Banks.am’s interview with Sevak Sarukhanyan, visiting Fulbright Fellow at Georgetown University

- What particular impact might the lift or loosening of Western sanctions on Iran have on Armenian-Iranian trade-economic ties? To put it simply, what was impossible to do under the exposed sanctions?

- Positive expectations from the loosening or removal of sanctions on Iran are exaggerated, while they won’t have any qualitative impact on Armenian-Iranian relations.

The reason is that the sanctions affected 4 main sectors of Iranian economy – oil, insurance, technologies (including arms) and financial transactions. The economic cooperation between Armenia and Iran did not involve any of these sectors, with the exception of the financial sector. We did not import oil or oil products from Iran. The insurance industry first of all involved the Iranian oil fleet. As to technological cooperation, Armenia exported virtually nothing to Iran, all the more arms.

The only sector of the Armenian economy, which might benefit from the removal of sanctions, is cattle-breeding. The volumes of export of mutton from Armenia to Iran have dramatically declined precisely because of the sanctions: they first resulted in the depreciation of the Iranian rial as a result of which mutton faced 40% fall in price (in dollar equivalent) in the Iranian market.

It was then followed by the deficit of currency in which Iranians were paying for imports from Armenia and other countries, and it also had adverse impact on the export of meat to Iran. As soon as the currency crisis is over in Iran and it will be over after the sanctions are lifted, this sector will regain its positions.  

- To what extent did sanctions affect the banking sectors of Armenia and Iran?

- They did not have any major impact, although they could. After the package of financial sanctions was imposed on the Islamic Republic of Iran, Iranian banks and financial groups attempted to enter regional financial markets in order to evade sanctions. In 2012, there was information leakage by several anonymous sources from the UN and World Bank according to which the Iranian party was displaying interest in acquiring shares in two Armenian banks to ensure foreign market entry through them.

However, these attempts were suppressed, and it was quite expected considering the Armenian financial sector’s dependence on international financial institutions.
 
In the meantime, Iran managed to carry out its plans in other countries, first of all in Iraq and Turkey, which became the main “hubs” of the currency influx to Iran as well as of illegal sales of oil and gold. To date, the scandal over Turkish-Iranian businessman Rıza Sarraf who, circumventing the sanctions, laundered around USD 50 billion for Iran through Turkish financial institutions has not abated. However, Sarraf was acting together with Erdogan’s government, which granted him even more freedom of action.

In view of the small scale of financial markets in Armenia as well as the absence of significant political resources to support such activities, the prospect of transforming the country into a zone of laundering illegal Iranian money was impossible.

- There were opinions that the implementation of major infrastructure projects, including the construction of joint HPP on the Araks was also, in fact, delayed because of the sanctions. Are these opinions justified?

-They are both justified and unjustified. It is clear that Iran needs free capital for the construction of the HPP but the country lacks them because of the deep macroeconomic crisis. However, it does not mean Iran will invest in the project as soon as it has the resources. So to speak, in terms of finances, once the sanctions are lifted Iran will have a chance to invest in the project, but the practical prospect depends on a whole series of circumstances, above all political.

The question how interested Iran will be in this project after the sanctions are removed and after it returns to global economy remains open, especially provided that Tehran has started reviewing its power industry policy – previously new capacities were planned to ensure higher consumption volumes, while presently the policy of introducing energy efficiency technologies in current capacities has become a key element of the energy policy.  

- In a recent interview with Mediamax, Georgian Minister of Energy Kakha Kaladze said that the southern route of the transit corridor is “very interesting and prospective provided the establishment of relevant legal environment.” Do you think Armenia, Georgia and Iran will be able to engage in this and other trilateral projects after the sanctions are removed?

- Of course, they can. But it requires the settlement of not only legal, but also a number of practical issues, which are not directly related to the absence of the contractual base – it refers to the construction of new overhead transmission lines between Armenia and Iran, which is being delayed although Armenia has abiding interest (or should have abiding interest) in the implementation of this project.

Without overhead transmission lines, no development of Armenian-Georgian cooperation in the power industry sector can create a trilateral transit, as the possibilities of exchange between the systems of Armenia and Iran are set in almost full motion and cannot withstand any additional and considerable burden.

I would like to particularly note that after the exploitation of Iran-Armenia gas pipeline energy cooperation between Armenia and Iran did not undergo any new developments, which in my opinion, is not good at all. We should take advantage as long as Iran is closed and as long as Iran is politically interested in reinforcing ties with regional neighbor states through even economically non-beneficial projects. After all, as soon as Iranian gas enters European market and Iran starts playing a “big game” on the international energy scene, it will no longer show any interest in projects such as overhead transmission lines in Armenia or joint HPP.

- Will the removal of sanctions create new prospects for Iran-Armenia gas pipeline or is this issue fully in the field of Armenian-Russian agreements in the energy sector?

- I don’t think so since in technical terms, as long as the gas pipeline from Russia operates Armenia does not need higher volumes of import of Iranian gas. There are many talks on that we can purchase Iranian gas at lower prices than the Russian gas, but these are theoretical arguments not supported by practice. Iran has never sold cheap gas to anyone. Even Turkey, which is a strategically important country for the future of the Iranian transit, spends months negotiating over 10% gas discount.   

I believe the maximum use of Armenia-Iran gas pipeline is beneficial for “Gazprom” itself inasmuch as the Russian gas sold at USD 189 to Armenia (let alone the astronomical 10% gas left to Georgia for transit) can be sold at way higher prices in foreign markets.

So, if there is a real prospect for lower gas prices, the Iranian gas might come to replace the Russian on the initiative of Russia itself. If it does not happen, it means one thing – there is no such prospect.

Meanwhile, for objective reasons, Armenia might need additional volumes of gas from Iran after Metsamor Nuclear Power Plant is closed. If electric power needs are covered by constructing new Thermal Power Plants after the NPP is closed, then the pipeline from Russia to Armenia might not be able to address increased supply volumes. The gas pipeline, particularly its Georgian part, is in a bad and here and then, in a deplorable state; Georgia makes minimal investments in its modernization and security and it can make the increase of Iran-Armenia gas pipeline capacity non-alternative, including to the Russian owner of the Armenian gas transportation system.

- Some pessimistic scenarios were also voiced in Yerevan after the meeting in Lausanne. In particular, the removal of sanctions was said to result in a dramatic increase in the volumes of Iranian oil supplies and as a consequence, in even a greater decrease in global oil prices and new weakening of the Russian economy, while Russia is Armenia’s main economic partner. What can you say on this?

-Oil is a commodity the price of which is determined not only based on the volumes of production and consumption or on speculations, but also on stir. The removal of sanctions will create a stir in the market and the prices will drop, however, it will be temporary. And there are several reasons for it.

First, nobody knows for certain how much gas Iran has actually exported in the period of sanctions. The data provided by the Ministry of Petroleum of Iran are one thing, and the reality is another. Given the virtual absence of border between Iran and Iraq as well as the border of oil-bearing Iranian Khuzestan with Iraq, Iran used to supply to foreign market substantial volumes of Iranian oil as Iraqi. After the sanctions are lifted it will continue to enter the foreign market but as Iranian oil, which will not change anything in respect to volumes.  

Second, Iranian oil-wells are often in a terrible state and cannot secure dramatic increase in oil extraction. Around 80% of Iranian wells were drilled before the Iranian (Islamic) Revolution. Over the past years, no significant capital investments were made for their preservation and safety. Iran’s current task is not to take over the international oil market but to retain its position in it, and it is impossible without substantial financial and technological investments. In this regard, Iran needs five to ten years to fully return to the global market and according to various estimates, it will require investments to the tune of USD 50-150 billion.

Ara Tadevosyan and Khoren Ormanyan talked to Sevak Sarukhanyan