Iran’s trade relations with the Caucasus region reveal a striking paradox. Armenia and Azerbaijan, two immediate neighbors with comparable geographic proximity and market potential, have followed sharply diverging trajectories in their economic ties with Iran.
While trade with Armenia has gained momentum amid political stability and preferential trade frameworks, commerce with Azerbaijan has weakened under the combined weight of diplomatic frictions, regional competition and persistent domestic economic constraints inside Iran.
On the Armenian front, trade dynamics have been broadly positive. Iran–Armenia trade has surpassed $800 million and is widely expected to approach the $1 billion mark in the near term. The upward trend has been reinforced by both countries’ participation in the Eurasian Economic Union framework, which has lowered trade barriers and expanded market access.
Armenia has also emerged as more than a destination market: its preferential trade arrangements with Western economies have turned it into an attractive re-export and joint-investment platform for Iranian firms.
Iran is now among Armenia’s top five trading partners, a position that underscores the strategic importance of bilateral economic ties.
Iran’s exports to Armenia span both final goods and raw materials, including fuel, bitumen, polyethylene feedstock, industrial machinery, packaging equipment and selected household goods. Iranian technical and engineering services have also secured a foothold, particularly in infrastructure projects linked to the North–South transport corridor, where Iranian firms compete alongside international contractors.
Beyond trade, Armenia offers relatively low-friction investment conditions. Company registration can reportedly be completed within hours, and Iranian investors benefit from Armenia’s access to multiple preferential trade agreements. Through these arrangements, goods exported from Armenia to markets such as Japan, Canada and parts of Europe face tariffs as low as 4%, providing Iranian businesses with a cost-efficient gateway to non-regional markets.
Opportunities also exist in extraterritorial farming and livestock production, particularly given Iran’s domestic water constraints.
In contrast, Iran’s trade with Azerbaijan tells a more subdued story. In 2025, bilateral trade reportedly fell to around $520 million, marking a decline of roughly 20–25% compared with previous years. Although Azerbaijan remains a critical transit route—especially for Iranian exports bound for Russia and other northern markets—political tensions and Azerbaijan’s deepening economic alignment with Turkey have eroded Iran’s market share.
Transit activity remains significant, with hundreds of trucks crossing daily through Astara and Incheh Borun toward Azerbaijan, Russia and the Caucasus. Recent agreements aim to increase daily transit capacity to reduce congestion and prevent spoilage of perishable goods. Still, these logistical improvements have not fully offset the broader decline in trade volumes.
Core Challenge
Crucially, business leaders argue that Iran’s core challenge in both markets lies less in external politics than in domestic economic instability. Volatile exchange rates, high inflation and restrictive foreign currency repatriation rules have injected uncertainty into pricing, contracting and settlement processes.
Exporters often face cost increases between price quotation and deal execution, undermining trust with foreign partners. Payment transfer difficulties and rigid central bank regulations have further strained trade, pushing some traders toward informal or high-risk financial practices.
The diverging experiences with Armenia and Azerbaijan illustrate how political alignment can shape trade outcomes, but they also highlight a deeper structural issue. Even in politically stable markets such as Armenia, Iran’s geographic advantages and competitive potential remain underutilized due to macroeconomic volatility at home.
Achieving the $1 billion trade target with Armenia and reviving trade with Azerbaijan will therefore require more than diplomatic engagement. Sustainable gains depend on stabilizing key economic variables, reforming restrictive trade and currency regulations, and restoring predictability for exporters. Without such reforms, Iran’s Caucasus trade paradox is likely to persist.
