BACKGROUND: On February 10, 2016 The Iranian Ambassador to Azerbaijan Mohsun Pakain, informed the Azerbaijani news agency APA that the President of Azerbaijan, Ilham Aliyev, will pay an official visit to Tehran at the end of February. “The visit is organized at the invitation of the President of Iran Hassan Rouhani, and it is expected that a number of economic and energy agreements will be signed during the visit.” This is already the Azerbaijani President’s second visit to Iran in the last year, and the fifth meeting between the heads of states in the last 15 months. In 2015 alone, the Presidents have met four times, including bilateral visits as well as meetings at multilateral fora in Davos and during the summit of Heads of States of Caspian littoral states in Astrakhan, Russia.

Iranian-Azerbaijani relations have been on a normalization track since the election of President Rouhani, and the subsequent progress on the nuclear talks between Iran and the Western states. President Rouhani, eager to attract investments into Iran, has visibly changed the Iranian government policies towards Azerbaijan, and the two nations have been deepening economic and political ties for the past two years.

This stands in bright contrast to much of Azerbaijan’s 25 years of independence, which have seen the country face relations with Iran that have often been troubled. The two countries hit a low in their bilateral relations in the summer of 2001, when Iranian military vessels attacked an Azerbaijani vessel in the southern Caspian Sea, which was engaged in exploration works in contested Alov oil field. Subsequently, Iranian jet fighters violated Azerbaijani airspace for three days in a row, sending harsh signals to official Baku and to the energy industry to stay off waters Iran considers disputed. At the time, the intervention of the Turkish military on the side of Azerbaijan prevented further escalation of the conflict. (See September 26, 2001, Central Asia-Caucasus Analyst)

Iran has been traditionally upset and suspicious over the pro-Western policies of Azerbaijan, its engagement with NATO and the U.S. military, the involvement of Western oil companies in the Azerbaijani sector of the Caspian Sea, as well as the deep military and economic cooperation with Israel. (See May 15, 2013, Central Asia-Caucasus Analyst) Azerbaijan has at times been unhappy about Iran’s attempts to fund various religious groups and parties in Azerbaijan, thus posing a threat to the secular nature of the Azerbaijani government. The two countries are also at odds regarding the legal division of the Caspian Sea as well as the treatment of the Azerbaijani minority in Iran.

During the Presidency of Mahmoud Ahmadinejad from 2005 to 2013, the two countries faced further upsets, including the arrest of Azerbaijani poets in Iran, political statements in Tehran against the visit of Israeli President Shimon Peres to Baku, and the scandal in Baku regarding the prohibition of hijabs in secondary schools. (See May 15, 2013, Central Asia-Caucasus Analyst) It is only following the departure of Ahmadinejad from office and the election of a more moderate president in Iran that the relations have taken a turn for the better.

During President Rouhani’s first visit to Baku in 2015, a large business forum between Azerbaijani and Iranian entrepreneurs was held in the Heydar Aliyev Center, where both Presidents spoke about the deepening of economic ties as well as the attraction of Western investments in mutually beneficial projects.

IMPLICATIONS: The normalization of Iranian-Azerbaijani political, economic, business and social relations would have a significant impact on the regional geopolitical picture. For most of 1990s, the region was divided between an Azerbaijan-Georgia-Turkey alignment and a Russia-Armenia-Iran axis. Iran and Azerbaijan refrained from much economic cooperation, and the two countries had virtually little mutual investments. Yet this new chapter in bilateral relations could bring new business opportunities for both countries, which have suffered from low oil prices.

Azerbaijan is rapidly changing its economic policies, shifting its focus from reliance on oil and gas and working to modernize its industry, production capacity, and developing its non-oil sector – particularly tourism, agriculture, IT and transport. Many Iranians already travel to Azerbaijan for tourism purposes and Azerbaijanis often seek medical services in Iran. This trend can further be deepened if the visa restrictions are lifted.

At the same time, Azerbaijan is seeking investments in its non-oil sector and Iranian companies and businessmen could become a valuable resource in this issue. Similarly, Azerbaijani holdings and companies can invest in the Iranian economy, thus expanding their international presence in the region. These investments can be in oil and gas, construction, petrochemicals, chemicals, and textile, among other sectors. Iran is welcoming foreign direct investments and the proximity of the two cultures, languages and traditions will give Azerbaijani entrepreneurs advantages in terms of entering the Iranian market.

The development of North-South transport and energy corridors will become another priority in the bilateral talks. Azerbaijan is about to complete the Baku-Tbilisi-Kars railway system, which will link Europe with Asia and allow the transportation of goods in both directions. At the same time, Baku International Port has started its operations and develops useful links with Central Asia to boost regional trade, commerce and logistics. Linking the Iranian and Azerbaijani railway systems will further make both Azerbaijani and Iranian ports into key hubs for the regional trade. This is especially valuable since the Turkey-Russian trade has suffered a severe blow in the last year. Thus, Turkish as well as Ukrainian cargo are looking for new transport routes in greater Eurasia.

Azerbaijan is also completing the construction of major TANAP gas pipeline to export its gas resources to the European markets. Iranian gas could join this pipeline and enter the Balkans via Azerbaijan and Georgia. At the same time, the Georgian market, which has suffered shortages of gas in the last year and had to turn to Gazprom for more inputs, could greatly benefit from Iranian gas both as a source for domestic consumption, as well as subsequently for transit purposes.

Azerbaijan has a rather solid and well-developed economic and energy cooperation with the European Union, and could become a convenient and beneficial window to Iran for European and American businesses. Entering the Iranian market via Azerbaijan, and utilizing Azerbaijani local and regional expertise, including cultural and linguistic links, will help Western businessmen to adapt to the Iranian market. In a way, Azerbaijan can become a useful platform for EU-Iranian business links.

CONCLUSIONS: Azerbaijan and Iran have a chance to radically change the nature of their relations, and move away from decades dominated by suspicion and antagonism in their bilateral relations. This would bring not only a new picture to the regional geopolitics, but also significantly shift regional trade and commerce and boost economic development. Under these conditions, the prospects for ethnic and regional conflicts could further fade away, paving the way for mutually beneficial projects. In that respect, Azerbaijan seeks to become a valuable platform for EU-Iran economic ties as well as convenient hub for Iranian gas and oil transport to Western markets.

AUTHOR’S BIO: Fariz Ismailzade is Vice Rector of ADA University in Baku. The views expressed here do not represent the official policy of his employer.

Image Attribution: www.ewan24.com, accessed on Feb 19, 2016