Azerbaijan, Georgia and Turkey build a golden triangle of mutual investment

By bne IntelliNews December 17, 2013

Clare Nuttall in Astana -

The countries of Turkey, Azerbaijan and Georgia are building a golden triangle of mutual investment, as the three very different but prosperous countries of southeastern Europe look to benefit from each others' advantages.

The synergies are almost as good as those between Russia and China. Turkey has the people that go to make up the largest consumer market in the region. Azerbaijan has the energy resources and cash that comes from being an oil producer. And Georgia is one of the most progressive reformers in the former Soviet Union.

Both needs and geography are tying these countries together - but need is a good foundation to start with and Azerbaijan and Georgia in particular have been moving together steadily for the last few years. Now both are looking to the Turkish market as the best place to continue their growth and scale up their businesses.

The cornerstone of the relationship is energy and money. As rich as Azerbaijan is in energy, Turkey is poor. Multi-billion-dollar investments by Azerbaijan's state oil company Socar into Turkey have established Azerbaijan as the country's largest energy investor, and add to the steadily growing economic and infrastructure ties between Azerbaijan, Turkey and Georgia. All three countries are crucial elements in the Southern Gas Corridor - an EU energy initiative - but future trends in their economic cooperation depend in part on the ever-changing geopolitical landscape in the south Caucasus and the efforts by other regional players, in particular Russia and Iran, to build their own alliances.

Socar's investments in Turkey are concentrated in the Izmir region, where the Azeri company acquired petrochemicals giant Petkim in 2008. On November 19, the head of Socar Turkey, Kenan Yavuz, announced that Azerbaijan was investing between $17bn and $20bn into Turkey, thereby becoming the country's top source of energy sector investment. Plans in the Petkim peninsular include construction of the Star refinery and Turkey's biggest container port. Socar's local subsidiary, Socar Turkey Enerji, is set to become Turkey's largest company by 2018.

For Azerbaijan, Turkey is a crucial link in the energy transport corridor to European markets. Since Socar's initial Petkim investment, Turkey has also been connected to Azerbaijan's new energy strategy, under which it is moving from the export of crude oil to the export of petrochemical products.

While Socar's mega projects have grabbed the headlines recently, the volume of trade and investment between Azerbaijan and Turkey has been steadily growing over the last two decades. The two countries' historic and cultural ties - the Azeri and Turkish languages are mutually intelligible - have helped to boost economic links, as has government-level encouragement. In June, Azerbaijani Economic Development Minister Shahin Mustafayev announced that at $4.5bn Azerbaijani investments into Turkey are around three-times higher than Turkish investments in Azerbaijan, Fineko/ reported.

Many of these investments are by small and medium-sized enterprises from both countries. According to the Azerbaijan Export and Investment Promotion Foundation (AZPROMO), some 1,100 Azerbaijani companies are operating in Turkey in sectors including construction, tourism and real estate, as well as energy. The Turkish presence in Azerbaijan is even larger in terms of the number of companies, with more than 2,000 companies with Turkish capital registered in Azerbaijan - 36% of all foreign companies registered.

"As Azerbaijan and Turkey are strategic partners, the volume of mutual investment and trade are expected to increase in the following years. The governments of both countries continuously work on further development and intensification of bilateral cooperation," AZPROMO head Rufat Mammadov told bne. Mammadov forecasts that the Azerbaijani government's economic diversification policies will open up new opportunities for foreign investors.

The third point in what is emerging as a "golden triangle" of investment and trade in the south Caucasus is Georgia, which counts Turkey and Azerbaijan as its top two trading partners. Aside from their geographic proximity, all three countries bring different qualities to the table economically.

Azerbaijan is a major oil and gas producer that supplies Georgia and Turkey as well as exporting to Europe, and has accumulated large amounts of capital that it is investing at home and abroad. As well as Socar's investments in Turkey, Azerbaijan's sovereign wealth fund SOFAZ was a cornerstone investor in the $6bn Georgia Co-Investment Fund launched in September. Turkey is one of the world's top 20 economies in GDP terms. In May, the European Bank for Reconstruction and Development (EBRD) chief economist Erik Berglof identified Turkey as one of three countries - alongside Russia and Poland - with the economic weight to influence their regional economies. While Georgia is the smallest of the three economies, it has pursued far-reaching economic and political reforms since the 2003 Rose Revolution. There is also a political dimension, since Azerbaijan and Turkey's hostile relationship with Armenia, and Georgia's with Russia, pushes the three countries closer.

Lacking large amounts of oil and gas, Turkey is stronger in other industries. It has thus become a natural partner for Azerbaijan as Baku seeks to diversify its economy and ease the traditional reliance on hydrocarbons. "Turkey is the biggest foreign investor in the non-hydrocarbon sector of the Azerbaijani economy. Its share in the total volume of non-oil foreign direct investment since 1995 exceeds 23%," Mammadov says. "Turkish investors contribute to the development of almost all the sectors of Azerbaijan's economy."

However, the energy sector remains the single most important basis for cooperation among the three countries, given Azerbaijan's status as one of the main oil and gas producers in the Caspian Basin. The Southern Gas Corridor strategy developed by the European Commission sees Azerbaijan as one of the main supplier nations as Europe seeks to reduce its reliance on Russian gas by tapping other sources in the Caspian and Middle East.

The construction of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which was completed in 2006, opened up a new route from the Caspian to European markets, bypassing Russia. Plans to build gas pipeline infrastructure from the Azeri sector of the Caspian via Turkey to Europe are now underway. The Trans-Anatolian Pipeline (TANAP) is an Azeri-Turkish project that will carry gas from Azerbaijan's offshore Shah Deniz field to the Turkish-Bulgarian border, from where the Trans-Adriatic Pipeline will transport the gas into the heart of Europe.

Cooperation between the three countries has also increased outside the oil and gas sector. The other major project in progress is the Baku-Tbilisi-Kars (BTK) railway. The line will connect the three countries' rail networks, facilitating cargo transport between China and Europe across the Caucasus. It will restore links severed when Turkey closed its border with Armenia in 1993, forcing the Kars-Gyumri-Tbilisi line to shut down. The first pilot trains are due to run on the BTK railway in 2014, and when it reaches full capacity it will carry up to 30m tonnes of cargo a year.

In the electricity sector, the Azerbaijan-Georgia-Turkey Power Bridge Project was established in 2009. The opening of the Borçka-Akhaltsikhe electricity transmission line - an important part of the project - on December 12 will make it possible to transmit electricity initially from Georgia and later also from Azerbaijan to Europe via Turkey.

Private sector companies are also pursuing expansion opportunities across the three countries. Azerbaijan's Pasha Bank, for example, launched its first international branch in Tbilisi in 2013, and is now considering strategies to enter the Turkish market. Azerbaijan's Akkord Industry-Construction Investment Corporation has expanded into Georgia as well as other former Soviet countries. In the opposite direction, Georgian companies such as TBC Bank and marketing consultancy ACT made their first international moves by setting up in Azerbaijan.

While these infrastructure projects and the rise in trade and investment has a solid business case for the three countries, and further cooperation is planned, future relationships are also influenced by the evolving political landscape in the Caucasus.

Stratfor analyst Eugene Chausovsky points out that increased investment between Azerbaijan and Turkey "is very much steered by the geo-political situation... Turkey is trying to boost this even further in order to strengthen its ties in the region, especially as Russia has grown its influence there over the past couple of years. Now Iran could become a stronger player in the region as a result talks with the US that are still at an early stage but potentially significant," he tells bne.

In another recent development, on December 12 Turkish Foreign Minister Ahmet Davutoglu made his first visit to Armenia since the failure of a 2009 attempt to normalise relations between two countries. However, Davutoglu's meeting with his Armenian counterpart Eduard Nalbandyan did not appear to yield any concrete results, and as such is unlikely to affect the status quo.

Any major political changes in the region could have knock-on effects economically. The change of government in Georgia, for example, has led to a tentative rapprochement with Russia this year. Russian President Vladimir Putin announced during a visit to Armenia on December 2 that Moscow plans to build up its presence in the south Caucasus. "As far as Transcaucasus is concerned, Russia has never intended to go away from here. On the contrary, we are going to strengthen our positions in the Transcaucasus," Putin said.

A greater Russian presence in the region could mean that Moscow's interests may need to be considered when drawing up regional energy projects - even though Azerbaijan's status as a major energy producer have given its greater independence from Russia. "Azerbaijan's relationship with Russia has always been the most complicated among the three south Caucasus countries. To an extent, Azerbaijan has become more cooperative with Russia recently, but at the same time Baku is wary of Russia's influence in the region," says Chausovsky. "While they talk more with the Russians about energy and economic ties, they are also talking with other players like Turkey and Israel to balance that relationship."

Even with a greater Russian presence in the region, the ties between Azerbaijan, Turkey and Georgia are likely to remain strong - given the good political relationships among the three countries and the existing momentum of small- and large-scale investment and regional infrastructure projects.

Azerbaijan, Georgia and Turkey build a golden triangle of mutual investment

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