Iran’s Gas Export to Armenia: From Energy Imbalance in Iran to Russia’s Monopoly in the Armenian Gas Market

Executive Summary:

• The Iran-Armenia gas-for-electricity swap agreement allows both countries to address seasonal energy imbalances while enabling Iran to expand its influence in the South Caucasus region.
• Iran faces challenges through sanctions, electricity shortages, gas imbalance, and Russia’s dominance in Armenia’s gas market via Gazprom hinders Iran’s efforts to expand exports and reduce Armenia’s reliance on Russian energy.
• With the normalization of Armenia’s relations with Azerbaijan and Türkiye, which can lead to the reduction of Yerevan’s dependence on Moscow, Iran can have more space to increase gas exports to Armenia.

Armenia’s Deputy Minister of Territorial Administration and Infrastructure, Hakkob Vardanyan, announced on September 30 that the third Armenia-Iran power transmission line is in its final stages, with 85 percent already completed. The line will be 280 kilometers (174 miles) long, stretching from Razdan to the border with Iran, and a 400 kilo-volt substation will be built in the Syunik region (Mgdesyan, September 30). When this project is completed, Iran will double its import of electricity from Armenia. Iran is the second largest gas supplier to Armenia after Russia. Unlike Russia, however, Iran’s gas export to Armenia is done through an exchange for electricity. The gas and electricity swap between Iran and Armenia is based on Iran’s imbalance in electricity supply in the summer and Armenia’s imbalance in gas in the winter. The growing energy partnership between Iran and Armenia highlights Iran’s strategic push to expand its influence in the South Caucasus amid challenges such as its own energy imbalances, international sanctions, and competition with Russia’s dominant role in Armenia’s gas market.

Iran and Armenia signed a 20-year gas-for-electricity swap agreement in 2004, which became operational in 2009. The Iran–Armenia gas pipeline spans 140 kilometers (87 miles). The Iranian section runs from Tabriz, the capital city of the East Azerbaijan province in northwestern Iran, to the Iran-Armenia border. The Armenian section runs from the Meghri region to Kajaran in Syunik province, through southern Armenia. Since 2009, Armenia has been importing natural gas from Iran, turning it into electricity at a local thermal power plant, and supplying it back to Iran. The surplus of electricity obtained from every cubic meter of natural gas remains in Armenia (Common Space, August 11, 2023). Iran currently exports one million cubic meters of gas per day—about 365 million cubic meters of natural gas annually—to Armenia. In exchange, Iran receives three kilowatt hours of electricity produced in the thermal power plants of Armenia for every cubic meter of gas. According to the end of the 20-year contract, the initial agreement on the new contract was reached during Armenian Prime Minister Nikol Pashinyan’s visit to Tehran in November 2022. Iran and Armenia extended the “natural gas for electricity” program until 2030, which was signed in Yerevan on August 10, 2023 (Azatutyun, August 10, 2023). This agreement means that every year Iran will export 360 million cubic meters of gas to Armenia and import electricity in return.

Doubling the volume of the gas and electricity swap between Iran and Armenia after the completion of the third Armenia-Iran power transmission line will lead to two serious challenges. The first challenge is the energy imbalance in Iran. Although Iran is one of the richest countries in the world in terms of energy resources—including the world’s second-largest proven gas reserves behind Russia—it is the world’s fourth-largest consumer of gas in the world, behind the United States, Russia, and China (ISNA, February 20, 2023). Iran’s economic sanctions in the past two decades have prevented foreign investment and the development of gas production capacity. Iran has also faced a severe electricity shortage. Based on a recent decision by the Iranian government, electricity will be cut for two hours a day in all provinces of Iran, an unprecedented action in the last three decades.

In these circumstances, Iran has decided to import gas from Turkmenistan and, recently, Russia (see EDM, January 4, 2023, June 5). Under the tripartite swap agreement between Iran, Turkmenistan, and Azerbaijan signed on November 27, 2021, Iran will receive about 1.5 to 2 billion cubic meters of gas a year from Turkmenistan in the Sarakhs region and will deliver it to Azerbaijan from Astara (see EDM, December 17, 2021) In the swap process, Iran will take the gas it needs for five provinces in the northeast, which can play an important role in reducing the gas imbalance, especially for northeastern provinces of Iran in the winter. In June 2024, Iran reached an agreement with Russia to import gas, which stipulates that Iran will receive 300 million cubic meters of Russian gas daily (Caspian News, June 28). This amount of gas is more than one-third of Iran’s daily production. Iran hopes that with the implementation of this agreement, it will consume part of the imported gas to compensate for the gas shortage and imbalance and export the rest to Armenia, Pakistan, Türkiye, and Iraq.

The second challenge in increasing Iran’s gas exports to Armenia is the Russian energy corporation Gazprom’s monopoly on the Armenian gas market. Last year, Armenia imported 2.7 billion cubic meters of gas from Russia, a significant gap compared to the 365 million cubic meters of gas imported from Iran (Arka.am, November 28, 2023; Civilnet.am, March 15). Additionally, Armenia pays $165 per thousand cubic meters from Russia, but while Russian gas prices increased by $15 per thousand cubic meters in 2019, they have not changed since (Arka.am, November 14, 2019; Armenpress, December 15, 2023). According to Armenian officials, however, Russian gas is cheaper than Iranian gas, but Armenia does not pay for its Iranian imports. Due to Armenia and Iran’s deal, neither country pays with money but exchanges energy instead (Eurasianet, November 2, 2023).

Undoubtedly, Iran’s gas export to Armenia conflicts with Russian interests. After Russia’s August 2008 war against Georgia, Russia lost access to the Georgian gas market, and the State Oil Company of the Republic of Azerbaijan (SOCAR) replaced Gazprom in the country’s energy sector. Therefore, Armenia is the only Russian gas market in the South Caucasus, making Gazprom reliant on Russian influence in the region. Due to this, many suspect that Gazprom was behind the decision to reduce the Iran-Armenia pipeline’s diameter from 1,420 to 700 millimeters (56 to 28 inches). Gazprom previously purchased a majority share in the Armenian section of the pipeline through its subsidiary, Gazprom Armenia (see EDM, November 3, 2006; Eurasianet, November 17, 2023). If the pipeline had been built with its initial diameter, it would have allowed Iran to export to markets in Europe, thereby competing with Russia’s natural gas industry (see EDM, March 21, 2007). The non-construction of the Iranian gas export pipeline to Georgia and Armenia’s 2006 decision to hand over 41 kilometers (25 miles) of the Iranian gas export pipeline on Armenian territory to Russia’s Gazprom—allowing Moscow to control all energy supply routes to Armenia—were interpreted as other signs of conflicting interests between Iran and Russia in the South Caucasus energy sector (Azatutyun.am, April 6, 2006).

Pashinyan’s government could potentially end Armenia’s geopolitical and geoeconomic isolation and dependence on Russia if it were to sign a peace treaty with Azerbaijan and normalize relations with Türkiye (see EDM, May 6). This could lead to the weakening of Gazprom’s monopoly in the Russian gas market, giving Iran the opportunity to increase gas exports to Armenia and even Georgia (see EDM, July 17). This opportunity will require solving the problem of the gas imbalance in Iran, canceling economic sanctions, attracting foreign investment, developing Iran’s gas fields and refineries, and increasing Iran’s gas production and export capacity. Otherwise, just as Iran could not use it to export gas to Europe after the beginning of Russia’s war against Ukraine, it will not be able to increase gas exports to Armenia after reducing Yerevan’s dependence on Moscow.