The INSTC, Transregional Connectivity and Geopolitics

The INSTC, transregional connectivity and geopolitics

The multi-modal International North-South Transport Corridor (INSTC) has the potential to boost Eurasian trade connectivity by linking Russia to the warm waters of the Persian Gulf and Indian Ocean. Only 160 km of track remains to be laid in Iran’s northwest for Mumbai to be connected to the Baltic Sea. However, geopolitical barriers and the fragile political commitment of member states risk putting the network into a state of arrested development and have raised questions about the project’s economic viability. Meanwhile, Russia is strengthening its access to diversiﬁed regional transit corridors in West Asia.

INSTC: a missing link for Eurasian connectivity

Introduced as a project in the early 2000s by India, Iran and Russia, the INSTC aims to link the Indian Ocean to the Baltic Sea through the Persian Gulf and the Caspian Sea via a network of rail, roads and shipping routes.

The corridor began to gather interest in the mid-2000s, when a dozen other countries joined up. However, it gradually lost momentum and became focused on integrating the three founding members with countries in Central Asia. Accordingly, the Ashgabat Agreement, which was signed in 2011 and aims to establish a separate transport corridor between Central Asia and the Persian Gulf, paved the way for the INSTC’s western corridor to connect with such countries as Turkmenistan, Uzbekistan and Kazakhstan.

When fully operational, the INSTC could be the fastest transit route between Mumbai and St Petersburg: in theory, it will reduce the distance on the current maritime route through the Suez Canal from 16,000 km to 7,200 km and bring down the travel time between South Asia and Northern Europe from 60 days to 30, signiﬁcantly driving down transport costs. On a continental level, the INSTC has the potential to be the north-south counterpart to China’s east-west (Yiwu to Duisburg) New Silk Road project. There is also a possibility that further expansion in the future could see it connect Africa to the Americas through Asia.

Geopolitics put the transport corridor’s future in doubt

Despite enormous potential, the future of the INSTC remains uncertain, mainly due to geopolitical headwinds, which are threatening to directly impact the project’s economic viability.

This is especially notable at Chabahar Port on Iran’s south-east coast. As the Islamic Republic’s only oceanic port outside the Persian Gulf, Chabahar has historically been seen by New Delhi as an ideal gateway to Afghanistan and Central Asia. With the aim of increasing trade ﬂows, in May 2016, India, Iran and Afghanistan signed a trilateral deal to equip and operate multipurpose terminals at the port. The private company India Ports Global Limited and its Iranian partner Aria Banader later took on the project, bringing $85m of capital investments and $500m of planned investments over a 10-year period, with the aim of increasing the port’s capacity to 82m tonnes per year.

Fast forward to 2019 and only 10% of that capacity has been installed. It is also vastly underutilised: approximately 1.9m tonnes of cargo passed through the port between 2016 and March this year, according to the Iranian port authority. Furthermore, in its Union Budget 2019-20 India slashed its annual spending commitment to Chabahar from $22m to $6.5m, a move that is likely to result in postponement of the port’s completion from the mid-2020s to the 2030s.

With a vacillating imprint in Iran, India risks jeopardising the INSTC-dependent objective of doubling Indo-Afghan trade to $2bn by 2020 and the more crucial goal of tripling Russo-Indian trade from $10bn in 2017 to $30bn in 2025.

Because the country is a key node of the transport corridor, India’s reduced commitment could threaten the project’s economic viability. Scarce capital, low traﬃc frequency and shipment volume would greatly increase premium costs and diminish INSTC’s competitive advantage.

India’s withdrawal caused by US sanctions on Iran and foreign policy changes

The primary driver behind India’s retrenchment is without a doubt renewed US sanctions on Iran, which not only make logistics and finance more difficult, but affect cooperation with Chinese and European firms tasked with providing Chabahar with vital equipment, such as rail-mounted cranes. Iran’s unviable business environment is also a factor. As a result of difficult conditions for companies operating in the country, IRCON International, formerly the Indian Railway Construction Company, could reduce its $1.5bn investment in a rail link between Chabahar and Zahedan on the Afghan border, especially in light of Khatam ol-Anbia’s involvement, a conglomerate linked to the Islamic

Revolutionary Guard Corps.

Moreover, the re-election of Narendra Modi as prime minister will see New Delhi retrench into its immediate neighbourhood in order to refocus its resources on warding oﬀ Chinese inﬂuence in the Indian Ocean. It is also keen to deepen ties with countries belonging to the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). India has signed free-trade agreements with many of the bloc’s members and has developed strong commercial relationships with them. Overall, BIMSTEC accounted for 11.42% of Indian exports in 2017 while Central Asia, Afghanistan, Iran, Azerbaijan and Russia constituted just 2.2%.

It is possible that India has already conceded defeat in this area of the world, considering that China’s exports to the region are 12 times higher than India’s in terms of value. The expansion of a key component of the China-Pakistan Economic Corridor – Gwadar Port – which will see its throughput capacity increase to 400m tonnes per year, is likely to increase the gap and ensure India-led infrastructure development remains secondary in West Asia.

From the INSTC to a Russia-dominated Trans-Caspian trade area?

The INSTC’s slow pace of development – the project has been in the works almost 20 years now – illustrates the diﬃculty large-scale multilateral undertakings face in deﬁning, maintaining and implementing priorities across multiple stakeholders, especially when the economic returns are uncertain, and the political will and capital are scarce.

Despite the setbacks, the INSTC should not be seen as a project which has failed in its infancy: the network is expected to be fully linked in just a few years’ time, following the completion of the Rasht- Astara section of the Qazvin-Rasht-Astara railway connecting Iran to Azerbaijan.

Azerbaijan is expected to provide $500m in financing to finish the line, which is scheduled to enter into operation in 2020-21. The country has a significant stake in the INSTC, not only because of the access it will provide to the Persian Gulf but because it is an alternative to the slowly advancing railway project between Baku, Georgia’s capital Tbilisi, and Kars in Turkey, and will further isolate Armenia by linking Iran and Russia through Azerbaijan’s territory.

For central Asian states and Azerbaijan, the INSTC holds substantial potential in terms of its ability to

open up their economies and allow them to export natural resources and agricultural goods to the south. Following last year’s agreement on the Caspian Sea’s legal status, riparian states are poised to increase trade and integrate economically, although the process is likely to be overwhelmingly Russian-led.

There is also a chance that Iran will soon enter into a preferential trade agreement with the Eurasian Economic Union, which consists of Russia, Kazakhstan, Armenia, Belarus and Kirgizstan. In fact, continued sanctions on Russia and Iran are encouraging a process of Eurasian dislocation, whereby trading blocs are formed mostly due to political necessity and larger Eurasian integration plans are slowed due to geopolitical barriers.

Daniel Moshashai is the regional analyst at Castlereagh Associates. He specialises in Iran, the GCC, economic diversiﬁcation in national agendas and geopolitics in the Middle East.