Opening up of Iran provides transit route for Central Asia

Opening up of Iran provides transit route for Central Asia
The lifting of Western sanctions is expected to boost cooperation between Central Asia and Iran. /
By Naubet Bisenov January 31, 2016

Central Asian countries are buzzing with excitement over the partial lifting of Western sanctions against Teheran,  but for the time being Iran may mainly act as a transit hub between the landlocked region and the Middle East, as its first priority is to re-establish trade links with the European Union.

“For many centuries, caravans crossed through Iran and Central Asian territory, but it has been well over 100 years now since trade between, or across, Iran and Central Asia flowed freely,” proclaimed a roundtable held by the RFE/RL's Turkmen Service

When they were part of the Soviet Union, the five Central Asian countries could trade with the world only via Russia, and they were only able to start building alternative routes, mostly via China,  after they obtained independence in 1991. Turkmenistan and Kazakhstan, as Caspian-littoral states, could also divert some trade with Iran and the Caucasus by sea.

According to Luca Anceschi, senior lecturer in Central Asian studies at the University of Glasgow, “having this reentry of the Islamic republic onto the world stage does actually favour the Central Asian states, giving it easier access to global markets, to the open sea, to the [Persian] Gulf”. “Iran can be a real game changer for infrastructure – railways, freeways, roadways...that could actually change a lot in terms of the connectivity of Central Asia with the rest of the world,” Anceschi told the roundtable.

In December 2014, even when Iran was still under Western sanctions because of its nuclear programme, Kazakhstan, Turkmenistan and Iran opened a new 928km-long Ozen-Gyzylkaya-Bereket-Etrek-Gorgan railway line which gave access for Central Asian goods to Iran and the Middle East, and for Iranian commodities to Russia and China. Earlier in the 1990s Kazakhstan had linked its railway networks to those of China’s by building the Dostyk-Alashankou railway corridor and in 2012 it opened the second Zhetygen-Korgas railway link to China with a capacity of 12mn tonnes per year. Astana now plans to increase the capacity of the first link from the current 23mn tonnes a year to 50mn tonnes and the second one to 33mn tonnes per year in the future.

With Ashgabat having already completed the construction of an 88km-long stretch of a Turkmenistan-Afghanistan-Tajikistan railway line, Turkmenistan is on course of diversifying its gas-based economy by turning into a transit bridge between other Central Asian countries and Iran and potentially Turkey. This link has become more important after  Russia banned the transit of Turkish goods via its territory following the downing of one of its bombers by Turkish air forces.

The lifting of Western sanctions also means that Central Asia can expand its already healthy trade with Iran. Bilateral trade between Iran and Kazakhstan, a country with reliable foreign trade statistics, reached nearly $1bn in January-November 2015, up by 10% y/y, given a more than over 10% slump in Kazakhstan’s overall foreign trade. While Iran’s trade with Central Asia’s largest economy is dwarfed by Turkey’s $3.3bn trade in January-November 2015, with fewer restrictions Tehran may well catch up with Ankara in the near future.

Having been restricted in its relations with the West for quite some time, Iranian President Hassan Rouhani’s government will want to secure much needed trade and investment as soon as possible, according to Alex Vatanka, senior fellow at the Jamestown Foundation’s Middle East Institute. “The northern neighbours are mostly energy-exporters and cannot inject the kinds of money Iran needs into its gas and oil sector but there are areas of cooperation such as swap deals and export transit and pipeline cooperation,” het tells bne IntelliNews. “Iran’s first priority is the EU, then East Asia and then its immediate neighbours such as Central Asia.”

Even though Iran has a “significant” industrial base and it can offer a variety of exports, “in the first instance it is Iran as an import market that will be attractive for the CA states”, Vatanka says, referring to Kazakhstan’s potential to supply foodstuffs to Iran. In January-July 2014, Iran increased exports of Kazakh grain by 180% y/y to 786,000 tonnes and was expected to increase it to 1.2mn tonnes in the full year. Kazakhstan also has plans to export up to 50,000 tonnes of meat a year to Iran as part of Astana's strategy to make the Middle East one of the main markets for its meat.

But both Central Asian countries and Iran have oil-based economies and will see one another as rivals on the currently tightening energy markets. Iran is a major supplier of hydrocarbons to India and Pakistan, the markets of which attract Turkmenistan’s interest: in December Turkmen authorities started the construction of a 1,735km-long Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline with a capacity of 33bn cubic metres of natural gas.

Having failed to secure Western majors to operate the pipeline, Ashgabat is reported to have entered into talks with Dubai-owned Dragon Oil on the pipeline, estimated to cost $10bn. Turkmenistan and Iran may now start considering building a joint pipeline to the Indian subcontinent, bypassing war-torn Afghanistan to solve TAPI’s security concerns.

“At the moment, it is the security of transit that makes TAPI an unfeasible and unrealistic project. The situation in Afghanistan and to a lesser extent Pakistan is too chaotic and unpredictable to allow the construction of critical infrastructure,” Glasgow University’s Anceschi explains to bne IntelliNews. “No one can guarantee the security of the pipeline, so there is no commercial incentive to invest in this project. This risk, in this sense, remains unavoidable.”

Iran may not have capacity, capital or technology to offer Central Asian countries compared to other countries but expanding economic cooperation between the region and Iran will still make sense, Vatanka believes. “Not everything they do will have a strong economic logic as such but Iran is too important for them to ignore,” he says. “At a minimum, the CA states want to have Iran to balance against China and Russia becoming too dominant.”