South Caucasus attracts investors from Middle East

In early November this year, Azerbaijan’s capital Baku played host to the 7th Azerbaijan-UAE Intergovernmental commission on Economics, Trade and Technical Cooperation. Political and business leaders came together to discuss further expanding trade links between Baku and Abu Dhabi, increasing security cooperation, and providing mutual assistance as both oil and gas rich economies attempt make bold attempts to diversify away from hydrocarbon dependence.

In the hotel lobbies of Baku, at the resorts of Batumi, and in the cafes of Yerevan, Farsi, Arabic, and Hebrew have become increasingly common, Albawaba writes in the article The Caucasus is Quietly Becoming a Hub for Middle East Trade, Tourism and Investment.  And as the Caucasus becomes an increasingly central region for China’s Belt and Road Initiative, investors from the Middle East see great potential in this geo-strategically vital region. Yet increasing connections between the Caucasus and Middle Eastern states, which have been especially pronounced in recent years rarely catch the attention of political analysts.

Lincoln Mitchell, an Adjunct Associate Professor of Political Science at Columbia University argues that this is a mistake. To Mitchell, ‘people who study the Caucasus see its politics through a Post-Soviet lens’ which often distorts the growing connections and entangled histories of the Caucasus and Middle East. Developments in the South Caucasus and the Middle East are becoming increasingly entwined as states in both regions seek economic opportunities and diplomatic partners and share the burden of complex international security challenges. To fully understand the politics of both regions, analysts ought to become more comfortable with seeing the South Caucasus as part of a ‘Greater Middle Eastern’ system.

Dr Mitchell notes that when analysing the South Caucasian states, it is important to note the significant differences between their economic and political systems. Yet Azerbaijan, Armenia and Georgia have all increasingly engaged with Middle Eastern states in recent years. Armenia has cultivated close relations with Lebanon and Syria, driven in part by Armenia’s sizable diaspora community in the Levant. Additionally, the Armenian government has managed to balance these relations with increasing engagement with Israel, a major trade partner. Azerbaijan, whose economy is largely based on hydrocarbon exports, has grown increasingly close to Turkey in recent years. Turkey provides a key transport route for the supply of Azeri gas and oil to Europe via two major pipelines, the Baku-Tbilisi-Ceyhan pipeline and the Baku-Tbilisi-Erzurum pipeline. Relations between Azerbaijan and its neighbour Iran remain complex. Despite economic ties between the states, the Azerbaijani government has long been concerned with the treatment of Iran’s Azeri minority which makes up close to 30% of Iran’s population. Iranian leaders fear the export of Azeri nationalism in Azeri dominated regions, whilst the secular government of Azerbaijan fears the influence of Shi’a religious fundamentalism within its own borders. Close security cooperation between Azerbaijan and Israel has also proved irritating to Iran. Relations between Azerbaijan and the Gulf have increased significantly in recent years. Dubai based conglomerate DP World has played an advisory role in the development of the Alyat Free Trade Zone, a business hub surrounding the Port of Baku. Sultan Ahmed bin Sulayem, the company’s director notes, ‘We want to turn Baku into a coordination centre of Eurasia. We want the commercial port not to be some kind of alternative for entrepreneurs but become a necessity for business, as once we did in Dubai’. Azerbaijan has increasingly courted foreign investors, particularly from the Gulf, jumping in the World Bank’s Ease of Doing Business Ranking from 57th in 2018 to 25th in the world in 2019. Increasing security cooperation has emerged between Arab League States and Azerbaijan as the security threat of fighters returning from Syria increases.

To Dr Mitchell, Georgia offers some of the most significant economic opportunities for Middle Eastern states. Turkish-Georgian relations have proved especially strong in recent years. Turkey remains Georgia’s most important trade partner and a key destination for Labour migrants. Transportation involving key ports on Georgia’s black sea coast, particularly Batumi and Poti, have long attracted foreign investors. Yet the key driver of Georgia’s recent economic growth has been its expanding tourism sector. Relatively liberal social standards have proved a magnet for Middle Eastern travelers.  Significant economic opportunities in resort development, retail, and outdoor travel exist for entrepreneurs and foreign investors in Georgia and Gulf money has been key to Georgia’s economic performance in these sectors. UAE businesses have invested more than $1 billion in Georgia, helping launch multiple hotel and shopping centre chains. Twenty five flights per week shuttle business and leisure travellers between Georgia and the UAE.

The increasing entanglement between the Middle East and its northern neighbours offers exciting opportunities for investors and should be cautiously welcomed. An increasingly diverse investment base for the states of the Caucasus and opportunities for diversification for the oil rich states of the Gulf can facilitate a mutually beneficial relationship between the regions. For better or worse, increasing engagement between the Caucasus and Middle East will come to play an increasingly important role in the evolving politics of West Asia.