CAUCASUS BLOG: Unsplendid isolation

CAUCASUS BLOG: Unsplendid isolation
Meghri, located by Armenia’s border with Iran, is home to a new special economic zone which Yerevan hopes will herald far bigger things to come where business with the small country’s big neighbour is concerned.
By Emil Avdaliani in Tbilisi September 12, 2018

Small and impoverished, landlocked Armenia struggles to make any impressive trade or investment headlines.

Shunned by the anti-Yerevan Azerbaijani-Turkish axis running from east to west and rather hemmed in by the geopolitical priorities of ally Russia to the north, it has not even managed to form impressive business links with Christian neighbour Georgia—even though Georgia is a fellow diminutive nation, with a population numbering around 3.7mn compared to Armenia’s 2.9mn, it has for the past six years concentrated on developing the Turkey-Georgia-Azerbaijan trilateral cooperation, the notable achievements of which so far include the Baku-Tbilisi-Kars railway launched in October last year and Southern Gas Corridor (SCG) pipeline infrastructure that, once completed, will take Azerbaijani gas all the way to Italy.

Where Armenia is concerned, Azerbaijan, of course, doesn’t want to know, given its anger over the Nagorno-Karabakh breakaway territory populated by ethnic Armenians. Turkey stands by its ally Baku in refusing to maintain diplomatic links with Armenia and the Armenians, surrounded by hostility, thus rely on hosting Russian military bases for their security—a fact which Russia deploys as part of its strategy to deter Georgia from too eagerly pursuing its dream of joining Nato.

What’s left for Armenia?
So what’s left for poor, isolated Armenia, beyond its delicate relationship with Moscow and the investment commitments it can raise from the 7-10mn-strong Armenian diaspora? Ask an Armenian and you might at least get a nod to the south where lies the sleeping giant that is Iran, a country of some 80mn.

Iran may be under a renewed sanctions-led economic attack from the US—in which Washington is warning third countries to drop trade and investment links with the Islamic Republic or face the consequences—but Yerevan will be tempted to continue exploring any economic potential with Iran that it can.

In late 2017, a free economic zone (FEZ) was opened in Meghri, a town bordering Iran in the southern Armenian province of Syunik. Aimed at reviving economic prospects with Iran—given its geographical position, commercial and logistical capabilities as well as Armenia’s multi-sector preferential trade regimes—the free zone could amount to something of a bridge between Iran, the Moscow-led Eurasian Economic Union (EEU) and the European Union.

According to the Armenian government, approximately 50-70 operators will be involved in the Meghri FEZ over the next several years with a projected combined investment of $100-130mn. Officials say the FEZ will create 1,500 new jobs and can achieve an annual turnover of $250mn in exported goods and services. Moreover, entrepreneurs at Meghri will not pay taxes, except for the levy on their net income.

Though nothing to shout about from the rooftops, trade between Armenia and Iran is on the rise. In 2017, it grew to more than $220mn, up from 2016’s $199.4mn. Armenian exports to Iran last year moved up to $66.9mn, while Iranian exports to Armenia increased to $144.4mn.

The Meghri FEZ will be developed in two stages. During the first stage, basic infrastructure for the launch of the FEZ will be prepared. The second phase will involve the expansion of FEZ operations with additional infrastructure rolled out over approximately 70 hectares of land to provide a business-friendly environment.

Geopolitical quandary
A close look at Armenia’s geopolitical quandary shows how all substantial regional energy and railroad projects circumvent the country. Though a modest breakthrough, the Meghri FEZ is a meaningful contribution to Yerevan’s broader push at breaking out of its isolation by fostering regional cooperation where it can.

Indeed, there are positive trends under way which could help the Meghri FEZ raise its impact: Iran always expresses an interest in ramping up trade links to Russia—and with the Moscow-opposed US economic assault on Tehran under way, at a time when Washington is also pressing home sanctions imposed against Russia and Turkey, the Russians, Turks and Iranians are exploring the pursuit of foreign trade in their own currencies rather than the dollar wherever possible—and the wider Eurasian Economic Union (EEU), with which it one day hopes to strike a fully-fledged free trade agreement.

Such an FTA would nicely fit into Iran’s strategy of increasing its political and economic influence in the South Caucasus. The obstacles on that road, however, are formidable. Russia and Turkey are both well represented both militarily and economically in the region. Russia may not have opposed Meghri, but the Russians will continue obstructing any Iranian moves towards establishing new and independent energy pipelines that run through Armenia and Georgia.

When several years ago talks took place on building a major pipeline that would transit Iranian gas through Armenian territory to Georgia, Moscow was quick to block the move. The Kremlin even bought a majority stake in the existing 140-kilometre Iran-Armenia gas pipeline, which runs through to Meghri, to effectively forestall any further initiatives on that front.

Tehran and Yerevan have also discussed constructing a $3.7bn railway that would run through Armenia to Georgia’s Black Sea coast. But here too the project stalled as difficulties in securing financing arose.

The stark reality is that Russia, which is keeping a close eye on Armenia’s direction under its post-people’s revolution government, owns most of Armenia’s existing railway infrastructure and as a result can block any such pro-Iranian initiative. Another factor is that neighbouring Azerbaijan already has the necessary gas pipeline infrastructure running through Georgia to Turkey. The new Baku-Tbilisi-Kars railway, meanwhile, will only strengthen Iran’s willingness to take the Azerbaijan route.

Back to Meghri FEZ
Despite the Meghri FEZ’s ambitious projections, past experiences show the zone will face clear constraints. For example, other two other economic zones, the Meridian and Alliance FEZs in Yerevan, established in 2014, have between them created just 94 jobs and garnered interest from as few as 17 companies.

Meghri’s fortunes may also suffer as the Baku-Tehran cooperation gains real momentum. Iran cannot very well ignore the business potential offered it by gas-rich Azerbaijan’s already existent infrastructure.

In January 2017, Tehran was the recipient of a $500mn loan from Baku to construct a 205-kilometre railway connecting the Azerbaijani and Iranian railway networks (the Rasht-Astara line). According to the deal, Azerbaijan will lease the line for 15 years and the terminals for 25 years. Both Iran and Azerbaijan claim that their bilateral trade will consequently increase to 5mn tonnes per year. This will further limit any potential for more trade corridors running from Iran to the Black Sea via Armenian territory.

Yerevan needs as many imaginative, strenuous and effective efforts in trade and investment as it can devise. Otherwise, the Armenians, it seems, could remain rather too boxed in for a long time to come.

Emil Avdaliani teaches history and international relations at Tbilisi State University and Ilia State University. He has worked for various international consulting companies and currently publishes articles focused on military and political developments across the Eurasian continent.