Azerbaijan: Perspectives on Eurasian integration

Azerbaijan is located at the crossroads of major Eurasian land and air transport corridors. Since the country gained independence in 1991, its government has sought to make it a bridge between Europe and Asia. It has invested millions of dollars in commercial infrastructure and transport projects over the last decade, aiming to position Azerbaijan as a lucrative link between Central Asia, the South Caucasus, and Europe. Baku understands the importance of implementing diversification strategies ahead of the depletion of the country’s hydrocarbon reserves.1

Its geographical position makes it a key territory for regional integration projects. Today, Azerbaijan is at the centre of three major integration initiatives – the European Union, the Eurasian Economic Union (EEU), and the recently established One Belt, One Road (OBOR) initiative championed by China. All three initiatives target Azerbaijan. However, Baku 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 exclusively tying itself to one project could jeopardise its economic and political stability. This profile looks at the integration projects implemented by each side, analysing the pros and cons of each initiative.

 

Background

After the collapse of the Soviet Union, it was neither China nor Russia that initiated the integration projects that have made Azerbaijan an important crossroads. The first effort to bring Central Asia and the Caucasus closer to Europe was the EU’s project TRACECA (Transport Corridor Europe–Caucasus–Asia). It also intended to link Europe with China and Southeast Asia through Eurasia. Since 1993 the EU has invested around $800 million in capital projects and in the renovation of ports, railroads, and roads along the TRACECA corridor. Countries along the TRACECA corridor have also invested in the project. By 2007, trade along the corridor reached $40 billion, while their combined trade with the EU reached $290 billion.2

However, around 70 percent of this trade came from oil and gas transport between Georgia and Azerbaijan.3 Baku and Tbilisi benefited most from this corridor, which was also good for Kazakhstan and Turkmenistan. Both Astana and Ashgabat used the corridor extensively to bypass Russia when transporting oil. However, the corridor’s potential is limited by the low non-energy export potential of countries in Central Asia and the Caucasus, as well as obstacles related to border delays and controls, custom offices, and corruption.

Russia gradually began to turn back to the region in the mid-2000s, aiming to attract Baku with a new model of integration. Baku initially ignored Russia’s initiatives, such as the Customs Union and later the EEU. Aiming to become an energy hub and critical state for European energy security, Baku looked at the Russian projects as hurdles in its journey toward an independent foreign policy. In addition, the economic benefits weren’t sufficiently attractive. However, Baku has begun to rethink its attitude towards the EEU in the last two years, in a climate of deteriorating relations with the EU, the drop in oil prices, and Russia’s position on resolving the Nagorno-Karabakh conflict. Baku has not officially stated that it wants to join the EEU, but the negative rhetoric towards Russian initiatives in the region is in decline.

China, meanwhile, has never been active in Azerbaijan and the South Caucasus. Historically, relations between the two countries are positive, but neither considers the other to be a longstanding or strategic partner. Geographical distance and the absence of massive Chinese investments meant that there was little to drive this partnership forward. China has always been interested in hydrocarbon resources as well as transport routes through Azerbaijan as a tool to expand its influence, however.

Azerbaijan reacted positively when China announced its ambitious plan to promote OBOR in 2013. At the time, Baku urgently needed a regional player 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, and mean that all goods were diverted through Azerbaijan.

Following Dubai’s emphasis on port development, Baku is constructing an enhanced port at Alyat – “the Jewel of the Caspian” – which includes an international logistics centre 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).4

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 for construction of the missing link between Akhalkalaki and Kars, as well as the modernisation of existing infrastructure. The railway is expected to handle 20 million tons of cargo and around three million passengers annually.

 

Analysis

At first glance, the EEU might appear to be the better choice for Azerbaijan. Baku’s membership in the Commonwealth of Independent States (CIS) eased Azerbaijani-Russian relations after a tense period in the early 1990s, and, with its visa-free regime, addressed high unemployment by allowing for large-scale labour migration to Russia. Joining the EEU now would increase the ability of Azerbaijani products to penetrate neighbouring markets. In addition, the import

of cheap Russian food products would lower prices, benefitting a large proportion of the population. Meanwhile, delays in Azerbaijan joining the World Trade Organization (WTO) could be one of the stronger arguments in favour of Russia admitting it to the EEU. Building on their current relationship, it would be little work for Russia to adjust Azerbaijan’s trade tariffs to meet EEU standards.

However, Azerbaijan’s largest trading partner today is not Russia but the EU. In 2011–2014, between 48 and 52 percent of Azerbaijan’s exports went to the EU, while between 26 and 32 percent of imports came from there.5 According to one of the experts interviewed for this paper, “if the Eurasian Union offers a model of regional economic cooperation, then there are many benefits such as cross-border trade, customs, labour, investments. However, there are fears that this project is a political tool in Russia’s hands to unify former USSR countries under its hegemonic control.”6 In addition, it is mostly businesses that export products to Russia that would be interested in the EEU.

Nevertheless, the political establishment still toys with pro-EEU rhetoric. Foreign Minister Elmar Mammadyarov has suggested that Azerbaijan might consider joining the EEU.7 However, the public considered this as mere appeasement to the Russian establishment. Azerbaijan is afraid that Russia may use other means to influence it.8 Some experts interviewed state that the Nagorno-Karabakh conflict is considered one of the major tools of leverage. The public may accept EEU membership if Russia promises to return occupied territories, thereby sacrificing certain EU integration projects for the sake of regaining territory.

Armenia’s EEU membership is not considered to be an obstacle to Azerbaijan joining the Union. Both countries have successfully participated in the Russian-led integration process. The Commonwealth of Independent States, established in the 1990s, is a good example of an integration project that both sides were able to get on board with. However, in future, the EEU may encompass the Collective Security Treaty Organization (CSTO), which could pose serious challenges to Azerbaijan and Armenia. In contrast with the EEU, where it is still possible to refrain from economic contact with other members, in the CSTO both countries would need to play by rules established by Moscow. This means that they would need to find a way of cooperating on security and military affairs – something considered to be impossible from the Azerbaijani perspective. The flare-up of the Nagorno-Karabakh conflict in April cast further doubt on the prospect of both states peacefully coexisting under one integration project.

One of the strongest factors counting against Azerbaijan joining the EEU is the opposition of political and economic elites. EEU membership would undermine the position of many local oligarchs, who are close to the government and reap considerable benefits from the economy’s monopolistic nature. While oligarchs in Armenia and, to some extent, Kazakhstan and Kyrgyzstan have business interests in Russia, the businesses of Azerbaijani-based oligarchs are concentrated in Azerbaijan and Turkey. For these oligarchs, joining the EEU raises the spectre of the economic “Armenianisation” of Azerbaijan – the buy-out of the economy by Russian oligarchs and companies. Ethnic Azerbaijani oligarchs who live in Russia, like Lukoil President Vagit Alekperov and billionaire Telman Ismailov, do not have sizeable business interests in Azerbaijan, and have little ability to influence the country’s political establishment to move towards the EEU.9

It is hard to find successful example of large-scale Russian infrastructure developments or investments in Azerbaijan, and only a handful of Russian businesses are represented in the country, such as Lukoil, Aeroflot, Nikoil Bank, and VTB Bank. Meanwhile, Russia does not invest much in the development of the North Caucasus, something that would naturally spill over into Azerbaijan. For the last decade, the Russian authorities completely ignored the idea of constructing a north–south highway to connect Russia with Iran through Azerbaijan. Meanwhile, Azerbaijani investments in Russia total less than $1 billion over the last ten years.

By contrast, the EU plays an important role in Azerbaijan’s trade. For a number of years, over 50 percent of the country’s foreign trade has been with EU countries – much higher than the level of trade with Russia or its partners.10 The EU is positively viewed in the country and is considered the most desirable region for study and travel.

Chinese investments and projects are also positively viewed in the country. The public and the political establishment believe that China does not have political interests 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.11 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. Experts noted that “if China negotiates a project and investments, and credit agreements [are] signed, no obstacle stands in its way. Additionally, no countries can compete in terms of resources to provide an alternative to China.”12

The Chinese OBOR initiative was enthusiastically greeted by the political establishment, though the public is not aware of many of these Chinese projects. Chinese investment helps to fill the funding gap 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 Silk Road, travelled the more than 4,000km from China in a record six days, arriving at the newly constructed Baku International Sea Trade Port. This signalled a new era in regional transport links.

China, together with partners from Azerbaijan and Kazakhstan, was a major player in implementing the project. It demonstrated to Chinese partners 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 establishments to begin infrastructure in their territories so they could reap the benefits. Azerbaijani authorities believe that by 2020 some 300,000–400,000 containers will be transported via this route, bringing billions of profits.

Though it is attracted to China’s east–west corridor, Azerbaijan does not reject the idea of a north–south corridor from Russia to Iran. Azerbaijan was in favour of this project, but both Russia and Iran lacked much interest in pushing it forward. However, the economic crisis, sanctions against Russia, and the opening of Iranian markets may offer the opportunity to revitalise the project. On 7 April 2016, the foreign ministers of Azerbaijan, Iran, and Russia met in Baku to discuss the north–south transport corridor. On 20 April, Azerbaijan and Iran launched construction of an 8km-long railway linking the borders of Iran and Azerbaijan, due to be completed by the end of the year. Meanwhile, the Iranians have accelerated work on the construction of the Rasht–Astara railway to link the rail systems of Iran, Russia, and Azerbaijan, allowing Russian goods to reach the Persian Gulf faster. Baku has already given Iran a $500 million loan to complete the project.

 

Conclusion

Comparing Chinese and Russian integration projects, it seems clear that China does not threaten the EU’s political stance on the region as much as the EEU might. Moreover, the OBOR initiative would strengthen the ties between Asia and Europe. While China would invest in OBOR, the EU could invest in and revive the TRACECA project. The question that may arise is which power – the EU or China – will have greater influence along the route. While it would be difficult for the EU to compete with Chinese influence (especially after the establishment of the Asian Infrastructure Investment Bank (AIIB)), the Caucasus, Azerbaijan, and Georgia rely more on European investments and EU involvement.

However, the differences in the political structure and ideology of China and the EU, as well as their diverging approaches towards domestic issues such as human rights, makes this problematic for the EU. Close relations with the EU make the Azerbaijani elite uncomfortable, and they are irritated by its criticism over human rights violations, corruption, and the absence of reform. The establishment understands that continued movement towards the EU will force Azerbaijani elites to carry out significant reform of the public administration, respect human rights, and open up local markets. This all points to the further democratisation of the country, which could undermine the current government.

Because of this, the Azerbaijani elite is ambivalent in its approach towards EU-led initiatives. It wants to be part of these projects, but without significantly changing the country’s system of governance. By contrast, cooperation with the EEU or China does not require reform or involve criticism of Azerbaijani policies. Beijing’s ability to pump investment into Azerbaijan and stave off financial crisis, with no reform agreements attached, may push the country towards China and away from the EU.

The oil windfall made the government bold in recent years, and led it to ignore the demands of international institutions such as the Council of Europe and the International Monetary Fund (IMF). However, the recent drop in oil prices has had a big impact on the economy. The years of massive investment and spending are over, and the population is feeling the effects of a decreased level of income. This, in turn, affects their political and economic expectations, and could lead to riots or protests if the situation becomes bad enough.

The EU should be decisive when involving Azerbaijan in its projects, making large investments that can outbid Russia, while bearing in mind that its projects will only be successful if they are planned with the peculiarities and interests of Azerbaijani society in mind. Meanwhile, the Russian-led EEU has little chance of success from an economic perspective. It lacks both financial and economic stamina. However, the political manipulation of instability in the region, and the stirring up of fears of a new “Orange Revolution”, may attract the political establishment of Azerbaijan.