For more than 20 years, the Islamic Republic of Iran has appeared as the main and most reliable ally of the republic of Armenia. Since Iran recognized Armenia`s independence on December 25, 1991, the two countries have strengthened their political relationship on many occasions and have committed themselves to realize numerous common projects in the economic field.
At first sight, such alliance between the beacon of the “Global Islamic revolution” and a Christian nation religion can appear as deeply unnatural. Looking at it more closely, it responds to a very specific concern, namely to oppose the building of a geopolitical axis running westwards from Baku to Washington.
For Armenia, this alliance is a way to circumvent economic sanctions taken by Azerbaijan and Turkey since the beginning of the occupation of Azerbaijani territory by Armenian force. Moreover, it allows Yerevan to diversify its energy supplies and to position itself as the central element of a North/South axis that would both open the “Warm seas route” to Russia and the European markets for Iran.
In Tehran view, the special relationship with Armenia offers a way to evade international sanctions and pursue its nuclear ambitions. It is aimed at struggling against largely imagined Azeri “irredentism” and at weakening Azerbaijan as part of the competition for Caspian Sea`s hydrocarbon resources. Taking a position into the Caucasus lastly allows Iran to oppose the involvement of the United States and of the European Union in the region and to respond the strategic ambitions of its traditional foes: Turkey and Israel.
The present report will therefore show that Iran and Armenia have developed a hidden agenda to undermine efforts undertaken by the international community to bring stability to the region and to achieve a peaceful settlement of the Nagorno-Karabakh conflict. Similarly, this strategic choice is indicative of Iran`s will to use the Caucasus as a battlefield of a proxy war with the United States and the European Union in the framework of its nuclear program.

The unlikely alliance between Islamic republic and Armenia

For more than 20 years, the Islamic Republic of Iran has appeared as one of the main and most reliable allies of the republic of Armenia. Iran recognized Armenia`s independence on December 25, 1991 . Since then, the two countries had neither border or economical disputes nor ethnical or religious rivalries. Moreover, their successive leaders welcomed the strengthening of their relationship on many occasions and committed themselves to realize numerous flagship projects in the fields of transport and energy. Their bilateral trade has been expanding steadily for several years now, as the two countries dismantled barriers for their respective goods. Iran also made unsuccessful mediation attempts into the Nagorno Karabakh conflict between Armenia and Azerbaijan. It is also worth mentioning that tens of thousands of Armenians live in Iran, where they enjoy a certain amount of political and religious protection.
At first sight, such alliance between the beacon of the “Global Islamic revolution” and the first nation that adopted Christianity as a state religion can appear to us as paradoxical, or even as deeply unnatural. However, looking at it more closely, it responds to very specific internal, economical and geopolitical concerns:
For Armenia, this strategic alliance is a way to circumvent the economic embargo imposed by Azerbaijan and Turkey since the outbreak of the full-scale Nagorno-Karabakh War in 1992. Moreover, it allows Yerevan to avoid being completely dependent on Moscow. The alliance will also open access to Iranian hydrocarbon reserves and diversify natural gas supplies for Armenia. Lastly, securing a southern alliance would position Yerevan as a central element of an axis that would both open the “Warm seas route” to Russia and the European markets for Iran.
In Iran`s view, the special relationship with Armenia offers a way to break the international isolation of the regime. Iran`s strategic positioning in favour of Armenia is also due to ongoing tensions with Azerbaijan over a supposed Azeri irredentism and the struggle for the Caspian Sea`s resources. Taking a position into the Caucasus lastly allows Iran to oppose America`s involvement in the region and to respond the strategic ambitions of its traditional foes: Turkey and Israel.
Beyond such general considerations, this report aims at underlining the deep roots of the Armenia-Iran alliance and its consequences for peace and regional stability. From this standpoint, it will highlight the close geographical and historical links that brought the two nations closer together despite their religious differences. The report will also review and analyse the conditions under which Tehran and Yerevan formed their alliance in the 1990s, and which tangible economic benefits they received from it.
We`ll lastly attempt to overcome placard politics, in order to identify which strategic objectives are behind the demonstrations of friendship made by both countries` leaders. Each of the two partners plays an important role in the diplomatic process put in place by the other to ensure its role in the Greater Caucasus region. Their hidden agenda could indeed undermine the efforts undertaken under the authority of the OSCE Minsk Group on the peaceful settlement of Nagorno-Karabakh conflict. Similarly, Armenia could offer Iran a way out to evade international sanction, hence delaying the solving of Iran`s nuclear issue.

The Iranian Armenian community

Around 100,000 of Armenians are living nowadays in Iran, most of them in Tehran . Moreover, the Armenian Apostolic Church of Iran has between 100,000 and 250,000 adherents, which make it the most important Christian minority in the country. According to Armenians who remained in Iran after the Islamic revolution, their relation with the government is good and they are entitled to a number of rights and protections, including a guaranteed representation in the parliament and in the local councils .
There are more than 200 churches across the country. Christmas has an official recognition although it is not a national holiday, and it is not uncommon to see decorated Christmas trees in the streets of north-western Tehran during the holiday season . The Iranian-Armenians have their own football, basketball and swimming teams and have private establishments known as the “Ararat clubs in Tehran, Kish and Isfahan, in which Islamic law does not apply. It is however important to note that Muslims are prohibited to enter the premises of Ararat infrastructures . In the same way, witnesses have complained about a worrying increase in cases of harassment outside Christian premises. According to these reports, Revolutionary Guards are taking up positions in front of churches, asking for the identity papers of worshipers in order to discourage religious conversion .
The Armenian community owns several media bodies which enjoy a certain degree of independence. Alik is the historical daily newspaper of the Armenian community . Created in 1931, it is the country`s second oldest newspaper after the Persian daily Ettela. It marked its 80th anniversary on August 23 2001 in a celebration attended by many representatives of the government . The group enjoys government`s support and is receiving assistance from the ministry of Culture . The group owns a publishing company and printing factory. It has also opened talks with the government for the opening of a TV channel. Alik is the only Armenian language daily in Iran, but the community has also the literary, cultural and social weekly Arax. It is published in Tehran, Isfahan and North eastern Iran, where the majority of the Armenians are living. Arax` website is published in both Armenian and Persian yet the magazine is only published in Armenian .
This policy also aims to attract a certain amount of sympathy from the Armenian diaspora in Europe, Russia and the United States. The contacts between the Armenian Iranian community and the Republic of Armenia have facilitated the cooperation between the two countries. Both communities in Iran and in Armenia indeed back each other in trade, energy security, and economics. Thus, it is fair to say that the presence of the Armenian community in Iran is an important element of Tehran`s diplomatic strategy in the Caucasus region.
Growing trade partners
Effective cooperation” in every sphere of the economy
As highlighted by the Armenian ministry of foreign affairs, the two countries have established close ties in all spheres and promoted “effective cooperation” in the fields of energy, sport, nature protection, health care, agriculture, education, science, culture as well as in the interprovincial relations . In 2009, Iran and Armenia have signed 8 memorandums of understanding concerning various joint economic projects, including the construction of a hydropower station on the Araxes River, a new trans-border power line and an oil pipeline .
Tehran and Yerevan have also announced on multiple occasions the opening of negotiations on a free trade agreement that would boost Armenian exports towards Iran, which are still undermined by strict custom barriers . Another fundamental project is the agreement for the building of a 470-kilometer railway line circumventing the Azerbaijani exclave of Nakhichevan and ensuring a secure access for Iranian goods towards the Black Sea and for Armenia towards the Persian Gulf . This relation also includes travelling facilities for people, mainly in the fields of sport and tourism. Tourism in Armenia is indeed highly promoted in Iran and Vice Versa .
As we will analyse the fundamental implications of the Iranian-Armenian relation further in the present report, this chapter will seek to describe the development of their economic relationship in all other significant sectors. On Sunday April 29, 2012, Iranian President Mahmoud Ahmadinejad proposed to “Preparing conditions for free trade activities” at the border, emphasizing on the mutual importance of the economic ties between the two countries . They are also willing to improve the cooperation in infrastructure, development of railways and a joint construction of the oil refinery.

Facts and figures

Currently, the government of Armenia could ratify the agreement on a free trade zone within the Commonwealth of Independent States (CIS) as soon as September 2012 , and is also working on a comprehensive trade agreement with the EU . Although privatisation continued during the 2003-09 period, most of the enterprises are still public-owned, in particular in health care, education, and military activities.
The volume of trade exchanges between Iran and Armenia had increased steadily for the last 20 years, reaching the level of 1 billion USD in 2010 . The two countries also significantly improved their transport routes. Today, Iran remains one of Armenia`s biggest economic partners, although the latter has diversified economic opportunities after its accession to the World Trade Organisation (WTO) on February 5, 2003 . However, Armenia`s modifications in tax and trade administration as well as in fight against corruption have been ineffective and the economic downturn led to sharp decline in tax revenue, forcing the government to accept loan packages from Russia, IMF and other financial institutions . For example, the current loans disbursed by the International Bank for Reconstruction and Development (IBRD) in favour of Armenia amounted to 216,565,258 USD from) by March 2012, while the current International Development Association (IDA) credits disbursed for Armenia was $1,253,418,586 for the same period .
The import-export relation with Iran is particularly noticeable in the statistics. According to the Directorate General for Trade of the European Commission, Iran is the fourth major trade partners of Armenia. In 2010, the Armenian exports towards Iran amounted to 65,1 million euros (8,3% of the total amount of Armenian exports) while imports amounted to 151 million euros (5,3% of total imports) .
A more refined analysis of the import-export figures between the countries underlines a particular cooperation in mineral fuel, oils and artefacts of iron and steel . The variety of activity sectors concerned by the bilateral cooperation is a clear indication of the rapid development of trade relations between Iran and Armenia. Besides the huge portion of exports in iron, steel, mineral fuels and oil, Iran is also increasing the export of food and beverages, consumer goods and industrial supplies. This shows that the country is interested in maintaining its role as one of the main export and import partner of Armenia in these various sectors .

Increasing economic dependence

These facts and figures underline the tremendous importance of the trade relations between Iran and Armenia for the latter`s economic survival. The country has often looked forward to be less dependent on Russia and to protect itself from the wary relationship with Azerbaijan. In turn, Armenia became more dependent upon Iran over the years to import and export goods vital for its economy. The economic indicators show the intensification of Iran`s relations with Armenia. Moreover, the presentation of the Free Trade Agreement (FTA) by Iran to Yerevan is another attempt to boost these ties.
However the agreement has not yet been finalized until now, as Armenia appeared to be reluctant because Iran is not prepared to introduce zero customs dues in trading with Armenia . Nevertheless the agreement if reached will boost trade turnover between the two countries and enhance the commercial and economic ties. In the future, it is not ruled out that Iran will try to surpass Russia as Armenia`s main foreign partner.
The strengthening of such relationship is also of prime importance for Tehran. Despite increased revenues linked to the rise in the world oil prices, Iran`s GDP growth remained stagnant in 2011 due to international sanctions, government mismanagement, and endemic underemployment . The reliance on oil provides the majority of government`s revenues and therefore the economy is marked by statist policies. Hence, establishing itself firmly as an actor of a tri-partite economic relation with Armenia and Russia is one of the very few solutions for Iran to reduce its dependence on oil and to afford it costly policies of food and energy subsidies.
 
I. Iranian gas exchanged for Armenian electricity
A. Armenia energy needs and sources of supply

Armenia is neither a producer of oil nor of natural gas so is highly dependent on imported hydrocarbons. The main suppliers are Russia and Iran but fuel produced from oil is also imported from Bulgaria, Romania and other countries in the Middle East. Russia owns about 80% of the country generating capacities and therefore Armenia is extremely dependent on Russia. The Argel Gyumush (Sevan-Hrazdan Cascade) hydroelectric power plant and the Hrazdan thermal power plant (the largest in the South Caucasus) were given to Russia as part of payment of national debt . In April 2006 the he 5th block of the Hrazdan Heat Power Plant was sold for $248.8 million to Gazprom that also controls the Armenian section (Meghri-Kajaran) of the Iran-Armenia gas pipeline .
Therefore diversification of natural gas sources and supply routed is of paramount importance for the country also because of increasing tariffs for Russian gas (increased in April 2006, January 2009 and April 2010) . For this reason in December 2008 was completed the construction of the Meghri-Tabriz pipeline delivering natural gas from Iran to Armenia. The 142-kilometre pipeline connecting Tabriz (Iran) with Meghri (Armenia) has a delivery capacity of 2.3 billion cubic meters per year.
From the beginning, Russia became involved in the construction of this pipeline and Gazprom invested $200 million and later purchased the section in the Armenian territory via the ArmRosGaz Company (45% owned by by Gazprom, 10% by Itera and the remainder by the Armenian energy ministry) . Gas deliveries were expanded after the April 2010 completion of the Yerevan Thermal Power Plant. Most Iranian gas is used to fuel the Hrazdan power station, and the electricity produced there is exported back to Iran .

B. Precarious and threatened facilities

Since Turkey and Azerbaijan imposed an economic blockade on Armenia by closing the borders since the armed aggression of Armenia and the occupation Azerbaijani territories, the country`s energy imports relied on Georgia and Iran. This situation threatened gas deliveries making difficult the lives of households during the 1990`s given the very harsh weather conditions in the Caucasian winter. Moreover, the 2008 Georgia war proved the instability of the country`s main energy corridor, especially when the Verkhny Lars checkpoint on the Russo-Georgian border, the only overland connection between Armenia and Russia, was closed. A first pipeline project was launched in 2002. On March 19, 2007 Iranian President Mahmoud Ahmadinejad and former Armenian president Robert Kocharyan inaugurated a pipeline linking the Iranian city of Tabriz to the Armenian province of Sardarian.
Iran`s energy deliveries to Armenia allowed Yerevan to circumvent the Azerbaijani and Turkish sanctions policy carried out through closing the borders. Moreover, it has reduced Armenia`s reliance on Russia, while helping Iranian gas to get to Europe. The two countries have therefore invested millions of dollars in energy projects, making sure that Armenia won`t be hit by and energy shortage during in diplomatic crisis, hence undermining Baku and Ankara in the peace process negotiations.
In exchange, Armenia is providing electric energy produced by hydroelectric power plants, thereby breaking the international embargo that has been imposed on the Islamic Republic. As we will discuss later in this report, Armenia has become an important partner for Iran`s diplomacy in the region to improve its economic links and to hinder Turkish and American influence in South Caucasus .

C. Increasing cooperation with Iran in the energy sector

The two countries, perceiving themselves besieged in their neighbourhoods, fostered cooperation establishing a border corridor, reducing and then eliminating transnational movement constraints like visas or trade permits. According to the head of the Armenia-Iran Chamber of Commerce (another product of this cooperation), in 2010 bilateral trade was at $310 million, up 50 percent from the previous year. 818 companies had Iranian capital in Armenia, Russia in the same year had 1,000 companies operating in the country . The two countries cooperate not only in gas and electricity but also in area like hard-industry, pharmaceuticals, mining and petrochemicals .
According to the CIA World Fact book, Iran in 2011 was the fourth larger exporter to Armenia, with a share of 6.5% (after Russia, China and Ukraine) and the third major importer with 9.8% (after Russia and Germany) . The centrepiece of the bilateral cooperation is a planned 365-kilometer-long oil pipeline linking Tabriz to the southwestern Armenian town of Yeraskh. It will be capable of delivering 1.5 million litres of gasoline and diesel daily and is scheduled to be completed by 2014. Experts at the Armenian Energy Ministry estimate that this pipeline will save the country up to 30% per year in energy costs .
Armenia would save approximately $15-20 per barrel and transportation costs would be 3-4 times less than now . A 470-kilometre long railway will connect the two countries giving Armenia access to the Persian Gulf. A free trade area and a trade centre were set up in July 2012 . Besides two hydropower plants are under construction on the River Arax financed by the Iranian government. Armenia will pay the loan by supplying electricity to Iran . 

II. Shared geopolitical interest: Yerevan in a frantic search for a regional ally
A. Risk of isolation during Nagorno Karabakh war : In need of allies to achieve war goals

Military victory at all prices and international recognition of the de facto Armenian control over the disputed territory have been the main priority of the government until now. For that reason, Armenia`s first non-communist president Levon Ter-Petrossian, who had been himself a leading member of the “Karabakh committee” in the 1980s , considered the issue as a major element to ensure the survival of Armenia as an independent state. Yerevan has always denied the involvement of its national army, and Nagorno Karabakh has never been officially annexed into the republic of Armenia. In facts, the war however resulted in the expansion of the Armenian territory to the detriment of Azerbaijan.
During the first part of the conflict, none of the parties had a professional army on its own. Hence, both Armenia and Azerbaijan have relied on paramilitary units to achieve their military objectives, while the Soviet Army took an increasingly passive role over the years. After 1991, there has however been credible testimony of the involvement of unlisted members of Russian Special Forces (Spetnaz) in the conflict, although it was denied by Russian military hierarchy . In any case, it appeared soon that Armenia would benefit from the tacit support of Moscow. Interestingly, Moscow and Yerevan signed a military cooperation treaty just shortly before the removal of Azerbaijani president Elcibey in 1993 . The latter had adopted a vehement anti-Russian and pro-Turkic attitude which partly prompted Russia to stand by Armenia in the conflict. Although it remained committed to its special relationship with Armenia, one has to note that Russia adopted a much more balanced position in the conflict after the rise to power of President Heydar Alyev in Baku.
Meanwhile, as a result of closing borders by Turkey and Azerbaijan since the aggression and the occupation of Azerbaijani territories, Armenia also needed to secure at least one alliance on its own borders. Thus, Iranian aid was directly delivered to Nagorno Karabackh, allowing the Armenian militias to continue the fighting and to secure victories on the field. Although Tehran attempted in some occasions to be the mediator in the conflict, its actions during the war were significant in securing the present situation. The geopolitical situation gave little choice to Armenia: forging an alliance with the beacon of the “Global Islamic Revolution”, even at the risk of attracting the anger of Washington.

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