The global community has their eye on Russia and Iran regarding developments in Syria and the broader Middle East North Africa (MENA) region.
The Syrian war has proved to be a humanitarian catastrophe and a direct show of force between the West, Russia and Iran. The background of the developing Iranian-Russian partnership has roots elsewhere, in the often neglected Caspian, where current events reveal these two powerhouses are reasserting their dominance in uncharacteristic moves over a shared periphery. Infrastructure and the North-South Transport Corridor, a buzzword regional project by Russia, Azerbaijan, Iran, and India, tell the real story.
Russia’s Caspian port Astrakhan sits at the mouth of the Volga River, a transport artery for trade with Iran and other Caspian littoral states. The port is an important node in the proposed North-South Transport Corridor linking Russia with India. Back in 2011, Iranian companies Hazar See Shipping Lines and South Way Shipping Agency partnered with Azores Shipping Company L.L.FZE from the United Arab Emirates (UAE) to buy a controlling stake of the Russian firm Astrakhan Port OJSC, which controlled the city’s port of Solyanka.
The acquisition allegedly didn’t conform to Russian regulations concerning strategic investments so the Federal Antimonopoly Service (FAS) launched a suit in 2012, calling for the trio to eliminate their shares. It wasn’t until February 2016, that the suit was settled and the firms agreed to sell their controlling shares.
The decision was an odd one. In December of 2015, the FAS pre approved the acquisition of a controlling stake of the port’s shares by Iranian shipping firm Nasim Bakhr Kish (NBK), who bought out the other three firms. News reports were scant but it seems Nasim Bakhr Kish has retained ownership of Astrakhan’s Solyanka port.
More likely, Russia preferred to work with a non-state firm that had links to Kish Island, a potential banking hub for companies seeking to operate in Iran. $5 million has since been pledged to improve Solyanka.
Reports also surfaced last December that Iranian interests won a bid for Russia’s other Caspian port Makhachkala in Dagestan, which would extend Iranian influence into the Northern Caucasus in Russia. Ports are critical strategic assets and Russia closely guards ownership as different national elites and international players compete for the country’s maritime infrastructure. Now that Iranian firms have controlling stakes in both of Russia’s Caspian ports, Russia is clearly comfortable ceding ownership of assets to Iran as opposed to other Caspian states.
A complicated partnership
Attempts to deepen trade with Iran gathered steam once the Joint Comprehensive Plan of Action (JCPOA) came into view and consensus was reached on Iran’s nuclear program. In 2015, the two countries agreed to start direct flights between Tehran and Astrakhan and Islamic Shipping Lines expanded service to Astrakhan and Makhachkala.
There is also reason to believe that as Iran’s economy grows, imports for cars, aviation equipment, and power generation technology will grow as well, giving Russia and Iran potential economic complementarity. There is broad consensus publicly that Iran and Russia share mutual interest in improving trade, evidenced most strongly by a preliminary agreement between Iran and the Eurasian Economic Union for a free trade deal.
However the sales of port assets represent a security decision. Azerbaijan’s Caspian Shipping Company opened a subsidiary in Astrakhan in 2015 and has pursued closer commercial contacts with the region as a means of influencing Moscow. The sale of the controlling stake in Solyanka cost roughly $11 million, something that could be written off with public debt in Kazakhstan or Azerbaijan.
In conjunction with sales to Iranian firms, Russian Railways prioritized repairs and expansions of rail capacity in the rail corridor heading north from Astrakhan instead of improving Dagestan, Chechnya, and Ingushetia’s rail network, which connects to Azerbaijan.
It seems that not all partners on the North-South Transport Corridor are equal. Russia is attempting to superficially include Azerbaijan in the Corridor as a regional initiative and reduce Azerbaijani influence in Dagestan while targeting bigger trade flows through Astrakhan into Central Russia by partnering with Iran. The project is therefore a means for Russia and Iran to politically entrap Azerbaijan into cooperation as it loses regional influence in relative terms.
The end of Azerbaijan’s Soviet Dividend
For two decades, Azerbaijan had near monopoly power over Caspian shipping because it inherited almost the entire Soviet Caspian tanker fleet. The 2008 financial crisis encouraged states to build or buy their own fleets, chipping away at Azerbaijan’s market power. The shift paralleled growing military spending from Russia and Iran in the Caspian.
In October of 2013, Azerbaijan merged its two largest shipping operators into one firm: the Azerbaijan Caspian Shipping Company (ACSC). The company remains the largest player on the regional market and owns 34 tankers and 20 container ships. For reference among the smaller Caspian states: Kazakhstan’s Kazmortransflot owns 8 tankers and 13 container ships while Turkmenistan’s Marine Trade Fleet has 6 tankers and, source depending, a few more container ships.
Russian companies lease some of ACSC’s considerable support fleet, but Russian and Iranian firms have ordered or acquired more tankers and container ships in recent years. Russian firms such as the Safinat Group have sought greater market share through Astrakhan and its sister port Olya, and Iran has set a goal of controlling as much as half of the Caspian shipping market by 2018-2019, squeezing Azerbaijan’s influence as a shipping power.
North-South integration vs. East-West integration
Azerbaijan’s market dominance in the region has slipped at an inopportune moment. Infrastructure initiatives connecting Europe and Asia have taken off. Baku’s seaport and the expansion at Alyat south of Baku remain the gold standard for regional port projects, largely because of oil deliveries bound for the Baku-Tbilisi-Ceyhan pipeline or the Baku-Novorossisk pipeline, both of which can send about 1 million barrels of crude on to other markets. East-West oil flows shape most of the Caspian shipping industry. That dynamic may change if the JCPOA holds steady and Iranian oil production rises.
In 2015, Iran began expanding capacity in the Caspian port of Neka to enable North-South transit of oil from the region to the Gulf. Expanded capacity would mostly benefit Russia. Kazakhstan’s rising production is largely transiting Russia to Novorossisk by contract, Azerbaijan’s oil production will not grow again, and Turkmenistan’s energy sector is geared towards China-bound export.
Russia is particularly interested because Caspian oil is of higher quality than Western Siberian oil and therefore more attractive on Asian markets. Russian firm Lukoil is committing $8.5 billion to develop Caspian oil fields and was the first international oil firm to sign contracts in Iran.
Since 2009, Iran has sought financing for a pipeline connecting Neka to the Gulf port of Jask with a planned capacity of a million barrels of oil per day. Growing fears of an oil supply shortage in the early 2020s may aid investment in newer oil infrastructure, which would come onstream as Lukoil’s production hits the market.
Azerbaijan is ostensibly set to benefit from its newly minted rail connection with the Iranian rail network. The link will also help Iran trade with the Northern Caucasus and aid the transit of Indian goods from Iran’s Gulf ports to Russian and European markets.
The rail link was financed largely by Azerbaijan and Russian Railways is committing significant resources to upgrade rail in the Northern Caucasus despite the increase in usage one would expect. Peculiarities of Russian policy in the Caucasus, particularly Dagestan, suggest that the rail link is not the primary desired route for Indian and Iranian goods, limiting the benefits of the Corridor for Azerbaijan and ideally directing investment towards Astrakhan.
Some roads lead to Dagestan
Dagestan is the most populous, most diverse, and most troublesome republic in Russia’s Northern Caucasus. Whereas Ramzan Kadyrov in Chechnya has created a semi-autonomous fiefdom—state-owned Rosneft’s sale of Chechnya’s oil assets to Kadyrov is proof—Dagestan lacks a comparable figure with the same grasp on power.
Current governor, Ramazan Abdulatipov, is constantly negotiating between local elites in cities and towns in Dagestan who despise Kadyrov, Dagestani oligarchs living in Moscow, the Kremlin, different clan networks and ethnic groups in the capitol Makhachkala and city of Derbent, and a complicated relationship with neighboring Azerbaijan.
Growing regional interconnectivity has added a new factor to Abdulatipov’s delicate balancing act. Russia has historically used isolation as a means of guaranteeing Dagestan’s budget dependency on Federal aid to deter secession. The same day that Dagestani and Iranian interests agreed on the sale of Makhachkala’s port, Abdulatipov paid an official visit to Baku.
It’s difficult to imagine that the optics weren’t considered. After being awarded the Order of Friendship by Azerbaijani president Ilham Aliyev, Abdulatipov made sure to emphasize the constructive role played by Putin in Dagestani-Azerbaijani relations.
The reference was not subtle or perfunctory. Dagestani farmers have fought over water usage from the Samur River due to a water sharing agreement reached by Moscow and Baku, many of Azerbaijan’s radicalized population bound for Syria likely come from ethnically mixed border regions with Dagestan, and Dagestan’s Interior Ministry recently clamped down on illegal migrant labor from Azerbaijan in Derbent.
Investment has not been forthcoming from Azerbaijan and long-standing political tensions limit its potential. The Kremlin’s involvement has much to do with both problems. One would expect the North-South Transport Corridor would encourage trade. Agreements for Azerbaijani investment in Dagestan were reached in late October, but the picture is quite skewed.
In 2014, turnover between the two republics amounted to $278.8 million. In 2015, that figure dropped to $161.1 million, of which only 12.9% were Dagestani exports to Azerbaijan. That dynamic is unlikely to shift with token projects and it seems that Iran is likelier to benefit by controlling more of the supply chain. Iranian-invested firms in Dagestan would ship through Makhachkala, increasing profitability for Iranian firms.
Iran as friend of Dagestan and Moscow
Iran is cutting into Azerbaijan’s shipping advantage just as it has become Russia’s preferred investment partner for the Northern Caucasus. Agreements have been reached between agricultural firms and manufacturers in Iran, Dagestan, and Ingushetia in the last year and a half.
Abdulatipov and trade interests in Makhachkala have publicly invited Iranian investment, though efforts have been marred by Dagestan’s shoddy record in the past with Azerbaijan and Turkey. Iranian businessmen are now fielding proposals on waste processing and agricultural products in the region and there’s public momentum towards bettering economic ties.
In the last few years, Iran’s Moscow cultural attaché Reza Maleki has consistently met with Russia’s Minister of National Policy in Dagestan, Tatiana Gamalay, to discuss cooperation concerning religious extremism and terrorism. Iran also recently sailed a small flotilla of warships to Makhachkala’s harbor as a sign of military cooperation with Russia.
Given the relatively low economic value of trade with Dagestan and issues for rail transport in the region, Iran and Russia’s partnership seems most driven by security and political aspirations.
It’s the security, stupid
Crackdowns by the Financial Stability Board (FSB) and Ramzan Kadyrov’s loyalists have produced a decrease in terrorist attacks in the Northern Caucasus, but ISIS has gained a foothold in the region. The potential for attacks will likely scare off some shippers and events in Syria and Iraq may shift the network’s focus elsewhere in the region.
Dagestan, not Chechnya, has become the locus of recruitment and attacks continue, not just against the Russian state but between Sufis and Salafists as well. Dagestan’s terrain makes it incredibly difficult for Russia to suppress insurgency.
To deepen trade through Azerbaijan and Dagestan, Russia therefore must guarantee the physical security of rail transport through the region. Over the last seven years, the Russian military has repeatedly had to deploy railway troops—engineer battalions equipped with heavily armed and armored trains and weapons platforms—to repair tracks in the Northern Caucasus after attacks, accidents, or disrepair rendered connections inoperable.
As of 2015, Russia had 10 engineer battalions available and there’s little evidence that greater resources have been devoted to them since. Every deployment dents Russia’s ability to logistically respond to threats on its borders elsewhere and eats up valuable military resources.
Greater trade could also fund local insurgents. For example, if Russia wished to export uncut diamonds from Yakutia to India—one of the prizes of current trade talks—potential transit through Dagestan could provide valuable resources to insurgents looking for sources of funding. That example is unlikely as Astrakhan or Far Eastern ports are better situated but the logic remains that transshipped goods can be turned into financial support for violent activities.
The region’s oil tank farms lost 1.43% of transshipped oil, considerably higher than the .2% norm. Between 20,000 and 30,000 tons of oil are lost in the region every year, mostly to theft.
Stolen oil supplies provide an important source of offbook, untaxed revenues for locals and, by extension, insurgents. As much as 59% of neighboring Azerbaijan’s economy functions in the shadows, untaxed or unregulated. In Dagestan, sector depending, it’s between 40 and 66%.
An increase in good transshipments would exacerbate that problem for local authorities seeking to reduce their dependence on Federal money while also threatening Moscow’s grip on the region’s economic fortunes.
Astrakhan remains the Window to the East
Russian Railways has targeted investment in rail between Astrakhan and Volgograd for its portion of the Corridor, in part, because of security concerns in the Caucasus. Another driver are similar economic-security concerns in Tatarstan. The region is currently struggling with the failure of Tatfondbank, a crucial financial institution for the regional economy.
There are widespread protests calling for repayments on lost deposits. Improving trade would be a big win for the Kremlin, as Tatarstan has a history of toying with independence. The regional government has sought greater trade ties with Iran in the past. Azerbaijan has representative offices in both Dagestan and Tatarstan, a telling symbol of its desired reach into Russia’s Muslim regions. Post-JCPOA, Russia seems to be using Iran to feed these regions trade deals that historically would have been a means of pressuring Moscow.
However, if Moscow maintains cooperative relations with Tehran in the Caspian, that leverage will be lessened.
Astrakhan is also much better situated to serve Russia’s traditional military-industrial base in Central Russia. Arms are Russia’s most lucrative export for Iran in the short-term and Russia faces future competition from China on the Iranian market. As China’s military exports improve in quality, Russia needs to lock in market share abroad where it can.
Russia would not risk shipping arms through Dagestan. Astrakhan is also fast becoming an oil province as Lukoil’s investments bear fruit, bringing needed regional and Federal revenues into view. Russia has consciously prevented the development of Dagestan’s energy reserves, a policy that bears no signs of change.
The confluence of security and economic concerns and drivers point to a Russian-Iranian partnership in the Caspian to Azerbaijan’s detriment and the benefit of the tortured political relationship Moscow has with Dagestan. Infrastructure spending reveals a different picture than public announcements. The Baku summit last August that birthed the latest frenzy over the Corridor showed a public face of cooperation.
As usual, the motives of the Caspian’s two biggest powers suggest otherwise. Azerbaijan has lost much of its power to control Caspian trade. Growing East-West trade flows will not ease the country’s loss of influence in Southern Russia and potential shifts in regional trade patterns.
Russia and Iran are angling to control more of the flow of goods East-West and North-South while paying lip service to Azerbaijan’s role. If Iran signs a free trade agreement with the Eurasian Economic Union, it will become more difficult for Azerbaijan to resist Russian attempts to incorporate it. Any talk of circumventing the Suez Canal is a means of hiding the actual political motivations of what’s at stake.
Nicholas Trickett is a Policy Intern at Foreign Policy Initiative.
As originally appears at: http://globalriskinsights.com/2017/03/russia-iran-north-south-transport-corridor-security-control-power/