By Richard Giragosian,

After years of steadily deepening relations with Iran, Armenia is poised to take advantage of the recent Western engagement of Iran. For Armenia, Iran has always represented a significant alternative to its geographic isolation.

It was this sense of isolation that has also drawn these two countries together – albeit, somewhat counterintuitively. With its borders with neighbouring Turkey and Azerbaijan closed, Armenia’s southern neighbour, Iran, offered an essential second outlet for trade and energy imports. And given the constraints of both Armenia’s reliance on Georgia as its primary trade route and its dangerous over-dependence on Russia as a major trade and security partner, the need for alternatives and options has always been an imperative.

Yet, Armenia’s Iranian option has always been fraught with difficulty. For the West, Armenia’s steady but stealthy ties to Iran were overlooked.

In exchange, Armenia was careful to abide by the limits of Western sanctions on Iran. And this has also generally limited trade, with bilateral trade at only about $300m last year and with meagre Iranian investments in Armenia, estimated at only $100,000 for 2014.

Carefully scrutinised

For Russia, the course of Armenian ties to Iran was also carefully scrutinised, as Moscow sought to maintain Armenian dependence on Russian energy. This was also most evident in Russia’s move to pressure Armenia over the construction of a natural gas pipeline, which was officially inaugurated in March 2007.

Moscow succeeded in reducing the pipeline’s diameter, thereby limiting the volume of Iranian gas exports to Armenia. In fact, despite the strategic significance of the pipeline, Moscow’s successful move to reduce the diameter from 1,420 to 700 millimetres imposed an obvious limit to any competition for Russian gas, and made any Armenian re-export of gas impossible.

Moscow’s limits over Armenia’s ability to turn to other energy suppliers is now demonstrated by the disparity of Armenian gas imports, which receives a mere 500 million cubic metres (cm) of gas from Iran, while importing some 2 billion cm from Russia.

Much to the frustration of the Armenian energy sector, the Iranian pipeline’s overall capacity of 1.1 billion cm stands as an example of underused potential.

But in the wake of the recent Western-brokered nuclear deal with Iran, Armenia is now looking to position itself as a “bridge”, or at least a platform, for engaging Iran. And it is geography – not geopolitics – that now counts the most in determining whether Armenia can exploit its position.

There are several advantages for Armenia, ranging from a cheap, educated workforce to low transport costs stemming from reliable infrastructure links. Perhaps most importantly, Armenia is one of the few stable neighbours of Iran, with a deep degree of stability and a long record of close and cooperative relations.

More recently, with several high-level visits of Armenian officials to Iran this year, and the planned visit to Armenia by the Iranian president, there is renewed interested in expanding trade and transport ties. The possible construction of a second twin gas pipeline has also resurfaced as a strategic priority for both countries as well.

Armenian role

On a smaller, yet more realistic scale, Armenia is also eager to expand its existing exports of surplus electricity to Iran. For years, as the only country in the region with a nuclear power plant, Armenia has sold electricity to neighbouring Georgia and Iran.

Iran is also keenly interested, as the planned expansion of the power grid would also link Iran to the Georgian network as well. This has also recently driven Iran to pledge to invest some $91m as its share in the $117m project. This is further supplemented by the development of hydroelectrical projects aimed at bolstering Armenian energy exports to Iranian consumers.

However, the outlook for a key Armenian role in re-engaging Iran depends less on energy and more on other trade opportunities. More specifically, according to diplomatic sources, Armenia offers a unique opportunity for Western commercial engagement with Iran, especially in the sectors of aircraft and automotive parts, as well as high-end consumer products, all of which have been subject to strict sanctions.

And after years of pent up demand and steady levels of disposable income, the sheer size of the Iranian market and the scale of opportunity have already attracted the interest of several larger Western firms.

This inherent opportunity for Armenia is also driving recent negotiations over an ambitious railway project connecting Armenia with Iran. The large, roughly $3bn project has also attracted the interest of Chinese investors, aimed at further leveraging the rail link to expand Chinese-Armenian trade, which stood at $600m last year, but that is limited to a reliance on a lengthy road network to Armenia from southern Iranian ports.

Despite the obvious potential for the deepening and development of Armenian-Iranian trade, the geographical advantage may still be trumped by the geopolitical reality. And unlike the limits on Armenian-Iranian ties imposed by Western sanctions, the coming challenge may be Russia, which is likely to see a new threat from any decrease in Armenian dependence on Russian energy and trade.

All this only raises the risk for Armenia to miss yet another strategic opportunity.

Richard Giragosian is the founding director of the Regional Studies Center (RSC), an independent think-tank in Yerevan, Armenia.

Source: Al Jazeera