Iranian Influence in the South Caucasus and the Surrounding Region

Introduction

On behalf of the Foundation for Defense of Democracies, I would like to thank Chairman Burton and Ranking Member Meeks for the opportunity to submit written testimony for this subcommittee’s hearing on Iran’s influence in the South Caucasus.

Both the Caucasus and Central Asia are Iran’s traditional backyards. Historically, the Persian Empire competed for influence over both areas with the other two erstwhile empires – Czarist Russia and Ottoman Turkey. Today, the South Caucasus remains a transit point for commercial routes – straddling the middle ground between Europe, Russia, Central Asia and the East and well-positioned on the old Silk Route. The territories of Armenia, Azerbaijan and Georgia have also become critical for Europe’s energy strategy. Old conflicts and new opportunities draw Russia, Turkey and Iran into the area in search of influence.

Iran’s goals in the South Caucasus are threefold:

1.     Use its expertise in the energy and infrastructure sectors to expand its influence through soft power;

2.     Expand trade and enhance diplomatic cooperation to fend off Western influence in the area; and

3.     Establish a firm foothold in the financial and business sectors of the region to facilitate its efforts to evade sanctions.

In this pursuit, Iran has built deep and growing networks in the Caucasus, which are facilitated by the fact that there are no visa requirements for Iranians traveling to Armenia, Azerbaijan, Georgia and Turkey. The combination of visa-waivers, attractive business opportunities, geographic proximity, and sometimes lax law enforcement at frontier crossings, all provide Iran with an ideal sanctions busting environment.

There has been a dramatic proliferation of Iranian, and Iranian-supported companies in the region. In Armenia, as of 2010, there were 818 reported companies with Iranian capital.[1] According to official 2012 data, another 2337 exist next door in Turkey.[2] Iranian businesses are reportedly present in Georgia’s Poti Free Industrial Zone,[3] in Georgia’s banking sector and its infrastructure as discussed below. Iranian companies with links to Iran’s proliferation efforts have won important tenders, mainly in the hydropower sector, in Armenia, Azerbaijan and Georgia.[4]

My testimony today will explore four case studies about how Iran is engaging in sanctions busting activities in this region in order to protect its investments and move hard currency in and out of the country. Iran’s activities in the Caucasus are significant because they mitigate Iran’s economic isolation and ease the economic pressure which the international community put in place in order to convince Iran to give up its nuclear program. 

I will conclude with policy recommendations aimed at strengthening bilateral ties between the United States and the Caucasus as a way to undermine Iran’s networks.

Armenia: Iran’s soft power as a backchannel for proliferators[5]

Armenia is ripe for Iranian sanctions manipulation because land-locked Armenia is dependent on Iran as an export route. Because of tensions with Turkey over the Armenian genocide and with Azerbaijan over Nagorno-Karabakh,[6] Armenia’s borders with Turkey and Azerbaijan are closed. Armenia is highly dependent on Russia and seeks to diversify its energy sources as well as its trade options. Georgia is too small an economy to offer an alternative. Iran, which supported Armenia in its conflict with Azerbaijan, is therefore a natural choice.

Iran has taken full advantage of this opportunity.

Iranian circumvention of sanctions in Armenia is facilitated by extensive corruption and lack of transparency in the country. Armenia ranks 105 of 176 countries surveyed by the 2012 Global Corruption Index.[7]

It is likely for these two reasons – as well as the general lack of export control and sanctions enforcement in Armenia – that we see significant IRGC involvement in infrastructure and energy projects in Armenia.

These projects generate revenue for Iranian companies and enable them to procure technology and use the local banking system.

Following are three examples of such activities:

The Iranian company involved in the development of an oil pipeline between Tabriz, Iran and Yeraskh, Armenia is the National Iranian Oil Products Refining and Distribution Company (NIORDC).[8] It is a subsidiary of the National Iranian Oil Company (NIOC), which was designated by the U.S. Treasury Department for its links to the IRGC. [9]

Estimates indicate that the pipeline will be able to pump 440,000 tons of oil from Iran to Armenia annually while Armenia’s annual total demand for oil and diesel fuel is 250,000 tons. [10] This discrepancy raises concerns that the IRGC may siphon the remaining oil for smuggling at a significant profit.

This pipeline will flank the already existing gas pipeline, which was completed in 2007, thanks to funding coming from the Russian company Gazprom and the IRGC-linked and U.S.-sanctioned Iranian Bank for Export and Development. The company in charge of the project, SUNIR, is a consortium of Iranian companies that includes sanctioned proliferators Mahab Ghodss Consulting Engineering Co. (designated by OFAC in 2010),[11] Mehrabad Industrial Complex (blacklisted in 2008 by the British government as an entity of potential concern for WMD-related procurement)[12] and Fulmen Co., the owner of Mehrabad and a company sanctioned by the European Union in July 2010 for its involvement in “the installation of electrical equipment on the Qom/Fordoo [sic] site at a time when the existence of the site had not yet been revealed.”[13]

Iranian expertise is also at hand to build the Meghri Dam on the Aras River. The 261 Mw project is being carried out by Iran’s Farab Co. At the time of the original agreement, the company was chaired by Rasoul Zargarpour.[14] Mr. Zargarpour is a board member of the International Development Construction Company on behalf of Bank Saderat’s Broker Company (Bank Saderat is under U.S. and EU sanctions for proliferation concerns) and for Tose’e Investment Company. Prior to entering the business sector, Mr. Zargarpour was deputy minister at the Jihad Sazandegi – the wartime IRGC-affiliated Ministry of Construction Jihad.[15]

As previously mentioned, Iran uses these infrastructure projects to generate hard currency and access the international financial system, undermining the economic pressure that is behind international sanctions.

Azerbaijan: drug money, trade opportunities and political tensions

For Iran, Azerbaijan represents both a threat and an opportunity. The threat derives from the fact that the Azeri regime in Baku has thrown its lot firmly with the West, is fiercely secular, and appeals, culturally and linguistically, to the Azeri and Turkic populations of North-Western Iran. These populations share the same ethnic background and are increasingly restive due to the regime’s stubborn refusal to recognize their cultural rights. But business opportunities abound and, given that Azerbaijan, much like Armenia, scores very low on Transparency International’s Corruption Perception Index (it ranks 139 out of 176),[16] there are good avenues for illicit activities as well.

Much like in Armenia, companies like SUNIR, which have been linked to Iran’s nuclear program, have been actively seeking business opportunities in Azerbaijan. For example, in 2006, SUNIR was responsible for “Design, Procurement, Construction & Commissioning” of power lines and substations in the southern Azerbaijani area of Astara.[17]

Despite Iranian anxieties about their own restive Azeri minority and Azeri concerns about Iranian support for Islamic revivalist groups inside Azerbaijan, trade opportunities and exchanges are facilitated by an open border and a lack of visa restrictions. Iranians travel frequently to Azerbaijan for business and tourism.

The lax border controls have also been exploited for other reasons – there are growing reports that Iran’s IRGC commanders control a smuggling drug network that provides refined heroin for European markets through Azerbaijan. Leaked U.S. Embassy cables from 2009 suggest that drugs were being refined in IRGC-controlled labs in Tabriz – the capital of Iran’s Azeri province – and then smuggled north through criminal networks. These reports were further substantiated in a Times of London article from November 2011 which posited that “Iran’s hard line stand against narcotics conceals a lucrative business smuggling heroin, opium and methamphetamine, spearheaded by the Guards, the supposed defenders of the Islamic Revolution.”[18]

For years, Iran has benefited from international support in its war against drug trafficking. Parts of the Iranian regime, however, are benefiting from it by having it both ways – getting foreign technology and aid to fight drug lords while making a profit by selling part of the heroin they seize to European markets through smuggling networks in the Caucasus.

As we saw in the plot to assassinate the Saudi ambassador in Washington DC, drug trafficking routes can be used to facilitate the flow of terrorist operatives and terrorist financing. The United States should be particularly concerned about the use of these networks to move al-Qaeda terrorists between Iran and Europe.[19]

Georgia: Dubai on the Black Sea?

Much like Armenia, Georgia feels its geostrategic circumstances warrant closer ties with Iran. As a consequence, Georgia is very open for business with Iran. Since 2006, there have been dozens of cooperation agreements signed between the two countries, ranging from environmental issues[20] to media,[21] to a cooperation agreement between the two countries’ chambers of commerce.[22]

There are biweekly flights between Tehran and Tbilisi, and Batumi has become a regular vacation spot for Iranians in part because of the lack of visa restrictions for Iranians traveling to Georgia. While much of this travel may be above board, in the past, criminal networks have invested heavily in the tourism industry as a way to launder money and raise additional funds. Additionally, the free flow of travel allows nefarious actors and normal travelers alike to move between Georgia and Iran.

As a consequence, Iranian investment in Georgia is up significantly, and there is evidence of Iranian involvement in the country’s banking system. Iran is also heavily involved in important developments in the field of hydropower. Much like Armenia and Azerbaijan, Georgia welcomed SUNIR for a twin-dam project at two points of the Khobi River, upstream from Poti.[23] A Memorandum of Understanding was signed between the two countries in February 2010, indicating the project would be financed by the Iranian Export Development Bank, although leaked U.S. Embassy Cables suggest that U.S. pressure may have led to the exclusion of the IEDB.[24] Information from Georgia’s Ministry of Energy indicates that the project is moving forward and being financed by the Georgian Investment Group.[25] It is unclear at this time whether this financial institution has any links with designated Iranian banks; however, given Iran’s pattern of using little-known foreign banks to facilitate banned financial transactions, additional attention should be paid to this situation.

In particular, it is important to focus on Iran’s growing investment and business in Georgia’s Free Industrial Zone (FIZ) in Poti, a port city on the Black Sea. In 2008, the Georgian government signed an agreement with the Ras al Khaima Investment Authority to create this FIZ, modeled after Dubai.[26] That itself should raise red flags for U.S. policy makers given how Dubai has been used by Iran as a transshipment and financial hub.

The Poti Free Industrial Zone, now managed by Ras al Khaima Investment Authority (RAKIA)-Georgia has in turn opened the doors of the FIZ to Iranian companies – including Iran’s Chemical Commercial Company (formerly known as Polychem), which has office and warehouse space at the FIZ. The company produces chemicals, fertilizers and poison, the export of some or all of which may be banned under EU sanctions targeting petrochemicals.[27]

According to the Poti Free Industrial Zone website, in March 2012, the FIZ, in cooperation with the Iranian Business Council in Dubai, held “a presentation to discuss how Iranian companies can set up businesses in the zone. More than 100 manufacturing and trading companies participated in the event… As a result, several companies made an agreement with RAKIA Georgia FIZ LLC to set up their businesses in Poti FIZ.”[28]

U.S. policymakers should be particularly concerned about the proliferation of Iranian companies in Poti because this move adds another Black Sea port to the list of transshipment points Iran can rely on in the area. Iran already has access to Trabzon, in Turkey, for transshipment arrangements. The distance between Poti and Trabzon is approximately 120 nautical miles. Trabzon has an Iranian General Consulate and thriving trade with Iran. The port has a sister agreement with the IRGC-controlled container terminal of Shaheed Rajaee in Bandar Abbas, Iran. Meetings between local chambers of commerce are frequent to promote cross-border trade. And the Trabzon-Tabriz route is an ancient trade route for merchandise on its way to the Gulf and the Indian Ocean.

Although problematic trade such as Turkish gold exports to Iran is unlikely to go through Poti and the Caucasus – when it can travel more directly to Iran through the Turkish-Iranian border – larger or more suspicious cargoes might benefit from the generally lax nature of controls at a FIZ and go undetected and then transit by land into Iran.

Beyond the Caucasus: Radioactive Cargo Shipment from Kazakhstan to Iran

In April 2008, a cargo of radioactive material en route from Kazakhstan to Iran was stopped at the Kyrgyzstan-Uzbekistan border. The cargo had already passed through a number of border checkpoints without being stopped.[29]

In addition to the proliferation concerns that this case raises, the broader issue is Iran’s role as the major transit point between the Indian Ocean and Central Asia. There is a large, unregulated amount of commercial movement between Iran and its northern neighbors in Central Asia because of the overall lack of Iran sanctions enforcement and general customs controls. Much of this traffic is now potentially going through the Caucasus as well, relying as it does on Caspian Sea routes and new transit routes that Iran is opening to the Black Sea through Turkey, Armenia and Georgia.

Much of this traffic goes through Iranian ports in the Persian Gulf, inland through Iran, and then, depending on its final destination, it will continue overland across into Turkmenistan or across the Caucasus, or by water from any Iranian Caspian Sea port. And in most cases, control over container traffic at ports is in the hands of the IRGC.

The main transit point for container traffic in the Gulf is at Bandar Abbas, whose container terminal of Shaheed Rajaee is under the control of the IRGC. Shaheed Rajaee is operated by Faraz Royal Qeshm LLC, the successor company to Tidewater, an IRGC company sanctioned by the United States for proliferation concerns.[30]

Iran’s IRGC-controlled port operators were involved in many past instances of arms smuggling and proliferation activities. As Iran controls container traffic in a key developing north-south corridor of commerce, opportunities for IRGC efforts to suborn commercial traffic to their smuggling activities will inevitably increase. The IRGC is likely to continue to use both normal and nefarious trade routes to raise and move capital, proliferation-sensitive goods, and embargoed products. Furthermore, the more these countries along these trade routes are dependent on  and integrated with Iran, the less likely they are to participate in international trade and financial sanctions.

Sanctions Busting and Foreign Exchange Reserves

Beyond the concerns with specific sanctions busting cases, the larger issue at stake in the region is the way that Iran uses these types of situations to protect its investments and enhance its foreign exchange reserves. Iranian penetration of the commercial and banking sectors of neighboring countries helps Iran and its companies earn revenues in much needed foreign currency and rely on a foreign but friendly banking system to conduct its own financial activities outside the sanctions-squeezed domestic banking sector of Iran. This is of particular concern for companies linked to the IRGC and Iran’s proliferation efforts.

By taking these steps, Iran is staving off the economic cripple date that is vital to the efficacy of international sanctions.

In order for economic sanctions to change the regime’s calculus regarding nuclear weapons, Supreme Leader Ali Khamenei needs to be put to a choice between his nuclear program and his regime. With the continued influx of hard currency from Iran’s sanction busting schemes, Iran will be able to hold off the economic cripple date that could cause massive unrest and threaten the regime’s hold on power.

In order to have time for the economic collapse to fully impact the regime’s calculations, the cripple date should arrive at least six months before Iran crosses the nuclear threshold so that the impact of economic collapse can be fully felt by the public and the political system. As it currently stands, however, based on FDD’s analysis, Iran will cross the nuclear threshold before the economic cripple date. Massively enhanced U.S. and international sanctions are necessary to move the economic cripple date forward. However, Iran’s networks in the Caucasus help Iran to lessen the impact of even enhanced international sanctions.

Conclusion and Recommendations

The first step in the process of curbing Iran’s nefarious activities in the Caucuses is to pass additional sanctions like those included in the Senate version of the National Defense Authorization Act of 2013. This sanctions package targets Iran's energy, shipbuilding, shipping and ports sectors and authorizes sanctions against foreign companies violating these measures. The package also accelerates the designations of Iranian front companies and permits purchases of Iranian natural gas but only if the payment is made in local currency, not precious metals like gold.[31]

Additionally, since we are witnessing significant sanctions-busting and illegal or gray activity as it is, U.S. sanctions measures alone are unlikely to be effective at stemming Iran’s activities in the Caucasus. Coupled with stronger sanctions measures, the United States, working with European allies, should take proactive steps to strengthen relations with the countries in the Caucasus.

1)    Strengthen trade ties: Countries in this region, specifically Armenia and Georgia, are looking towards Iran for trade reasons. Therefore, the United States can undermine Iranian influence by enhancing bilateral trade and business ties with these countries in order to serve as a counterweight to Iran in the economic and foreign policy calculations of these countries. The U.S. embassy and U.S. trade representatives should organize business cooperation missions and encourage U.S. companies to consider investments in the Caucasus. Stronger economic ties would better position the United States to discuss Iran sanctions enforcement with these countries.

2)    Strengthen defense cooperation: Given the region’s value in terms of energy resources and geography if military steps become necessary to curb Iran’s nuclear program, the United States should enhance military-to-military relations with these countries as an alternative to military cooperation with Iran.

3)    Review U.S.-Georgia relations: Following the 2008 war between Russia and Georgia, U.S.-Georgian relations have suffered. Georgia views this situation as a partial reason for warming up its ties with Iran. The United States should conduct a comprehensive, interagency review of U.S.-Georgia policy to consider what steps can be taken to repair this relationship and improve U.S.-Georgian cooperation on sanctions enforcement.

4)    Provide Training and Equipment for border and customs controls: There are regions along the borders of many of these countries that suffer from lawlessness and a general lack of border control. Additionally, the systematic corruption in many government agencies encourages illicit, or at least unregulated, trade. The United States should work with countries in the Caucasus to provide training, technology, and assistance to improve border controls and customs enforcement.

5)    Leverage communications to the minorities in Iran and the countries in the Caucasus: The Radio Free Europe’s broadcasts in each of the countries can be leveraged to highlight the pro-American messages and discuss Iranian regime’s human rights abuses against its citizens including ethnic minorities. Additionally, Congress has previously appropriated funding for Azeri language broadcasts into Iran. Congress should exercise oversight to determine if these broadcasts are being conducted and if they are effectively communicating the desired messages.

6)    Use international forums to highlight Iran’s role in drug smuggling: The U.S. should use its weight in the UN Office on Drugs and Crime – a primary supplier of aid to Iran in its fight against drug trafficking – to prevent Iran from playing the victim in the international fight against drugs and be held accountable for its role in smuggling drugs through Azerbaijan and profiting from such traffic while benefiting from international aid to its police forces.

On behalf of the Foundation for Defense of Democracies, I thank you again for the opportunity to submit this written testimony.