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The Iranian-Imposed Slowdown on Fuel Imports into Afghanistan

February 2011 Comprehensive Information on Complex Crises

Steven A. Zyck Economic Development Knowledge Manager steve.zyck@cimicweb.org

This document examines the economic dimensions of the Iranian governments recent limitations on shipments of oil to Afghanistan via Iran. Additional information is available at www.cimicweb.org. Hyperlinks to source material are highlighted in blue and underlined in the text.

n early December 2010, the Iranian government placed unanticipated restrictions upon oil and gas shipments travelling through its territory en route to Afghanistan. The first several weeks of what is described in this report as a slowdown (and others have labelled an embargo or blockade) saw very little oil and gas entering Afghanistan via Iran, which normally provides approximately 30% of Afghanistans overall fuel supply (and a larger proportion in western and southern Afghanistan). Following the intervention of Afghan First Vice President Marshal Mohammad Fahim Qasim, on 25 December, Iranian restrictions eased slightly but did not end, according to Tolo News. For instance, the New York Times reported on 10 January 2011 that approximately 40 oil tankers were crossing from Iran into Afghanistan each day compared to the 250 to 330 tankers that had previously crossed the border on an average day. Radio Free Europe/Radio Liberty (RFE/RL) adds that those tankers which are not permitted to cross are forced to wait within Iran, where they have been subject to added taxes and fees by Iranian officials. While the Iranian government had suggested on 20 January that only 160 tankers remained held at the IranAfghanistan border, according to Tolo News, the Afghan government and Afghanistans Chamber of Commerce and Industries (ACCI) told Pajhwok Afghan News that the number was closer to 2,000. The Iranian government indicated it was willing to increase fuel shipments to Afghanistan if the Afghan government would provide officials in Tehran with a breakdown of the countrys oil requirements, noted the Associated Press (AP). Iran would then allow only that level of fuel into Afghanistan. However, given that fuel entering Afghanistan from Iran originates from third countries such as Iraq and Turkmenistan, Afghan officials and the business community strongly opposed such an arrangement. This situation resulted in an outcry within Afghanistan and, starting on 13 January, several hundred protesters began chanting Death to [Iranian President Mahmoud] Ahmadinejad, Hands off Afghanistan and similar slogans outside of the Iranian embassy in Kabul, according to RFE/RL. Pajhwok described 300 protesters throwing eggs and stones at the embassy. In addition, the ACCI launched a drive to end Afghan investment in Iran and, on 18 January, instructed its members to cease their support for Iran or Iranian companies. Meanwhile, the Afghan government and business community began exploring alternative sources of fuel as well as alternate transport routes which would allow Afghanistan to bypass Iran. One example of this occurred on 20 January when Afghan President Hamid Karzai flew to Russia to discuss, among other things, the potential for increased Russian fuel exports to Afghanistan, said Tolo News. A separate report in Tolo News notes that, while in Russia, President Karzai agreed that Afghanistan would purchase 1.8 million tonnes of fuel from Russia. Pajhwok further reported an agreement between Afghanistan and Kazakhstan for 200,000 tonnes of fuel in late January 2011. The situation appears, however, to have come to a close, with Pajhwok indicating that 225 fuel tankers had crossed from Iran into Afghanistan on 23 January, and AP reporting that approximately 200 tankers crossed the next day. A week later, the Tehran Times announced that the Iranian and Afghan governments had signed an
MONTHLY REPORT ON ECONOMIC DEVELOPMENT IN AFGHANISTAN

Monthly Report: Iranian-Imposed Slowdown on Oil Imports into Afghanistan

agreement whereby Afghanistan would begin purchasing a portion of its fuel supplies from Iran; the agreed amounts to be purchased are small, only two million litres in 2011 (i.e., the amount needed to power the major generators feeding the city of Kabul for fewer than three days).1 The purchase of Iranian fuel by Afghanistan is just one of several parts of an agreement negotiated by a high-level, 20-person delegation from Afghanistan, which was led by the Minister of Finance, during a five-day trip to Iran, according to Pajwhok. Iranian officials also agreed, in a conciliatory gesture, to allow 40,000 Afghan refugee children in Iran to attend Iranian state schools and to enable Afghan banks to establish branches in parts of Iran. Finally, Iranian officials agreed to ensure the uninterrupted supply of fuel to Afghanistan in the future. With the slowdown apparently resolved, this report attempts to look back and capture the motivations for the fuel slowdown as well as the impact it has had upon the Afghan economy, poverty, regional relations, and domestic politics.

Motivations

he Iranian government publicly acknowledged two explanations for the slowdown in fuel shipments to Afghanistan. First, Iranian officials interviewed by the Washington Post in the early days of the standoff indicated that the slowdown was tied to the Iranian governments recent decision to reduce domestic fuel subsidies. A spokesperson for Irans Ministry of Foreign Affairs (MFA) told AP that [a]fter changes that cut subsidies, it is natural that some technical problems occur when sending fuel to neighboring countries. Additionally, the Iranian government is undergoing a difficult economic period which, according to the Washington Post, has been worsened by international sanctions, and is seeking supplementary revenue streams. The Washington Times suggests that regulating high-value transit trade through its territory is one such source of income for Tehran. This perception was seemingly bolstered by early reports from RFE/RL indicating that Iranian border officials were imposing a USD 300 per day tax on oil tankers as they awaited permission to enter Afghanistan. Second, according to Iranian television station Press TV, the Iranian government indicated that the slowdown was impelled by concerns that fuel shipments to Afghanistan via Iran were supporting international military operations. Press TV quotes the Iranian ambassador to Afghanistan, Fada Hossein Maleki, saying [w]e supply fuel for the [Afghan] people, but no one is allowed to place it at the disposal of the military forces of a [third] country, who will use it against the interests of Iranians, Afghans and Pakistanis. Ambassador Maleki stated that Iran was therefore slowing fuel shipments from its territory into Afghanistan until the Afghan government agreed to carefully supervise the use of that fuel to ensure that it did not make its way to American or NATO military forces. To allay concerns that fuel was benefiting international forces in Afghanistan, the Afghan Minister of Commerce and Industries, Anwar-ul-Haq Ahadi, has repeatedly assured Iranian officials that fuel imported via Iran is not benefitting foreign soldiers, according to RFE/RL and other media sources. United Press International (UPI) adds that NATO officials have provided similar assurances. Agence France-Presse (AFP) notes that none of NATOs fuel enters Afghanistan via Iran, and Shamshad TV has indicated that most of the fuel used by NATOs International Security Assistance Force (ISAF) arrives via the Hairatan port at the Afghan-Uzbek border. It remains unclear why Iranian officials discounted such assurances. In addition to these official explanations, analysts and commentators were quick to propose a range of alternative or underlying motivations for the Iranian slowdown. These purported motives are noted below.

According to a 2005 report at which time energy supply to Kabul was significantly lower than it is today Kabuls major generators, excluding generators for individual houses or businesses, required 600,000 litres of fuel per day.

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Truck drivers stranded at the Iranian border told Tolo News that, early in the standoff, Iranian officials suggested that they would not be permitted to pass unless they agreed to purchase Iranian oil and transport it into Afghanistan. As such, the situation was viewed as a means of promoting the importation of Iranian oil into Afghanistan. RFE/RL suggested that the sanctions were intended to punish the Afghan government for having given priority to the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline over a comparable pipeline which would have originated in Iran rather than Turkmenistan. Pajhwok cited defeated Afghan parliamentary candidates who suggested that Tehran was attempting to use oil to pressure President Hamid Karzai to approve the outcomes of the recent elections, which some view as being favourable to Iran.

Finally, and perhaps most widespread, experts such as those interviewed by Tolo News and numerous other media outlets suggested that Irans sanctions were a form of protest against economic sanctions recently imposed against Iran by the United Nations (UN), European Union (EU) and US government. The UN, EU and US sanctions were levied against Iran to dissuade the country from continuing to develop its nuclear programme, reports the BBC. According to RFE/RL, Tehran is clearly sending a signal to [the US government] in response to international sanctions imposed against the country over its controversial nuclear program. Despite the range of suspected motives, experts cited in the Los Angeles Times note that Irans fuel slowdown was unlikely to affect far larger political and economic questions such as international sanctions and regional energy strategies. Furthermore, with international forces in Afghanistan reportedly receiving fuel primarily via Uzbekistan and, likely, Pakistan, the military implications also appeared to be of dubious significance. Moreover, it remained difficult to resolve Irans fuel slowdown with its willingness to contribute to reconstruction and development activities in Afghanistan; Iran pledged USD 660 million for projects in Afghanistan. Indeed, a report by the United States Institute of Peace (USIP) highlights that Iran has been seeking to develop influence in western Afghanistan exactly those areas which have been hardest hit by the fuel slowdown. Accordingly, experts cited in Turkeys Hurriyet newspaper have begun to question whether the current situation began merely as a means of taxing Afghanistan-bound tankers and escalated into a diplomatic confrontation as the international and Afghan media brought global attention to the situation.

Effects of the Slowdown

ising fuel prices were the most significant and immediate effect of the Iranian-imposed slowdown. In the first week of 2011 alone, the price of diesel fuel in Kabul increased from AFN 51 (USD 1.19) to AFN 65 (USD 1.51) per litre, and the price of petrol (unleaded gasoline) went from AFN 48 (USD 1.12) to AFN 56 (USD 1.30) per litre, according to Pajhwok. Based upon a dataset of fuel prices in Kabul created by the Civil-Military Fusion Centre (CFC), diesel fuel cost a third less in January 2010 when it went for AFN 44 (USD 1.02) per litre than in January 2011. This increase in diesel prices in Kabul was exceeded by price spikes in western provinces closer to the Iranian border. In Nimroz province, which borders Iran, for instance, the New York Times reported that the price of fuel had increased by 53% and that 80% of fuel pump stations were forced to close after running out of supply. The rise in fuel prices reverberated across the Afghan economy, said UPI. With traders and businesses forced to pay higher rates for fuel to ship their products, particularly food, throughout Afghanistan, the higher transport costs have been passed along to consumers. The New York Times found that the price of a container of cooking oil in Kandahar province rose from AFN 900 (USD 20.92) prior to the Iranian slowdown to AFN 1,250 (USD 29.05) in mid-January 2011. These rising food prices were particularly destabilising for poor households, who also found themselves unable to purchase fuel for cooking and heating as the winter descends upon Afghanistan, according to the UN-affiliated Integrated Regional Information Network (IRIN).
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Afghanistans business community was also hit by the crisis, which drove up the cost of everything from transportation to electricity; electricity is commonly produced by diesel-powered generators in much of Afghanistan. The Afghan Ministry of Finance (MoF) told Reuters that businesses in Afghanistan were losing approximately USD 500,000 every day of the slowdown, and IRIN quoted ACCI officials as stating that the slowdown had cost the Afghan economy USD 100 million as of 13 January. Such figures may be even higher if agricultural impacts are taken into consideration. A New York Times article cited analysts in Afghanistan who indicated that farmers in Helmand and Kandahar provinces would face difficulties as a result of the fuel slowdown. The rising price of fuel to power water pumps and tractors could have prevented adequate irrigation and delayed the wheat harvest in these areas. As a result of diminished income from wheat, experts interviewed by the New York Times believe that Afghan farmers may eventually decide that less water-intensive opium poppies are a more predictable source of income in 2011.

Figure 1. Petrol and Diesel Fuel Prices in Kabul, January 2010 to January 2011

Note: See Annex A for the original figures and a discussion of the data source. USD 1 = AFN 43.025

The Afghan government also experienced a range of political effects from the Iranian oil and gas slowdown. For instance, in an interview with Tolo News, the deputy head of the ACCI, Khanjan Alokozai, suggested that the situation demonstrated the Afghan authorities inability to effectively influence neighbouring countries. In a separate article by Tolo News, ACCI officials indicated that the restrictions imposed by Iran contributed to a broader narrative, bolstered by Pakistani seizures of Afghanistan-bound merchandise, in which the Afghan government was not taken seriously by neighbouring governments. The fact that the personal intercession of Afghanistans First Vice President was unable to earn concessions from Iran proved to be a serious affront. Furthermore, Afghan businesspeople and political figures appeared to have interpreted Afghan officials conciliatory response to the situation as a sign that their government did not adequately appreciate the hardship that the slowdown had caused for businesses and vulnerable populations. For instance, Reuters quoted an MoF spokesperson as stating that the Iranian restrictions were not a major problem and that the situation had not
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negatively affected relations between the two countries. In response to remarks such as that, the AP quoted a former member of Afghanistans parliament who openly questioned why the Afghan government is quiet and has shown no reaction to the Iranian restrictions. According to Tolo News, the Iranian media claimed that Afghan officials had gone so far as to apologize to the Iranian government for anti-Iran protests which erupted in Kabul and Herat City in response to the slowdown. Retired Afghan General Amrullah Aman told Tolo News that Iranian payments to the Afghan president had made many within the Afghan government hesitant to publicly criticise Iran for the slowdown. Some dissatisfaction has, however, spilled over to the international community, with Shamshad TV, a private Afghan media outlet, citing Afghan businesspeople who believe that NATO should provide traders with access to Hairatan port at the Afghanistan-Uzbekistan border, which is reportedly the source of much of the international forces fuel.

Conclusion

hile the situation has recently been resolved, its long-term implications are unclear. At a minimum, it increasingly appears likely that many in Afghanistans business community may no longer view Iran as a safe and predictable transport route for fuel and for other imports and exports. Alternative routes via Central Asia and Pakistan are anticipated to become more heavily utilised in the future. More broadly, the future of IranianAfghan relations remains an unresolved issue. While the current Afghan government has emphasised its strong relations with Iran during this fuel slowdown, provincial officials, Afghan legislators, future governments and the broader Afghan citizenry may be less willing to put the incident behind them quite as easily.

The Civil Military Fusion Centre (CFC) is an Information and Knowledge Management organisation focused on improving civil-military interaction, facilitating information sharing and enhancing situational awareness through the web portal, CimicWeb. CFC products are developed with open-source information from governmental organisations, non-governmental organisations, international organisations, academic institutions, media sources and military organisations. By design, CFC products or links to open sourced and independently produced articles do not necessarily represent the opinions, views or official positions of any other organisation.

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Annex A.

Monthly Fuel Prices in Kabul, 2005 to 20102

The following figures were calculated based on retail fuel price data for Kabul reported on a near-weekly basis in Pajhwok Afghan News. Where Pajhwok reported numerous different prices for a given month, the average of these figures was taken. It should be noted that prices noted in Pajhwok apply solely to Kabul and are based on visits to only one or two privately-owned pump stations and, hence, may not be as representative as one might anticipate.
Date May 2005 June 2005 July 2005 Aug 2005 Sept 2005 Oct 2005 Nov 2005 Dec 2005 Jan 2006 Feb 2006 March 2006 April 2006 May 2006 June 2006 July 2006 Aug 2006 Sept 2006 Oct 2006 Nov 2006 Dec 2006 Jan 2007 Feb 2007 March 2007 April 2007 May 2007 June 2007 July 2007 Aug 2007 Sept 2007 Oct 2007 Nov 2007 Dec 2007 Jan 2008
2

Petrol (AFN per Litre) 25.50 27.00 34.50 47.00 46.00 40.67 40.00 40.50

Diesel (AFN per Litre) 26.00 25.00 26.00 29.80 32.00 34.00 37.33 37.00 27.50 27.00 33.40 34.00 32.50 31.20 31.33 32.00 30.00 29.00 32.00 32.00 35.00 34.00 34.00 35.33 40.00

Liquid Petroleum Gas (AFN per KG) 32.00 32.00 32.00 40.00 40.00 49.14 50.00 40.00 30.00 39.25 40.00 38.40 45.00 45.00 36.50 35.00 32.50 46.00 61.33 44.00 45.00 -

All prices within this document are provided in Afghani (AFN). While the exchange rate between USD and AFN has varied over the time period examined within this document, the rate at the time of writing is USD 1 to AFN 43.025.

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Feb 2008 March 2008 April 2008 May 2008 June 2008 July 2008 Aug 2008 Sept 2008 Oct 2008 Nov 2008 Dec 2008 Jan 2009 Feb 2009 March 2009 April 2009 May 2009 June 2009 July 2009 Aug 2009 Sept 2009 Oct 2009 Nov 2009 Dec 2009 Jan 2010 Feb 2010 March 2010 April 2010 May 2010 June 2010 July 2010 Aug 2010 Sept 2010 Oct 2010 Nov 2010

42.00 43.80 45.00 47.40 52.00 50.00 50.00 48.00 37.25 33.50 30.67 29.33 32.50 37.25 39.33 39.00 42.00 41.00 40.00 40.00 38.75 39.80 44.00 47.60 46.40 44.67 44.50 43.67 44.00

39.00 48.20 53.00 54.60 58.00 50.00 49.00 48.00 36.25 36.25 34.00 31.67 35.00 35.25 36.25 37.75 52.00 48.00 44.00 40.00 39.75 39.60 42.00 46.60 49.00 49.67 46.00 42.67 43.00

62.50 52.20 53.00 58.00 50.00 70.00 37.50 30.00 29.33 33.33 40.00 40.00 50.00 50.00 58.33 55.00 48.00 46.00 42.50 45.00 45.00 42.00 43.00 52.50 50.00 -

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