Armenia-Iran Railway May Fall Victim to Easing of Sanctions

Nine months ago Armenia and Iran signed an agreement to construct a railway between their nations. At the time, it seemed a win-win deal for both nations, Armenia having closed borders with both Azerbaijan and Turkey, and Iran hemmed in by sanctions.

But now, with the imminent lifting of Western sanctions, Iran is likely to abandon the estimated $3.7 billion project, which cash-strapped Armenia is unable to finance on its own. When a sudden change like this happens, people are left with a lot of questions because they don’t really have experiences with situations like these. Of course, Armenia will not be able to finance the project all by itself, in order to finish the railway, both countries have to participate in the process because we are talking about a lot of money. As mentioned, this railway would be a huge benefit for everyone, so the idea is supported by both of countries, but because of the circumstances, Iran may have to abandon this great project.

What has the Armenian government so unsettled is that Iran and Azerbaijan are now having discussions about establishing a railway connecting the two countries. As this railway would have the same functions as the Iran-Armenia railway, the two projects can be considered direct rivals. If Iran and Azerbaijan set up this communication route, the Iran-Armenia railway will be useless, and vice versa.

Where the Armenia-Iran railway comes up short is cost, currently estimated at roughly $3.7 billion. In contrast, the official price of the construction a rail link between Azerbaijan’s Astara and Iran’s Rasht is $400 million, making the Armenian-Iranian rail option nearly nine times more expensive.

The cheaper cost of the Iran-Azerbaijan railway is not its only advantage. If the Iran-Armenia railway is built, then products shipped to Russia from Iran by this railway will have to make a rather tortuous route, as Armenia has no direct rail links to Russia. In case of the Iran-Azerbaijan railway, the trains from Iran will enter Azerbaijan and then Russia. An additional advantage of the Iran-Azerbaijan railway along with the construction expenses is the cost of its maintenance and that of the provision of transport services.

Azerbaijan’s Nagorno-Karabakh region and some adjacent territory have been under the control of Armenian soldiers and ethnic Armenian local troops since the end of a six-year separatist war in 1994. In 1993, before the ceasefire, Turkey closed its border with Armenia in solidarity with Azerbaijan. The Armenian-Azeri border is also closed, effectively isolating Armenia.

Accordingly, while neither government has yet publically dropped the Armenia-Iran railway, all the portents for doing so are there, despite government agreements and MoUs.
On November 13, 2014, Iran’s Minister of Roads and Urban Development of Iran Abbas Akhundi announced that Iran had signed a memorandum of understanding with Armenia on building an Armenia-Iran railway, adding that the agreement called for Armenia to extend their railway to the city of Julfa in Iran. The 237-mile railway would consist of 50 miles passing through Iran and 188 miles via Armenia.

The following month Iranian Energy Minister Hamid Chitchian announced on the sidelines of the Iran-Armenia 12th Joint Economic Cooperation Commission in Tehran that Iran and Armenia would cooperate in various economic fields, including construction of hydro and wind generators, power transfer lines, Aras river environmental protection issues, railway construction, and mining.

Reading the writing on the wall, during the July BRICS summit held in Ufa, and the EEU and SCO meetings held there as well, Armenian President Serzh Sargsyan invited the organizations to participate in the construction of the Armenia-Iran railway, but no one expressed any interest in the project.

Six months ago, the South Caucasus Railway (SCR), a Russian Railways subsidiary firm operating Armenia’s railroads under a concession agreement that was concluded in 2008 for 30 years, announced at the South Caucasus Infrastructure & New Energy Investment Summit in Tbilisi that it had spent $245 million to modernize Armenia’s railway infrastructure from 2009 to 2014.

Russian Railways opposed the Armenia-Iran railway, a not insignificant consideration given its position. On June 8 Russian Railways President Vladimir Yakunin said that the Armenia-Iran railway had no prospects and was “the same as opening a hole in the wall to nowhere.” Undaunted, Armenian Deputy Minister of International Economic Integration Suren Karayan told Parliament on June 15 that preparations for the construction of Iran-Armenia railway were underway. Karayan stated that construction could begin in 2016 and be completed in 2022 and the cost of the Iran-Armenia railway, estimated at $3.2 billion, would see 60 percent coming from the Dubai-based Rasia investment firm, which submitted a funding proposal in 2014

In the meantime, Armenia can only gaze longingly at the rising trade volumes passing through fellow Transport Corridor Europe-Caucasus-Asia (TRACECA) member Azerbaijan. TRACECA is an international cooperation transport program between the EU and partner Eastern European, South Caucasian and Central Asian nations. TRACECA member states are Armenia, Azerbaijan, Bulgaria, Georgia, Kazakhstan, Kyrgyzstan, Iran, Moldova, Romania, Turkey, Ukraine, Uzbekistan, Tajikistan, and Turkmenistan. TRACECA has a permanent secretariat in Baku, originally financed by the European Commission, and a regional office in Odessa. Since 2009 TRACECA has been entirely financed by member countries.

While Armenia’s foreign trade languishes, Azerbaijan’s TRACECA transit trade rises. Azerbaijan’s State Statistical Committee reported that the volume of cargo transported via the TRACECA Eurasian transport corridor through Azeri territory in January-February 2015 was 9.1 million metric tons, or 1.6 percent more than in the same period of 2014. The committee’s report said that the road transport accounted for 54.1 percent of the total volume of transported cargo, railway – 31 percent and maritime transport – 14.9 percent. Furthermore, 53.8 million passengers traveled along the TRACECA corridor in January-February, 7.9 percent more than in the same period of 2014.

Azeri revenues from the cargo transportation via the TRACECA corridor totaled $80.1 million, an 8.6 percent increase over the same period in 2014. Passenger fare receipts stood at $19 million, a 14.7 percent increase over the same period of 2014.

Azerbaijan’s geostrategic position as a Caucasian transit corridor will strengthen further even as Armenia’s declines with the opening later this year of a key component of the slowly emerging Eurasian railway network along the historic “Silk Road,” the much delayed 513-mile-long, Baku-Tbilisi-Kars railway, costing more than $613 million, which when complete, will integrate the national rail systems of Azerbaijan, Georgia and Turkey. The peak capacity of the BTK will be 17 million metric tons of cargo per year, with initial stage projections of one million passengers and 6.5 million metric tons of cargo. Turkish President Recep Tayyip Erdogan, who is attending the Chinese-Turkish business forum in Beijing, announced that the first BTK test train began crossing Turkish territory on July 30.

Interest in the BTK extends far beyond the three countries involved. Last December Kazakhstan’s ambassador to Azerbaijan, Amangeldy Zhumabaev, told a press conference, “For us, it is very important to have access to foreign markets, we could supply not only oil and natural gas but also other products. The Baku-Tbilisi-Kars railroad, which opens next year, is a great opportunity for us. According to our data, the volume of freight traffic on this route will be 16 million tons, and we would like to see our products in this volume.”

Farther afield, China is also interested in using the BTK. Last November, Azerbaijani Minister of Transport Ziya Mammadov said that the Chinese Ministry of Railway Transport had guaranteed transportation of 10 million tons of cargo annually via the Baku-Tbilisi-Kars railway.

Even Afghanistan is interested in the BTK. In March Afghanistan’s Foreign Minister Zarar Ahmad Osmani has expressed interest in the BTK railway being extended on to Afghanistan via Caspian railway car carrying ferries across the Caspian from Azerbaijan through Turkmenistan.

Azerbaijan is also upgrading its maritime infrastructure. The state of the art new Baku International Sea Trade Port ferry terminal in Alat, 40 miles south of Baku, has begun operations, while the Baku SeaPort has begun upgrades which will be ready for commissioning later this year. Baku Sea Port’s cargo transportation capacity will be gradually increased to 25 million metric tons and one million containers per year.

According to Azerbaijan Railways head Arif Asgarov, Armenia can participate in the BTK – but only after the Armenian-Azeri Nagorno-Karabakh conflict is settled.
As a harbinger of things to come, the first test container train from China arrived at the Baku International Sea Trade Port via the Trans-Caspian international transport route on August 3. The train, consisting of 82 containers and 41 railway cars, departed from Shihezi city on July 28, traveling more than 2,500 miles to the Kazakh Caspian port of Aktau, where it was transferred to a ferry for transshipment to Baku.

The former head of the Armenian Central Bank Bagrat Asatryan succinctly observed, “Armenia is under an effective blockade now since it has no railroad communication with its main trade partners: Europe and Russia.” Given the rising trade all around it as the Armenian economy continues to flat-line, thoughtful Armenian politicians must undoubtedly be wondering if retaining Nagorno-Karabakh is worth the cost.