Washington Report on Middle East Affairs, April 1998, Pages 45-46, 101

Central Asia

Iran Profiles Itself as a Regional Power Inside the Former U.S.S.R.

By Gordon Feller

Iran’s growing importance as a regional power is creating a dilemma for its northern neighbors in the Caucasus and Central Asia. The dilemma is how to reap the benefits of increased trade with Iran while not alienating the United States, which maintains sanctions against Iran for its alleged support of international terrorism.

During the Soviet era, Iran was more or less an outpost. It was cut off from what are now the eight independent Caucasian and Central Asian states which cluster along its northern borders. But the collapse of the Soviet Union changed that dramatically. Iran now finds itself in a new geopolitical situation as the natural focal point through which the eight mostly landlocked states can reach the outside world. That geographical reality is reinforced by the strong desire of all these newly independent states to reduce their dependence on Russia.

An international affairs expert, now based in London but who regularly visits Iran, told the press that one of the major priorities of the Iranian Foreign Ministry is to further develop links with its northern neighbors. By pushing northward, Iran can tap into other links heading west and east, thus profiling itself as a regional power and reducing the isolation imposed on it by the U.S. sanctions. The London source says Iran has been nurturing good-neighborly ties with its neighbors on more than one level. Apart from offering trade and transport possibilities, Iran has at various times mediated in regional disputes, such as between opposing factions in Tajikistan, and between Azerbaijan and Armenia in the Nagorno-Karabakh dispute.

The dilemma for Iran’s neighbors is well illustrated by the three Caucasian states: Armenia, Georgia and Azerbaijan. Each of these has links with the United States, links which they consider essential to preserve. Each receives substantial U.S. foreign aid, ranging up to about $100 million annually in the case of Armenia.

At the same time, Iran is the number one exporter to Armenia, mainly in food, manufactured goods and machinery, while Iran is Armenia’s second biggest export market, mainly in metals and building materials. Iran also supplies some 10 percent of Armenia’s electricity demands. The key importance to Armenia of relations with Iran is thus clear. One Yerevan-based journalist said that for Armenia, the huge Iranian market is an El Dorado. On the political level, relations are cordial, if passive.

In the case of Azerbaijan, there is also considerable trade with Iran. But perhaps because the two states share a Muslim heritage, Tehran appears to have taken a more active political line. Azerbaijani President Heidar Aliyev told RFE/RL recently that Iranian spiritual leader Sayyed Ali Khamenei had raised objections to Azerbaijan’s links with the United States and Israel. Aliyev said he replied to that by asking Khamenei why Iran maintained good trade links with Armenia, which—as Aliyev put it—had carried on a war with Azerbaijan.

Like the other two Caucasus states, Georgia has friendly and growing ties with Iran. The two countries have signed agreements, and a direct rail link is planned. Georgian officials tend not to say too much too loudly about the links with Tehran, but they realize their potential. In Georgia’s case, however, Turkey is still a more important partner than Iran. Central Asian countries are similarly building links with Iran, particularly with a view to moving their oil and gas riches to the world market. In the case of Turkmenistan, a gas pipe line has already opened onto Iranian territory, and plans call for the line to be extended to Turkey.

For Iran, the economic links with its neighbors are useful in the first line as steps toward regional leadership. To boost its own economy significantly, Iran needs more investment than can be found in Central Asia or the Caucasus. The U.S. sanctions bar it from receiving American capital, so it turns mostly to western Europe, where French companies in particular have been willing to defy the sanctions, even at the risk that they too will come under sanctions. Some 80 percent of Iran’s export income of some $12 billion per year comes from oil. And it badly needs investment to upgrade its oil wells, particularly to develop modern re-injection processes, which will allow more oil to be won from the aging fields.

In the Caucasus All Oil Routes Lead to Power

The Caspian oil game is being played for very high stakes. Despite continuing disputes over how to carve up the resources, the race is on to extract and bring to market billions of dollars worth of oil and gas from the Caspian Sea basin.

Major oil corporations, powerful individuals from East and West, and the governments of the Central Asian and Caucasian states around the Caspian Sea all are involved in the quickening spiral of events. The latest question is whether the lure of oil wealth threatened or nearly brought about the death of Georgian President Eduard Shevardnadze.

Shavardnadze’s motorcade was attacked in Tbilisi Feb. 9 in a carefully planned military-style operation. The president was lucky to escape alive from the wreckage of his armored limousine. First thoughts were that purely domestic political forces were behind the assassination attempt, the second he has survived since 1995.

But Shevardnadze himself played down that likelihood within hours. He told journalists that “very powerful interests” could be trying to ruin Georgia’s chances of becoming a key transit route for oil to the west. He hinted at the involvement of Russians in the plot.

He noted that plans to transport oil through Georgia would mean avoiding Russian territory, and he said that the assassination attempt could not have been the work of amateurs. Were Russians really behind the attempt? Or is big brother Russia just a convenient scapegoat? The truth may never be known. But certainly the link to oil interests, whether Russian or non-Russian, is a credible possibility given what’s at stake.

Georgia is active in promoting itself as a main corridor for Caspian oil flows. A pipeline already exists over most of the route from Azerbaijan to the Georgian Black Sea port of Supsa, and, under a $1.5 billion contract signed with an Australian consortium, this line is to be refurbished and completed by the end of the year. In addition, there is the prospect of Georgia hosting a much bigger share of transited oil, through a new pipeline from Azerbaijan through Georgia to the Turkish Mediterranean port of Ceyhan. With additions, petroleum from Kazakhstan and Turkmenistan could also use this route, thereby securing enormous transit fees for Georgia.

Russia, for its part, is already transporting Azerbaijani oil through a northern route through Chechnya to the Black Sea port of Novorossisk. Russia is also planning a major expansion of its carrying capacity by means of a new pipeline further north, to link Novorossisk with the Kazakh and Azerbaijani fields. The Russians are pressing very hard for this to be the major transit route, and the Georgian plans cut squarely across their intentions.

Has the Shevardnadze assassination attempt, even though it failed, created uncertainties which will reduce Georgia’s chances of being a major transit center? Caucasian affairs analyst Edmund Herzig says he does not believe so.

Herzig, a senior researcher with the Royal Institute of International Affairs, said that since the Caucasian countries gained independence, their leaders had used any political violence as a reason for strengthening state control and eliminating opponents. In this case, Shevardnadze will probably use the occasion to further rally public support around him.

Herzig says that the pipeline projects are only part of Georgia’s desire to be a pivot between the Occident and the Orient, between the Black Sea and Europe on the one hand, and the Caspian Sea and Central Asia on the other. He said the Georgians are looking to the broader possibilities of communications, whether by road, rail or seaports, which would create opportunities for participation by Georgian companies.

From Turkmenistan and Iran, Oil Powers Eye Pakistan Market

After more than two years of delay, the race to deliver gas to Pakistan has entered a new phase with Iran’s announcement in February that it will compete with Turkmenistan for the strategic eastern market.

Competition appears inevitable as the result of the decision by one of Iran’s biggest organizations to invest $3 billion in a gas pipeline from the Persian Gulf to Pakistan.

The huge investment comes from Bonyad-e Mostazafan va Janbazan (the Foundation for the Deprived and the War Disabled), probably the largest of the charitable institutions which control much of Iran’s nationalized industry.

According to the official news agency IRNA, the bonyad will join in a consortium with Royal/Dutch Shell, British Gas and Petronas of Malaysia to build a 1,400-kilometer pipeline to Pakistan from Iran’s South Pars offshore gas field in the Gulf. The deposit is the subject of a $2 billion contract with Total SA of France, Russia’s Gazprom and Petronas to produce 20 billion cubic meters of gas per year starting in 2001.

At the same time, Turkmenistan is trying to speed up its own plans with a consortium led by U.S.-based Unocal Corp. to pipe gas through Afghanistan to Pakistan and possibly the larger market of India. A Unocal official said last week that the company hopes to build the $2 billion line in the next two years, also to supply 20 billion cubic meters per year.

The situation has made Turkmenistan and Iran both energy partners and competitors. Since December, Turkmenistan has been supplying gas to Iran’s northern cities where fuel is in short supply. Most of Iran’s energy wealth is in the south, allowing it to compete for the Pakistani market if it can successfully develop the South Pars field.

Both plans have disadvantages, making it unclear which one will win. Turkmenistan’s plan, which has U.S. backing, depends on peace in Afghanistan. No financing is likely until stability comes to the divided country, another Unocal official said last week. A further complication is a lawsuit against Unocal by the Argentine company Bridas over an earlier version of the Afghanistan pipeline plan, which Turkmenistan decided to cancel.

The Iranian pipeline avoids Afghanistan and its problems altogether, but it may run afoul of U.S. policy if Washington decides to apply sanctions to the South Pars deal.

Although the Clinton administration has postponed a sanctions decision several times, the latest reports indicate that an announcement will come soon.

Iran needs Western technology to develop the vast South Pars field, but it may not need multilateral financing to raise its share of the pipeline costs. The bonyad, a tax-free institution in Iran, is believed to have ample funding of its own, as well as access to government loans. On the other side of the argument, Iran’s route to Pakistan may be longer and more expensive.

There are serious questions as to whether the Turkmen and Iranian plans can both succeed. While Turkmenistan’s project is aimed mainly at serving the Pakistani population centers in the north, the Iranian pipeline would join Pakistan’s gas system in the south, requiring the direction of the country’s central line to be reversed in order to get the gas to Islamabad.

It remains to be seen whether Iran, Turkmenistan and their respective partners could agree to share the Pakistani market, given the problems of serving both parts of the country and the high cost of building separate pipelines.

Adding to the competition and the complexity is the role of Gazprom, which recently announced that it would not join in the consortium to build the Turkmenistan pipeline through Afghanistan. The decision is probably good news for Turkmenistan, given the republic’s many problems in negotiating with Russia for gas deliveries to Europe.

Western analysts have been concerned that Russia might use its role in the Unocal consortium to frustrate progress in order to continue its domination over Turkmenistan. Instead, Gazprom has cast its lot with the Iranian development at South Pars and may eventually take a part in the pipeline to Pakistan. The move makes Gazprom’s competition with Turkmenistan appear clear.

The relationship between Iran and Turkmenistan will probably be more complicated. The two countries must still cooperate in building a pipeline across Iran to Turkey, a project with vital interests for both Turkmenistan and Iran. Until development gets underway at South Pars, Iran will also depend on Turkmen gas for a portion of its domestic energy needs.

That connection is likely to keep relations between Iran and Turkmenistan from turning into the kind of conflict that has marked Turkmen negotiations with Russia over pipeline access to Europe for the past year. But it remains to be seen how a formula can be found that will serve all interests in the race to supply gas to Pakistan.

Kazakhstan Sees Calm End to Caspian Oil Dispute

The oil-rich Caspian has the potential to become a spark of conflict between nations, but Kazakhstan is confident of solving current disputes with Russia in a friendly manner, Kazakhstan’s president said on Jan. 22.

“If we recall history, the small geographic territory of the Balkans was the bone of contention between nations and two world wars resulted,” Nursultan Nazarbayev told a news conference. “These same interests of world governments converge in the Caspian.

“Whether the region becomes a benefit for our peoples or a bone of contention depends on us, the politicians.”

Russia and Kazakhstan still dispute the status of certain areas of the Caspian.

Almaty has complained that Moscow gave an oil and gas concession to the Russian oil company LUKoil in the northern Caspian that overlaps with Kazakh territory.

“I’m convinced that in the tradition of friendship between our countries we’ll calmly settle this question,” Nazarbayev said, adding that government officials from both countries were working on the problem.