Uniting the Caspian Sea: integration of the region in the framework of ‘network partnerships’ scenario

Alexander Karavayev, the academician of the Economics Institute of the Russian Academy of Sciences, exclusively for Vestnik Kavkaza
Uniting the Caspian Sea: integration of the region in the framework of ‘network partnerships’ scenario

One of the key applied problems arising after the signing of the Convention on the Legal Status of the Caspian Sea is an understanding of how to unite five countries in a single complex of economic activities: where exactly their interests fit together and how new relationships can be developed. We will start this review with the Russian Caspian Sea region uniting the most developed economic potentials of neighbors - Azerbaijan and Kazakhstan.

Complex characteristics of the Russian region

To date, the Russian Caspian Sea region should be viewed in several systems of the political-economic coordinates. In addition, it has multiple, multidirectional characteristics that affect the strategic planning of its socio-economic development.

1. The region is influenced directly not only by the subjects of the Russian Federation located on the shores of the Caspian Sea (Astrakhan Region, Dagestan, Kalmykia), but also by the associated territories - the Volgograd Region, the Samara Region, the Rostov Region, up to the regions of the Central Federal District, along the Volga-Don hydrohubs connecting the basins of the Caspian and Azov Seas, integrating the regions that make up the North Caucasian Federal District (NCFD), and wider to the South of Russia to the Krasnodar Territory (the Novorossiysk port is the main export hub for the oil and other products of the Caspian states, the fifth in Europe in terms of cargo transshipment).

The factor of geographic and direct transport connectivity of the Russian Caspian Region with four Caspian states turns the region into a communication junction of the center of Eurasia, where the borders of the Greater Middle East, South Caucasus, and Central Asia are linked up. Such a location feature has created the unique historical prerequisites for the formation of a modern international traffic intersection, including the water area, airspace, coastline and riverbeds. To date, the Caspian transport hub has been formed by the meridian and latitudinal intersection of the global transit and local regional infrastructures.

2. The region is formed by two free trade zones - the Customs Union of the EAEU and the CIS (agreements of 1994 and 2011) - several integration associations (CSTO, SCO), as well as the bilateral relations with neutral states from among the main partners of the Russian Federation. In addition, the WTO conditions and external factors partially influence the region, including the pressure of anti-Iranian and anti-Russian sanctions imposed by the US and the EU. The Caspian region is the region of Russia's main partner in the EAEU- Kazakhstan region, the trade turnover with which amounts to $ 17.2 billion, (growth of 32.22% comparing with 2017). Russia's foreign trade turnover with the countries of the EAEU grew by 27.6% (to $ 50.8 billion), most of it is formed by the regional trade.

The region of Azerbaijan is the main partner of the Russian Federation from the ‘near neighborhood’ zone of the CIS. In 2017, the trade turnover amounted to $ 2.1 billion, (an increase of 4.3%).

The Caspian region unites the main importers of Russian products in the CIS, and also affects adjacent territories - Uzbekistan, Turkmenistan, and Kyrgyzstan (the share of the CIS countries in the Russian trade turnover was 12.4% in 2017).

The Caspian countries account for the bulk of trade with the CIS countries, with the exception of Belarus. However, Belarus is a subject of the region's foreign trade activity due to the Caspian communications.

3. International transit. The region accounts for no more than 3% of the transit of goods between the PRC and the EU. However, from the point of view of the Russian economy, the Black Sea-Caspian region (South of Russia) is a connecting element in Russia's trade with APEC and the EU.

Ports and railway communications of the Black Sea-Caspian basin (in addition to the Far East) to a considerable extent form the flows of foreign trade turnover of the Russian Federation with the countries of the Asia-Pacific Economic Cooperation (APEC), the share of which amounted to 30.5% in 2017 ($ 178.2 billion).

In addition, the freight flows are being formed in the region for the current needs and prospective consumers of Iran, India, the countries of the Persian Gulf and East Africa.

4. The region of external investment activity and North-South, West-East development corridors.

From the political point of view, the Caspian region is not homogeneous - a separate geopolitical unit. It is under the influence of Russia and China - the main investors. A significant role in its formation is played by the extra-regional players. The EU countries (Germany, Italy) are the main trade partners of Kazakhstan and Azerbaijan. France is one of the key investors in Iran. The US is extending the infrastructure of the military operation in Afghanistan to Central Asia and the Caspian region. Thus, the region is in an indirect intersection of several security spaces, which affect the picture of its long-term socio-economic development and set corresponding tasks for Russia to strengthen its influence.

Development goals

Let us consider several targeted infrastructure tasks, some of which have already been identified as a program of actions in the framework of President Putin's Decree "On national objectives and strategic tasks of Russian Federation’s development in the Period up to 2024":

- logistics of transportations

To increase the efficiency of regional transport communications, it is necessary to create a single logistics company that unites the processes of delivery and transportation of goods with local stevedore companies in ports. In addition, a unified tariff policy is necessary (for a number of regional areas, commercially viable tariffs have not been developed). Within this task, it is necessary to carry out a comprehensive modernization of the transport system (road and rail communications and port infrastructure).

- modernization of railways

The railway is one of the main means for cargo transportation to the ports of the Caspian Sea - it delivers about 48% of cargo to the ports of the Caspian Sea without taking into account pipelines. In the three ports of the Caspian Sea (Astrakhan, Olya, Makhachkala) there is a significant skew in the direction of exports of goods supplied by railroads. In 2015, its volume amounted to 1017 thousand tons, which is 18% more than in a previous year. The most loaded railway routes at the moment are the entrances to the ports, where the average load of the infrastructure is estimated at 91%. At the same time, there are sites that work with overload, and such places are found both on the Volga railway, leading from Astrakhan to the central part of Russia, and on the North Caucasian railway connecting Makhachkala with other capitals of the subjects of the North Caucasus Federal District. At present, JSC Russian Railways implements a number of projects aimed at increasing the throughput and carrying capacity of the basin ports designed for the period up to 2020.

- modernization of highways

In 2015, the volume of cargo transportation by road to the three ports of the Caspian Sea amounted to 484.9 thousand tons, which is 1.5 times more than a year ago. At the same time, 150.7 thousand tons of various cargo were sent from the ports along the roads, which is 60% below the level of 2014. Although the carrying capacity of the main roads still has reserve capacity for growth, there are problematic places that impede traffic along the Caspian coast. First of all, we are talking about the federal significance road P-215 ‘Astrakhan-Kochubei-Kizlyar-Makhachkala’. Its length is 526 km, of which 123 km do not have asphalt covering.

The most loaded highway in the region is the federal significance road P-217 ‘Vladikavkaz-Grozny-Makhachkala-Azerbaijan border’ with a length of 388 km. At the moment, its capabilities are completely exhausted, and the load is 100% with the planned capacity of 70%. In this regard, the project for the construction of the M-29 ‘Caucasus’ road is being implemented. The upgraded P-217 road will be linked to the Caucasus road. The project of reconstruction of the route P-22 ‘Caspian’, connecting Moscow, Tambov, Volgograd and Astrakhan is being implemented and planned to be completed by the end of 2018.

- modernization of seaports, the Volga-Don Shipping Canal, airports

The main direction of cargo transportation through the port of Astrakhan in 2015 was export - 75.4%, while almost all cargo volume amounts on dry cargo (grain, ferrous metals, timber and lumber). The expected growth of container trade with India and other countries through the territory of Iran is constrained by restrictions on the length and depth of container ships imposed by the lock characteristics in Russia's inland waterways.

Within the framework of the development of the EAEU Agreement on Navigation, it is possible to create a number of investment stimulation measures: investment of the countries of the Caspian Five into the infrastructure of the Volga-Don, or attraction of external banks for infrastructure development. It is also necessary to improve the mechanisms for attracting investments for the development of the infrastructure of airlines, Caspian airports, airfield equipment, and an increase of entry/exit points into the airspace of the states of the region.

Within the framework of the optimal scenario for the economic development of the region, including through the full FTA between the EAEU and Iran, it is expected to implement a project to build a new deep-sea ice-free port in the vicinity of Derbent (as an option, the modernization of the Makhachkala port) with a container terminal. In this case, it is possible to increase the container turnover to 265,000 TEU by 2030.

By 2030, the container freight turnover between Russia and India could grow to 461 thousand TEU, of which 40% can be redirected to the Caspian ports.

- creation of electronic trading platforms for goods and raw materials (an interstate network of information and marketing centers)

Considering the expected impulse of the development of electronic communications, it makes sense to create an integrated information system of mutual and foreign trade in the region, with a functional link to all global markets. This platform can be created by integrating the information systems of Kazakhstan - JSC Eurasian Trading System  (www.ets.kz), Kazakhstan International Stock Exchange  (www.mtbk.kz), Russia - St. Petersburg International Mercantile Exchange (www.spimex.ru) and the National Commodity Exchange, a part of the Moscow Exchange (www.micex.ru) group of companies, Uzbekistan - Uzbek Republican Commodity and Raw Materials Exchange (www.uzex.com) , Belarus (www.icetrade.by, the information system ‘Tenders’ provides complex information support of purchases on the competitive basis), the Portal of export information support (www.export.by), Azerbaijan - Digital Trade Hub (www.azexport.az).

- industrial and innovation zones

It is necessary to think over the establishment of several industrial parks having connected production in the region within a single technological chain. An example: the assembly of GAZ vehicles, production of advanced aircraft components (The Irkut MC-21 projects in Russia with a partial localization in Kazakhstan, as well as promising options for the renewal of the cargo planes line of the AN family in Azerbaijan). As a prologue to such a network of industrial parks, the project Aurora in the Karabudakhkent district of Dagestan can be used. It is assumed that residents of the Aurora industrial park will mainly be enterprises engaged in machine building, instrument making and metal processing, food industry, furniture manufacturing, metal-plastic and construction materials production. In the process of implementing this project, more than 1,700 jobs will be created (the expected production output of the residents of the park will be about 6 billion rubles a year).

It is necessary to think over the development of the Caspian park of the creative industry (film production, advertising, IT applications, computer games, and other related creative industries). The Russian-Kazakh socio-cultural space along with other Caspian countries can develop fruitfully at the crossroads of modern arts, business, and new digital technologies. According to experts, the tax revenue of the joint projects of the RF-EAEU-Caspian Five can amount to  7 -10 billion rubles per year.

- development of electric power industry

As a part of the creation of the common electric power market of the EAEU, it is necessary to create an algorithm for the development of an integrated network of the electricity market around the Caspian Sea (to create pricing mechanisms for interstate transmission of electricity, facilitate the cross-border electricity trade), taking into account the specific features of the domestic markets in the Caspian territories.

Taking into account the development of the region's trade and industrial potential, it is necessary to assess the need for the construction of a modern nuclear power plant. Such a project will give a serious impetus to the entire region and increase its ‘linking’ to the Russian economy as a whole.

- stimulation of the Russian logistics operators on the parallel transport corridors

Among the challenges to the interests of the Russian Federation in the Black Sea-Caspian basin is the use of the Soviet communications on the territory of Ukraine, simplifying the flow of goods to the EU markets. They create the additional competitive pressures for the Russian trade routes. This problem can be solved by involving of the Russian logistics operators to the new regional corridors for increasing our own advantages.

In particular, the Russian loading of the Baku-Tbilisi-Kars railroad with goods for the Turkish and Georgian markets (rolled metal, grain, coal, timber, lumber) will create channels for the effective performance of the Central Asian and Iranian producers on the European southeast markets bypassing Ukraine. Thus, the strengthening of the Russian-Turkish business capacities will supplant competitors in other logistical directions.

Network partnerships compatibility scenario

Obviously, security and political stability of the Caspian states depend on the infrastructure connectivity of the region.

However, the geographical and infrastructural connectivity does not mean ‘compatibility’. In an ideal scenario, an institutional and contractual framework is needed (within one or more conjugated integration projects), a prologue to this is the gradual build-up of the socio-political partnerships at the level of business and public associations.

In other words, the compatibility is determined not only by the availability of physical infrastructure (roads, ports, logistics centers, etc.) but also by the opportunities for various entities from physical to legal persons to freely use this infrastructure. It is necessary to work out the following issue - the extent to which the peculiarities of national legislation and the provisions of interstate treaties make possible the unhindered movement of goods, services, capitals and labor across the borders and between different integration associations.

To solve this problem, from the point of view of Russia's interests, it is necessary to pursue a conscious policy of regional integration within the framework of the strategy of flexible partnerships through the following provisions:

- creation of a common foreign exchange market. Usually, this is a fairly high degree of integration, difficult to achieve in practice. However, the creation of quasi-currency unions to avoid mutual trade in the US dollars is one of the constantly discussed topics in the format of the EAEU, the SCO and the Islamic Eight D-8 (the so-called Eight of the most developed countries of the Islamic world, established in the framework of the OIС in 1997) ;

- unified trade terms. Promotion of the mutual export on the level of medium and small business is one of the ways to arrange regional integration;

- practical and continuous modernization of infrastructure - transport, pipelines, power grids, and waterways;

- development of tourism and visa-free travel. Actually, these are the main points of support for the creation of a common labor market;

- development of the military-technical cooperation. On the one hand, this is certainly a boost for the Russian manufacturers. And by the gradual transfer of technology, it will become a form of support for the high-tech industries of the consumer countries (Iran, Kazakhstan, Azerbaijan, Turkey). At the same time, within the framework of such a development, the foundations for a possible proto-military bloc atop the previous political limits dictated by NATO are laid.

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