Cablegate: Iran-Azerbaijan Snapshot and Overview

VZCZCXRO5761
RR RUEHBC RUEHDE RUEHDIR RUEHKUK
DE RUEHKB #1069/01 3121331
ZNR UUUUU ZZH
R 071331Z NOV 08
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 0316
INFO RUCNIRA/IRAN COLLECTIVE
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEAIIA/CIA WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEKDIA/DIA WASHDC
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEKJCS/JOINT STAFF WASHDC

UNCLAS SECTION 01 OF 03 BAKU 001069

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL ENRG ECON RU IR AZ
SUBJECT: IRAN-AZERBAIJAN SNAPSHOT AND OVERVIEW

1. This cable provides a general unclassified snapshot of
Iranian political, economic, and commercial activities in
Azerbaijan, outlining apparent evolving Iranian regional
priorities and recent and pending developments in bilateral
political and economic relations. Many issues noted in the
cable have been or will be the subject of more detailed
reporting, and this overview will be updated periodically to
ensure its continued utility as a general unclassified
reference. In this context, comments, questions, and/or
requests for inclusion of additional topics in future
snapshots are welcomed.

A. General Background
-----------------------

1. Iran made a major effort in the early 1990s toward
economic and political subversion of Azerbaijan including
subsidizing a pro-Iranian Islamist movement and other
activities. These were mostly mopped up in the mid-1990,s
by former President Heidar Aliyev, and subsequent bilateral
relations have generally gravitated between mildly surly to
smilingly correct (which is basically the current state).

2. Azerbaijan currently provides refuge to a small number of
Iranian regime opponents, including monarchists and
Iranian-Azerbaijani pan-Turks, autonomists, and separatists
(far more ethnic Azeris live in Iran than Azerbaijan).
Azerbaijan,s relatively cool posture towards Iran contrasts
with its much warmer relations with Turkey, with which it
frequently exchanges official visits.

3. Iran continues to make propagandistic TV broadcasts
visible in the south of Azerbaijan, including a widely
watched Azeri language current events show that includes
gossip and stories embarassing to the GOAJ, and often
challenges the secular policies of the government. At the
same time, economic cooperation is modestly increasing, and
some irritants such as violations of Azerbaijani airspace and
sea space by Iranian military have reportedly decreased
greatly over the last few years.

Education: Iranian Students in Azerbaijan
-----------------------------------------

4. More than 2,000 Iranian students are currently studying
in Baku, most from Iranian Azerbaijan. Unlike students in
Armenia and many other countries, these students are not
entitled to GOI loans or subsidies, and many reportedly
experience considerable harassment and red tape when they
return to Iran. Ability to study in the Azeri language,
freer life style, and relatively easy cash-based admissions
policies at many Azerbaijani universities are key attractions
cited by Iranian student interlocutors.

5. For its part, Iran provides material support to some
Farsi language schools, and allegedly entices village and
lower-income Azerbaijani children with all-expenses paid Iran
study scholarships (some reportedly including stipends for
their families).

Possible Aliyev Visit to Iran
-----------------------------

6. The desirability and even &imminence8 of an official
visit by President Aliyev is a frequent public theme of GOI
diplomats, including Foreign Minister Mottaki. These
assertions are almost invariably met with silence by the
GOAJ. Some interlocutors assert that Aliyev is loath to
visit Iran in the absence of concrete progress in areas of
bilateral tension, including Caspian demarcation and de facto
Iranian support for Armenia.

7. Nonetheless, an official visit to Iran by Aliyev is
likely sometime during 2009, given recent geopolitical
developments and related improved energy ties (see below).
The GOAJ is also cognizant of the need to repay President
Ahmadinejad,s August 2007 official visit to Baku.
B. Regional Political Picture
------------------------------

8. The Russian invasion of Georgia cast a shadow over
security and stability in the region. Though a bit slow off

BAKU 00001069 002 OF 003

the mark, since the Georgian invasion Iran has been
attempting to assert a position as a key regional player with
a significant role to play in stabilizing the region.

9. Since last September, Foreign Minister Mottaki has made
high profile visits to Baku, Moscow, and other regional
capitals to lobby for an ill-defined Iranian Caucasus
stability plan which appears to have gotten nowhere. Local
interlocutors speculate that Iran welcomes increased Russian
influence in the region so long as this comes at the expense
of the U.S. and the West, and sees itself (not Russia) as the
long-term winner in such an eventuality.

10. Iran may also be attempting to insert itself more
aggressively as a player in the Armenia-Azerbaijan/Nagorno
Karabagh issue, adopting a dismissive stance towards the
Minsk Group (Russia, France, and the USA) that are the
official mediators between Azerbaijan and Armenia.

Iran,s &Me-Too8 Caucasus Plan
-----------------------------

11. Iran was not included as a notional member of Turkey,s
proposed &Caucasus Stability Pact,8 postulated in early
September. Iran,s subsequent regional activity, including
Mottaki,s recent flurry of visits to neighboring capitals
and vague talk of submitting a new Caucasus policy plan, does
not seem to be paying off yet in terms of any significantly
increased Iranian role or influence. Interlocutors here
bluntly characterized Iran,s recent Caucasus efforts as
essentially catch-up and &me-tooism8 in response to the
Turkish initiative.

C Economic Issues/Relations
---------------------------

Energy
------

12. For several weeks during the Russia-Georgia conflict,
Azerbaijan reportedly utilized Iran as an outlet for some
oil exports blocked from Georgian ports, and Iran has been
quick to emphasize the value to Azerbaijan of maintaining
this alternative energy route. Azerbaijan,s state oil
company, SOCAR, announced in September that it will soon open
a permanent office in Teheran, its third overseas office.
Meanwhile, Iran and Azerbaijan have regularized the supply of
gas and electricity to the Azerbaijani enclave of Nakchivan
based on energy swaps, and is cooperating on a related border
hydroelectric project.

Energy Infrastructure Issues
----------------------------

13. The Iranian company NICO, which serves as the National
Iranian Oil Company's (NIOC) marketing arm, is a ten-percent
partner in the large Shah Deniz energy consortium, which is
Azerbaijan,s (and the Caspian Sea,s) largest offshore
producer of gas. In addition, Iran (as well as Russia)
continues to offer to buy all Shah-Deniz "Phae II" gas
(thereby torpedoing current USG and European-supported plans
for new pipelines bringing Caspian gas to Europe, and
increasing the probability of an Iran-Europe energy
connection). Neither this nor the Russian offer are
currently taken seriosly by the GOAJ, which (in addition to
other reasons) prefers a direct tie to the European market.

14. As a consortium partner, NICO is also entitled to ten
percent of the multi-billion-barrel oil condensate reserves
also being tapped into at the Shah Deniz field, but due to
international/USG sanctions, NICO is unable to ship its share
of this condensate through the BTC pipeline. NICO reportedly
plans to use a new energy terminal being constructed by a
private Azerbaijani company, and a related proposed pipeline
project, to transport its share of the oil condensate from
Azerbaijan to Iran.

15. Iran also continues to tout to international oil
companies in Baku its expanding energy infrastructure at the
Caspian port of Neka, and a related proposal to build a new
oil pipeline from Neka to Jask on the Indian Ocean.

Iran: Not a Business Magnet for Azerbaijanis...

BAKU 00001069 003 OF 003

--------------------------------------------

16. According to local interlocutors, Azerbaijani
entrepreneurs have little interest in investing in Iran due
to government interference and red tape, unreliability of
Iranian contracts, and faster and more lucrative returns on
investment offered domestically and by Russia, Ukraine, &and
even Moldova.8 Most Iranian agricultural products and hard
goods are also reportedly unattractive to Azerbaijani buyers,
&due to issues of price and quality.8

Iranian Business Activities in Azerbaijan
-----------------------------------------

18. In contrast, several local sources claim that Iranian
traders and entrepreneurs are increasingly active in
Azerbaijan. The Iranians are allegedly participating in the
Baku construction boom by purchasing apartments and by
providing wide varieties of inputs, including
Iranian-produced plaster, marble, furniture, kitchen wares,
and other materials. In addition, Iranian suppliers and
shippers allegedly play a large role in the purchase and
transportation to Azerbaijan of electronics, appliances, and
similar items from the UAE. Iranians are also active in
local service, tourism, and financial sectors.

19. For example, dual-citizenship Iranians own two
Baku-based bank companies, a telecommunications/internet
company, and agro-business and oil services companies, and
manage the major international hotel. An undetermined number
of Iranian-Azerbaijani (or other national) joint venture
companies also operate here, including at least one insurance
company that was shut down in March 2008 by the GOAJ Ministry
of Finance due to unspecified &repeated violations.8 Many
interlocutors report that tourism from Iran is visibly
increasing, and several travel agencies and small hotels are
allegedly catering to this business.

Proposed Tri-Country Railroad
-----------------------------

20. A proposed tri-country railroad consortium linking Iran
with Russia through Azerbaijan could have a significant
impact on regional commercial and economic relationships.
Although the proposal has been around for several years, it
may have picked up some steam recently following a Russian
government commitment to underwrite a feasibility study to be
completed by the end of this year. Both Iran and Russia have
expressed strong support for this railroad, while GOAJ
support has been more cautious.

21. A major alleged sticking point is alleged Iranian
inability up to now to dedicate the estimated 280 million
Euros needed to build its share of the proposed rail line;
other issues include a possible connection to Armenia
(opposed by Azerbaijan), and disputes within Azerbaijan over
the political, commercial, and economic costs and benefits
likely to result from the proposed project. According to
some sources, GOAJ support for this project (assuming it is
realizable) may be growing.

Iranian Medical Care: The Best in the Region?
--------------------------------------------- -

22. Compared to other regional options, Iranian medical
facilities and doctors are highly regarded, and Iran is
reportedly increasingly favored as a destination over
Azerbaijan and Russia by middle-class individuals in need of
significant medical care. Even an ethnic Russian
interlocutor asserted that, apart from expensive facilities
in Moscow and Petersburg, the quality of Iranian medical care
is the best in the region.
DERSE

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