Armenia, Azerbaijan Compete to Attract Iranian Cargo

On its heavily-fortified border with the Islamic Republic of Iran, Armenia is developing a new strategy to overcome decades of economic isolation.

However, slightly to the east, on its own border with Iran, Azerbaijan is endeavoring to thwart Yerevan's plans.

Last December, Armenia opened a free economic zone in its southernmost city of Meghri along the Iranian border. The zone aims to take advantage of the Iranian market and position Yerevan as a broker between Tehran and the Eurasian Economic Union, the Russia-led trade organization of which Armenia is a member, reads an article published by US-based news organization Eurasianet. Excepts follow:

The trade could be mutually beneficial: The Islamic Republic has long expressed interest in expanding trade links with Russia via EEU, while Iran offers just one of two borders left open to Armenia after Turkey and Azerbaijan closed their respective frontiers following the war over Nagorno-Karabakh in the early 1990s.

Trade between Armenia and Iran has been growing annually, reaching $211.4 million in 2017.

Iran has been a fairly marginal player in the politics of the South Caucasus, but both Armenia and Azerbaijan are competing to draw it into the region, and by extension, gain a strategic advantage.

“Our intentions [in Meghri] are serious,” Armenian Prime Minister Karen Karapetyan said at the opening ceremony of the FEZ.

"Iranian entrepreneurs will have the opportunity to establish businesses in the zone and then export their products to European and Eurasian markets."

The Iranian side is also positive about developments on the border.

“The launch of Meghri Free Economic Zone will be conducive for economic turnover between Armenia and Iran and the exchange of experience with Iranian free trade zones,” Seyyed Kazem Sajjadi, Iran's ambassador to Armenia, said at the inauguration.

The conditions in the zone are certainly generous.

“Companies operating in the Meghri FEZ will be exempt from profit tax, value added tax, excise tax and customs fees,” the provincial governor’s press secretary, Vazgen Sagatelyan, told Eurasianet.

“We expect the zone to attract 50 to 70 companies in the coming years, investing a total of $100-130 million and creating more than 1,500 jobs.”

These projections are ambitions. Armenia’s other two economic zones, the Meridian and Alliance FEZs in Yerevan, established in 2014, have between them created just 94 jobs and garnered interest from 17 companies. Two of those suspended their activities last year.

> Stalled Rail Project

And the Meghri FEZ is being launched even as another ambitious Iran-Armenia trade project, the Southern Armenian Railroad, has stalled.

Agreement on the construction of a rail link between the two countries was approved by both governments in 2009. Three years later, Yerevan granted the Dubai-based Rasia FZE Investment Company a 50-year concession by the Armenian government to build and manage the 305-kilometer line. By late 2013, the company had developed a feasibility study for the project, estimating it to cost $3.5 billion.

The project failed to take off, however, after aggressive lobbying by Baku.

“In 2016, after the Iranian government and China held negotiations to construct a new railway between Iran [and] Armenia, Azerbaijan (unofficially) threatened to freeze its loans to Iran,” Fuad Shahbazov, a political analyst based in Baku, said in emailed comments.

> Baku Loan for Iran-Azerbaijan Rail Connection

In January, Tehran accepted a $500 million loan from Baku to construct a 205-kilometer railroad from Rasht to the Azerbaijani border (known as the Rasht-Astara line). Then in March, the foreign ministers of Iran, Turkey, Georgia and Azerbaijan all met in the first-of-its-kind quadrilateral meeting.

In a statement following the meeting, the four sides hailed “the significant steps taken to increase the transit potential of the four countries … favorably situated on international transit corridors in order to integrate their national transport infrastructure.”

They also pledged “further enhancement of cooperation for the implementation of new projects in order to develop transport infrastructure and increase transit potential of the four countries ... starting from the Iranian ports of Bandar Abbas and Chabahar at the Persian Gulf through Rasht-Astara [and] connecting to Baku-Tbilisi-Kars railroad”.

The Rasht-Astara deal, signed between Azerbaijan Railways and the Islamic Republic of Iran Railways, will see Azerbaijan rent the railroad for 15 years, and the terminals for 25 years. It aims to increase bilateral trade between Iran and Azerbaijan from 600,000 tons to 5 million tons per year.

“Azerbaijan hopes the railroad will create new jobs for people in the provinces, as well as stimulate the development of local infrastructure across the southern part of the country,” Shahbazov said.

There’s also a strategic imperative. A major security concern for Baku is its exclave of Nakhchivan which, since the war with Armenia, has been only reachable by air. Baku sees the potential to expand the recently launched railroad between Nakhchivan and the Iranian city of Mashhad, linking it to Azerbaijan’s main rail network.

“The first freight from Russia reached the Iranian part of Astara in February 2018,” Shahbazov said, adding that the network is likely to become fully operational in summer.

Nevertheless, it does appear to give Azerbaijan a lead in the competition for Iranian transit.

The Armenian prime minister in January acknowledged his country's troubles financing its railroad project.

“I believe that the construction of a railroad to Iran is not an end in itself, because if built, it might not be used to transport as many commodities as [necessary] to become commercially viable,” Karapetyan added.

But Armenians hope that the new trade zone in Meghri will boost commerce and thus create an economic base for the railroad.

“The establishment of FEZ is aimed at replacing [the railroad],” says Richard Giragosian, director of the Regional Studies Center think tank in Yerevan. “It is seen as a more effective and viable alternative, but also a better strategy to meet the same goal: to deepen and develop bilateral trade.”

By developing bilateral trade first, Yerevan hopes then to position Armenia as a major transit hub between Iran and Russia. To this end, the country is also lobbying its northern neighbor Georgia to invest in the Meghri FEZ.