Prospect of Iran-Azerbaijan relations

By Dalga Khatinoglu

Despite 600 kilometers of joint border, trade between Iran and Azerbaijan stood at $210 million in 2013. Both Iran and Azerbaijan are dissatisfied with the current volume of trade.

Following to the visit of Azerbaijani president to Tehran in early spring, Iranian President Hassan Rouhani is scheduled to travel to Baku on November 12, aiming to sign 10 MOUs with Azerbaijan, including energy MOUs.

After eight years of political and security struggles between Iran and Azerbaijan, which culminated during the second term of Iranian former president Mahmoud Ahmadinejad, the bilateral ties have becoming ameliorated at a brisk pace after President Hassan Rouhani took power in Iran in August 2013.

Over the past year, several senior Azerbaijani officials have visited Iran and several Iranian officials as well as trade and economic delegations have come to Azerbaijan. The two countries signed an MOU in October to cooperate in oil exploration in the Caspian Sea.

Prospect of Iran-Azerbaijan economic ties

According to the Azerbaijani government's official figures, trade between Iran and Azerbaijan has been declining sharply since 2009 to below $300 million. This is while the two countries boast of 600 kilometers joint border. Trade with Iran is even less than one percent of Azerbaijan's total foreign trade. During the eight-year administration of Ahmadinejad in Iran, Azerbaijan increased its gross national production by around ten folds to $70 billion.

Azerbaijan invested $11.8 billion abroad in 2013, the balance of payments for 2013 published by the Central Bank of Azerbaijan (CBA) said in March.

According to the State Statistical Committee of the Republic of Azerbaijan, Iran's exports to Azerbaijan rose 117 percent last year to $208 million. Meanwhile, Azerbaijan's exports to Iran rose 84 percent to $74 million. However, the Iran Customs Administration has put the bilateral trade in the past Iranian calendar year, which ended on March 20, 2014, at $513 million, which is about double of the figure announced by Azerbaijan. Of course, Iran sets the US dollar exchange rate at 26,700 rials, while the free market rate is more than 32,000 rials.

Although a look at statistics show that Iran and Azerbaijan are highly dependent on hydrocarbon export revenues, but there are lots of other fields of economy which can boost trade relations between the two countries.

Iran and Azerbaijan are situated along two major transit routes: the North-South transport corridor and the Europe-Persia Express Gateway (EPEG). The two projects is projected to be completed by 2016. The transport corridor has already extended from Russia to Astara, and is projected to be connected to the Qazvin-Rasht-Astara railway. Less than 200 kilometers of the railway in Iran and 8 kilometers in Azerbaijan should be established. The railway will connect Russia and Azerbaijan to the Persian Gulf.

Once the Sari-Rasht railway, to the length of 356 kilometers, is established, the Astara border terminal between Iran and Azerbaijan will connect Iran to Central Asia. The Central Asian section of the project, which will connect Iran to Turkmenistan and Kazakhstan, has been completed and will be inaugurated by the end of the year.

Also The Europe-Persia Express Gateway (EPEG) cable system, with the design capacity of 3.2 Tbps, is stretched from Germany to Azerbaijan, and from there to Iran and Oman. The project will be completed in 2016. The project is expected to connect to the Europe India Gateway (EIG), linking Europe to India.

Azerbaijan can also invest in Iran's mines. The country can even increase its exports to Iraq via Iran. There are 408 mines only in Iran's northwestern provinces, near the Azerbaijani border.

Energy Sector

The two countries have recently held negotiations in the energy sector and signed a memorandum of understanding in the field of exploration and production of oil in the Caspian Sea.

The two countries have a long history in energy relations, but that ties have always been limited.

The Iranian part of the Caspian Sea have been studied by Azeri equipments two times - once before the fall of the Soviet Union, and the second time in 1994 and 1995 - to discover possible hydrocarbon reserves, but to no avail. Until 2011 the existence of oil and gas reserves in Iran's share of the Caspian Sea was unclear. Iran was carrying out exploratory operations with Pejvak vessel in the Caspian Sea in the past decades, but the ship caught fire during presidency of Mahmoud Ahmadinejad. Pejvak ship performed three dimensional seismographic operations in the Caspian Sea.

Azerbaijan possesses Seismic vessels and can help Iran in this regard. Also Iran's Amir Kabir drilling rig's crane crashed last March that can be repaired in Azerbaijan.

The Amir Kabir Semi Sub Drilling Rig is to explore and drill oil wells in Iran's Sardar-e Jangal field. The pressure in the western gas fields of the Caspian Sea is around 10,000-15,000 bar, so the rig can be rented and use to drill just in certain depths. The bar is a metric unit of pressure, defined by the IUPAC as exactly equal to 100,000 Pa.

Iran's share out of Azerbaijan's Shah Deniz gas field is 10 percent. The first phase of the project produces 50,000 barrels of gas condensates per day and 9 billion cubic meters of gas per year. The second phase of the project is also expected to come on stream in 2018. The second phase is scheduled to annually produce 16 billion cubic meters of gas.

Iran and Azerbaijan also swap 1.2 million cubic meters of gas per day. The two countries also swap electricity. Iran's electricity consumption in winter is less than summer, but it's exactly opposite in Azerbaijan. So the two counties can swap electricity.

Azerbaijan currently accounts for 1.5 percent of Iran's total electricity trades, but the country can also serve as a route to transit or swap Iran's electricity to Russia or even Europe.

Dalga Khatinoglu is a specialist on Iran's energy sector and head of Trend Agency's Iran News Service

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