CLOSE NEIGHBOUR IS BETTER THAN FARAWAY RELATIVE?

A close neighbour is better than a distant relative? It depends. Azerbaijan has always been willing to share its bread, help in difficult times financially and morally, without aggravating squabbles and holding a grudge against a neighbour for a long time unless, of course, he is trying to "settle" in its territory through various tricks and brazen intrusions. But there is also another type of neighbour, who is friends with you, but secretly backs the enemy. Anyway, there are different types of neighbours...

The international situation surrounding Iran has been heating up for almost half a year. Iran is one of the main partners of Azerbaijan in regional trade and economic relations. For example, on 1 July, the ban on the importation of Iranian oil to the European Union (EU) came into force. In October, the EU imposed severe restrictions on trade with Iran in addition to the comprehensive sanctions imposed by the West earlier and aimed at forcing Tehran to suspend its nuclear programme. Given that at present, there are also four UN Security Council resolutions on sanctions against Iran and various other resolutions, all these measures together, of course, have had a negative impact on the economy of the Islamic Republic. Given that Iran is one of the most important economic partners of Azerbaijan, which forms a certain part of the foreign trade turnover, the situation there could not but affect the economy of Azerbaijan.

Is all quiet in Tehran?

Despite Tehran's strenuous efforts to prove to the world that the sanctions do not hinder the economic development of the country, published statistical data and information leaked to the media suggest otherwise.

For example, Mehr news agency quoted the head of the Parliamentary Committee on Economy, Gholamreza Mesbahi-Moqaddam, as saying that Iran could face a budget deficit of 540 trillion rials (about $ 44 billion) this year. Earlier, the same Mesbahi-Moqaddam said that Iran's oil revenues had declined and there was a poor economic situation in the country. According to him, currently Iran sells about 1.03 million barrels of oil per day, while the target level was 2.5 million barrels. Under Iranian law, 37.5 per cent of revenues from hydrocarbons are used to develop oil and gas fields or transferred to the National Development Fund, while 62.5 per cent are used for current budget expenses.

At the same time, Iranian officials say that in response to the sanctions and the decline in exports, the country will try to significantly reduce the budget's dependence on oil revenues in the next calendar year, which begins on 21 March 2013. Shana News quoted the Iranian vice-president for planning and supervision, Behruz Moradi, as saying that according to the five-year programme on the development of Iran, this year the government halved the national budget's dependence on oil revenues. Analysis showed that the Iranian national budget revenues will be largely generated from traditional sources, one of which is taxes. This year, the Iranian state budget is expected to receive $ 37 billion in taxes. Nonetheless, it is difficult to imagine how the Iranian government plans to provide budget revenues for this year given the expected tougher sanctions that undermine the entire economy. The International Monetary Fund says in its report on 9 October that the economic development of Iran has decreased by 9 per cent in 2012 compared to last year, while inflation exceeds 25 per cent.

At the same time, Tehran argues that the sanctions have not affected trade relations. However, the Iranian society to protect consumers and producers has sent a letter to the Ministry of Commerce requesting a ban on the export of 50 types of goods in order to ensure their domestic supplies as part of the "resistive economy" that has been proclaimed.

Furthermore, Iran has temporarily banned the import of some "luxuries", including cars and mobile phones, in order to save billions of dollars needed to buy essential commodities under the sanctions. Amid complaints regarding such sanctions on spare parts and other equipment for computers, the ban was recently lifted.

At the same time, Iran does not exclude that it will respond to the sanctions by the principle "a tooth for a tooth" by suspending the export of hydrocarbons. In late September, the Iranian parliament announced plans to discuss a bill to halt oil exports during the winter to the countries that have imposed sanctions against Iran's oil sector. European exporters claim that the world market can withstand the loss of Iranian oil, and that the EU even has to resort to a full blockade of Iranian oil. It is quite obvious that this measure will benefit oil-producing states, including Azerbaijan, 79 per cent of whose budget in 2013 will be generated by oil revenues. But will such a sum be useful for the economy of our country and what does a possible embargo on the export of Iranian gas to Europe promise us?

Cornerstone

The economic effect of the decline in Iranian oil supplies to the world market is that the prices for this type of fuel will increase or at least remain at a high level for an even greater period of time. The current price of oil really has a geopolitical Iranian component, i.e. about 30 per cent of the actual price considering supply and demand ($ 90-100 per barrel).

On the surface, as we said, it is certainly beneficial to Azerbaijan - we do not have to worry about the state treasury. However, there is another side to the coin.

Thus, according to the chairman of the Baku Nobel Heritage Fund, president of the Moscow International Petroleum Club and UN expert on energy, Togrul Bagirov, "the short-term gain of oil-producing countries from higher oil prices due to the situation in Iran will be quickly neutralized. In principle, it is harmful for countries such as Russia and Azerbaijan, who are trying to get away from oil dependency and balance their budget by actively developing the non-oil sector."

At the same time, the expert believes that Iran will likely find a replacement for oil supplies to Europe (about 800,000 barrels per day), and the country's main trading partners will be China and India. In addition, despite the huge international pressure, Iran denies the sharp fall in exports of oil owing to supplies from the private sector of Iran, whose oil exports to international markets bypassing the sanctions amount to more than 20 million barrels of oil.

As for the export of gas, by and large, Europe has nothing to lose here: the main consumer of Iranian gas is Turkey, and Europe is receiving small amounts. According to the Turkish state pipeline company Botas, in 2011, Turkey imported 39.7 billion cubic metres of gas. Among the exporters of gas to Turkey, Russia ranks first and is followed by Iran and Azerbaijan.

Today, Iran is trying every possible way to retain this market through concessions in price and other measures. After all, in principle, Turkey may stop buying Iranian gas in the future by increasing supplies from other countries, namely Russia and Azerbaijan. Thus, under the existing contract, Turkey must receive 6.6 billion cubic metres of gas in the first stage of the development of the Azerbaijani field Sah Daniz [Shah Deniz]. However, Ankara fails to take the contracted volumes of Azerbaijani gas annually. Turkey's possible refusal to import Iranian gas will allow the country to comply with its contractual obligations to Azerbaijan and receive gas from the second phase of the development of Sah Daniz in full - 6 billion cubic metres.

Thus, the embargo on Iranian gas could further increase the importance of Azerbaijani gas as an alternative source of supplies to the European market, as well as its role in the energy security of Europe.

With this in mind, it is not surprising that Iran strongly opposes a gas pipeline under the Caspian Sea to transport Turkmen gas via the Trans-Anatolian Pipeline (TANAP), citing the environmental risk of the project. Yes, Iran is not against TANAP overall. The director of the National Iranian Gas Export Company (NIGEC), Hossein Bidarmaghz, said that the project is not a threat to the export of Iranian gas, and if it is implemented, 16-20 billion cubic metres of gas will be exported via it. "Due to its geographical position, Iran has different options and markets to export its gas," Bidarmaghz said. However, Turkmen gas can get to TANAP only through Iran. And the West absolutely does not want Iran to get involved in a project that aims to become an important link in the chain of Europe's energy security, which is quite understandable.

The situation is almost deadlocked, though the negotiations, of course, are continuing and will continue. However, TANAP is quite effective even without Turkmen oil, and Azerbaijan, in fact, has nothing to lose in this situation - it will only gain additional transit revenues.

There remains one more possible point of damage from the sanctions against Iran - swap supplies of Azerbaijani gas to this country for the Naxcivan Autonomous Republic. However, Azerbaijani Minister of Industry and Energy Natiq Aliyev assured reporters that there will be no stoppages here. "The sanctions against Iran will not affect the swap gas supplies and the flow of electricity between Iran and Azerbaijan," the minister said. We should note that Azerbaijan annually supplies Iran with about 350 million cubic metres of gas, which are returned to Naxcivan through the Iranian gas pipeline system. In addition, Iran is supplied with electricity in return for Iranian supplies to the NAR.

Against whom are we friends?

Yet the sanctions have affected trade relations between Azerbaijan and Iran to some extent. According to the State Customs Committee, in the first half of 2012 Azerbaijan reduced the export of goods to Iran by 35.3 per cent compared to the same period last year, while imports from Iran to Azerbaijan rose by 9.6 per cent. The figures are explainable given that Iran has generally reduced the import of goods from other countries because of the "resistive economy".

Thus, Iran is not on the list of 15 major exporters of Azerbaijan, but takes 12th place among importing countries. Overall, in the first half of this year, the trade turnover between Azerbaijan and Iran amounted to $ 149.7 million and this is despite the fact that, according to the Iranian ambassador to Azerbaijan Mohsen Pak'ayin, the trade turnover between the two countries is $ 500 million. "If you count the entries and exits and trade between the border areas of both countries, we can say that the volume of trade is close to 1 billion euros. Of course, this figure cannot be satisfactory, and we hope that thanks to the planned work, it will get better," Trend quoted the diplomat as saying.

The Azerbaijani ambassador to Iran, Cavansir Axundov, said that Iran has suggested increasing the trade turnover to $ 10 billion in the long-term. That is to say Iran is set to improve trade and economic relations with Azerbaijan, and Azerbaijan could exploit the situation and begin to implement mutually beneficial projects.

According to Axundov, "in order to develop trade between Iran and Azerbaijan, the parties must first develop the transport infrastructure, in particular the North-South transport corridor, by building the Rasht-Qazvin-Astara railway in Iranian territory. It is also important to build the Zanjan-Miyaneh-Ardabil-Mugan railway."

The border areas with great potential, according to the diplomat, can also make a significant contribution to the development of trade. For example, there is already a project to open a market at the Astara border checkpoint. Iran will also open a new sea route to carry passengers between the port of Astara in Gilan Province and the Baku International Sea Trade Port. In the future, it is also planned to carry out transportation from Baku to other ports in Iran - Amirabad and Nowshahr. Also, a new bus service will operate from West Azerbaijan Province - the city of Urmia - to the city of Naxcivan (Naxcivan AR).

In other words, Azerbaijan is only in favour of increasing the volume of trade and economic cooperation with Iran. And it cannot be otherwise, taking into account not only territorial proximity, but also historical, cultural and religious ties, and the fact that about 25-30 million ethnic Azeris are living there. These factors often force us to turn a blind eye to the increasing role of Iran in the economy of neighbouring, but hostile Armenia. Major projects in the energy sector, the implementation of a new railway, the growth in the banking sector and many other things are a black spot in Azerbaijani-Iranian economic relations.

Whether such double standards are Iran's attempts to survive the sanctions or they want to make better friends with Armenia for geopolitical interests is a question of political analysis. But leaving aside the political implications of the situation, one can note - it would be of greater benefit to Iran to build relations with Azerbaijan, which has a fast growing economy and greater opportunities than Armenia.