Iranian President Mahmud Ahmadinejad’s visit to Armenia on October 22-23 marked a new stage in the relationship between the two countries. The former Soviet republic, which has adopted a Western-type market economy principle, and Iran, one of the most closed economies of the world, will make increasing efforts to make their economic ties closer. Moreover, the two countries are likely to initiate some cooperation in the military sphere as well. The close ties are designed to help both sides stabilize their current position in view of future challenges. 

BACKGROUND: Iran has long ago assumed the tactic of establishing as strong relations with its neighbors as possible, as a means to turn them into potential allies against external threats, such as international sanctions or even military strikes in response to its controversial nuclear program. In the case of Armenia, one of Iran’s smallest neighbors, the situation is especially beneficial, as the two countries have no serious political issue of discord. In particular, Iran shares the vision that the Karabakh conflict, Armenia’s most sensitive foreign policy problem, should be resolved only through peaceful means. Armenia, in its turn, has declared its support for Iran’s right to have a nuclear program for exclusively peaceful purposes. Moreover, Armenia is among the countries most concerned with the prospect of a possible U.S. military attack on Iran, as Iran provides one of Armenia’s two links with the outer world, the other being Georgia. On this basis, the October summit and events accompanying it revealed several trends.

First, bilateral trade is set to sharply increase in the near future due to several factors. Armenian trucks are given the permission to carry cargos through Iranian territory – something previously done only through Iranian vehicles. Iran will also provide trade benefits to Armenia by removing some trade barriers, a benefit exclusive to Armenia. Work is under way toward preparation of a free trade agreement between the two countries. Moreover, communication routes connecting the countries also being upgraded, in particular, a new highway segment was recently inaugurated, which will make cargo turnover more stable and less dependent on seasonal and weather factors.

Second, mutual investments appear to grow rapidly, mainly in the energy sector. After the gas pipeline project connecting the two countries operates at full capacity late next year, trade in electric power will grow, and a third high voltage transmission line will be constructed before 2010. Armenia will buy gas and pay with electricity. Another energy project, the hydropower station on the Araxes border river, is also expected to serve as a power exporter to Iran. If these projects alone are successful, exports from Armenia to Iran may rise to some 30 million dollars a year even before the process of elimination of trade barriers starts.

Third, both partners look determined to realize the extraordinary project of constructing an oil refinery in southern Armenia, which will process Iranian oil and export part of its production (including some back to Iran, which is short in refinery capacities). A feasibility study is now under way. If agreed, this project will require the construction of an oil pipeline connecting the two countries, some 70 kilometers in Iran, and several dozen kilometers in Armenia depending on the location of the future factory. In addition, construction of a railroad connecting Armenia and Iran is on the agenda, as a part of the oil refinery project. All of this will be very beneficial for Armenia, both in terms of boosting its economy and eliminating (or bypassing) the Azerbaijani and Turkish embargoes imposed since the early 1990s.

Fourth, as revealed by the visit of Iran’s Defense Minister Mostafa Mohammad Najjar to Armenia on November 6-8, Armenia and Iran are also considering military cooperation, mainly in logistics: Iran is likely to supply the Armenian Army with food and other commodities.

IMPLICATIONS: The relations between Armenia and Iran have a number of unusual aspects, and they may become even more non-typical in the future.

The current trade turnover between Armenia and Iran is some 160 million dollars a year, down from 190 million at its peak in 1997, when Iran was Armenia’s largest trade partner. In 2006, in spite of its 80 million population, potentially a very large market for Armenia, Iran was only Armenia’s seventh largest trade partner, whereas the first six (Russia, Ukraine, Germany, Belgium, Kazakhstan, and Israel) are located much farther from the country. This is partly due to Armenia’s open economy, and Iran having one of the highest trade barriers in the world. If the above-mentioned free trade agreement is reached, it will be a unique document, as one of its parties is a member of the World Trade Organization and the other is not. For Armenia, this is good news, given its need for markets for its rapidly growing economy. Iran’s evident interest is that the stronger the Armenian-Iranian ties, the stronger will be the opposition of Armenia to any American military action against Iran.

Another peculiar aspect is that Armenia, which has been dependent on Western aid and assistance, has managed to maintain good relations with both Iran and the United States. Symbolically perhaps, during Ahmedinejad’s visit, Armenian Prime Minister Serge Sarkissian was on a working visit in the U.S., where he met with Vice President Dick Cheney, Defense Secretary Robert Gates and Secretary of State Condoleezza Rice. The Armenian-Iranian military contacts are of course much smaller in scale compared with Armenia’s ties with Russia and even NATO. However, theses contacts, which will hardly go beyond the level of logistics, serve as a psychological indicator of the friendly relations between the two countries.

Finally, it is evident that Iranian-Armenian economic cooperation has an important third party as well, namely Russia. Moscow has acted as a principal investor in at least one important Iranian-Armenian project, the gas pipeline. And it will evidently be even more active in future projects, in particular the oil refinery, which is an expensive venture and will need a significant period of time to become profitable. Hence, Moscow will have a good opportunity to enhance its influence on both of the future ventures’ partners. In addition, future investments in this refinery project (if any) will not be subject to the U.S. sanctions on Iran since they will be done in Armenia.

CONCLUSIONS: Iran and Armenia are strengthening their ties, mainly in the economic sphere, trying to use them as tools to stabilize their positions in the region. Russia, a partner and ally of both, is a potential participant of their joint economic projects and may reap political and geopolitical dividends from its involvement. Friendly relations with Armenia’s three different “poles,” Russia, the U.S. (and the Western community) and Iran can potentially enhance Armenia’s geopolitical role, but is a difficult balance to walk.

AUTHOR’S BIO: Haroutiun Khachatrian is an analyst on political and economic issues based in Yerevan.