RAIL BLOCKADE: TIGHTENING THE NOOSE AROUND ARMENIA

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 002656

SIPDIS

DEPARTMENT FOR EUR (DAS KENNEDY) AND EUR/SNEC (AMB. MANN)
NSC FOR BRYZA

E.O. 12958: DECL: 12/10/2014
TAGS: PREL ETRD AM AZ
SUBJECT: RAIL BLOCKADE: TIGHTENING THE NOOSE AROUND ARMENIA

Classified By: Ambassador John M. Evans for reason 1.4 (b) and (d)

SUMMARY
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1. (C) For more than twelve years, the blockade of Armenia
by Turkey and Azerbaijan has disrupted regional transit
corridors. All political considerations aside, regional
economic development has been stymied. Recent steps by
Azerbaijan to improve the effectiveness of its blockade have
tightened the noose. Armenia has a single active
international rail crossing, through Georgia. International
freight arriving at this point must either arrive via the
port of Poti (at significant cost),or through Azerbaijan.
Press reports suggest that Azerbaijan is pressing Georgia
hard to step up enforcement of agreements which prohibit
trans-shipment of cargoes to Armenia. More than 1000
railcars intended for delivery to Armenia, primarily carrying
fuel and grain, are now being held in Azerbaijan.


2. (C) The GOAM is feeling the pressure. In addition to the
immediate economic pressures of the blockade, a new rail line
is under consideration to link the Turkish city of Kars
directly to Georgia, bypassing Armenia. The GOAM offered
Turkey the use of the rail connection from Turkey to Georgia,
even if only for transit purposes. As he prepared for a
recent trip to Turkey, President Putin told the press he
would argue against construction of this line and the further
economic isolation of Armenia.


3. (C) We think the proposed bypass would remove the
incentive to develop the economic links which could bridge
the political gaps that divide this region. A rail bypass of
Armenia would work against U.S. regional goals. End Summary.

ISLAND IN THE STREAM
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4. (C) Situated on the historic silk road, less than 200
miles from the busy ports on the Black Sea and 350 miles from
the Caspian, Armenia nonetheless faces some of the highest
transport costs in the world; a recent World Bank report
compares costs as exceeded only by some "African landlocked
countries." Azeri and Turkish borders are closed. The road
to Iran is steep, narrow, and perilous in winter. Nearly
ninety percent of goods (other than diamonds) imported to or
exported from Armenia transit Georgia, where they incur high
transit costs, both in terms of formal customs fees and also
in what the World Bank report charitably termed "informal
transit costs."


5. (C) Goods that come to Georgia from the East which
transit Azerbaijan must be consigned to Georgia and then
resold to an Armenian importer, incurring customs duties and
taxes in both Georgia and Armenia. Armenian importers once
solved this problem informally with Georgian customs
officials. "Under Shevardnaze, we would just fix the
paperwork," a senior customs official told us recently, but
now Georgian officials are "unfortunately are following the
law."

Azerbaijan Steps Up The Pressure
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6. (C) Azerbaijan in recent weeks has stepped up the
pressure and is reportedly holding more than a thousand rail
cars, mostly laden with grain and fuel, at the Georgian
border on suspicion that they will be re-consigned to
Armenia. According to Deputy Minister of Trade Tigran
Davtyan, the goods held are in fact bound for Armenia.
Davtyan told us earlier that recent measures by Azerbaijan
have caused shortages of aviation fuel in Yerevan, forcing
Armenian airlines to stop in Sochi for refueling and driving
the price of aviation fuel to more than USD 700 per ton in
Yerevan. According to press reports, the Azeri Embassy in
Tbilisi has added a new officer whose sole duties are to
enforce a CIS agreement which prohibits the improper
re-consigning of cargoes.

THE COST TO BUSINESS IS HIGH
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7. (C) If the transit through Georgia is costly to
importers, it is prohibitively expensive to businesses
seeking to export from Armenia, whose goods -- save polished
gems -- tend to be heavy for their value. An American marble
importer told us that to bring marble from Armenia to
California he pays USD 4,000 per container, opposed to USD
2,000 from across the border in eastern Turkey. Another U.S.
company that exports molybdenum from Armenia to Western
Europe claims that the trip from Armenia to the Georgian port
of Poti is the most expensive part of shipping costs, at USD
1,500 per container. Armenian freight forwarders point out
that Georgia levies high transit fees (USD 300 per container
plus ecological charges--higher for Armenians than for
Azeris, despite the fact that both Georgia and Armenia are
members of the WTO. Freight companies also point to high
risks due to corruption and poor infrastructure in Georgia.
In total, Armenia's balance of payments shows a USD 90
million debit for external freight charges -- more than one
third the value of Armenia's total exports excluding precious
gems.

THE IRON CURTAIN'S REMAINING CHINK
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8. (C) In Soviet times the Gyumri-Kars railroad crossing
over the Arax river on the eastern Turkish border was the
only rail link between the Soviet Union and Turkey. We
recently visited the site and were struck by how much it
still seems like a scene out of the cold war. Russian border
guards still man Armenia's borders with Iran and Turkey and
our Armenian hosts had to seek their permission to approach
the border post.


9. (C) Today, the rails lie unused. Although idle since
1992, the railway from the border to Gyumri is intact. Three
years ago the Armenian Customs Service refinished a building
at the border for use as a customs house in the anticipation
that the border would open soon. The old Akhurik rail
station (five kilometers from the Turkish border) needs new
loading and unloading equipment, but the rails are
operational. (Armenian trains, like Georgian and other Soviet
trains, have a different gauge than Turkish trains. Cargo
would have to be transferred from the Turkish trains to
Armenian trains at Akhurik.) From Gyumri the current
Armenian railroad provides service to Tbilisi.

Armenia Seeks to Open Rail Link
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10. (C) Armenians are acutely aware of their isolation.
Foreign Minister Oskanian and his Deputy Tatoul Markarian
told us that Armenia seeks the rehabilitation of existing
rail infrastructure through the Caucasus. During a September
meeting, the press reported that President Kocharian asked
Georgian President Saakashvili to help re-open the rail
connection through Abkhazia, thereby providing a railroad
link to Russia. Russian Transport Minister Igor Levitin
recently announced that Russia agreed to re-open the line
through Abkhazia, but we understand this will take more than
a year to implement.


11. (C) Markarian told us the GOAM is willing to take bolder
steps to encourage the use of the Gyumri-Kars railroad
between Armenia and Turkey, including the use of the Armenian
rail corridor by Turkey and Georgia without insisting on full
normalization of trade ties. Turkish cargoes would be
permitted to transit to Georgia. Markarian said Armenia
offered to permit rail transit of cargoes bound for Iraq from
Turkey and has also offered transit through Armenia for
humanitarian goods from Turkey or Azerbaijan to the Azeri
enclave of Nakhichevan. Both offers were rejected in favor
of maintaining the blockade, he asserted.


12. (C) The governments of Azerbaijan, Georgia and Turkey
reportedly made a proposal to the TRACECA (Transport Corridor
Europe Caucasus Asia) forum to solicit EU financing to build
a new route from Kars to Tbilisi, going around Armenia.
Armenia's representative to TRACECA, Gagik Grigorian, told us
that the EU's current position on the proposal to build a new
railway was to encourage the use of existing rail
infrastructure instead. Grigoryan admitted that the
realization of the new railway would ultimately be
commercially determined, but contrasted the situation from
the Baku-Tbilisi-Ceyhan pipeline dispute: "If the demand is
there (for cargo from Kars to Tbilisi) the railway already
exists. Rather than build a new railroad let's operate the
existing system." Russia has already spoken out against the
new rail link. In a press interview given in advance of his
December 6-7 trip to Turkey, President Putin said that he
planned to raise Russia's opposition to the new rail link as
it would increase Armenia's isolation and would be a step
away from resolving the ongoing conflict.

Comment
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13. (C) The GOAM sees Azerbaijan's new push to enforce its
blockade in the context of other efforts to force Armenia to
concede in negotiations to end the conflict in
Nagorno-Karabakh. During a recent visit to Yerevan, Heikki
Talvitie, the EU's Special Rep for the South Caucasus, told
us that he saw a new pattern of actions by Azerbaijan to
isolate Armenia in every way possible, and cited Azerbaijan's
efforts to raise N-K at UNGA as an example.

14. (C) However legal Azerbaijan's actions to enforce the
blockade may be and however legitimate -- from its view --
its political reasoning is, the economic division of the
South Caucasus works against our goal of developing regional
stability. While we believe it likely would be
counterproductive (and probably pointless) for outside actors
to engage any of the players in the current border dispute,
we believe it would be a blow to efforts to build regional
ties to support a rail bypass of Armenia. Encouraging the
use of existing rail infrastructure through Armenia rather
than the construction of a new route around could result in a
small step towards the rapprochement between Turkey and
Armenia.
EVANS