AFGHAN/IRAN TRANSIT TRADE - A GROWING EMBRACE

UNCLAS SECTION 01 OF 04 KABUL 001946

SIPDIS

DEPARTMENT FOR SA/FO, SA/A, EB/BTA FOR MBGOODMAN, P STAFR
(MANUEL)
TREASURY FOR PARAMESWARAN
NSC FOR AHARRIMAN, KAMEND
COMMERCE FOR SUE HAMROCK
USTR FOR GHICKS

SIPDIS
SENSITIVE

E.O.12958: N/A
TAGS: ECON ETRD PREL AF
SUBJECT: AFGHAN/IRAN TRANSIT TRADE - A GROWING EMBRACE

REF: A. Kabul 1186

B. 05 Karachi 1248

C. New Delhi 2603

KABUL 00001946 001.6 OF 004



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SUMMARY
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1. (SBU) Afghanistan is deepening its transit trade ties
with Iran. Afghan companies are increasingly favoring Iran
to transit goods out of frustration with perceived shipping
delays, surcharges and corruption in Pakistan. The GoA
recently signed a new transit trade agreement with Iran and
both the Indian and Iranian governments are cooperating to
upgrade Iran's transportation infrastructure near the Afghan
border to facilitate trade and create a transit corridor
alternative to Pakistan. While GoA officials regularly
express their anxieties about deepening commercial
engagement with Iran, such concerns are tempered by
Afghanistan's eagerness to expand its trade options and
reduce its transit trade dependence on Pakistan. End
Summary.

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IRAN AND AFGHANISTAN SIGN NEW TRANSIT AGREEMENT
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2. (SBU) The GoA has negotiated three bilateral transit
agreements with Iran covering the carriage of passengers and
freight. The original two bilateral transit agreements date
to 1973, and a third transit agreement was signed on
December 11, 2005. The salient features of these transit
agreements cover the re-export of transit goods to third
countries, non-discrimination in customs duties, taxes on
goods, and arbitration provisions. The latest agreement
details specific areas of transit cooperation between the
two states and creates a joint government-to-government
transit committee that will meet quarterly.


3. (SBU) The new December 2005 agreement marks a deepening
relationship between Afghanistan and Iran on transit issues.
The agreement specifically calls for greater security for
Iranian trucks transiting Afghan territory and states that
any damage to or attacks on Iranian trucks, resulting in the
loss of their cargo is the responsibility of the GoA;
trucks from both countries will be allowed to transit the
other and no fees will be assessed for road passes; Iranian
goods that are imported into Afghanistan to complete Iranian
financed reconstruction projects will be exempt from all
Afghan taxes; the GoA will expand its consulate in the
Iranian city of Zahedan, near the Afghan province of Nimroz,
by adding a trade facilitation office to assist Afghan
traders, and; at the request of Iran, a new transit trade
route will be opened in western Afghanistan connecting the
cities of Milak (Iran) and Zaranj (Afghanistan - Farah
Province.) Iran has raised security concerns over
permitting Afghan trucks unfettered access to its territory
and both governments are still negotiating on this issue.
The next meeting, date still to be determined, will take
place in several weeks in Teheran.

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AFGHAN FIRMS FAVORING IRAN OVER PAKISTAN FOR TRANSIT TRADE
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4. (SBU) Most Afghan goods transiting Iran are unloaded
through the port of Bandar Abbas. Under the 1973 transit
trade agreement with Iran, goods bound to or from
Afghanistan are permitted to transit Iranian territory
without incurring taxes or fees unless mutually agreed upon
by both governments. Econoff met with three representatives
from freight forwarding companies based in Herat to discuss
transit issues. All three were satisfied with the
infrastructure facilities and transit services provided in
Iran. Iran boasts modern port facilities, extensive road
and rail networks that are in good repair and, at least as
far as the Afghans are concerned, honest customs officials.
The businessmen were specifically asked if they had
encountered problems with poor infrastructure, inadequate
storage and transport vehicles, unwarranted and/or excessive
taxes and fees, official corruption or the theft of
consignments. The Afghans, all successful businessmen based
in Herat, were uniform in their lack of grievances against
Iran regarding transit issues. (Note: Econoff has
questioned Afghan officials at the Ministries of Foreign
Affairs and Commerce regarding transit trade tensions with
Iran and received similar positive responses.)


5. (SBU) Businessmen in western Afghanistan have
traditionally favored Iran as a transit route over Pakistan
due to lower costs and shorter transport routes. The Afghan
freight forwarders said the average cost of transporting a
container of goods from Bandar Abbas to Herat was USD 1300
compared to USD 2000 in transit costs incurred between
Karachi and Kabul. Historically, the additional cost, delay
and security risks in bringing goods across the length of
Afghanistan have prevented traders and businesses in Kabul
and eastern Afghanistan from utilizing Iranian transit
routes. However, the significant donor-funded work to
improve the (still incomplete) Kabul-Kandahar-Herat portion
of the Ring Road and an improved (though still challenging)
internal security environment are giving eastern Afghan
businesses an Iranian transit alternative to Pakistan.
(Note: GoA officials have informed Econoff that they also
are seeing an increase in Afghan traders favoring Iran over
Pakistan. Officials at both the Commerce and Foreign
Affairs Ministries did not have specific figures, but said
the balance between goods transiting through Iran versus
Pakistan was shifting from approximately 20 percent and 80
percent respectively to roughly equal shares of
Afghanistan's total transit trade.)


6. (SBU) Neither the GoA nor the IMF report statistics
detailing either Afghan transit trade through Iran or
bilateral trade between the two countries. Trade data
limitations are based in part on faulty data generated at
the border. Econoff spoke recently to a USAID-funded
Bearing Point customs consultant who has been based in Herat
for two years. The consultant said traders were required
to provide both the country of origin and country of export
information for all imported goods on Afghan customs
declaration forms. However, due to carelessness and
illiteracy, most traders listed Iran, the country of export,
for both categories. He said GoA customs officials at the
border are aware of the problem, but take no action to
correct it. Herat is the gateway for most goods transiting
through Iran and generates about half of the GoA's customs
revenues.

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AFGHAN BUSINESSES FRUSTRATED WITH PAKISTAN
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7. (SBU) All three of the Herat shippers said that they
were seeing a steady increase in transit trade through Iran
for goods being shipped to Kabul and eastern Afghanistan
instead of the shorter Pakistani route. Econoff also spoke
to a group of Kabul traders who also said Iran was capturing
a larger share of Afghanistan's transit trade. Both groups
of businessmen offered a familiar litany of complaints about
transiting goods through Karachi, including high demurrage
fees due to port processing delays, insufficient rail
service and storage facilities, theft and corruption. (Ref
A.) Although bringing a container through Karachi is
cheaper for a Kabul-based business than transiting goods
through Iran, the Pakistani route carries higher potential
risks. High demurrage fees in port can amount to more than
the value of the goods being transported and organized theft
can rob a trader of his entire consignment. (Note: Econoff
spoke to a shipping agent in Kabul who said containers
carrying goods to Afghanistan were sometimes pilfered en
route in Pakistan. He said the thieves were careful not to
damage the containers' seals and instead cut through and
removed the sides of containers, took what they wanted, and
then meticulously welded the container back together.)

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INDIA BUILDING TRANSIT LINK ALTERNATIVE TO PAKISTAN
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8. (SBU) The GoA and Iran have also expanded their transit
trade links with India. In 2003 the three governments
signed a trilateral transit agreement to establish a second
transit corridor that will offer a viable and cost effective
alternative to Pakistan. The trilateral agreement is
centered on developing trade through the new Iranian port of
Chabahar: India and Iran have agreed to build a rail link
from the port to Iran's central rail network; Iran is
upgrading the Chabahar-Milak road to international standards
and will build a bridge over the Helmand River at Milak on
the Afghan border; India is building a 215 km road linking
the Afghan border town of Zaranj with the Iranian city of
Delaram, and; Iran is extending a rail link to the Afghan
border at Islam Qalah. Pakistani shipping agents in Karachi
are reportedly alarmed that up to 70 percent of their Afghan
transit trade could eventually be siphoned off to Chabahar.
(Ref B.) Officials at the Indian Embassy confirmed to
Econoff that the Indian-backed projects were progressing as
planned, although the Zaranj-Delaram road construction has
faced setbacks due to security concerns - an Indian
engineer was killed in Iran last year. Black-topping has
already begun on a portion of the road and the final road
section is expected to be completed in approximately two
years. (Ref C.)


9. (SBU) Iran has granted transit concessions to both
Afghanistan and India at Chabahar. Both nations are
entitled to a 90 percent discount on port fees (except for
oil tankers) and a 50 percent discount on warehousing and
related transit services. In addition to Chabahar, both
countries have the right to use all Iranian ports and roads
for transit purposes and their vehicles and vessels are
permitted to pay for fuel at rates equivalent to Iranian
vehicles and vessels.

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COMMENT
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10. (SBU) Despite the increased cooperation on transit
trade issues, Afghan officials regularly express their

KABUL 00001946 004.6 OF 004


suspicions and anxieties about engaging with Iran.
Enthusiasm for increased trade and commerce appears tempered
by concern about expanding Iranian influence in Afghanistan.
GoA officials also express concerns about Iran's "dumping"
of goods whose production is subsidized by Iran's below-free
market domestic energy prices. Such concerns are moderated
by the GoA's eagerness to expand Afghanistan's trade options
and reduce its transit trade dependence on Pakistan. The
GoA is taking advantage of Iranian transit concessions and
improved, modern transportation networks and facilities.
For its part, Iran appears eager to draw its Afghan neighbor
further into its economic orbit.

NEUMANN