China Targets Azerbaijan for Transportation Projects
China has historically had few vital interests in the South Caucasus. Distance, along with the region’s unpredictable political and economic conditions, precluded China’s involvement in the region. In comparison with Central Asia, South Caucasus markets were marginal, population were low and investment opportunities challenging. Beijing was involved in only a few oil projects in Azerbaijan, mostly for representation rather than economic benefits. Chinese presence was merely for showing the presence of Chinese interests without massive involvement. Relations between the two countries were positive, but neither side considered the other to be an essential strategic partner. Geographical distance and the absence of large-scale Chinese investments meant that there was little to drive the relationship forward. However, starting from the second half of the aughts, China slowly began to look at the region from a different angle.
Surprisingly enough, it was the European Union’s TRACECA project (Transport Corridor Europe-Caucasus-Asia) that turned China’s interests to the region by demonstrating its potential as a logistical hub for East-West trade. Since 1998, the EU has invested around $800 million into capital projects and the renovation of ports, railroads, and roads along the TRACECA corridor, which includes the countries of Central Asia and the Caucasus. Member states have also pursued integration of their infrastructure, tariffs, and logistical chains. By 2007, trade among TRACECA members surpassed $40 billion, while their combined trade with the EU reached $290 billion that is almost ten times more compared with 1996 figures. Of this, 70 percent of the trade was in oil, with most of the trade flow passing through the Azerbaijani-Georgian segment of the corridor. Meanwhile, Azerbaijan, located at the crossroads of major Eurasian land and air transport corridors, has invested millions of dollars in commercial infrastructure and transport projects over the last decade, aiming to position itself as a key link between Central Asia, the South Caucasus, and Europe. Baku understood the importance of implementing diversification strategies before the depletion of its hydrocarbon reserves. At the same time, China began to look at new transportation routes to deliver its goods to Europe, perceiving sea routes to be too expensive, time-consuming and vulnerable to disruption. Thus, tapping into existing infrastructure and fixing the missing links along the road fit well into China’s strategic goals.
Azerbaijan’s geographical position has made it a key area for regional integration projects. Currently, three major integration initiatives target Azerbaijan: the European Union’s TRACECA project, the Eurasian Economic Union (EEU), and China’s recently established One Belt, One Road (OBOR) initiative. However, Azerbaijan officially keeps an equal distance from all of them, hoping to gain more from a neutral status than from endorsing one at the expense of the others. Baku is afraid that binding itself to one project would jeopardize its economic and political stability and independence.
Nevertheless, the Chinese initiative looks most beneficial from a purely economic perspective. Thus, Azerbaijan reacted positively when China announced its ambitious plan to promote the OBOR initiative in 2013. At the time, Baku urgently needed a partner that could fill the vacuum left by an increasingly disengaged EU. The government hoped that land routes and high-speed rail links connecting East Asia and Europe would bring in Chinese investment and curb Russian influence. Following Dubai’s emphasis on port development, Baku constructed an enhanced port at Alyat – “the Jewel of the Caspian” – that includes an international logistics center and a Free Economic Zone. The project is estimated to cost around $870 million, and it is expected to handle 10 million tons of cargo and 40,000 containers a year (with an eventual capacity of up to 25 million tons of cargo and 1 million containers). Meanwhile, other transport links have been created. In 2007, the Presidents of Azerbaijan, Turkey, and Georgia signed an agreement to construct the Baku–Akhalkalaki–Kars railroad, uniting the three countries via a direct railway link. Azerbaijan gave Georgia a $700 million loan to build the missing link between Akhalkalaki and Kars and modernize existing infrastructure. The railway, slated to open by the end of 2017, is expected to handle 20 million tons of cargo.
The political establishment enthusiastically greeted the Chinese OBOR initiative, though the public is largely unaware of many of these Chinese projects. Chinese investment helps to fill the funding gaps in Azerbaijan’s strategic plan, allowing many projects to go ahead that would otherwise have struggled to find financing. In August 2015, the first container to take the OBOR route, or New Silk Road, travelled more than 4,000km from China in a record six days, arriving at the newly constructed Baku International Sea Trade Port. This signaled a new era in regional transport links. It demonstrated to Chinese firms that cargo could reach Europe much faster via the Silk Road than by sea or by transiting through Russia. Both Kazakhstan and Azerbaijan used the project to encourage Chinese companies to invest more in their territories. Azerbaijani authorities believe that by 2020 some 300,000–400,000 containers will be transported via this route, bringing billions of dollars in profit.
Azerbaijan views Chinese investment in a positive light. Both the public and the political establishment believe that China does not have a political agenda in the region due to its geographical distance. Chinese projects are therefore considered in purely economic terms. China also has enormous funds for the implementation of projects, lessening the burden on Azerbaijan. With falling oil prices and fewer cash reserves in the country, Chinese investments could be critical. Meanwhile, China is perceived as a country that delivers and implements projects with a quick turnaround. In contrast to the US and the EU, which are constrained by bureaucratic hurdles, and Russia, which puts politics ahead of economics, China is considered to be a reliable partner.
Starting in 2015, Beijing and Baku began to intensify their political relations too. In December 2015, president Aliyev visited China, met with the country’s political establishment, and called for Chinese companies to invest in Azerbaijan. During his visit, Aliyev and his counterpart signed a series of agreements including a memorandum of understanding over the Silk Road Economic Belt. The budding relationship grew even deeper when Chinese Vice Premier Zhang Gaoli visited Baku and met with Prime Minister Rasizade and President Aliyev. One month later, China and Azerbaijan held Intergovernmental Commission on Trade and Economic Cooperation. The intergovernmental commission was established few years ago with the purpose to deepen economic and trade relations between the countries as well as facilitation business ties. So far, both sides had held six meeting of the commission for the last years. During the last, sixth meeting, particular attention was paid to cooperation in transport and logistics sectors. It was mentioned that the trade turnover between the countries amounted to more than $560 million in 2015 dropping down from $650 m in 2013. China is also involved in 12 investment projects with over $640 million in total funding.
In order to promote its economic interests and allow countries mostly in the Eurasian region (along OBOR) to access the funds for various infrastructure projects, China established the Asian Infrastructure Investment Bank (AIIB) in January of 2016. The bank is intended to help China bolster its OBOR initiative and create the Silk Road Economic Belt. AIIB has so far committed $1.7 billion in loans. One sponsored project is a $600 million loan to support the construction of the Trans-Anatolian gas pipeline (TANAP), which is going to connect Caspian Gas fields with European markets. Although the loan only represents 10% of the total expected cost ($11.7 bn), the fact that AIIB is sponsoring the pipeline along with the World Bank and other private companies demonstrates China’s interest in extending its influence in the Caucasus. It is expected that the loan is just the beginning of China’s slow economic expansion into the region. In order to give an additional boost to the OBOR initiative, China is planning to host the Belt and Road Forum for International Cooperation in May in Beijing. Around 20 heads of states and government and over 50 leaders of international organization will attend the event.
Comparing China’s initiative with other transportation projects initiated by Russia or the European Union, it seems clear that OBOR has much more potential for Azerbaijan. However, this does not mean that Baku has given up on other initiatives. OBOR compliments the EU’s TRACECA project to link Europe with Asia via Caucasus and Central Asia. While China invests in OBOR, the EU could invest in and revive the TRACECA project. From this perspective, OBOR and TRACECA could work in complement with each other, increasing trade between China and South-East Asia on the one hand and Europe on the other. Meanwhile, countries along the road would receive tremendous spillover benefits, as investment creates new economies based on logistics, services, and hubs. For Azerbaijan, the OBOR initiative could not be more timely.