Iran: Relations With Key Central Asian States

CRS Report for Congress
Iran: Relations With Key Central Asian States
Kenneth Katzman and James Nichol
Foreign Affairs and National Defense Division
Iran sees the Central Asian region as an arena for reducing its own isolation.
Hoping to make itself an attractive economic and political partner to these states, Iran
has been cautious in supporting radical Islamic opposition movements in the region.
Several Central Asian states are proceeding with or contemplating energy projects that
transit Iran. These projects present the Administration and Congress with the dilemma
of how to keep Iran's financial resources constrained while at the same time fostering
economic and political development in Central Asia. Provisions in S. 2334, covering
FY1999 foreign operations appropriations (S.Rept. 105-255), as well as in S. 1344, the
Silk Road Strategy Act of 1997, appear intended to reduce Central Asian incentives to
cooperate with Iran. This report will be updated to reflect legislative developments.
Background 1
Successive U.S. Administrations have identified Iran's support for radical Islamic
movements as a key justification for containing and applying sanctions against Iran.
During the 1980s, Iran attempted to "export" its Islamic revolution to Lebanon,
Afghanistan, Sudan, Algeria, and the Persian Gulf states. During the 1990s, Iran has
built ties to Palestinian Islamic movements opposed to the Arab-Israeli peace process.
After the Soviet Union broke up in 1991, U.S. analysts and policymakers feared that Iran
would attempt to use its varied ethnic, linguistic, religious, and cultural ties to Central
Asia to cultivate pro-Iranian radical Islamic opposition movements in the region.
Tajikistan, which does not border Iran but whose people are of Persian origin, and
Azerbaijan, which shares with Iran the predominance of Shiite Islam, appeared to be
natural targets for increased Iranian political and religious influence.
The worst fears of some in the United States and Central Asia about Iran's regional
intentions apparently have not been realized. Iran's revolutionary purists, who wanted to
take advantage of the Soviet collapse to push Iran's ideology, quickly lost out to Iranian
pragmatists who saw Central Asia as an export market and a potential avenue to frustrate

1In this report, Azerbaijan, Kazakstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan are
considered as Central Asian states. Azerbaijan, Kazakstan, Russia, Turkmenistan, and Iran
constitute the Caspian Sea littoral states.
Congressional Research Service ˜ The Library of Congress

U.S. attempts to isolate Iran. Iran's leaders apparently also believed that political
meddling in Central Asia, which Russia considers its "sphere of influence," could
jeopardize its ties to Russia. Russia has been a major supplier to Iran of conventional
weapons, including submarines, tanks, and combat aircraft, as well as a nuclear reactor
(under construction). In June 1998, Iran allegedly tested an intermediate-range missile
of North Korean design, reportedly with Russian assistance.
Since 1992, Iranian leaders have been stressing to their Central Asian neighbors the
economic benefits of dealing with Iran. Iran argues that it has the most developed
transport network and well-equipped ports on the Persian Gulf and Sea of Oman, and that
rail lines could be easily extended. Some in Central Asia have looked at Iran as a market
for raw materials and industrial products such as cotton fiber. Currently, Iran still is a
minor trade partner for the states of the region, but it has established economic
commissions with most of the states to expand trade. Iran's emphasis on economic
cooperation has been reinforced since the May 1997 election of a relative moderate,
Mohammad Khatemi, as Iran's President.
Either by design or lack of opportunity, Iran has not developed significant political
influence in the Central Asian countries. Iran provided some support to a coalition of
Islamic and democratic movements that briefly seized power in Tajikistan (September -
December 1992). Iran also has provided sanctuary to Tajik Islamic opposition leaders
such as Akbar Turajonzada and reportedly has built up an intelligence network there.2 At
the same time, Iran has built ties to the government of Imomali Rakhmanov and helped
broker a ceasefire (September 1994) and a further peace settlement (June 1997) in the
internal conflict in Tajikistan. The United States accepted a statement in the communique
of the P-8 summit in Denver in June 1997 praising Iran's mediation role in Tajikistan.
Iran also has tried to mediate in the dispute between Armenia and Azerbaijan over the
disputed Nagorno-Karabakh territory. Over the last few years, Iran has worked to
improve often contentious relations with Azerbaijani President Heydar Aliyev, and has
offered only minor support to a pro-Iranian Islamic Party in Azerbaijan.
Among the other Central Asian states, Turkmenistan has developed the warmest ties
with Iran. President Niyazov in June 1997 termed Iran the "closest friend and neighbor
of Turkmenistan," and the two countries opened a major rail link in May 1996.
Uzbekistan's relations with Iran, earlier cool, have warmed somewhat. Uzbekistan openly
backed a May 1995 U.S. trade and investment ban on Iran. In 1997, after Iran's apparent
good-faith mediation efforts in Tajikistan, Uzbekistan's President Islam Karimov said he
supported expanded trade and transport ties with Iran. Kazakstan and Kyrgyzstan have
consistently been less concerned than the other Central Asian states about Iran's intentions
in the region and have steadily broadened economic ties with the Islamic Republic.
Energy Relationships
As it became apparent in the mid 1990s that the expected Iranian effort to gain
"influence" in Central Asia was not materializing, the Central Asian states began to see
Iran as a viable and desirable partner to help them exploit the resources they would need

2Gertz, Bill. Intelligence Agency Highlights Threat of Anti-American Terror in Tajikistan.
Washington Times, December 9, 1997.

to develop economically. According to the U.S. Energy Department, proven and possible
oil reserves in the Caspian region are 171-191 billion barrels of oil and 564-665 trillion
cubic feet of natural gas. Proven reserves are much smaller, but are still comparable to
North Sea oil reserves and North American gas reserves. The landlocked Central Asian
states were anxious to develop alternatives to Russia as a transit route for exporting their
energy resources. Iran has argued that the shortest and least expensive route to export
these resources runs through Iran. To bolster this view, and to discourage U.S. energy
firms from proceeding with projects, Iran has maintained that exploitation of oil and gas
resources in the Caspian Sea, and related uses, cannot move forward until the status of the
sea is worked out. Azerbaijan has led objection to this position, in part because its
Caspian Sea projects are more advanced than those of other littoral states.
Despite widespread concerns about Iranian foreign policy, Iran's political stability
gives Iran an advantage in competing for projects over some regional countries, such as
Afghanistan. Two energy teams3 are vying for the right to build a gas pipeline from
Turkmenistan to Pakistan, through Afghanistan. Although the Clinton Administration
endorses such efforts, it admits that a trans-Afghan pipeline is unlikely as long as inter-
factional strife continues in that country. Major energy projects that involve Iran and
Central Asian states, either under way or planned, include those discussed below.
!In mid-1997, Kazakstan conducted a test swap of oil to Iran, under plans for Iran
to use the Kazak oil in its northern refineries and to then export an equivalent
amount of its own oil from Persian Gulf terminals in the south, crediting
Kazakstan for the shipments. Technical and other problems, however, have put
this project on hold.
!On December 29, 1997, the President of Iran, Mohammad Khatemi, and of
Turkmenistan, Saparmurad Niyazov, inaugurated a 125-mile pipeline linking the
two countries' gas transport networks. Initially, Iran will use the Turkmen gas in
its northeast to offset the $160 million Iran funded to construct the pipeline. Under
a May 1997 memorandum of understanding between Turkey and Turkmenistan,
the Turkmen gas will eventually be exported through Iran to Turkey when an Iran-
Turkey pipeline, agreed to in August 1996 and now under construction, is
!One day earlier, Khatemi and Niyazov were joined by Turkey's Prime Minister
Mesut Yilmaz in endorsing a plan by Royal Dutch Shell to study the feasibility of
a larger 940-mile gas pipeline from Turkmenistan to Turkey, through Iran. The
energy firm envisions that pipeline as eventually transporting gas from Central
Asia and Iran to Europe.
!Kazakstan is in discussions with Iran for the construction of an oil pipeline from
Kazakstan's oil fields to Iran's Persian Gulf coast. Iran is offering to finance
construction of that pipeline. For Kazakstan, the pipeline to Iran would cost a
fraction of that envisioned in an alternate pipeline corridor, strongly backed by the
United States, that would avoid Iran by running from Baku (Azerbaijan's capital)

3One grouping competing for the project is led by the U.S. firm UNOCAL, the other is led by the
Argentine company Bridas.

to Turkey's Mediterranean port of Ceyhan. To link this pipeline with Kazakstan,
tanker or undersea pipeline transport are contemplated. A provision of S. 2334,
covering FY1999 foreign aid appropriations (S.Rept.105-255) requests an
Administration report, by March 1, 1999, on the status of U.S. initiatives to
promote financially the Baku-Ceyhan pipeline route.
!Azerbaijan has given Iranian firms 10% stakes in two consortia (out of seven)
currently developing Azerbaijan's oil and gas resources. In June 1998, the main
foreign oil consortium in Azerbaijan (Azerbaijan International Operating
Consortium, AIOC), which includes some U.S. firms, acknowledged it had begun
talks with Iran on oil swap arrangements.
!In June 1998, Iran solicited bids for a $400 million oil pipeline from Iran's Caspian
port of Neka to Iran's northern refineries. The plan is intended to encourage oil
swaps between Iran and Caspian region oil producers and could eventually form
part of a new energy route from the Caspian to Iran's Persian Gulf ports.
!Turkmenistan has transported some crude oil by road and rail through Iran to
Persian Gulf ports. However, Asian economic turmoil has reduced this trade, and
Turkmenistan has shifted to Western exports through Georgian and Russian ports.
U.S. Policy
The financial attractiveness of energy export routes through Iran has run up against
the commitment of the Administration and Congress to constrain Iran's financial and
military capabilities. An April 1997 State Department report on Caspian energy
development4 stated that "the United States strongly opposes activities which significantly
contribute to Iran's revenues and petroleum sector, increasing the funds available to
support international terrorism and development of weapons of mass destruction." A
chief congressional backer of this position has been Senator Sam Brownback, who said
in a November 5, 1997, speech on Central Asia that "If the floodgates open through Iran,
the eastern Caspian will certainly fall into the Iranian sphere of dominance and the South
Caucasus will lose out on its opportunity to prosper." In October 1997, Sen. Brownback
introduced a bill, the Silk Road Strategy Act of 1997 (S. 1344) that provides incentives
for the Central Asian states to cooperate with each other and with the United States, rather
than with Iran. The bill was reported to the full Senate on June 23, 1998.
While trying to persuade the Central Asian states to exclude Iran from major energy
projects, the Administration apparently has sought not to interfere with the overarching
objective of energy development in Central Asia. In May 1995, President Clinton
imposed a U.S. ban on trade and investment with or in Iran and in any territory or marine
area (apparently referring to portions of the Caspian) over which Iran claims sovereign
rights or jurisdiction. However, the ban specifically allowed for licensing, on a case-by-
case basis, U.S. participation in temporary market-based swaps of crude oil from the
Caspian Sea Basin in support of energy projects in Turkmenistan, Azerbaijan, and

4This report was requested by the conference report on FY 1997 foreign aid appropriations (P.L.


Kazakstan. One U.S. firm, Mobil Corp., has already applied for a U.S. license to engage
in oil swaps with Iran; no decision has been announced on that application.
Some observers believe the overarching goal of promoting Central Asian
development -- coupled with a U.S. desire to reach out to the more moderate new
President of Iran -- has made the Administration hesitant to apply the Iran-Libya
Sanctions Act (P.L. 104-172, ILSA), to Central Asian energy projects that include Iran.
5 The ILSA law, signed August 5, 1996, requires U.S. sanctions on foreign firms that
make substantial investments (over $20 million in one year) in Iran's energy sector.6 At
a July 23, 1997 hearing of the House International Relations Committee, State
Department officials said that the Iran-Turkey-Turkmenistan project discussed above was
not sanctionable under that law because Turkey had agreed to purchase gas from
Turkmenistan, not Iran. As currently constituted, Iran will earn only transit fees from the
project. Whether or not it purchases Iranian gas, Turkey maintained that its pipeline
with Iran was not sanctionable under ILSA because Iran and Turkey were each
constructing portions of the pipeline on their respective sides of the border. Many outside
experts agreed with the Turkish interpretation that this did not meet the definition of
sanctionable investment stipulated by ILSA.
The international energy community was further encouraged by a May 18, 1998 U.S.
decision not to sanction a September 1997 deal between Iran and Total SA (France,
Gazprom (Russia), and Petronas (Malaysia) to develop Iran's South Pars gas field. The
Administration judged the deal to meet the criteria for ILSA sanctions, but it waived the
sanctions on national interest grounds, and indicated that similar deals by EU firms would
also receive waivers. Many experts viewed the Administration waivers as an effort not
only to avoid trade frictions with the EU, but as part of a U.S. effort to signal positively
toward Iranian President Mohammad Khatemi. Some observers believe that imposing
sanctions under ILSA could undermine the more moderate Khatemi as he is attempting
to consolidate his position in Tehran.
In late 1997, and especially following the May 18 ILSA waivers, the Administration
has sought to counter the widespread interpretation that it is softening its position on
Central Asian energy routes through Iran. apparently recognizing the widespread
interpretation of U.S. policy, the Administration sought to articulate more clearly its
policy on energy projects that transit Iran. On October 23, 1997, in testimony before the
Subcommittee on International Economic Policy, Export and Trade Promotion of the
Senate Foreign Relations Committee, Under Secretary of State Stuart Eizenstat said, "Let
me be clear... We do not support any pipelines through Iran carrying either Iranian oil and
gas to Western markets or that of any other country." Referring to the July 23 testimony
about the Iran-Turkey pipeline, Eizenstat said, "This announcement has been widely
misinterpreted to mean that the [United States] has approved a pipeline across Iran. This
is definitely not the case...should we find evidence of investment activity which could
enhance Iran's ability to develop its own petroleum resources, we will take appropriate
actions under ILSA."

5U.S. firms were already banned from making such investments in Iran under the May 1995
executive order discussed above and a March 1995 executive order.
6U.S. firms were already banned from making such investments in Iran under a March 1995 and
a superseding May 1995 Executive order.

In November 1997, Energy Secretary Federico Pena visited Turkey and the Caspian
region in an attempt to build support for a trans-Caspian pipeline route rather than one
that transits Iran. President Clinton pressed that same agenda during a visit to
Washington in mid-November 1997 by Kazakstan's President Nursultan Nazarbayev. He
reportedly told President Clinton he would support that route over one that transits Iran
if the United States could arrange financing for the trans-Caspian route by October 1998.7
During Turkmen President Saparamurad Niyazov's April 1998 U.S. visit, the
Administration similarly advocated alternatives to trans-Iranian oil and gas shipments, and
proffered some study aid, but Niyazov reportedly reiterated his support for Iran as one of
multiple transshipment routes contemplated for large-scale Turkmen energy exports.
On June 3, 1998, two weeks after the ILSA waivers, Under Secretary of State
Eizenstat testified before the House International Relations Committee that the United
States "remain[s] strongly opposed to oil and gas pipelines which transit Iran and that, as
a policy matter, we will continue to encourage alternative routes for the transport of
Caspian energy resources, such as trans-Caspian pipelines and the Baku-Ceyhan
route....We will carefully examine any proposals for trans-Iranian pipeline construction
for possible implications under ILSA, and any other relevant laws, and take appropriate
action. In view of our strong opposition to such pipelines, we intend to continue to
challenge them."
Despite the strong Eizenstat and other U.S. statements, many in the oil industry
continue to believe that U.S. resolve to press for routes that exclude Iran is weakening.
They received some support for their analysis from a June 18 State Department press
briefing by Department spokesman Jamie Rubin. In answering reporter questions, Rubin
suggested that the United States opposed reliance on Iran as an export route, saying that,
the United States does not "believe it is in any country's best interest to have Iran as the
only transit corridor for Caspian oil and gas." The statement left open the possibility that
the United States
might acquiesce to the
development of some
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Prepared by CRS for FAND.
7Ottaway, David and Morgan, Dan. U.S. Backs Non-Iranian, 'Eurasian' Corridor West for
Caspian Sea Oil. Washington Post, November 20, 1997.