Engaging Iran: Implications for the South Caucasus

How the post-deal detente between Iran and the West might benefit the Caucasus states

As the US Congress prepares to formally consider the Iran nuclear deal, the possible implications of a new opening with Iran have raised expectations around the globe. The European Union, which celebrates this deal as a rare success in foreign policy, is positioning itself to exploit new commercial opportunities in the long-closed Iranian market. Not to be outdone, US firms are equally eager to secure their own deals in Iran. 

Winners & Losers

Yet aside from the generally celebratory mood in the West, there are also losers from the nuclear breakthrough. An obvious loser, Israel’s Prime Minister Benjamin Netanyahu, staked much of his political standing and even his country’s strategic relationship with the US, on his fierce opposition to the deal. But even more significantly, Russian President Vladimir Putin suffered a double blow. Moscow had little choice but to remain engaged in the negotiations with Tehran, which resulted in a breakthrough arrangement that did much to lessen Russia’s role as a tactical alternative to the West for Iran.

But the immediate impact of the Iran deal, and its subsequent reintegration in the global economy, is much more significant for the three countries of the South Caucasus. Just like the broader international community which consists of winners and losers, the South Caucasus is no exception. The clear local winner is landlocked Armenia, which has a long record of stable, friendly and cooperative relations with Iran, and as an immediate neighbour, expects direct benefits from an opening up of Iran. Also benefiting, though to a lesser degree, is Georgia which envisions an opportunity to deepen its own relations with Iran. But for energy-rich Azerbaijan, this is not a welcome development, as it may exacerbate lingering tensions over territorial disputes, enhance energy rivalry and perhaps encourage a more active regional role by Iran over the unresolved Nagorno-Karabakh conflict.


For Armenia, the possibility of further developing ties with Iran offers much more than trade or economic opportunities. Rather, Iran is an essential alternative for Armenia to overcome its dual dependence, on Russia for energy and on Georgia as a primary transit route. Armenia senses a fresh opportunity, like Iran itself, to emerge from its own profound isolation. And it also presents a rare strategic opening for Armenia to offset its over-reliance on Russia by enhancing its own bargaining power by leveraging its role as a partner of both Moscow and Tehran.

From Partner to Platform

Since independence, Armenia has forged a close and consistent bilateral relationship with its southern neighbour. Rooted in shared geography and converging interests, Armenia stands out as one of Iran’s few reliable and stable partners, while positioning itself less from a basis of a deep and historic symbolic partnership and more as a practical “necessary neighbour.”

Clearly, the Armenian strategic approach towards Iran is grounded in graduating from a limited role as a small, symbolic partner to a becoming more of a strategic platform. But for this to happen, Yerevan needs to do more. First, there is an obvious necessity to correct the imbalance in trade. Although the trade volume between the two countries has been steadily growing, from a meagre $72 million in 2001 to $300 million in annual turnover last year, Iran remains a marginal import and export partner, despite the low transit costs. One crucial move would be for Armenia to better leverage its membership in the Russian-led Eurasian Economic Union, which may offer Iran an attractive way to enter that much larger market. Second, that appeal of using Armenia for trade promotion and projection can be furthered by an added incentive of preferential tax treatment for Iranian commerce to operate and export from Armenia.

Beyond trade and commerce, however, the energy sector is in some ways the least viable opportunity for Yerevan. Although the two countries have an operating natural gas pipeline, it was largely limited by Russian pressure, which imposed serious curbs on gas imports from Iran in order to block any Armenian aspirations of emerging as a regional energy hub, and to maintain Armenian dependence on Russian gas, while also preventing any competition for Russia’s Gazprom as the primary energy player. 

From the Iranian perspective, however, the significance of Armenia stems from three considerations. First, seeing Armenia as a strategic pathway to surpass a shared sense of blockade and isolation. Second, looking to a geographic partnership with Armenia as a stable and friendly neighbour. And third, as a geopolitical platform, based on Armenia’s inherent advantages of access to the Eurasian Economic Union and as an outlet through the North-South transport network, thereby engaging the broader South Caucasus region. But the key for Armenia to seize this new opportunity remains in Moscow, and the real test is to what degree Yerevan has the will or the way to overcome Russian limits on Armenian-Iranian engagement.


Georgia definitely should welcome the historical deal with Iran as it implies a weakened Russian position in the region. Moreover, having opened itself up years ago to Iranian tourists and capital, Georgia can now benefit even more as Iran itself opens up to the rest of the world.

The “main historical adversary” as a new hope

There were times when Iran dominated Georgia’s political and cultural life. However it all ended disastrously when in the late 19th century the Persians burned down the Georgian capital. Later on, Soviet propaganda did its best to portray Iran as Georgia’s main historical adversary (and consequently Russia as its saviour). The propaganda worked so well that even in the late 1980s many Georgians were afraid that a break-up of the Soviet Union would lead to another Iranian invasion.      

After regaining its independence, Georgia enjoyed friendly relations with Iran insofar as this was possible (given Iran’s isolation). The then President Shevardnadze – a former foreign minister of the Soviet Union – understood only too well that Georgia could not afford to neglect Iran. Saakashvili – who was initially almost totally focused on the West – came to realise this too. However, after the 2008 war with Russia, Georgia no longer had the luxury of ignoring anyone, especially a country of Iran’s importance and resources. Tbilisi introduced a visa-free regime for Iranians (later rescinded by the current Georgian authorities, but then partly restored) and embraced Iranian investment which had almost nowhere else to go.

Despite this breakthrough, US-Iranian hostility still poisoned bilateral relations. Besides, with a resurgent Russia, with an anti-American Iran, with Turkey adopting a less pro-American stance and finally with the US noticeably disengaging itself from the South Caucasus, Georgia could not really feel safe. Therefore this historical deal should strengthen Georgia’s position as Tbilisi has lived in fear of another Russian invasion since 2008. There are other benefits too: Iranian oil and gas exports should further weaken Russia’s position (as oil prices are set to decline further and as Iran emerges as an alternative gas supplier). Moreover, Georgia in general welcomes any development that will bring peace and stability to the region and therefore promote further economic development.  


Of the three countries in the South Caucasus, Azerbaijan has the most to lose from the return of Iran. A long record of simmering tension over deep-seated territorial claims, ranging from the delineation of the Caspian Sea to the land border between the two countries, will be difficult to overcome. This is further compounded by an inherent fear of irredentism, stemming from the sizable ethnic Azeri population of northern Iran.

Against this backdrop, tension between Baku and Tehran has steadily escalated over the last two decades. Increasingly aggressive moves by each side, including a covert Iranian role in fermenting instability within Azerbaijan’s more under-developed religious rural heartland and support for fellow Shiite Islamist groups, have deepened mistrust. And in a demonstration of the real risk of this escalating tension, the military situation has worsened significantly, as the Iranian navy and air force have routinely violated Azerbaijani air space and threatened maritime sovereignty, even aggressively threatening a BP survey vessel engaged in offshore energy exploration in the Caspian Sea in July 2001.

Azerbaijan, for its part, has also contributed to the rise in tensions by forging new military ties with Israel that were perceived by Tehran as being anti-Iranian. This recent security relationship with Israel also sparked serious worry over the use of Azerbaijan as a staging area for possible Israeli attacks against Iran.

But the more problematic aspect of Azerbaijan’s relationship with Iran will be driven by three trends. First, as Iran moves to reintegrate its energy sector with the global oil and gas markets, there will be a rivalry between the two energy-rich countries. And with Azerbaijan’s decline in oil production, its vulnerability to its pipeline reliance for gas exports will only foster a degree of weakness. 

Second, the likely re-emergence of Iran as a regional power will trigger concern in Baku over a possible Iranian role as mediator in the unresolved Nagorno-Karabakh conflict. Coupled with an Azerbaijani perception of Iran’s pro-Armenian stance, any resumption of Iranian mediation, which it pursued in the 1990s, will further deepen tension and mistrust. 

And a third factor undermining relations between Baku and Tehran stems from an inherent religious rivalry. For Iran, which seeks to remain the world’s leading Islamic state, anything short of control over fellow Shiite activity in Azerbaijan would be seen as a direct challenge to its religious authority. And obviously for Azerbaijan, the sanctity of its secular statehood would come under direct threat from any resurgence of Islamist belief.

From the broader perspective of a more active and re-assertive Iran in the South Caucasus would, therefore, reflect the same diverse and disparate set of winners and losers on the global stage. For Armenia and Georgia the gains are fairly clear, while the outlook for Azerbaijan seems more risky. The one clear outcome for the South Caucasus, however, is that the already delicate regional balance of power is starting to shift.  

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


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