Economy, Domestic Economy

South Caucasus Hopeful of Closer Ties With Iran

South Caucasus Hopeful  of Closer Ties With IranSouth Caucasus Hopeful  of Closer Ties With Iran

A flurry of activity between the South Caucasus capitals greeted the January 16 lifting of sanctions against Iran, with Azerbaijan, Armenia and Georgia looking to boost their struggling economies amid currency crises and low oil prices.

The media in the three post-Soviet states have all been preoccupied with the possible benefits of the end of anti-Iran sanctions, wrote the Institute for War & Peace Reporting.

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 that it can reach out to bigger international markets.

> Iran-Azerbaijan Commonalities

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 sizable 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 railroad 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 President Hassan Rouhani. They are expected to sign several agreements on economy and energy.

According to the State Customs Committee of Azerbaijan, trade turnover between Azerbaijan and Iran between January and October 2015 amounted to $98.8 million, of which $72 million went to the import of Iranian products.

However, if both prices and the standard of living in Iran rise following the lifting 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 Center.

> Opportunities for Cooperation

Another irritant for Azerbaijan is the ongoing improvement of relations between Iran and Armenia.

Armenia can only trade with the neighboring 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 commercial and energy cooperation.  

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.  

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 meters per year,” Yervand Zakharyan, Armenia´s energy minister, told a press conference on January 21.

“We now receive less than 400 million cubic meters 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 meters 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,” says Vahe Davtyan, an energy expert.

Another auspicious project is the planned construction of a hydropower plant on Araks River near Armenia´s southern border town of Meghri, which was signed by Yerevan and Tehran in 2007. The $323 million 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 that 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 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 railroad, 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,” says Tigran Jrbashyan, president of the American Chamber of Commerce in Armenia Council.

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.

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% to $250 million, representing less than 6% of Armenia´s overall foreign trade, according to the National Statistical Service of Armenia.  

The volume of exports from Armenia to Iran amounted to around $70 million and imports from Iran to Armenia stood at an estimated $180 million.

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

Iranian manufacturers are being subsidized by the state, and energy in Iran is much cheaper than in Armenia, he says, noting, 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 end of sanctions.

> Strengthening Tehran-Tbilisi Ties

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.

Imports from Iran then grew from $40.3 million in 2006 to $129.7 million 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.  

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

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 capitalize on the transit of Iranian products,” says Kornely Kakachia, director of the Georgian Institute of Politics.

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.

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

“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 added, Georgia might import electronics and cars from Iran.  

After a telephone conversation between Georgia's Prime Minister Giorgi Kvirikashvili and Iran's President Hassan 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 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.

> Supplementary Option

According to Kakha Gogolashvili, director of the Center of EU Studies at the Georgian Foundation for Strategic and International Studies, 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 Azerbaijan 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 a supplementary option for Iran or as a transit route.

“Although Iran has the Persian Gulf and the Suez Canal for trade with the West, additional routes are always attractive,” he added.