CPC Special Brief: An Economic Perspective for the Baku-Tbilisi-Kars Railway
The Baku-Tbilisi-Kars (BTK) railway project, which was initially proposed more than two decades ago, is finally coming to an end and the railway is going to be under operation before this year ends. The first idea for the BTK railway project emerged in 1993 when Turkey closed down the Kars-Gumri railway that passes through Armenia due to the Nagorno-Karabakh conflict. It took more than a decade for Azerbaijan, Georgia, and Turkey to reach an agreement for the railway construction and the leaders of the three countries signed the respective agreement in 2007. The initial plan was to open to the railway in 2010 but it was delayed several times and finally, the first train will operate by the end of 2017. The initial capacity of the railway will be 6.5 million tons of cargo per year and one million passengers but under full capacity, the total volume may increase up to 17 million tons of cargo per year.
Although the BTK railway project is assumed to be an important part of the New Silk Road network of transport corridors, the project was not able to obtain a strong international support. The leading international financial institutions including World Bank, European Bank for Reconstruction and Development, Asian Development Bank etc. did not give a financial support for the project. While Azerbaijan and Turkey financed the construction of their portions of the project, Azerbaijan also provided a low-interest loan ($112 million at 1% interest and $323 million at 5% interest) to Georgia through State Oil Fund (SOFAZ) to finish the portion of the railway in Georgia. One might consider this as an indicator of how serious the project is for Azerbaijan in terms of leveraging the geographic position of the region.
The BTK railway project is a part of the Trans-Caspian International Transport Route (TCITR), which is designed to a transport corridor from China to Europe passing through Kazakhstan, Azerbaijan, Georgia, and Turkey. There is no doubt that the BTK railway project will have some direct and indirect economic benefits for the neighbor countries and it will play an important role in shaping the future economic environment of the countries in the region. The transit fees that the BTK railway will provide to the countries that it passes through and increased economic activity in logistics industry are some direct and short-term benefits that Azerbaijan, Georgia, and Turkey will enjoy. According to some preliminary estimates, the BTK railway may generate more than $170 million revenue per year for Azerbaijan alone. The operation of the BTK railway will reduce the transport time of goods from China to Europe to 15 days which is less than half of the time that it takes today through sea transportation. Besides the time advantage, the new railway line will achieve this transportation less than half of the cost of air transport. Therefore, with the full operation of the BTK railway, there will be a big stimulus for the logistics industry in the region.
The long-term benefits that the BTK railway will provide to the countries that it passes through are much more important than the short-term benefits that the countries will enjoy. In order to reach the full potential of this New Silk Road network of trade and transport corridors, partner countries need to harmonize their customs and tariffs. In the long-term, this will certainly intensify economic cooperation in the region. Intraregional trade in the region is currently at very low levels and the new railway line provides an opportunity for increased trade among neighbor countries.
Another important long-term economic benefit of the new railway line is that it will facilitate the establishment of new local manufacturing operations. Countries in this new economic belt have realized large economic growth rates over the last ten years for various reasons. Countries such as Kazakhstan, Azerbaijan, and Turkmenistan with the large amounts of energy resources benefited from the rapid increase in energy prices after 2002. Per capita GDP has increased from 760 dollars to more than 8000 dollars in Azerbaijan and from 1650 dollars to more than 13.000 dollars in Kazakhstan between 2002 and 2014. Turkey does not have energy resources like these countries but due to its soaring domestic demand, which is financed by the strong banking sector, the country has experienced a rapid economic growth rate as well. Per capita GDP has increased from 3000 dollars to more than 10.000 dollars. High energy prices also leveraged the geographic position of Georgia and the country attracted large amounts of foreign investment particularly from Azerbaijan.
These numbers reveal us that there is a great potential on this new economic belt. Integration of transport networks of the countries in the region will play an important role in the realization of this potential and the BTK railway will be an important complement for the whole transport infrastructure of the region. An important issue that needs to be addressed at this point is about the goods that will be transported in this new economic belt. Oil and gas exports constitute a significant part of total exports for many countries in this region and this is the main reason for the low levels intraregional trade that is observed in this region. Therefore, there is a significant need economic diversification in the broad Caspian region. This need is intensified after the large decline that has been seen in oil prices since the second half of 2014. As the exports of many countries are very sensitive to oil and gas prices, the currencies of Russia, Azerbaijan, and Kazakhstan have realized a large depreciation over the last couple of years due to rapidly declining oil prices. This is a significant problem for long-term sustainable economic growth. The BTK railway and other transport projects along the TCITR will support the development of local manufacturing industries in the region and will reduce the dependency on oil and gas revenues.
Energy-intensive industries deserve a special attention in terms of the development of local manufacturing industries, particularly for Azerbaijan. Taking into account the large natural gas reserves of the country, Azerbaijan is very much interested in the development of its petrochemical industry. Azerbaijan’s state energy company SOCAR has already taken initiatives for gas processing and petrochemical complex to be built Garadagh, 15 km south of Baku. Besides that SOCAR also signed a memorandum of understanding with China National Petroleum Corporation in order to attract foreign investment in petrochemical industry. In the long-term, the development of the petrochemical industry in Azerbaijan will be an important stimulus for the downstream industries like rubber and plastics. The BTK railway project will be a stimulating factor for all these efforts and will speed up the process for economic diversification.
The BTK railway line is not the first big infrastructure project that has been achieved in the region. Baku-Tbilisi-Ceyhan, South Caucasus, and Baku-Supsa pipelines have all created large benefits for the countries that they pass through and they significantly contributed to the regional cooperation. The BTK railway project will be a new step for a stronger economic integration and will have large economic benefits for the partner countries.
Download the full brief here: CPC SPECIAL BRIEF_AN ECONOMIC PERSPECTIVE FOR THE BTK RAILWAY_