C O N F I D E N T I A L SECTION 01 OF 04 YEREVAN 000280

SIPDIS

/// C O R R E C T E D C O P Y ///
/// CLASSIFIED PARA 2. RENUMBERED PARAGRAPHS 5, 18 ////

E.O. 12958: DECL: 04/28/2019
TAGS: ECON ENRG PGOV PREL IR
SUBJECT: ARMENIAN PRESIDENT'S VISIT TO IRAN FURTHERS
ECONOMIC, ENERGY TIES

REF: YEREVAN 96

YEREVAN 00000280 001.4 OF 004


Classified By: Ambassador Marie L. Yovanovitch. Reasons 1.4 (b/d).



1. (C) SUMMARY AND COMMENT: Last week's visit to Iran by
President Sargsian was the culmination of a series of recent
visits by officials of the two countries, and included the
signing of eight MOUs, mostly on energy and transportation
projects. Officials of both countries spoke of their desire
to deepen relations, and Iranian officials also indicated to
their GOAM counterparts optimism about improved relations
with the USG.


2. (C) The GOAM's increased economic cooperation with its
southern neighbor is likely driven primarily by economic
security concerns; strong cultural differences will likely
limit such cooperation in other areas. It has become
customary for the two countries to mark each high-level visit
with high-flying rhetoric and by signing a blizzard of
agreements, most of which ultimately amount to little. The
latest round of bilateral visits has produced more talk at a
more senior level of the same well-known portfolio of
proposed ambitious projects -- railroad, hydropower station,
petroleum pipeline )- with at best modest incremental
progress. Completion of these proposals will require hefty
financial investments, and it remains unclear to us that
there is anyone truly ready to put up the kind of money to
make these lofty visions a reality. End Summary and Comment.

PRESIDENT VISITS IRAN, SIGNS MOUs
--------------


3. (C) President Sargsian visited Iran on April 13-14,
saying "I came to the Islamic Republic of Iran resolute to
deepen the friendship between the two countries." He was
accompanied by Foreign Minister Edward Nalbandian and several
other ministers. During the visit, Presidents Sargsian and
Ahmadinejad signed eight MOUs on projects including
construction of an Iran-Armenia rail line, investment in a

hydropower plant on the Araks River bordering the two
countries, and construction of a pipeline for transport of
refined petroleum -- the same set of reputed (ambitious and
costly) projects that have been trumpeted at every bilateral
meeting between the two sides for some time. The MOUs also
address free trade and closer cooperation on energy, banking
and insurance.

IRAN WARMING TO U.S?
--------------


4. (C) Foreign Minister Edward Nalbandian told Ambassador
on April 15 that the GOAM has no choice but to cooperate with
Iran on transportation and energy issues, given its closed
borders with Turkey and Azerbaijan. In the course of
President Sargsian's visit, he (Nalbandian) had met with
senior Iranian officials including President Ahmadinejad and
Ayatollah Khamenei, who gave his approval to the expansion of
relations between Iran and Armenia.


5. (C) According to Nalbandian, Foreign Minister
Manouchehr Mottaki told him during the visit that the Iranian
government was optimistic about improved relations with the
United States. Mottaki reportedly spoke very respectfully of
President Obama (referring to him as "the distinguished
American President" -- an apparent departure from past
practice.) Nalbandian told Ambassador he had indicated to
Mottaki his willingness to help pursue talks between the USG
and Iran. Nalbandian also claimed that Mottaki told him
Turkey would not be an appropriate intermediary for such
talks (Comment: It is possible that the Iranians were simply
trying to flatter the GOAM during the President's visit, but
it is also plausible that Iran views Turkey as a regional
rival, while tiny Armenia poses no threat to Iranian
ambitions. End Comment).

CULMINATION OF SEVERAL RECENT VISITS
--------------

6.(U) President Sargsian's trip followed visits in March and
April by several ministers of the two countries, beginning
with a two-day visit to Armenia on March 12-13 by Iran's
Foreign Minister Mottaki. During that visit, Mottaki called
for a deepening of political and economic ties between
Armenia and Iran, and extended an invitation to President
Sargsian from Iranian President Ahmadinejad to visit Iran in
the near future. In response, President Sargsian called Iran
a "good neighbor" and "reliable partner," and said the visit
of Iran's FM will give "a new boost" to "continuously
developing cooperation in all spheres."


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7.(U) Iran's Minister of Roads and Transport, Hamid
Behbehani, visited Armenia on April 2 for discussions on the
proposed Iran-Armenia railway, and Energy Minister Armen
Movsisian visited Iran on April 10 to conclude discussions on
a pipeline--first announced during Mottaki's visit in
March--for refined petroleum that would run from Tabriz to
the Armenian town of Yeraskh.


8. (U) During his two-day visit in March, Iranian FM Mottaki
met with President Serzh Sargsian, Prime Minister Tigran
Sargsian (no relation), Foreign Minister Edward Nalbandian,
Energy Minister Armen Movsisian, Parliament Speaker Hovik
Abrahamian, and National Security Council Secretary Artur
Baghdassarian. This was the second visit of an Iranian
official since December, when Iran's Deputy Security Chief
visited Armenia. That visit followed on the heels of visits
to Tehran by Armenia's NSC Secretary, Artur Baghdassarian and
Energy Minister Movsisian. During his meetings, FM Mottaki
highlighted the role of Iran's and Armenia's presidents over
the past four years in raising the level of relations. He
also reviewed the status of decisions made during the
Armenian-Iranian intergovernmental commission in Tehran last
November, which included ambitious energy and transport
projects.

WHAT ARE THE BIG PROJECTS?
--------------


9. (U) The MOUs signed by Presidents Sargsian and Ahmadinejad
during last week's visit address construction of: an
Armenian-Iranian railway; a hydroelectric plant on the Araks
River (which borders the two countries); a petrochemical
pipeline running from Tabriz to Yeraskh (in southern Ararat
Marz). In addition, the two presidents signed agreements
involving cooperation on energy, banking and insurance. The
two countries are also in the process of developing a
high-voltage transmission line, though that project -) one
of the most practical and economically viable -- is already
underway and was not addressed in any of the MOUs.

IRAN-ARMENIA RAILROAD
--------------


10. (C) The agreement on the railroad--a 500-kilometer line of
which 60 km would be in Iranian territory--calls for Iran to
lend Armenia USD 400 million toward construction of the
Armenian segment; the total project cost is estimated at
between USD 1.5-1.8 billion. Russia and Ukraine have
reportedly expressed interest in financing the project, and
the GOAM is likely to seek funding from the international
donor community as well; the Asian Development Bank already
agreed in late 2008 to finance a USD 1.5 million feasibility
study, which a newly-appointed working group is expected to
spend about three months developing. The railway would run
from the northern Armenian town of Sevan to the southern
border town of Meghri, before entering Iran. Such a rail
line would improve transportation of energy supplies and
other goods between the countries, which is now limited by
often-impassable mountain roads. In a mid-February meeting,
Armenia's NSC Secretary Artur Baghdassarian expounded to the
Ambassador on this project, saying it would be represent a
gateway for Armenia to trade with Iran, Central Asia and even
China (reftel).

PIPELINE TO REPLACE REFINERY?
--------------


11. (SBU) The two Presidents also signed a MOU for the
construction of a 300-kilometer-long pipeline carrying up to
500,000 tons of refined petroleum products (gasoline and
diesel) per year from the Tabriz oil refinery in Iran to the
town of Yeraskh located in the Ararat region of Armenia that
borders the capital of Yerevan. The pipeline was announced
on the eve of FM Mottaki's visit by Armen Movsisian,
Armenia's Minister of Energy and Resources, who said the
pipeline would satisfy Armenia's domestic demand of about
500,000 tons annually. Movsisian and FM Mottaki reached a
preliminary agreement on constructing the pipeline during
Movsisian's visit to Iran in December.


12. (SBU) According to preliminary estimates of the Ministry
of Energy, the estimated cost of the pipeline and oil
terminal (to be located in Yeraskh) will be between USD
200-240 million, with work set to start this spring and be
completed within two years. The pipeline is expected to
lower significantly the cost of Armenia's petroleum imports,
most of which currently come from Europe, shipped by rail
from the Georgian port of Poti. Financing is to be provided
by Iran, with gradual repayment made by Armenia after the
pipeline's completion.


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13. (C) The pipeline project would apparently replace a
refinery that Russia and Iran have for several years
discussed building in the Meghri (southern Armenia) region.
Deputy Energy Minister Areg Galstyan told EconOff on April 10
that refinery proponents had determined that a refinery was
not economically feasible, so the GOAM asked Iran to
construct a small pipeline (25 cm diameter) to transport
refined petroleum to Armenia sufficient for its annual demand
of about 500,000 tons of fuel. (COMMENT: It is not clear
where Iran will obtain the petroleum it will export to
Armenia, as the refinery was intended to bolster its own
inadequate refining capacity. Galstyan was unable to answer
this question, but noted that Armenia's annual demand is a
small percentage of Iran's consumption, so Iran may simply
import the extra fuel and transport to Armenia. End Comment).

REFINERY "NOT DEAD?"
--------------


14. (C) While the pipeline is ostensibly intended to replace
the refinery, Foreign Minister Edward Nalbandian told
Ambassador on April 15 that despite the agreement to
construct the pipeline, the oil refinery is "not dead."
(Comment: Nalbandian's statement notwithstanding, the
refinery has always sounded problematic, owing to the absence
of either a nearby pipeline or body of water, making
transport of petroleum in and out highly inefficient,
requiring the railroad that Iran now plans to help finance.
End Comment).

HYDROPOWER
--------------


15. (U) President Sargsian also signed a MOU regarding the
countries' ambitions to build a hydropower plant on the Araks
river that constitutes much of the border between Armenia and
Iran. According to Deputy Energy Minister Galstyan,
construction on this project, with 140 MW capacity, is
expected to start this year. The Iranian government will
finance the project, with the Armenians repaying the
construction through electricity exports; there will be two
hydropower plants, one on each side of the border.

ELECTRIC LINES
--------------


16. (SBU) While it has moved beyond the MOU stage, Energy
Minister Movsisian announced on March 20 that the project
work for the construction of a 400-kilometer-long
high-voltage transmission line had been completed and that
construction is to get underway by the end of May and likely
to take 2-3 years. Movsisian said that Iran's Export
Development Bank is financing the project, which is estimated
to cost approximately USD 100 million. The power line will
run across 300 km of Armenian territory and 100 km across
Iran, with a throughput of 400 megawatts. The third line
will complement the two existing transmission lines of 200
megawatts throughput each. Deputy Energy Minister Areg
Galstyan told Econoff that the preliminary documents and
agreements are all in place; the Ministry of Energy is
working with USAID on dispatching and control systems.

NUCLEAR PLANT AND WEAPONS
--------------


17. (C) The MOUs did not address with the Iranians either
replacement of the Armenian Nuclear Power Plant (ANPP) or
Iran's nuclear weapons programs. The GOAM has long
maintained that the ANPP project will be open to
international participation but has never indicated it
foresees a role for Iran. With regard to a nuclear weapons
program, FM Nalbandian told Ambassador that the GOAM abides
by all relevant UN resolutions. However, as Iran is their
neighbor and they must maintain good relations, they have not
been pressing this issue with them, and the Iranians did not
raise it.

COMMENT
--------------


18. (C) Regular bilateral visits between Iran and Armenia
almost invariably end in the issuance of effusive but vacuous
statements about the importance of cooperation. The two
countries have also signed MOUs in the past on similar
projects, most coming to nothing. President Sargsian's
visit, preceded by several ministerial visits, therefore
stands out due to the announcement of at least three concrete
energy projects -- the petroleum pipeline, development and
financing for the railway and the hydropower plant on the
Araks River. The pipeline can be viewed as a scaling back of
plans for the oil refinery, but we would not be surprised if

YEREVAN 00000280 004.4 OF 004


even this more limited project fails to make any real headway
in the near term. Iran's pledge to finance part of the
railroad--which is key to the refinery's viability--may
suggest that FM Nalbandian is correct that the project may
yet resurface, but securing the balance of the necessary
financing may prove elusive in the current global financial
climate.


19. (C) The press releases that emerge from Iranian-Armenian
bilateral summits, observed over time, seem spun from the
gossamer of diplomatic politesse, with precious little of
substance. There is room for some mutually beneficial energy
cooperation, especially on electricity, and those projects
tend to proceed in workmanlike fashion with little fanfare.
We remain skeptical of the prospect of the more elaborate
visions of new railroad lines, refineries, and petrochemical
pipelines being realized any time soon. Moreover, the
composite of political, cultural, and religious differences
between Armenia and Iran work against any substantive
relations in non-economic spheres.
YOVANOVITCH