New Economic Corridors in the South Caucasus and the Chinese One Belt One Road
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New Economic Corridors in the South Caucasus and the Chinese One Belt One Road Feride Inan and Diana Yayloyan The Economic Policy Research Foundation of Turkey (TEPAV) This publication has been produced with the assistance of the European Union within the framework of the Support to the Armenia-Turkey Normalisation Process programme. The views expressed in this report are those of the authors and do not reflect the official opinion of the European Union or any other Consortium partner in the programme. 1 The authors thank TEPAV researcher Berfu Çopur for her contributions to the fieldwork and research process; TEPAV data team led by Aysegul Tasoz and including Cansu Doğanay, Merve Dündar, Seçil Gülbudak Dil, Taylan Kurt and Aycan Kulaksız; and Ceyda Altunay, Ümit Durmaz, Burcu Urun and Beruh Yilmaz from TEPAV for their contributions to the fieldwork organization process. We would also like to thank TEPAV Program Director of Innovation Studies, Selin Arslanhan-Memis and TEPAV Managing Director, Guven Sak for their contributions to the research process and for their feedback to this report. We would like to extend special thanks to Richard Giragosian, Tatoul Manasserian, Anna Matveeva, Huricihan Islamoglu and Kemal Inan for their feedbacks to the report; the Turkish embassies in Tbilisi and in Astana for arranging interviews in Georgia and Kazakhstan, respectively; and to all our interviewees, which without this paper would not have been possible. 2 INTRODUCTION .................................................................................................................... 4 SECTION 1: BACKGROUND TO THE REGION AND ITS ACTORS ........................... 7 1.1 Armenia – Turkey Relations ............................................................................................ 7 1.2 Regional Economic Interactions and Connections: Turkey and the South Caucasus ...... 8 1.3 A Brief Overview of Economic Closures of Central Asia ............................................. 12 1.4 Big Actors, Big Projects: the EU, Russia, Iran, Turkey, the US .................................... 15 1.5 China as a Growing Power and the One Belt One Road (OBOR) ................................. 20 1.6 Chinese Perspective for Opening Up Eurasia by Land .................................................. 24 SECTION 2: ECONOMIC CORRIDORS OF EURASIA ................................................. 29 2.1 The Concept of Economic Corridors ............................................................................. 29 2.2 Corridors on the Land Route between China and the EU .............................................. 31 2.3 The Trans-Caspian Route Promises and Shortfalls ........................................................ 35 2.4 The North-South Corridor and Armenia ........................................................................ 40 SECTION 3: TURKEY AND THE MIDDLE CORRIDOR .............................................. 43 3.1 Turkey’s OBOR Perspective .......................................................................................... 43 3.2 Turkey’s Transportation Priorities ................................................................................. 45 SECTION 4. ARMENIA AND THE POTENTIAL FOR INVESTMENT ...................... 52 4.1 Armenia’s Access to Key Markets ................................................................................. 52 4.2 Foreign Direct Investment in Armenia and the ICT sector ............................................ 53 4.3 Free Economic Zones (FEZs) in Armenia ..................................................................... 56 4.4 China’s geopolitical interests in Armenia ...................................................................... 57 SECTION 5. OBOR PERSPECTIVES: KAZAKHSTAN GEORGIA, AZERBAIJAN, KAZAKHSTAN ..................................................................................................................... 59 5.1 Kazakhstan: A focus of Multi-Actor Interest and Transportation Priorities ............... 59 5.2 Georgia: A focus of Multi-Actor Interests including China’s involvement and Transportation Priorities ....................................................................................................... 62 5.3 Azerbaijan: Balancing the East and the West and Transportation Priorities ................. 64 SECTION 6 SUMMARY HIGHLIGHTS ........................................................................... 68 Armenia and Turkey: Their Strategic Assets and Needs .................................................... 69 SECTION 7. FUTURE CHALLENGES AND THE WAY FORWARD .......................... 70 REFERENCES ....................................................................................................................... 72 ANNEXES ............................................................................................................................... 85 3 INTRODUCTION This research report studies opportunities for Turkey and Armenia in view of emerging opportunities for regional economic integration. Armenia and Turkey are the main foci of our research; field trips have also been conducted in Azerbaijan, Georgia and Kazakhstan. In particular, our research focuses on economic corridors crisscrossing the region, singling out the Trans-Caspian Corridor or as Turkey calls it, the Middle Corridor, encompassing the countries studied. Both the report and the fieldwork address geographic and economic possibilities of the region. In doing this, we take a political economy approach. We take stock of changing dynamics in the larger region of Middle Eurasia, where big players i.e. the EU, Russia and the US, have been influential in various degrees in the post- Soviet era. In evaluating the new dynamics, the project addresses the escalating presence of China and to an extent Iran following the lifting of sanctions. China has made a grand entry into Central Asia and has a growing presence in the South Caucasus, since 2013 introducing a comprehensive vision of economic development with its ‘One Belt One Road’ initiative. The project rests on the assumption that transformations in the region are not simply top –down and big power initiated but individual countries (including those studied in this project) carve their own visions of economic change and development often challenging, if not contradicting, the visions of big powers. In this picture, the actions of big powers serve to facilitate movements of economic actors i.e. companies both state and private. The governments of countries in the region want a piece of the cake by attracting investments and by gaining access to routes and markets. We argue that from the perspective of countries visited, the Chinese One Belt One Road (OBOR) initiative, through a series of investments and providing transportation links, has the possibility of transforming the economies in this region. For Turkey, we explore why the Middle Corridor, a priority of the Turkish government, is important, how Turkey will benefit and the constraints and possibilities along the way in terms of transport infrastructure projects. Turkey has been treated both as a regional actor with economic and political presence in the South Caucasus and Central Asia and as a market and recipient of investments. In Armenia, we focus on the country’s investment potential. Though Armenia is not included in the Middle Corridor initiative, as an official OBOR country it has the potential to benefit from Chinese foreign direct investment. We also looked at new trade openings for Armenia, especially the North-South Corridor, connecting the Indian Ocean and the Persian Gulf to the Black Sea incumbent on sanctions being lifted from Iran. Azerbaijan, Georgia and Kazakhstan are included because of their location on the Trans- Caspian corridor; Azerbaijan and Georgia are also studied to measure the extent of China’s investments in the South Caucasus. The Trans-Caspian initiative has been critical from the perspective of EU to circumvent EU’s dependency on Russia, primarily in energy, as well as to maintain a foothold in the previously Russian controlled regions. The EU has established good political relations with countries along the Middle Corridor, which are also home to hydrocarbon resources and/or are passageways for transport of such resources. Turkey is an EU accession country (and thus covered by the Instrument for Pre-Accession Assistance) and it has been in a Customs Union with the EU since 1995. Georgia has the EU Association Agreement and Kazakhstan the Enhanced Partnership and Cooperation Agreement (EPCA) with the EU. Most recently, 4 Armenia signed the Comprehensive and Enhanced Partnership Agreement (CEPA) with the EU. Azerbaijan, which is closely linked to the EU through its energy exports, is in talks with the EU for signing an Association Agreement. Association with the EU is an asset in attracting Chinese investment taking into account the Chinese interest in having access to the larger EU market; also, Chinese companies are integrated into EU companies’ value chains. In the past decade, two factors have given impetus to development of land corridors in Middle Eurasia situated between EU and China, two massive trading blocs. First, China’s rise as an exporter of manufactured goods; as a major investor in different countries throughout Eurasia. The One Belt One Road (OBOR) initiative encompasses China’s both trade and investment concerns in Middle Eurasia. The second and a related factor motivating development of economic corridors between China