Economic Cooperation Organization (ECO) Summit: Implications for Regional Trade and Security
Data compiled by Caspian Policy Center shows that in 2016 the United States traded for $14.35 billions with the countries of the Caspian Basin and Central Asia (Russia, Iran, Georgia, Armenia, Azerbaijan, Tajikistan, Kyrgyzstan, Kazakhstan, Turkmenistan and Uzbekistan). In return, the US imported for $7.81 billions from the same countries.
This total trade volume might not at first appear striking but it is considering the geographic distance between the region and the United States. In comparison, intra-trade among the same group of states is still far below potential. The two of the largest economies – Russia and Iran – traded for about $2 billion in 2016, and that was after a sudden doubling in trade from the $1.2 billion reached in 2015.
In other words, one can make the argument that the countries of the Caspian Basin, Central Asia and the South Caucasus suffer from chronic underutilization in trade potential and economic integration among each other. This is, however, hardly an unknown reality. Over the years repeated – albeit lukewarm – attempts have been made to change this reality and foster inter-dependability that can lift the economic fortunes of the entire region.
And such efforts are ongoing. In early March, most leaders from the region attended the 13th summit of the Economic Cooperation Organization (ECO), a 10-state pan-regional entity set up in 1985 and aimed to cultivate economic cooperation. Iranian President Hassan Rouhani, whose country is home to the ECO headquarters, said that “boosting cooperation among [ECO] member states is a top priority.” Still, such grand pledges have been made many times before and yet the collective effort in the framework of ECO barely registers. Inside the ECO, the political will is simply not there for meaningful collective action.
Case Studies: Azerbaijan and Russia
The news is more uplifting when we look at what has been achieved on bilateral levels among the same states. Iran’s relations with two of its northern neighbors – Azerbaijan and Russia – is quite telling when we look at what has been achieved only in recent months.
On March 7, Iran’s Oil Minister Bijan Zangeneh said that the country’s “northern regions straddling the Caspian Sea could emerge as new hotspots for petrochemical production.” According to the Oil Minister, Iran’s northern regions on the Caspian with its plenty of access to water are “well-suited for petrochemical plants.” Such projects in turn can create “hundreds of new jobs and reinvigorate the region’s economy.”
The same Bijan Zangeneh, however, knows full well that little effort by Tehran has so far been invested in developing the petrochemical sector in the north or exploiting oil and gas deposits found off-shore in the Caspian Sea that could feed the same petrochemical industry that Zangeneh is touting as a promising scenario.
There are multiple factors why Tehran has not prioritized the oil and gas industries in its northern regions. Geopolitics, however, is an undeniable factor. Some quarter of century after the collapse of the Soviet Union, Iran and the other four post-Soviet republics that are Caspian littoral states have yet to agree to the demarcation of the oil and gas rich sea. In the case of Iran, this is an uncertainty that has curbed Tehran energy ambitions in the Caspian region. And the lack of an agreement on the division of the Caspian is inherently about a deficiency in trust and goodwill among the littoral states.
But there are some encouraging signs. Take this week’s visit to Tehran by Azerbaijani President Elham Aliyev. One of the top issues under discussion was the Iran-Azerbaijan-Russia International North-South Transport Corridor. This is a project that is hoped to become an important diversification of trade routes for trade between East Asia and the Indian Subcontinent to Europe. The project’s impact on fostering economic interdependence among regional states cannot be overestimated. While the idea was first floated about 15 years ago, it was only after the arrival of Rouhani as president in 2013 and the subsequent end to international sanctions on Iran that enabled Baku, Moscow and Tehran to forge ahead. Such projects generate political goodwill that can be deployed to resolve more persistent obstacles such as the unresolved demarcation of the Caspian Sea.
Meanwhile, there is also considerable thrill in Iranian and Russian circles about the improving prospects of bilateral relations between the two countries. For sure, these kinds of assumptions very often overlook a basic characteristic that continues to shape relations. That is the remanning mistrust that still exists on both sides as the Iranians and the Russians evaluate the scope available to pursue closer bilateral ties. Nevertheless, it is also patently evident that geopolitical developments – particularly the American-Russian fallout over the crisis in Ukraine and the ongoing conflict in Syria – can continue to act as a stimulant to elevate Moscow-Tehran ties.
At the same time, Rouhani appears to date to have the conditional approval of Supreme Leader Ayatollah Ali Khamenei to proceed on this diplomatic path. The groundwork for pursuing closer cooperation was set very early on in the Rouhani administration when the Iranian president met President Vladimir Putin at the sidelines of the Shanghai Cooperation Organization (SCO) in September 2013 in Bishkek. As early as that meeting, the two leaders formulated a desire for stronger ties and focused on economics in the first instance. Putin, who had not visited Tehran since 2007, travelled to Tehran in November 2015, a moment that was advertised as the beginning of a new era in relations.
Integration as security
Elsewhere, there has been even less hesitation in Russia’s desire to cultivate stronger economic ties with Iran and particularly in the energy sector. The Russians have made it clear they do not intend to fall behind Western firms in the race for deals in the Iranian market. Suggestions by Iranian officials about increasing trade from the present $2 billion per year to $15 billion per year is unrealistic in the near future but a number of factors will support the drive for closer Russian-Iranian economic ties.
First, the Rouhani government, the key initiator of economic policy in Tehran, is committed to trade diversification. In 2014, about one third of Iran’s $145 billion trade with the world was with China, a significant proportion which is widely deemed as unhealthy for the Iranian economy. At the same time, closer economic ties are seen as an important factor that can reinforce political relations. The Rouhani government makes no secret of the fact that it wants to use trade and inward investment as a way of making key states, such as EU countries, Japan and Russia, into stakeholders in the Iranian economy and thereby make any future sanctions policy against Tehran that much harder to implement.
For sure, much of the economic discussions across the Caspian region are promising but have yet to prove to be feasible. For example, large-scale barters, such as the one agreed in 2014 where 500,000 barrels a day of Iranian crude oil was to be swapped for Russian goods and services, have proven to be unworkable trade mechanisms for two large energy-exporting states. And yet, the recent uptake in interest among the countries around the Caspian Sea in pan-regional economic projects is both undeniable and should be applauded. With the proper political leadership, much more can be achieved.