Will Iran become part of important trade corridor?

Oilprice.com carries an article about the Zangazur transport project to link the Azerbaijani exclave with the mainland via Armenia, wondering if Iran will join the project. Caliber.Az republishes the article.  

Azerbaijan’s late September military operation to regain the separatists-controlled Karabakh led to the self-dissolution of the separatist structure by 1 January 2024.

The likely end of the conflict between Azerbaijan and Armenia may unlock opportunities for more trade in the region.

The leaders of Turkey and Azerbaijan have proposed the Zangezur corridor, which will give Azerbaijan free access to the Nakhchivan Autonomous Republic, and a connection with Turkey. The corridor from Turkey in the West to the Central Asian republics in the East would connect all the Turkic states. This would be a big deal for Turkey which considers itself the big brother of all Turkic peoples, but Azerbaijan and the Central Asian republics will probably eschew the symbolic significance and see it mostly as a commercial opportunity.

The Zangezur Corridor would be an addition to the U.S.-promoted Middle Corridor (“Trans-Caspian International Transport Route”, which Washington wants the republics to use in lieu of the Northern Corridor (the Trans-Siberian Railway), and the Southern Corridor which would connect Europe to Asia via India and Pakistan and would rely on cordial India – Pakistan relations, never a sure thing.

The 2020 cease-fire agreement between Azerbaijan and Armenia says, “The Republic of Armenia shall guarantee the security of transport connections between the western regions of the Republic of Azerbaijan and the Nakhichevan Autonomous Republic in order to arrange unobstructed movement of persons, vehicles, and cargo in both directions.” The agreement doesn’t specify a route, but the shortest route is via Armenia's Syunik Province (Zangezur in Azerbaijan), which borders Iran.

One idea for a Turkey-to-Azerbaijan route via the Zangezur corridor would require a 166- kilometer rail line (a rebuilt Soviet-era railway which parallels the Iranian border) from Horadiz in mainland Azerbaijan to Ordubad, Nakhichevan, then a 158- kilometer line from Ordubad to Velidag, also in Nakhichevan. The line would cross into Turkey at Dilucu, and connect there to the Kars- Nakhichevan railway.

An Azeri government think tank suggests opening the Zangezur corridor will increase exports by over $700 million USD, and grow the non-oil sector GDP by 2 percent, increase employment and small business activity in Nakhichevan, and eliminate the need for natural gas swap deals with Iran to supply Nakhichevan.

Armenia’s concern is that it will lose sovereignty over territory adjacent to its border with friendly Iran, which has opened a consulate in Syunik. And the Islamic Republic, which is annoyed when Azeris call the Iranian Azerbaijan region “Southern Azerbaijan,” will weigh in on the establishment of a corridor so close to its border, and Tehran doesn’t want to lose the 15% cut it takes in the natural gas swaps with Azerbaijan. Baku’s friendly relations with Israel add to the tension.

The creation of a trans-Armenia rail corridor may eventually happen, but waiting for the stars to align may take a long time. What are other options?

Iran road 16 is the East-West highway in the North of the country. It starts in Gilan province, which borders Azerbaijan, and hosts the border crossing at Astara, and will soon have a new bridge between the countries. The highway spans northern Iran and terminates at Esendere, Turkey. The highway can’t match the freight capacity of a railroad, but Iran and Azerbaijan are poised to increase transport cooperation via a joint transport committee.

Iran also has railway links from the border with Azerbaijan to Turkey and recent events may overshadow a railway through Armenia. In October 2023, Iran and Azerbaijan agreed on a protocol for the construction of “a new railway line and railway bridges between the Eastern Zangezur Economic Region of the Republic of Azerbaijan and the Nakhchivan Autonomous Republic, passing through the territory of the Islamic Republic of Iran.”

The downside of putting cargo on a line through Iran is that it gives Tehran the ability to throttle traffic between Europe and Central Asia. Israel has diplomatic relations with Azerbaijan, Kazakhstan, Uzbekistan, and Turkmenistan, and Iran would object to allowing cargo to or from Israel. (Iran has a military cooperation agreement with Tajikistan.) Goods can still travel between the republics and Israel but will have to go from Kazakhstan, across the Caspian Sea, to Turkey and Georgia, and onwards by sea or air to Israel.

Then there’s paying for the railway. The U.S. will probably veto funding by the World Bank or the Asian Development Bank due to Iran’s involvement, so Iran and Azerbaijan, and maybe Turkey, may create and fund a joint venture, or approach China, and suggest the railway be part of the Belt and Road Initiative (BRI). The BRI has passed its lending peak but China may include the project under the Iran–China 25-year Cooperation Program, under which China will invest $120 billion in upgrading Iran's transport and manufacturing infrastructure.

Will the U.S. look on this project favorably? Probably not, but the U.S. wants Central Asia and the Caucasus to be less reliant on links to Russia and this may be the best option available. A high-capacity railway will relieve the region of the cost of being landlocked, which China is attempting with the BRI.

The smart move for Washington is to ensure railways that connect Central Asia to the wider world have more than one financing option, that is, money at terms that compete with the loans from China’s policy banks and the Asian Infrastructure Investment Bank. This will be consistent with Washington’s Central Asia strategy that talks of promoting the sovereignty, independence, and territorial independence of the region.

U.S. President Joe Biden recently met the presidents of the Central Asian republics. Now it is time to follow up on the frothy bonhomie of the leaders’ meeting by taking the wider view of the benefits to Central Asia and walking the talk about “advancing [Central Asia’s] sovereignty and economic prosperity.”