Our Analytics 13 november — 14:42

Godsend for Russia: Baku-Tbilisi-Kars (Our research)



What is the main event in the macroeconomics of Azerbaijan in 2017? In principle, without waiting for a calendar end, it is already possible to draw certain conclusions. The leader, of course, is the transport sphere, where there were several milestone events that unite the latitudinal and meridian transport corridors in the territory of Azerbaijan.

First, the official opening of the long-awaited Trans-Caucasian railway line Baku-Tbilisi-Kars was held, which had been announced in 2005 within the framework of the European TRACECA project (Transport Corridor Europe-Caucasus-Asia), but now is poured into the component of the Chinese project 'One belt - one way.'

The second event occurred in March. A double-track railway bridge was opened on the border of Azerbaijan and Iran across the Astara River within the framework of the North-South international transport corridor (ITC). Work has also been completed on the construction of the station and the container terminal at the border: in 2018, four terminals with an area of more than 60 hectares built on Azerbaijani investments (about 60 million euros) - grain, dry cargo, for petroleum products, and container, will operate on Iranian territory. Significant progress in the implementation of the ITC has been the willingness of Azerbaijan to provide Iran with a $500 million loan for the construction of a 164-kilometre section of the Astara-Resht railway.

In the sphere of motor transport, the construction of the second automobile bridge across the Samur River on the border of Azerbaijan and Russia began, which, obviously, will create conditions for increasing trade between our countries. At the ceremony of laying the bridge the interim head of Dagestan, Vladimir Vasiliev informed that an international four-lane highway should go from the Azerbaijani border to the Caspian Sea coast. The bridge and the international highway will become elements of the strategic project of the Russian Ministry of North Caucasus Affairs on the creation of the Caspian transport and logistics complex in Derbent. The adjacent task of this Russian hub in the Caspian Sea is the integration of the ports of Dagestan and the Astrakhan region into the corridors of international trade of the Caspian Five. Investors from Azerbaijan and Iran actively participate in the construction of new plants within the boundaries of the Lotus special economic zone in the Astrakhan region. Iran also carries out a number of agricultural projects there...

On the Caspian Sea, Baku International Sea Trade Port CJSC (BISTP) reported in the first half of 2017 that the volume of cargo transportation increased by 43.5% in comparison to the previous year (excluding oil cargo), up to 1.9 million tonnes. The main source of growth is the Baku-Aktau ferry line joining Azerbaijan and Kazakhstan.

It is characteristic that the topics of interdepartmental consultations involving international participants of both latitudinal and meridian ITC projects are almost identical in terms of coverage and depth of elaboration: cross-cutting tariffs, conditions for national carriers, as well as technical parameters of the primary information exchange on goods and vehicles between customs authorities.

Therefore, it is hardly possible to talk about a competitive political victory of one direction in the minds of the political leadership of Baku, which is often discussed within the framework of geopolitical constructions. In addition, the ITC in Azerbaijan for objective reasons cannot be among the global transit channels, however, as well as global channels depend on the pace of macroeconomic development of China and India, exchange quotations of the cost of resources, also the strong influence on the Azerbaijani transit is provided by the transportation market in Russia. Baku relies on connecting the meridian and latitudinal ITC routes, and their integration into the agrarian and industrial economy (development of industrial zones and agro-parks along their lines).

It should be understood that 2018 will be the decisive factor in assessing the long-term prospects of the ITC in Azerbaijan. In any case, the publication of the results of application of commercial tariffs by the ADY Express Ltd operator for the North-South and the Baku-Tbilisi-Kars projects should be expected no earlier than the period of the first half of 2018.

Where is the strength?

Prospects for sustainable development of the ITC in Azerbaijan are primarily related to the growth of regional cargo transportation and the development of the commodity-export potential of the national economy.

Within the framework of the national economic policy, Baku is trying to solve several interrelated problems:

- to overcome the systemic decline in freight traffic caused by the fall in the transit (export) of crude oil and oil products;

- development of transport infrastructure in combination with the build-up of new production capacities (creation of regional SEZs and technoparks along highways of international importance);

- creation of a logistics infrastructure and trans-modal hubs in the ports (construction of the second stage of the Baku International Sea Trade Port on a 400 hectare site, as well as a new infrastructure for the integration of the Baku-Alat highway (port of BISTP) - Georgia). It should be noted here that by attracting external loans for these projects, Baku seeks to preserve construction contracts in the hands of the national developer;

- conducting administrative and management reforms in order to maintain an attractive environment for international transport and logistics companies.

In this regard, systemic management reforms: the liquidation of the Ministry of Transport and the transfer of some of its powers to the Ministry of Communications and High Technologies, the organisation of the Interdepartmental Coordinating Council of Azerbaijan for transit freight traffic, the establishment of an agency for the operation and development of highways, the support of state-owned companies (Caspar, Azerbaijani Airlines, Azerbaijani Railways). Measures have been taken to reduce the tariff value of transit through the country, reduce the time spent on logistics and minimise the processing of export-import transactions.

For example, since May 2016 Azerbaijani Railways CJSC provides a 50 per cent discount on rail transport to Astara station on the Azerbaijani-Iranian border, from where cargo is transported further to Iran by road;

- constant search for external and expansion of national investments in the ITC and related communications. Azerbaijan is the main investor in Baku-Tbilisi-Kars (in 2007, a loan of 775 million dollars was allocated for the construction of the Georgian section in two tranches). And the leading investor in the Iranian section of the western chord North-South - the site of Resht-Astara (agreement on a loan of 500 million euros signed in November 2017);

- development of tourism and recreational sectors. Improving logistics and infrastructure in air services, on the roads contributes to the increase in the number of tourists. In the first half of 2017, the republic was visited by 1 million 203 thousand 700 people (this indicator grew by 24.5% compared to the same period in 2016). Among the visitors, 31.2% are citizens of Russia, 21.2% - Georgia, 15% - Iran, 11.6% - Turkey, 3.7% - UAE. As a result of activity of tourists, the rental market in Baku in the summer season, by the same period last year, increased by 40%.

How Russia participates in Baku-Tbilisi-Kars, and Azerbaijan - in the EAEU

It is necessary to clearly delineate the accent - the projects of BTK and North-South are not competing, but complementary. For the transportation of goods by Russian exporters through BTK for Turkey, Azerbaijani Railways CJSC has already established preferential tariffs. This can attract a certain flow of grain, coal, fuels and lubricants to Turkey directly from Russia through Dagestan.

Another factor of influence is corporate - most likely, it is through Russia that the leaders in world container transportation will come to the region. In particular, if one of the world leaders in container shipments, the Mediterranean Shipping Company (MSC), takes part in the transaction to buy out a controlling stake of the container operator Transcontainer from the Russian Railways, it will become an obvious factor of influence on the ITC in the territory of Azerbaijan. The volume of freight turnover will increase.

When Russian Railways and Azerbaijani Railways agreed in advance on a through rate for container transportation on the route India-Iran-Azerbaijan-Russia (Mumbai-Moscow) in the framework of the North-South corridor in 2016, the experts of the departments also discussed the possibility of using the future BTK in this logistics.

Also, it is necessary to note an entirely new trend of influence of the Baku-Tbilisi route on the economy of Russian-Georgian relations. In January-August 2017, trade between Georgia and Russia reached the level of $700 million (30% growth compared to the same period in 2016, 10.6% of Georgia's total foreign trade turnover). Part of this flow goes through the Azerbaijani railway, without requiring transshipment at the seaport. It is, first of all, about wheat and petrol gases.

Another factor of interfacing with Russia is technological. The rolling stock of the Azerbaijani Railways, the main carrier of BTK, is also being formed by Russia. In 2015, the Azerbaijani company received 3,100 freight carriages under the contract with the Russian Uralvagonzavod, including 600 cisterns for transportation of oil cargo, 400 covered carriages, 400 fitting platforms, 200 fitting platforms for large-capacity containers, 1,000 gondola carriages, 300 grain carriages, 100 hoppers and 100 cement carriers. Azerbaijani Railways also has an additional option to supply about 14,000 freight carriages of different nomenclature from Uralvagonzavod.

In turn, the Azerbaijani state company SOCAR Methanol (a subsidiary of SOCAR), which owns a methanol plant in Azerbaijan, will become the main carrier of chemistry on the routes North-South. In 2013, 252 specialised cisterns for the transport of methanol were purchased in Ukraine.

The next point. With transportation by Baku-Kars Azerbaijani railway workers improve the transport potential of the whole EAEU.

How does this happen?

The offers of freight forwarding services of the Azerbaijani Railways are assigned to its subsidiary ADY Express Ltd.

In turn, ADY Express became part of the international trans-Caspian transport consortium, which was created by Azerbaijan, Georgia and Kazakhstan. It is designed to provide transportation of goods from Dostyk station on the border of China and Kazakhstan through the Caspian Sea (Aktau-Alat) to the Black Sea port of Batumi, or further to Turkey and Europe.

Of course, this route can be assessed as a segment of the One belt - One way project, at the same time, directly, it will influence the growth of the transit potential of the EAEU in Kazakhstan.

Finally, the role of Azerbaijan in the transit EAEU-Iran

An essential 'engine' for the development of the North-South ITC in Iran can be a program - oil in exchange for goods. However, for its implementation, a large set of measures of a different nature is needed. Russia needs to have a permanent market for Iranian oil outside the Russian Federation and develop complex clearing schemes. In addition, there is a negative impact of objective systemic factors: the reverse strengthening of US economic sanctions, the protectionism of the Iranian economy (a mandatory 4% duty on all imports), an objective infrastructural weakness.

Contrary to this number of factors, the export of the EAEU to Iran, according to the calculations of the Russian Export Centre (REC), increased by 48% in 2016 and reached 2.6 billion US dollars (the share of the Russian Federation is 2.2 billion US dollars). According to the REC, the most promising groups of products for export to Iran in the coming years are grain, vegetable oils, power equipment (including grid equipment), materials and machinery for railways, industrial equipment, and woodworking products.

However, this trade is, to a large extent, one-sided: exports from Russia are $1.9 billion (machinery, equipment, transport, food, metals), imports from Iran are only $0.3 billion (food). Iran's share in Russian trade is barely noticeable: only 0.4% (close to Armenia's share); the Russian share for the foreign trade turnover of this country is more significant - 4.2%.

At the beginning of March 2017, the members of the EAEU intergovernmental council signed an order to organise work on the preparation of a temporary preferential agreement with Iran. It should provide for a selective reduction of duties (we are not talking about a full-fledged free trade zone). In the list of priority duties - 20 positions on both sides.

While negotiations are under way to conclude an interim agreement, with limited coverage of preferences, only for the most significant export positions for the parties. According to the results of the Eurasian Economic Commission (EEC) analysis, Russia expects the largest GDP growth - $1.3 billion and Kazakhstan - $508.6 million. The increase in Belarus will be $78.6 million, in Armenia - $27 million, in Kyrgyzstan - $12 million.

According to the EEC forecasts, exports from the EAEU to Iran will mainly be for non-agricultural sectors - 83.1% of the total projected increase in exports. This will concern medicines, surfactants, paper, clothing, steel products, various types of mechanical and electrical equipment, cars, and more. Total exports may increase by 73%.

Azerbaijan already intends to receive part of this transit 'pie' by implementing a set of technical measures to transform the infrastructure and create economically advantageous transit conditions for third countries.

Reform and management of the industry

In conclusion, let us consider one more question: to what extent does the current policy of Baku in the sphere of state administration meet the tasks set?

To date, Azerbaijan has two documents of the nature of strategic planning. The first one is the concept of development 'Azerbaijan 2020,' created according to the type of Russian and Kazakh analogues, close to each other by the vague content of strategies.

The second document is more specific - 'Strategic Road Map on the Prospects of the National Economy.' Unlike the concept of development, 11 industrial road maps are mandatory, they are tied with the current presidential decrees. The Administration of the President of Azerbaijan controls the implementation. The document was the result of a nine-month study of more than a dozen areas of the national economy conducted by a working group led by Presidential Assistant for Economic Reforms Natig Amirov. The backbone of the road map is a study prepared by the consulting agency McKinsey.

Natig Amirov

In its framework, proposals have been prepared for the development of logistics and trade. The changes needed to improve the mechanism for managing local and foreign transportation are described, and the task is to strengthen the integration of the country's transport system into the international one. Measures are envisaged for road, rail, water, air and underground (metro) transport. In particular, the following measures are envisaged: laying the second branch of the railway Baku-Lankaran-Astara gauge; completion of the second stage of the BISTP in Alat; increase in passenger and cargo traffic of the Baku air hub; modernisation of highways of regional importance (from 10 to 70 km).

In the sphere of railway transport, measures are envisaged to integrate it into the domestic market: increase the share of market (not subsidised transport), increase labour productivity, increase energy efficiency by 15%, and cut emissions by 20%.

The developed road network is an element of the modernisation transformation of the Azerbaijani economy. Road construction is actually not only a business, but an entire industry with an almost unlimited increase in domestic resources. Suffice it to recall a well-known example from President Roosevelt's anti-crisis program, which invested state resources in the development of the road network, creating new jobs in a depression-depleted US economy. Not only roads, but also airports, sea terminals, railway junctions are actively being built in Azerbaijan. Strengthening the political importance of Azerbaijan as a trans-type transport hub, smooth transshipment from motor transport to rail and air transport may in the long term make the country a junction of Eurasian importance.

The possibility of simultaneous use of the meridian and zonal lines of the ITC in this part of Eurasia makes it possible, if necessary, to compensate for the emerging economic difficulties and political crises associated with one or the other direction. For example, today Chinese destinations are heavily dependent on a soft economic landing, perhaps even China's stagnation - a reduction in transoceanic shipments has reduced their cost by almost half.

The crisis in the fall of global transport directly affects the intensity of the Silk Road. And all the variants of the route - be it the Caspian-Caucasian, or Russian. China, of course, will support them at the level of 'the existence of an alternative,' but regional transportation due to Ukrainian and European commodity flows to the markets of Central Asia cannot make it globally significant. The same applies to transit through the territory of Russia. Accordingly, one cannot expect profits that are announced based on the previous planning stage, when the double-digit growth of the PRC economy relied on the long-term basis of traffic forecasts.

However, the existence of an extensive network of roads, well-established logistics, the availability of trans-type terminals gives advantages to Azerbaijani export-oriented producers, and also creates a good platform for the future growth of the economy of China and the Asia-Pacific region. The successful start of promising projects between Iran and Russia will give impetus to the development of the North-South ITC and will be able to attract cargo from India, Pakistan and other countries, for which the speed of delivery through Azerbaijan will be more attractive.

Reforms of the Azerbaijani economy, qualitative changes in administration, infrastructural pumping, encouragement of transit will give impetus to the development of the country as a whole. Naturally, this reality will become an additional factor of Azerbaijan's integration into the world economy.

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