbaijan Caucasus. If the lifting of the sanctions is and Turkey, and relies on Georgia and Iran, meant to be a game changer, it will have with which it shares a 219 km and 44 km to start from a very low base. Iran’s trade border respectively, for the transit of goods turnover with the entire region was only and energy. The road link to Iran became $634 million in 2015, placing it far behind a lifeline for Armenia in the early 1990s top trading partners such as Russia, the EU, during the conflict with Azerbaijan, as well China, or Turkey. Its official foreign direct as briefly in 2008 during the armed hostil- investment (FDI) in Georgia and Armenia is ities between Georgia and Russia. A close minuscule, although it has been more sub- relationship with Iran is meant not only stantial in Azerbaijan (mainly in the oil to counterbalance the strong Turkish-Azer- sector). The Caucasus countries’ aspirations baijani cooperation in the region (which to become a transit corridor between Iran often involves Georgia as a partner) but also and Europe would require enormous invest- sends a message to the domestic audience ments and a major shift in trading pat- that Armenia is not solely dependent on terns. Presently, Iran’s overland trade with Russia. Europe takes place through Turkey, there is As for Iran, strong ties with Armenia are no direct rail link between Iran and either important both for promoting stability in Armenia or Azerbaijan, and road connec- its Caucasus neighbourhood and to show- tions are poor. Due to US policies, Iran has case Iran’s ability to act as a responsible been excluded from major Western-sup- regional player. Directly bordering the un- ported pipeline projects in the region, which recognized Nagorno-Karabakh Republic, means that there is currently no infrastruc- Iran has sought peaceful settlement of the ture in the Caucasus to bring Iranian energy conflict, negotiating a short-lived ceasefire resources to European markets. Moreover, in 1992 and repeatedly offering mediation Iran is concerned about the uncertain services. Finally, Armenia could become future of the nuclear agreement under the Iran’s gateway to Georgia’s Black Sea ports, Trump Administration and, under the pres- and from there to southern Europe. This sure of expectations at home, has chosen to would provide Iran with an alternative to prioritise domestic infrastructural develop- its main transport route through Turkey, ment. As a result, incremental changes in which has been fraught with many prob- Iran’s economic cooperation with the South lems, including a major dispute over transit Caucasus constitute a more likely scenario. fees, long queues at the border, and attacks on Iranian truck drivers. SWP Comments 24 July 2017 2 Ambitions on hold lion Southern Armenian Railway connect- Both Armenia and Iran acknowledge the ing to the border with Iran (2009), an Iran- mismatch between their close political Armenia oil pipeline (2011), and an oil re- partnership and the limited scope of eco- finery near Meghri to process Iranian crude. nomic cooperation. Indeed, bilateral trade turnover has hovered around a modest $300 million level, as Armenian producers Post-sanctions prospects find it difficult to access Iranian markets, When the sanctions on Iran were lifted which are protected by some of the world’s in January 2016, Armenia’s expectations highest import duties, whereas Iranian focused largely on the fate of the joint consumer goods in Armenia face stiff com- projects awaiting implementation. Accord- petition from the more affordable Turkish ing to one optimistic take, with its un- or Chinese alternatives. Tourism is a prom- frozen assets and an ability to export oil to ising sector though, with Armenia being Europe, Iran would be finally able to follow the region’s most popular destination for up on its investment promises in Armenia. Iranian visitors. The US Embassy in Yerevan A more sceptical view has cautioned that a is also one of the most accessible locations de-isolated Iran could opt for economically for Iranians to apply for a US visa. more attractive partners. Both Armenia and Iran stress the im- The sceptics seem to have a point. The portance of energy cooperation, although most prominent project announced already so far it has mostly been limited to the “gas in 2008 – the 305 km Southern Armenian for electricity” arrangement. The 140 km Railway – has failed to secure external fund- pipeline, which was officially inaugurated ing. Russia, which controls the Armenian rail in 2007, delivers gas from Tabriz, Iran to network, has limited interest in the project, Armenia, where most of it is then converted as it would not connect Iran to Russia (this to electricity and transmitted to Iranian could only happen if Georgia agreed to northern provinces. Contrary to Iran’s allow rail transport through Abkhazia). The initial plans, the pipeline cannot be used railway has thus essentially lost competi- for major exports beyond Armenia, as its tion to a rival Azerbaijani-Iranian initiative diameter was reduced under Russia’s pres- that has gained speed since 2016. However, sure. Today, the entire gas distribution Armenia is also implementing a major network in Armenia is controlled by Gaz- highway construction programme called prom Armenia, a full subsidiary of the Rus- the North-South Road Corridor, which is sian state-owned gas monopoly. financed by international donors and is Armenia has long wanted to vastly expected to nearly halve transit times and expand the scope of its cooperation with significantly improve road connections, Iran. While still under the sanctions, the both to Iran and Georgia. Although Iran latter faced a challenging situation: given stands to benefit from the project, it is not its forced isolation, Armenian initiatives involved in its funding. were attractive, yet the burden of the sanc- Having heavily invested in its domestic tions made financial commitments diffi- power-generation capacity in recent years, cult. As a result, there has been a glaring Iran seems to have lost interest in the disparity between the number of agree- Meghri Hydro Power Plant project, which ments and memorandums of understand- already had to be scaled down in 2014 for ing signed in the last decade – often to technical reasons.
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