Will INSTC Overshadow Baku–Tbilisi–Kars Railroad?

EghtesadOnline: Azerbaijani President Ilham Aliyev’s official visit to Iran in early March 2017—his third in three years—was scheduled to include the trial run of a section of a new railroad along the Iran-Azerbaijan border.

News ID: ۷۷۵۸۷۶

03 May 2017

The Astara (Iran)–Astara (Azerbaijan) railroad is part of the International North–South Transport Corridor, which is currently under construction.

During Aliyev’s visit, two intergovernmental memoranda of understanding were signed. The first MoU dealt with preventing money laundering and financing terrorism. The more high profile, however, was the document on expansion of railroad links.

Iranian President Hassan Rouhani highlighted the short-term benefits of the railroad for promoting trade relations, which have seen a 70% increase in recent years due to the growth in trade in the border regions, reads an article recently published by an American institute for research and analysis Jamestown Foundation. According to Financial Tribune, below is the full text:

INSTC has become a particularly valuable project for Baku in the last two years, as it serves as a catalyst to deepen links with Iran and Russia—two major neighboring powers.

The transport corridor offers significant political benefits as well as economic ones for Azerbaijan, offering the country direct access to the Persian Gulf via Iranian railroads, and providing an alternative to Georgian railroads and Georgia’s Black Sea ports.

Undermining Armenian Initiative

Another important motivating factor for Baku is that INSTC undermines Armenia’s own regional railroad initiative. Yerevan wants to connect Armenian railroads with Iran and further extend this rail link via Georgia to Russia.

Securing the $3.2 billion financing for the project proved a major problem, however. Since INSTC connects Iran to Russia, the Iran-Armenia connection slipped down the priority list for Tehran.

Additionally, for the Armenia–Iran rail corridor to ultimately connect to Russia, Georgia would need to consent to rail transport via occupied Abkhazia. This is both highly unlikely in political terms, as well as costly to implement.

The economic dividends of an Iran–Armenia line are much more limited compared to what INSTC offers all the participating countries.

For Azerbaijan, another important factor to consider is the economic future of its Nakhchivan exclave. In INSTC, Baku sees the potential to expand the recently launched short-term project to transport pilgrims from Nakhchivan to the Iranian city of Mashhad, via Tabriz.

This could be developed into a new broader project—a railroad link between Nakhchivan and Baku via Iranian territory. But such a solution would require both time and financial backing from Tehran’s own railroad system engineers.

Previously, another way to connect Nakhchivan and the rest of Azerbaijan was envisioned: by extending the Baku–Tbilisi–Kars rail line to the exclave region through the projected construction of a Kars–Igdir–Nakhchivan spur.

The realization of both projects promises to boost the connectivity of the exclave, further safeguarding against its economic isolation.

Breaking “Iron Curtain”

Azerbaijan’s involvement in INSTC indicates a slight shift in the country’s railroad transport strategy. The BTK railroad project envisioned breaking the railroad “iron curtain” in the region by connecting the Caspian region to the Black Sea and beyond to Europe—bypassing Russia and weakening its Eurasian-region transport monopoly.

In contrast, INSTC does not address Russia’s domineering regional position; indeed it strengthens Russia’s access to diversified regional transit corridors. The INSTC project also helps Iran: Tehran will gain additional economic links via its transit connection to South Caucasus.

The full realization of INSTC requires the construction of the Rasht–Astara railroad line on Iranian territory, at a cost of $1 billion (partly financed via a loan from Azerbaijan). The construction will take a minimum of three years.

Even so, the project casts a shadow over the Baku–Tbilisi–Kars railroad project and could further undermine BTK. The risk to BTK is not solely attributable to INSTC; the former has itself suffered repeated construction delays.

Initially scheduled for completion in 2014, BTK remains unfinished. Turkish officials acknowledge that the last two years were marred by numerous problems with BTK’s Turkish construction firms. Foreign minister of Turkey, Mevlut Cavushoglu, stated, “We have some legal problems; some companies have filed lawsuits because of it”.

Turkey’s Diminishing Role

Against this backdrop, Ankara is largely to blame for Turkey’s diminishing role in this transport project. The lack of political will has resulted in the Turkish sections still being incomplete.

The Baku–Tbilisi component and the further connection to Georgia’s port of Poti on the Black Sea are operational, and have bypassed Turkey.

The Viking Train sent its first cargo from China through the Caspian to Azerbaijan and Georgia, with Draugiste, Lithuania, as the final destination in late July 2016. This is the so-called Trans-Caspian International Transport Route, an alternative east–west “Silk Road” branch (China, Kazakhstan, Azerbaijan, Georgia, and then through Ukraine to Europe).

Turkey is technically part of both projects and it was expected that the route would run through Turkish territory. But Ankara’s lack of progress on BTK meant that Ukraine became the main transport destination for cargo traveling along this corridor.

Kiev even harmonized its tariffs and provided discounted rates for the TCITR partner countries’ cargo. Despite expectations that it will run through both Ukraine and Turkey, it remains unclear whether the route will go through Turkey then Ukraine, or through the two countries in parallel.

So far, the overshadowing of the BTK railroad by the planned INSTC has not, as might be expected, stimulated the Turkish authorities to be more responsive. However, Azerbaijan’s slight policy shift in pushing both projects promises to bring benefits to Baku while also strengthening Iran’s and Russia’s regional positions.

More importantly, despite the delays in the construction of the Turkish section of BTK, the Baku–Tbilisi line and its connection to the Black Sea port of Poti have kept the railroad’s initial goal of connecting South Caucasus with global markets alive—mainly thanks to the modest level of Europe-bound cargo transport across the Black Sea and via Ukrainian territory.

Yet, after the completion of BTK’s Turkish section, Ukraine’s further transit role in this project will need to be reconsidered, particularly since BTK’s core idea was to connect with Turkish east–west railroads. The extension of the Baku–Tbilisi line into Anatolia could be interpreted either as diversification or duplication, and perceptions will be defined by economic effectiveness over time.