Kazakhstan favours Azerbaijan over Armenia as regional transport schemes take shape

Kazakhstan favours Azerbaijan over Armenia as regional transport schemes take shape
The leaders of the EEU.
By Naubet Bisenov in Almaty & Carmen Valache in Istanbul March 25, 2016

Picking between Armenia and Azerbaijan has been a no-brainer for the administration of Kazakh President Nursultan Nazarbayev. Despite the fact that Armenia is a fellow member of the Eurasian Economic Union (EEU) and has historically been close to Russia, just like Kazakhstan, Astana has always been more partisan toward Azerbaijan, a country with a large economy that shares the same Turkic origins as Kazakhstan and a shore along the Caspian Sea.

Astana and Baku’s close ties do not pose an immediate threat to the underperforming EEU – a Russian-led trade bloc that’s supposed to rival the EU – but they signal the former’s willingness to pursue its foreign policy and economic interests independently of Russia. After years of bilateral visits and amiable relations, Nazarbayev’s statement in March that Azerbaijan – and not fellow EEU member Armenia – is Kazakhstan’s “strategic partner” in the Caucasus therefore comes as no surprise.

Some are quick to dismiss the statement as diplomatic rhetoric, pointing to declining trade between the two countries, which fell from a peak of $490mn in 2008 to $250mn in 2014 and a mere $90mn in 2015. But low trade levels can be explained by the fact that the profiles of the Azerbaijani and Kazakh economies are so similar – oil and gas exporters that produce limited amounts of value-added goods – that they have precluded the development of significant commercial relations over the years. After all, it is hard to sell apples to an apple farmer.

Commerce is probably not the best metric for bilateral ties; Kazakh-Armenian trade stood at a meagre $4.6mn in 2015, with Kazakh exports amounting to $0.9mn, despite free-trade arrangements between the countries. 

Rather, Azerbaijan’s appeal to Astana comes from its role as a potential link for freight transport between Europe, Turkey, Kazakhstan and China, and gas transport from Kazakhstan to the Europe and Turkey. Together with Georgia, Azerbaijan constitutes a bridge between the Caspian-littoral countries like Kazakhstan and Turkmenistan and Black Sea markets such as Turkey, Ukraine and even the EU through Bulgaria and Romania. 

Trans-Caspian ties

Boosting trade across the Caspian Sea has been on the drawing board for a long time through projects such as TRACECA (Transport Corridor Europe Caucasus Asia), but these have had a limited degree of success.

The Caspian and the neighbouring Caucasus is also not included on the two main trade routes comprising the New Silk Road, a massive rail and road infrastructure project financed by China and international financial institutions (IFIs) that aims to create two land routes for Chinese-European freight transport through Central Asia, Russia, Iran and Turkey, thus slashing delivery times by 66% compared to maritime transport.

However, recent geopolitical events like the tensions between Russia and Turkey and Russia and the West have enhanced the importance of the Caucasus to regional trade and accelerated work on projects like the Trans Caspian International Trade Route, a multimodal route to ship goods from China to Europe through the Caucasus and Kazakhstan.

As a result of these developments, trans-Caspian shipments from the port of Baku in 2015 more than doubled year on year (y/y) to 13,307 twenty-foot equivalent units (TEU), of which 85% was transit cargo heading to Central Asia. And when Turkish trucks got stuck on the border between Georgia and Russia in November after Russia decided to sever commerce in agricultural products with Turkey, they were quickly redirected to Baku, where they were loaded on ships bound for Kazakhstan. Azerbaijan even lowered freight transit fees for its strongest ally Turkey and its trucks in a not-so-subtle attempt to show support for it in the Russian-Turkish tiff. Meanwhile, another country at odds with Russia, Ukraine, began using the Black Sea-Georgia-Azerbaijan-Caspian Sea-Kazakhstan route to export its goods to Central Asia and China in January, thus bypassing Russia.

While they may not be part of the most important international transport schemes, Azerbaijan and neighbouring Georgia form an attractive duo for regional transport links. The markets that they offer access to are sizeable enough - over 630mn consumers between Turkey, Ukraine and the EU – to peek Kazakhstan’s interest, especially in light of the country’s accession to the World Trade Organisation (WTO). That explains why in February the Kazakh, Azerbaijani and Georgian railway and shipping companies created a consortium to improve container shipping across the Caspian Sea, and why in January Azerbaijan, Kazakhstan, Georgia and Ukraine signed a protocol on preferential tariffs for cargo transport.

To Baku, the scheme is all the more important because it is working to diversify its economy away from its heavy dependence on oil and gas – and transhipments are a lucrative business. The trans-Caspian route promises to increase freight transport by a factor of eight to 300,000 TEU by 2020, and to generate some $1bn in profit in “the first few years”, according to Akif Mustafayev, TRACECA secretary. Azerbaijan Railways, the state-owned railway company, alone could make profits in excess of $600mn-700mn from transit traffic by 2020, Mustafayev added.

After building a second deepwater port on the Caspian Sea at Alat, some 65km from Baku, Azerbaijan has decided to cash on its potential as a transhipment link by building a free economic zone at the port. The project was announced on March 17 and could bring as much as $1bn in investments “in just a few years”, according to Taleh Ziyadorov, director general of the Baku International Sea Trade Port. He added that his company would build a roll-on/roll-off (ro-ro) terminal in Baku by end-2016 and that the railway company was looking to increase the speed of trains travelling through the country by 50% to 120km per hour.

Another transport plan connecting Kazakhstan to Azerbaijan that is long in the making, but difficult to implement, is the Trans-Caspian Gas Pipeline – a project that aims to funnel Turkmen and Kazakh gas under the Caspian Sea to a network of pipelines starting in Azerbaijan and ending in Italy. The challenge to the project is the disputed status of the Caspian Sea between the five littoral states, and Russia and Iran’s opposition to the pipeline ostensibly for environmental reasons. However, the size of the gas reserves in Central Asia, particularly in Turkmenistan, are a strong incentive for Astana, Baku and Ashgabat to continue to push for this project.

Poor cousin 

While these transport projects make Azerbaijan an interesting partner for Kazakhstan, impoverished and landlocked Armenia offers few attractions for Astana.

Kazakh-Azerbaijani trade might be low, but Kazakh trade with Armenia is virtually non-existent at less than $5mn a year. Armenia is geographically and economically isolated, its only link to the EEU – and Kazakhstan – is via Russia. And while the country acts as an extension of Russian interests in the Caucasus, that fact alone has not been enough to prompt Nazarbayev to make an effort to reach out to Yerevan.

On the contrary, back in 2014 President Nazarbayev asked his Armenian counterpart Serzh Sargsyan to “follow all UN principles that establish Armenia’s borders” if he wanted his country to join the EEU. This was a wink toward Azerbaijan, which has been trying to regain Nagorno-Karabakh and seven other territories under Armenian occupation that it lost in a war with Armenia that ended in 1994.

EEU membership is not enough of an incentive for the Nazarbayev administration to disavow ties with strategic allies outside of the bloc like Azerbaijan. And as regional transport schemes begin to take shape, they could further drive Kazakhstan away from partners in the Russia-led EEU, particularly if the benefits of EEU membership continue to disappoint as they have since the bloc came into being at the start of 2015.