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 -------------- SUMMARY -------------- ¶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. -------------- -------------- -------------- IRAN AND AFGHANISTAN SIGN NEW TRANSIT AGREEMENT -------------- -------------- -------------- ¶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. -------------- -------------- -------------- AFGHAN FIRMS FAVORING IRAN OVER PAKISTAN FOR TRANSIT TRADE -------------- -------------- -------------- KABUL 00001946 002.6 OF 004 ¶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. -------------- -------------- -------------- AFGHAN BUSINESSES FRUSTRATED WITH PAKISTAN -------------- -------------- -------------- KABUL 00001946 003.6 OF 004 ¶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.) -------------- -------------- -------------- INDIA BUILDING TRANSIT LINK ALTERNATIVE TO PAKISTAN -------------- -------------- -------------- ¶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. -------------- COMMENT -------------- ¶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