CASPIAN DIVERSIFICATION

The war in Ukraine and anti-Russian sanctions are gradually reformatting long-standing logistics schemes compelling Eastern and Northern European countries to diversify their transport routes through Russia. Obviously, these processes reinforce the transport cooperation in the Caspian region, where Kazakhstan and Azerbaijan, with the active support of China, Turkey and the EU, are working hard to expand cooperation along the Trans-Caspian International Transport Route (TCITR). Overall, Baku and Nur-Sultan seek to maximise trade and enrich the business agenda with investment projects that go beyond energy and transport cooperation.

Maritime neighbourhood

This year Azerbaijan and Kazakhstan are celebrating the thirtieth anniversary of the establishment of diplomatic relations. Over the years, the two countries have worked hard to develop economic cooperation and trade. And thanks to this partnership efforts between Baku and Nur-Sultan it was possible to recreate the ancient Silk Road, which unites the transport communications of Central Asia, the South Caucasus, Turkey and Europe. The Caspian neighbours have long and fruitfully cooperated in supplying hydrocarbons to global markets. This trend has been the basis of bilateral business relations for many years.

However, this scheme changed significantly during the 2014-2018 global energy crisis, when due to a sharp decline in global energy prices and rising transportation costs Kazakhstan stopped the tanker shipment of its oil to the Baku-Tbilisi-Ceyhan (BTC) pipeline system. Since then Kazakh hydrocarbon transit through Azerbaijan and Georgia has been limited to small volumes of oil products and fuel. Most of the Kazakh oil has been routed through Russia via the Caspian Pipeline Consortium (CPC) pipeline to marine terminals in the Black Sea.

The changing global conjuncture has only briefly reduced the intensity of trade and transport links between these two neighbouring littoral states. Since 2015, after another round of conflict in Syria, Turkey has sharply increased the shipment of non-oil cargo to the Central Asian region bypassing Russian ports and using the combined road and sea transport via the South Caucasus as an alternative. To an even greater extent, cargo flows between Azerbaijan and Kazakhstan have increased soon after the opening of the Baku-Tbilisi-Kars rail corridor (BTC) in October 2017. In the same year, Kazakhstan, Azerbaijan, Georgia and Turkey agreed to form the Trans-Caspian International Transport Route (TCITR), a critical component of the Transport Corridor Europe-Caucasus-Asia (TRACECA). Shortly after, the potential of the TCITR has made it a logistics hub for the entire Middle Corridor. This potential has been actively used by China as part of its ‘Road Initiative’ with several container block trains from a number of cities in China to Turkey and on to the Middle East and Europe. Japan's global logistics company NipponExpress (China) Co. Ltd. (NX China) has recently joined these initiatives by launching a new intermodal service to transport cargo through China, Kazakhstan and Azerbaijan to Europe bypassing Russia. In turn, Turkish industrial cargo was routed through BTK in the reverse direction via the Middle Corridor to Central Asia and China.

Thus, after the energy crisis, the lion's share of Azerbaijani-Kazakhstani trade turnover, including both mutual trade and transit operations, was provided by deliveries of non-oil products. The trade activity has contributed to the expansion of the range of supplied goods. Today Kazakhstan's export to Azerbaijan mainly consists of carbon steel rolls and ready metal products, railway and automobile parts, locomotives, chemical raw materials, wheat and flour products. Azerbaijan exports to Kazakhstan polypropylene and other polymeric raw materials, electrical equipment, prefabricated constructions, building materials, as well as fruits, vegetables, canned goods, wine-making products, etc. These supplies have grown dynamically, but during the pandemic the trade turnover between the countries dropped by 38% compared to 2019 (about $230 million) and trade indicators for 2020 ended at a fairly low level of $140 million. The decline has mainly affected Kazakhstan's exports, but emergency anti-crisis measures helped to quickly overcome the pandemic crisis, and last year the bilateral trade turnover more than doubled (to $300 million).

Geopolitics no good

The tragic events of 2022 have changed the geopolitical realities throughout the post-Soviet space. Today these processes also indirectly affect the trade and economic relations in the Caspian region.

One of the unpleasant episodes during the initial period of the war in Ukraine was the accident at Kazakhstan's oil export terminals at Novorossiysk and their overdue repairs, which resulted in the loss of about 350,000 tonnes of export oil produced at the Tengiz, Kashagan and Karachaganak fields.

In fact, about 80% of export supplies go through the CPC pipeline, whose main shareholders are Russia (31%), Kazakhstan (21%) and Chevron (15%).

Alternatives to the CPC include mainly other Russian pipelines. These include the 4,000-kilometre Druzhba network, which supplies refineries in Eastern Europe and further west to Germany. But this route can be shut should the EU decides to ban oil imports from Russia.

Another export delivery route to the east is the pipeline to China with the annual throughput capacity of 20 million tonnes, which is about a third of the CPC capacity. Finally, there is the Baku-Tbilisi-Ceyhan pipeline, which also supplies the Kazakh oil. Although, this volume is very small – in average about 100,000 tons annually, as the Caspian neighbours consider it expensive to deliver their fuel to Baku also due to higher pumping tariffs, which affects the volume of final profit. Yet today Kazakhstan is ready to increase the volume of transit through BTC.

In addition, the Kazakh economy has suffered from the Western sanctions, which have prevented the cargo movement through Russian rail and road routes to Europe. Shippers from Kazakhstan, as well as from Central Asia and China with no access to international seaports of neighbouring states, now need to reorient their cargo traffic primarily to the Azerbaijan-Georgia route with access to Turkey or the Black Sea ports of Georgia.

One of the active sides in this issue is Nur-Sultan, as one of the initiators of the TCITR designed mainly for non-oil cargo, including multimodal containerised cargo. Kazakhstan has recently put forward new plans to expand the logistics potential of the route. According to Kazakhstan's Ministry of Industry and Infrastructure Development, they plan to establish a container hub at the Aktau Sea Port FEZ. The project will involve international consultants and investors, including international container operators such as PSA International, Maersk and MSC. It is planned to add four ferries to Kazakhstan's merchant fleet on the Caspian Sea, as well as to build second tracks and electrify the Dostyk-Moyinty railway section in 2022-2025. If successful, these initiatives will increase the speed of container trains, multiply the capacity of sea ports and increase the volume of cargo handling by ferries. During the five months of 2022 the Aktau commercial seaport has already shipped more than 1.2 million tons of cargo (including transit container cargo), which is twice as much as in the same period of 2021. Moreover, according to the Aktau port's forecasts, the volume of traffic through the TCITR is expected to increase sixfold this year, to 3.2 million tonnes. However, achieving this ambitious goal will require close cooperation with partners on the western shores of the Caspian Sea, i.e. Azerbaijan.

Azerbaijan has also increased the transit of cargo through the TCITR. According to ADY Container (a subsidiary of Azerbaijan Railways), about 9,000 TEU containers were transported in January-April 2022, which is 30% more than in the four months of last year. By the end of the year Azerbaijan expects to see a threefold increase in container transportation along the Middle Corridor.

Key agenda

It’s no surprise that the transport and logistics agenda has been in the focus of all meetings and negotiations between government and agency delegations between Kazakhstan and Azerbaijan since the beginning of the year. Given the increasing cargo traffic, the parties will have to agree on tariff changes for transit cargo, the aspects of simplifying cross-border and customs procedures, optimise the purchase and lease of railcars, and consider new ferry and feeder vessel schedules between ports on the eastern and western shores of the Caspian Sea.

Transport issues were also discussed during the first state visit of Kazakhstan President Kassym-Jomart Tokayev to Turkey in early May. "We began to diversify oil export routes to China and Europe, including using Turkish transport corridors. We have also started works to increase the capacity of oil pipelines and to upgrade the Aktau and Kuryk seaports. Due to the changing geopolitical situation, the role of the TCITR corridor has increased significantly. After the Kuryk seaport was connected to this route, cargo transportation time from Khorgos to Istanbul was reduced five-fold, from 60 days to 13 days," the Kazakh president said during his visit to Turkey.  

Apparently, Kazakhstan is not going to limit its political and economic strategy to Russia alone and intends to diversify its transport and trade vectors by strengthening ties with Turkey and EU countries. Obviously, this trend implies an even greater cooperation with Azerbaijan, which is becoming the optimal maritime gateway for Kazakhstan to expand trade with the Western market.   

Apparently, the issue of expanding the transport potential of the TCITR will also be discussed during the Kazakh president’s planned visit to Azerbaijan. It is also planned to sign a number of documents in Baku, including a comprehensive programme for bilateral cooperation until 2026 and a new intergovernmental agreement on trade and economic cooperation. The expansion of transport and logistics relations will be a key issue on the agenda of the 18th meeting of the Azerbaijan-Kazakhstan inter-governmental commission on trade-economic cooperation in Nur-Sultan on July 4-5. The parties will discuss aspects of cooperation between the countries in various areas, including unused business resources.

The expansion of cargo traffic through the TCITR will boost the trade between the countries, as well as increase investment cooperation and the implementation of new joint projects in the non-oil sector. According to Kazakh estimates, the trade turnover between the two countries in 1Q2022 tripled and reached $100 million. In the near future there are plans to bring it to a billion dollars. In order to achieve this goal, it is necessary to significantly expand trade opportunities and involve more entrepreneurs in various areas of the non-oil sector in foreign economic relations.

In particular, Baku and Nur-Sultan will expand cooperation in telecommunications and space spheres in the medium term. Thus, the works on laying a 380-400km optical cable on the Caspian Sea bed is accelerated. Also, the space operators of the two countries - Azerkosmos and Garysh-Sapary concluded an agreement on the implementation of joint projects in the space and mutual use of satellite resources. Kazakhstan is interested in a project to build a new grain terminal at the Baku International Sea Trade Port in Alat. This can play a big role in the transit of grains. We have such an experience. Since 2007, a joint venture between Azerbaijan and Kazakhstan, Baku Grain Terminal, has been operating in the Baku port to deliver the Kazakh grain to Azerbaijan. Kazakh partners are ready to get involved in the restoration of the Garabagh and East-Zangezur economic regions, and perhaps to invest in agrarian-industrial projects in the future.