25 June 2022

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RIGHT PATH

Azerbaijan's logistics potential becomes more attractive amid anti-Russian sanctions

Author:

01.05.2022

Located at the crossroads of vital trade routes, Azerbaijan has historically functioned as an international transport and logistics hub between North and South. Apparently, the problems caused by the war in Ukraine and the increased pressure of sanctions on Russia contribute to the growing demand for Azerbaijan’s logistics potential. Customers urge on expanding Azerbaijan's transit resources despite their full-scale usage.

 

The sanctions crisis

Anti-Russian sanctions have been effective for more than two months and have severely limited Russian companies' access to global transport hubs, primarily in Europe and North America. At the same time, traditional international transit routes through Russia and Belarus, which used to connect European countries with Central Asia and the Far East, are being reformatted. Most European trucking companies are winding down cooperation with Russian Railways (RZhD), as well as with Russian ports and river transport companies.

These processes are simultaneously developing in several directions. By early March, operators of the largest container terminals in Hamburg, Rotterdam, Antwerp and Bremerhaven announced the cessation of ship services and cargo handling for Russian ports due to sanctions imposed by the European Union. The situation is extremely critical for Russia, as most European cargo and almost all transit from China, South and North America towards Russia's northern ports goes through the above hubs. A similar ban applies to exports from Russia in the reverse direction. Cargo transportation from Finnish and Estonian ports have been reduced almost to a minimum.

Meanwhile, sanctions have sharply reduced the volume of imports into Russia, causing major international container operators (Swiss Mediterranean Shipping Company, Danish Maersk, French CMA CGM, German Hapag-Lloyd, Singapore's Ocean Network Express, etc.) to withdraw from the Russian market.

To estimate the scale of losses, it is sufficient to note that in the previous two years there were on average more than 1.7 million universal containers passing through Russia, of which only 250,000 were controlled by Russian operators.

At the same time, foreign businesses began winding down transit shipment through the Russian territory. In March, transit from Scandinavian countries towards the Black Sea ports got frozen. By the end of April, Japanese and Korean transit cargo via the Trans-Siberian and BAM rail systems was essentially reduced to a minimum.

Therefore, customers are actively looking for alternative routes.

 

China: refocusing on BTK

Even China, which has not joined the Western sanctions, intends to reduce cargo transportation through Russia in order to protect its exporters from international sanctions. Also, Beijing is further increasing cargo volumes (tens of millions of tonnes) through Central Asia and South Caucasus to Europe. In addition to the Baku-Tbilisi-Kars (BTK) corridor, shipment of cargo through Georgian Black Sea ports to Romania, Hungary, Slovakia and the Czech Republic up to Mannheim, Germany, will be increasingly used.

It is clear that Azerbaijan, together with its partners in Central Asia, Georgia and Turkey, participants in Chinese One Belt, One Road initiative, will benefit from the growth in Chinese transit. The development of this corridor has made it possible to double the number of containers transported by railways: from 15,000 in 2018 to 30,000 in 2019. Moreover, since the launch of the pilot China Railway Express container train in 2019, Chinese multimodal transit has multiplied. Container shipments have become permanent, especially with the launch last year of container block trains from China's Gansu province, as well as agreements between Azerbaijan's Ministry of Economy and China's Xian Free Trade Port Construction and Operation Co. to establish permanent container transportation between China and Turkey in transit through Central Asia and South Caucasus.

The interest of China, as well as suppliers of goods from Japan, South Korea and other Southeast Asian countries, in the various routes along the Silk Road has increased remarkably since the post-pandemic rise in maritime transportation costs as well as in ship chartering and container rentals. Last year's dry cargo accident in the Suez Canal also played an instrumental role, having interrupted the traditional ocean transportation for a long time. Amidst the war in Ukraine and anti-Russian sanctions, the advantages of shorter rail and ferry routes through Central Asia and South Caucasus seem more preferable.

It takes around 40-50 days to deliver cargo by sea, passing through the Suez Canal or around Africa. By comparison, the estimated travel time from Turkey to China (8,693 km - two continents, two seas and five countries) takes around 12-14 days. Given the considerably increased prices for ocean freight transportation, the time factor is likely to dominate the choice of route for freight forwarders.

 

TRACECA: engaging all segments

Cooperation on another component of the Europe-Caucasus-Asia corridor (TRACECA), the Trans-Caspian International Transport Route (TCITR), which was created about seven years ago, is developing equally effective. TCITR is mainly designed to carry containerised multimodal cargo between Kazakhstan, Azerbaijan, Georgia and Turkey. Subsequently, the TCITR participants also co-opted Chinese transit route into their programme and succeeded in establishing block-train shipments from Qingdao, China to Tbilisi starting from February 2022. It is estimated that around 50 such trains will be running between these cities every year.

"TCITR route can be highly efficient if Georgia and Azerbaijan coordinate cross-border processes and follow specific steps to attract freight forwarders," the World Bank said in a recent statement. WB experts have developed a Strategy and Action Plan that highlights priority areas in the transport sector of the two countries, including customs, transparency of access and fair competition, organisation of permanent block trains and optimisation of intermodal infrastructure. WB experts refer to the TCITR project as the western section of the Middle Corridor, ensuring cargo transportation between the ports of Aktau and Baku and onwards through the BTK railway corridor.

The volume of traffic along the TCITR for 2021 was 586,200 tonnes, with container traffic of 25,270 TEUs. In January-March 2022, 266,300 tons of cargo were transported along this route, which is 123% more than during the same period last year. Container transportation reached 5,847 TEUs, which is 19% more than in 1Q2021.

Most recently, the heads of the railway administrations of Azerbaijan and Kazakhstan, Javid Gurbanov and Nurlan Sauranbayev, signed an agreement in Nur-Sultan on cooperation in logistics and the implementation of joint projects. The documents were signed right after discussions on the future development of multimodal transport via TCITR.

Azerbaijan also fully supports the expansion of container traffic along another segment of the TRACECA corridor, the Lapis Lazuli route. The goal is to ensure transit cargo between the ports of Turkmenbashi and Alat. The route is in fact a single artery of transport lines of Afghanistan, Turkmenistan, Azerbaijan, Georgia and Turkey. During the 15th Summit of the Economic Cooperation Organisation held in Ashgabat in November 2021, Baku and Ashgabat once again discussed the prospects of enhancing the potential of this route. In particular, Baku considers the Lapis Lazuli project as a driver increasing the transit potential of the BTK and of the Zangezur transport corridor in the future.  

Meanwhile, Iran plans to increase the number of permits for bilateral and transit traffic. This issue will be discussed at the next meeting of the Azerbaijani-Iranian commission on international road transportation slated for June 2022 in Iran. A government source told Interfax-Azerbaijan that in general Baku and Tehran are planning to expand cooperation in the transport sector. "There are plans to discuss possibilities to increase maritime transportation to third countries," the source said.

What will be the final outcome of all these processes? They will eventually increase cargo traffic through Azerbaijan and the state budget revenues. However, in January-March 2022, the volume of cargo transported by all types of vehicles in Azerbaijan was already 5.7% higher than in 1Q2021.

Given that in 2021 Azerbaijan's cargo revenues thanks to the TRACECA corridor grew by 5.2% (>₼539.8m), this year's indicators are expected to be more impressive. This means that the share of non-oil sector in Azerbaijan’s total revenues will also grow. And that is the main goal of Azerbaijan's current economic policy.



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