How train-happy Azerbaijan could upend global transport
The grand opening on October 30, 2017 of the Baku-Tbilisi-Kars (BTK) railway was almost a typical celebration of the completion of a Belt and Road project.
Azerbaijan’s authoritarian president Ilham Aliyev, standing beside President Erdogan of Turkey, called it “a restoration of a part of the historic Silk Road,” while the loyal Azeri media fawningly heralded the dawn of a new era for Azerbaijan. The new line finally connects the capital of Baku to the railways of Turkey and Europe.
What made the occasion unique was that the 513-mile BTK rail line was built without using a cent from China. The $1 billion it took to connect Azerbaijan’s capital to Turkey’s eastern frontier came mostly from the tiny petro-state’s sovereign wealth fund, SOFAZ.
Azerbaijan has long had superior rail infrastructure to its wealthier neighbors. The country stands out in a region characterized by poorly-maintained roads over mountainous terrain. Its railways rank 20th in the world, according to the World Economic Council. Neighbors Iran and Russia rank 73rd and 23rd respectively. Consequently, trade from China through Azerbaijan increased by 43% in 2017, and exports to the country doubled.
Railways serve three main purposes for Azerbaijan.
Second, it gives Azerbaijan leverage over Russia, its former imperial overlord and current petro-state competitor. The new route breaks Russia’s monopoly on overland Europe-Asia trade. After EU-Russia relations collapsed in 2015, Russia restricted freight moving into Western Europe. Now, European countries can bypass the Russia leg of the land trade routes to China. Azerbaijan’s transportation ministry expects that up to 15% of freight from China to Europe will go through Azerbaijan by the 2020s.
Third, the route is a cornerstone in Azerbaijan’s regional diplomatic effort to isolate arch-rival Armenia.
“It’s part of a grand scheme to encircle Armenia” said Zaur Shiriyev, an associate at the Royal Institute of International Affairs in London in an email.
“If Azerbaijan builds and owns railroads in key mountain passes in Iran, Turkey, and Georgia, it can cut off its rival completely from international markets and give them leverage over Nagorno-Karabakh” Mr. Shiriyev said, referring to the frozen conflict between Armenia and Azerbaijan. Georgia, Turkey, and Iran, have all adopted increasingly pro-Azerbaijan stances over the last decade, quietly pressuring Armenia to withdraw from the region.
In part this is because of Azerbaijan’s ability to provide cheap loans to its neighbors. In 2007 Georgia turned to its neighbor for a $200 million, doled out at a concessional rate. After Russia’s invasion in 2008, Georgia again tapped Azerbaijan, this time for $600 million, about 12% of the government’s annual expenses.
Third, it serves as an attempt to diversify the economy. Petroleum accounts for 85% of its exports. After oil prices collapsed in 2014, GDP per capita declined by 50% over the next two years. Azerbaijan Railways projects that new infrastructure projects will add $700 million to the national champion’s revenues by 2020.
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