Wednesday, 01 October 2014

The Evolving Strategic Context of the South Caucasus Transportation Network

Published in Analytical Articles

By Mamuka Tsereteli (10/01/2014 issue of the CACI Analyst)

Newly emerging geopolitical and economic realities are dictating an increased focus on developing the land transportation corridor between Asia and Europe. Asian producers and European importers are seeking faster ways of delivering business orders to European consumers at competitive prices, while there is also an increased flow of goods from Europe to Asia. Maritime routes are cheap but slow, and there is a growing competition between different land transportation options from China, India, Pakistan and other countries via Central Asia to Europe. One of them is a multimodal transportation option from Central Asia through the South Caucasus to the Black Sea or Turkey and beyond to Europe. Regional leadership and U.S. and EU support is required for it to succeed.

BACKGROUND: Europe is the largest trading partner for Asian producers. For example, the China-EU bilateral trade in goods reached €428 billion in 2013. EU exports to China increased by 2.9 percent to reach a record €148.1 billion. EU exports have nearly doubled in the past five years, contributing to a rebalancing of the trade relationship. China is the EU’s main supplier, with €279.9 billion worth of goods in 2013. In general, with rising purchasing power in China, India and other large and small countries in Asia, a larger trade in goods between Europe and Asia can be expected. These developments increase the potential of bilateral trade exponentially and, therefore, require additional transport options.

Current transportation options include the most cost effective transportation from Eastern China via sea, crossing the Indian Ocean, and then through the Suez Canal to Europe. As of today, this is the preferred way of transporting goods from China. But while this is the cheapest route, it is also the most time consuming, taking at least 40 days. A wide range of goods and products require faster delivery at competitive prices, hence the necessity of the shorter transportation options. One traditional route with a shorter delivery time is crossing from China into Russia and reaching Europe via the Trans-Siberian Railway; but this is not the best export option for the rapidly developing Central and Western Chinese provinces due to geography and distances.

A much more attractive land route for reaching Europe from China is a railway connection with Central Asia and beyond to Russia. Trains using the Chongqing-Xinjiang-Europe international railway network take just under 20 days to get to Europe, roughly twice as fast as cargo ships sailing from China’s east coast ports. The railway passes through Xi’an, Lanzhou, Urumqi and the Alataw Pass, where it crosses the border into Kazakhstan. It then continues through Russia, Belarus and Poland into Germany.

China’s rapidly developing Xinjiang region is also looking for export options via Central Asia. Urumqi, the provincial capital, is more than 3,100 kilometers (1,920 miles) from Beijing, while Kashgar, the westernmost Chinese city and historically a major Silk Road trading hub, is nearly 4,400 kilometers from the Chinese coast. It is natural that producers from Xinjiang are looking at transport options via Central Asia for shipping their goods to European markets. Kazakhstan is becoming major transit hub in growing trade between Western China and Europe. The recently developed railway connection from the Khorgos border crossing to the Zhetygen terminal near Almaty will facilitate larger cargo traffic between Xinjiang and Central Asia and beyond. In August Kazakhstan commissioned the new Zhezkazgan-Shalkar-Beineu and the Arkalyk-Shubarkol rail links with a total length of more than 1,200 km, 17 major stations and 31 junctures. These new railroads will be a shorter route to get from the East to the Caspian and further to the Caucasus and Europe, while making it possible to move rail cars eastward all the way to the Lianyungang port on the Chinese Pacific coast.

India’s interest in Central Asian markets and transit for Indian goods is also growing. Currently some products are shipped via Pakistan and Afghanistan to Central Asia and beyond by tracks, demonstrating a powerful transportation option even in the current security environment, and it promises to grow exponentially when conditions are improved and additional elements of infrastructure are in place. The Central Asian transportation network was a key element of the so called Northern Distribution Network (NDN), used to supply U.S. troops in Afghanistan. Russia’s railway system and Latvia’s port of Riga were part of the NDN as well, as was the South Caucasus transportation system, both connected to Central Asia. Reversed cargos associated with the U.S. withdrawal from Afghanistan have created a good precondition for commercializing cargo transportation from Afghanistan and most other countries of South Asia.  

IMPLICATIONS: Currently, options exist for railway cars to continue from Central Asia through Russia into Europe, as well as two alternative options for linking world markets by bypassing Russia. One option is to ship cargos to Iran, and then to Turkish or Iranian ports. As of today, Iran provides transit mostly for cargos originating in Central Asia. Over 12 million tons of goods were transited via Iran in the past Iranian calendar year, which ended on March 20, 2014 – a 4 percent rise on year on year basis. Over 96 percent of the goods transited by roads, showing an 8 percent rise compared to the year ending in March 2013. The attractiveness of the Iranian option for the auto shipments is determined by the very low cost of diesel fuel due to Iran’s continued government subsidies. 

The Central Asian states are building a railway connection to Iran via Turkmenistan to potentially use the railway connection from Iran to Turkey. The railroad will run from Uzen in Kazakhstan through Bereket in Turkmenistan to the Gorgan in Iran, then onward via Iran’s existing railroad system to Turkey, the Iranian Gulf ports, or to the newly developing port of Chahabar on the Gulf of Oman. Chahabar is of great interest to India as an access point to Central Asia, and possibly even to Europe via the Caucasus and the Black Sea. This Port already serves as an important export point for Afghanistan, competing with Gwadar port in Pakistan.

These developments clearly present Iran as a competitor to other transportation options that bypass Russia, but also bypass Iran – the multimodal transportation network from Kazakhstan or Turkmenistan via the Caspian Sea through Azerbaijan, then to Georgia’s Black Sea ports or Turkey’s transportation system to Europe and the Mediterranean. The additional attraction of this option is that some cargos could be shipped from the Port of Poti in Georgia via the Black Sea and the Danube Channel to the countries of Eastern and Central Europe, or via a Viking container train connecting the Black Sea through Ukraine and Belarus to the Lithuanian port of Klaipeda. The overall security environment in the Black Sea area, as well as security in Ukraine, will be a major factor in the viability of these options. Instability in the Black Sea region spreading from Ukraine may damage the perception of this transit corridor’s security.

It is clear that there will be fierce competition for cargos between these diverse transportation networks. Russia will try to maintain the leading role in transit for Asia-Europe trade. Countries of Central Asia and the South Caucasus will need greater regional cooperation and major international support to establish viable transportation alternatives to the emerging transit options in Russia and Iran.

A regional effort is in place, focused on developing the new elements of infrastructure facilitating Asia-Europe trade. In addition to upgrading railway infrastructure in Kazakhstan, this also includes the new railway system connecting Turkmenistan to Afghanistan and then Tajikistan, which can facilitate regional trade, as well as trade between these states and the rest of the world via Trans-Caspian or Iranian connections. This also includes upgrading port facilities on both sides of Caspian Sea – Aktau and Turkmenbashi on the Eastern shore, and Baku/Alat on the Western shore. Azerbaijan, Georgia, and Turkey are finalizing construction of the Baku-Tbilisi-Kars railway, which will ensure delivery of rail cars all the way from China to Turkey’s Mediterranean ports, or directly to Europe by railway. Port facilities are under active development on Georgia’s Black Sea coast, including an upgrade of the existing terminals, as well as plans for developing new ones. There are also ongoing upgrades to the road systems in both Georgia and Azerbaijan.

In addition to infrastructure development, there are clear signs of greater coordination between the transit countries. Kazakhstan, Azerbaijan, Georgia, and Turkey – in the framework of the so called Silk Wind project – have agreed to create a common customs and tariff structure for container trains shipped from China to Europe. The railway companies of Kazakhstan, Azerbaijan, and Georgia have also agreed on a common tariff on grain and liquefied petroleum gas from Kazakhstan to Georgia. As a sign of greater collaboration between Georgian and Azerbaijani railways, container block trains resumed regular operations in July 2014 between Baku and the Black Sea port of Poti twice a week, allowing containers to move from the Caspian port to the Black Sea port in about 30 hours. 

All these developments strengthen the competitive position of Central Asia-South Caucasus transportation corridor. But in order to compensate disadvantages of the multimodal nature of the transportation between railway and maritime operations, more must be done by the transit countries to reduce costs and transit time. That will require harmonizing tariffs and border crossing procedures for an entire range of cargos for containers, as well as other cargos, with the common aim of increasing the competitiveness of all of the corridor’s transit countries.

CONCLUSIONS: At least two elements are needed for the Central Asia-South Caucasus transportation system option to succeed: 1) strong regional cooperation between all transit countries and, 2) strong support for security and stability in the region by the major actors interested in the success of this corridor. The regional countries and their governing elites need to realize that a large scale presence and interest from international actors such as China, India, the EU, as well as the commercial interests of producers, global traders and consumers from Europe, Asia and the U.S. will facilitate greater interest in stability and security in Central Asia and the South Caucasus.

Greater traffic can increase stability for the transit countries, while strengthening their sovereignty and economic and political independence. China’s and the EU’s interest in the functioning of this corridor is a strong factor contributing to its potential success, but it is the U.S. that has a unique ability and experience to facilitate regional cooperation through pro-active diplomacy, as it demonstrated during Caspian energy developments. Currently functioning infrastructure that allows hydrocarbons from the Caspian region to be shipped to European markets is a vivid demonstration of the success of U.S. policies in the late 1990s and early 2000s. The countries of the region should step up their own diplomatic efforts to generate support from the U.S. and other state and commercial actors. Concerted efforts by countries in Central Asia and the South Caucasus and their international partners, including the U.S., can make these regions a primary transit route for Asia-Europe trade. By linking two major economic power centers of the world and by harmonizing multiple interests, this transportation network will facilitate global and regional stability.

AUTHOR’S BIO: Mamuka Tsereteli is Research Director of the Central Asia Caucasus Institute, Johns Hopkins SAIS.

(Image Attribution: joepyrek, via Creative Commons 2.0) 

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The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.


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