Economy, Business And Markets

Iran and Pakistan: Back to Business

Iran and Pakistan: Back to BusinessIran and Pakistan: Back to Business

Last Thursday, Iranian Foreign Minister Javad Zarif visited Pakistan as part of a multi-country tour to explore opportunities for greater economic and security cooperation in the region following the landmark nuclear deal with the P5+1.

The July nuclear deal likely clears the way for the completion of sanctions-delayed energy projects between Islamabad and Tehran, bringing relief to energy-starved Pakistan, wrote the Tokyo-base online international news magazine The Diplomat.

The eventual lifting of sanctions imposed by the US, EU and the UN Security Council on Iran over its nuclear energy program will allow for Islamabad-Tehran relationship to be increasingly driven by economic and geographic realities, rather than the interests of exogenous actors. Pakistan and Iran are neighbors. Pakistan is a net-energy importer. Iran is a net-energy exporter.

In anticipation of the lifting of sanctions on Iran, Islamabad and Tehran are moving forward with two major energy projects: a natural gas pipeline and an electricity transmission line. Together, both projects will alleviate Pakistan’s crippling shortages in both electricity and vehicle fuel.

Pakistan and Iran signed a $1.5 billion natural gas pipeline deal in 2013. The project has been in limbo as a result of anti-Iran sanctions.

In signing the agreement, Islamabad not only defied pressure from the West and Persian Gulf Arab states, it also put itself in a vulnerable position vis-à-vis Tehran. The accord stipulates that Pakistan would be fined up to $3 million a day if it failed to complete construction of the pipeline by the end of 2014. While Iran has essentially completed its portion of the pipeline, Pakistan has not. In fact, construction of the Pakistan portion did not begin until this summer.

  The China Factor

Importantly, Iran has not opted to exercise the gas deal’s penalty clause, indicating its keenness to become an energy partner with Pakistan. China may have also been a factor motivating Iran’s restraint.

With a population of close to 200 million, Pakistan is a large and growing energy and economic market. But China is even bigger. And for southern Iran, Pakistan is a land-based gateway to China.

Beijing is financing and constructing a $46 billion economic corridor that will connect Pakistan’s Arabian Sea port of Gwadar, located close to Persian Gulf shipping lanes, to China’s landlocked and economically underdeveloped Xinjiang Province.

Iran’s ambassador to China has expressed interest in eventually extending the Pakistan gas pipeline to China. Tehran may also be keen to exploit future land and rail routes connecting Gwadar to Xinjiang. Already, Iran is connected to Pakistan’s Gwadar by road; and a freight rail connection between Pakistani and Iranian Baluchestan has been restored.