Caucasus Trans-Caspian trade route to open China import markets

Author: Tristan Kenderdine, Future Risk

The ‘Middle Corridor’ of the Trans-Caspian International Transport Route (TITR) is expanding. At a meeting in Ankara on 16 February it was agreed that Turkish State Railways would join the TITR as a full member. Kazakhstan, Azerbaijan and Georgia established the TITR in 2013 as a coordinating committee between their national railways. In April 2017 they signed the Trans-Caspian International Transport Route Protocol, underpinning the international legal framework for the TITR.

Workers stand next to a train at a container yard at the Khorgos border crossing point, east of the country's biggest city and commercial hub Almaty, Kazakhstan, 19 October 2015 (Photo: Reuters/Shamil Zhumatov).

The main appeal of the TITR for landlocked Kazakhstan is access to Lianyungang Port in China’s Jiangsu. Lianyungang is an associate member of the TITR, along with the Ukrainian Railway and Poland’s PKP LHS Broad Gauge Metallurgical Railway Line, the longest broad gauge railway line in Poland. Ukrainian cooperation opens the Black Sea port of Chornomorsk, while Polish cooperation joins the Western Europe railheads.

The Ankara meeting followed the Trans-Caspian Middle Corridor meeting in Beijing with the embassies of Georgia, Azerbaijan, Turkey and Kazakhstan in January 2018. The discussion on deepening logistics and trade cooperation was attended by Shahin Mustafayev, the Azerbaijan Minister of Economic Development, and Giorgi Cherkezishvili, the Deputy Minister of Economic and Sustainable Development of Georgia, with China represented by Luo Weidong, director of the Eurasian Department of the Chinese Ministry of Commerce and Li Wenxin, deputy general manager of China Railway Corporation.

With Eastern Europe, the Caucasus and now Turkey on board, China is aiming for China–Europe trade to reach an annual 300,000 shipping containers via the Trans-Caspian Route by 2020. Fifteen thousand shipping containers per year is the agreed target for China–Turkey container traffic in 2018, with the cost of one container from Lianyungang to Istanbul by block train costed at US$6300.

For Azerbaijan, the development of this Trans-Caspian route means more than simply becoming a trans-shipment port. The Caucasus nations are already some of the economies most integrated into China’s Belt and Road Initiative (BRI). As more infrastructure projects are completed, China’s interest in Azerbaijan will shift from the construction of infrastructure to how such projects will facilitate regional trade.

On the east–west axis, the Baku–Tbilisi–Kars railway to Turkey opened in October 2017, facilitating the Middle Corridor plan. On the north–south axis, Azerbaijan is also pushing for the completion of the Rasht–Astara railway to Iran, which is part of the multilateral North–South Transport Corridor initiative going from Russia through the Caucasus and the Persian Gulf to India. And the Trans-Adriatic Pipeline will enable additional Azerbaijani natural gas exports to the European Union.

Hydrocarbons (Azerbaijan’s main export) are not necessarily the sole motivator behind these trade-related infrastructure projects. SOCAR, Azerbaijan’s main oil company, extracted 8.6 per cent less natural gas and 8 per cent less oil in 2016 than in 2015. Oil and natural gas extraction costs rose by 3.2 and 17.7 per cent respectively over the same period. While energy will continue to form the backbone of Azerbaijani exports, Azerbaijan is seeking to move away from hydrocarbon dependency amid these rising production costs in order to pursue newfound opportunities for export diversification along new transport routes.

Azerbaijan is strategising agricultural exports to both Russia and China, aiming to create a US$1 billion industry. Shahin Mustafayev recently said at a Russian trade conference that US$240 million of agricultural exports to Russia (in the first seven months of 2017) was not enough and that Azerbaijan sees agriculture as a good way to hedge against fluctuating hydrocarbon prices. Azerbaijani National Bureau of Statistics data show that exports of non-oil products in the first half of 2017 had increased by 27 per cent to US$855 million (which amounts to 10 per cent of total exports). These figures include the substantial growth in exports of fruit, vegetables, potatoes, tobacco, wine and cottonseed.

Deepening and normalising non-oil trade with multiple trading blocs could see Azerbaijan become an important agricultural exporter in China’s eyes. China is currently Azerbaijan’s fourth-largest trading partner and under the BRI that is sure to increase.

A major goal of the BRI is the broadening of China’s import base — it will give China greater access to goods and services that it cannot produce domestically. In return, Caucasus and Central Asian countries such as Azerbaijan gain an alternative export market. If BRI countries leverage the situation correctly and prepare adequate trade strategies and negotiating positions, then they too stand to benefit substantially.

Tristan Kenderdine is Research Director at Future Risk.

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