• STRATFOR ANALYSIS

    After sanctions, Iran’s growing role in the Caucasus

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    WITH the end of sanctions on Iran, the country’s regional economic influence will begin to rebound. The adjacent South Caucasus region, encompassing Azerbaijan, Georgia and Armenia, is one area that Tehran will target for greater cooperation, reaching out to make deals on trade and energy. In doing so it will inevitably have to consider the role of Russia, which has dominated the political and economic affairs between the Black and Caspian seas for two centuries. Russia and Iran are regional geopolitical rivals, a dynamic manifested in the long-simmering Nagorno-Karabakh conflict between Azerbaijan and Armenia and on negotiations over pipeline projects for Iranian hydrocarbon exports. Despite their rivalry, Russia and Iran will have to work together in order to block Western-led infrastructure projects, which they both largely oppose, and to avoid foreign military presence in the region, particularly by Georgia.

    The Jan. 17 end of sanctions on Iran will have important consequences worldwide, changing the state of play in the ongoing conflicts in Syria and Yemen. In the South Caucasus, however, Tehran’s reemergence will have particularly sweeping effects. For some time, Iran has lagged far behind its regional rivals in terms of economic and military influence, even as it has become increasingly interested in Azerbaijan, Georgia and Armenia for their transit and energy possibilities.

    Iran has a number of reasons for increasing its regional involvement. Europe is trying to diversify away from Russian natural gas, and Iran wants to seize the opportunity to take over these markets. But it needs access to the South Caucasus first. Tehran recently expressed interest in using existing infrastructure such as the Trans-Anatolian Gas Pipeline and the Trans-Adriatic Pipeline, which connect the Caspian and Mediterranean seas. Another option would be reaching Georgia’s Black Sea ports of Batumi and Poti through Armenia. Iranian officials are already courting Yerevan for that purpose.

    Exporting energy through Turkey would be more convenient for Iran, but difficult relations between the countries on issues including how to end the Syrian civil war ultimately make the Armenian route more viable. So far, there has been talk of building a $3.7 billion railway and of extending a natural gas pipeline between Armenia and Iran. However, that plan, too, is complicated for Tehran, because Moscow has repeatedly tried to stall or become a shareholder in major infrastructure projects so as not to lose its influence in Armenia.

    Weighing the options
    The recent diplomatic battle over who will meet Georgia’s growing natural gas demand is emblematic of the ways Iran is being blocked from taking on a more active regional role. The dispute began when Azerbaijan announced that it was unable to meet Georgia’s requests for more natural gas. Iran saw this as an opportunity and immediately reached out to Georgian officials, even announcing that an official agreement had been signed. Georgia, however, later refuted the claim. The silent player in the dispute is Russia, which has used Armenia to hinder attempts to transport natural gas to the Georgian market via either the construction of a new pipeline or the expansion of an existing one.

    The Russian obstacle has spurred Iran to look for routes that avoid Armenia. Tehran is now considering building around $400 million in railway infrastructure to Georgia through Azerbaijan, Armenia’s regional rival. This north-south transport corridor would run from Iran to Russia’s Baltic ports and take precedence over any plans for transit through Armenia. This is reflected by the pace of construction on railways from Iran through Azerbaijan connecting to Russia’s North Caucasus railway branch. Again, because of Russian interference, regional powers are circumventing Armenia to get their exports to the European market, in turn increasing Armenia’s dependence on Russia. But Iran is determined to increase its trade with all the South Caucasus countries. Trade with Georgia and Azerbaijan is set to more than triple from below $1 billion to $3 billion.

    Post-sanctions Iran will also try to become more involved in the Nagorno-Karabakh conflict. In the early stages of the territorial dispute, Tehran tried to mediate between the two sides, but Armenian forces violated the truce. Now, Azerbaijan is working to change the status quo on the contact line, and Iran sees an opportunity to insert itself into the new configuration.

    On Jan 22, Iran’s Foreign Ministry offered to mediate the conflict, as a possible resolution to the standoff would make it easier for Tehran to implement its infrastructure projects in the region. Tehran’s involvement will also undermine Russia’s dominant position in the negotiation process. Moscow could theoretically cooperate with Tehran, but considering how opposed Russia is to any Iranian moves into the Armenian and Georgian energy sectors, this scenario is unlikely. On the other hand, as other world powers try to increase their involvement in the conflict, Moscow could see Tehran as a valuable partner to counter foreign influence.

    Indeed, despite the disputes over influence in the South Caucasus, Russia and Iran have shown they can cooperate. In December, both managed to sign a memorandum to synchronize their electricity transmissions systems with those of Georgia and Armenia. And both are keenly aware of the larger threats to their interests. For example, the European Union and NATO are increasing their regional presence through political and economic treaties, as well as a new NATO training center in Georgia.

    Tehran and Moscow also both oppose Western-sponsored economic projects, namely the Baku-Tbilisi-Akhalkalaki-Kars railway, the Trans-Caspian transit route, and other projects such as the Nabucco pipeline.

    Russia’s fears of being sidelined were magnified Jan. 15, when following the severance of ties between Ukraine and Russia, Kiev signed an agreement with Georgia, Azerbaijan and Kazakhstan to move its exports to Asian markets through the Trans-Caspian transport route. This fear, along with the buildup of an economic and military alliance between Azerbaijan, Georgia and Turkey, may make Russia more willing to work with Iran in the future, especially when it comes to blocking Trans-Caspian efforts.

    Military considerations
    Iran and Russia’s military priorities broadly align. Both worry about growing military cooperation between Turkey, Georgia and Azerbaijan, and they fear a potential expansion of NATO’s presence in Georgia. Tehran and Moscow know that they need to prepare for such a threat by building out their regional military connections, and as a result, Iran wants a direct route to Russia. This, however, is politically difficult, given that Georgia, Azerbaijan and Turkmenistan are unlikely to allow Russian military equipment to transit through their territories. One suggestion for avoiding the issue altogether is to use the Caspian Sea as a transit route. Meanwhile, both sides are also concerned with the ongoing conflict in Syria and are both working to secure an alternate route to the country for Russian troops. Indeed, for the past two years, Stratfor has been closely tracking an expanding network of Russian and Iranian rail and road projects around the Caspian Sea and through the Caucasus mountains.

    Though military confrontation with any third party is a distant prospect, boosting mutual trade is a much more immediate motive for building roads and railways. Trade between Russia and Iran increased after the fall of the Soviet Union, reaching almost $1.2 billion at one point, but it eventually stagnated under sanctions. Trade is expected to rebound following the removal of sanctions on Tehran, particularly Iran rejoining the Society for Worldwide Interbank Financial Telecommunication (SWIFT), an international payments network. Moscow has already made some important moves to reestablish the lost ties.

    When Russian President Vladimir Putin visited Tehran in November 2015, he signed around 35 agreements on a range of issues, including in the areas of agriculture, military, nuclear stations and waste disposal. Moscow also provisionally agreed to provide Iran with a $5 billion line of credit. Moreover, as a token of the trade potential between Iran and Russia, Tehran recently floated the idea of signing a free trade agreement with the Russia-led Eurasian Economic Union.

    Regarding military cooperation, Moscow has agreed to provide Iran with an S-300 missile system, and Iranian specialists are now being trained in Russia. From 1992-2012, 52 percent of Iranian imports of military equipment came from Russia, but Iran’s share in the global military trade amounted to less than 1.5 percent.

    Thus, while Iran will certainly become more active in the region politically, and while it will increase trade with every South Caucasus country, it will encounter significant obstacles along the way. Russia is unlikely to loosen its grip on Armenia by allowing Iran’s large energy infrastructure projects to move forward — unless Iran allows significant Russian participation in them. And though Tehran will try to re-engage in Nagorno-Karabakh, Russia will limit or possibly block its involvement. Nonetheless, on a range of issue, the two have enough common ground to work together.

    © 2016 STRATFOR GLOBAL INTELLIGENCE

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