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Transit Georgia – Potential for US Foreign Policy Success

Transit Georgia – Potential for US Foreign Policy Success

Georgia plays a growing, though little-known, role in the global economy. Strategically linked with Azerbaijan, it serves as a key element in the transportation network that connects landlocked, but resource-rich areas of Central Asia to world markets via its Black Sea ports and Turkey.

Over one million barrels of oil and oil products cross Georgian territory daily using pipelines, the railways, and ports. For a decade, Georgian ports have also served as entry points for commercial and military cargo destined for Central Asia and Afghanistan. Azerbaijan and Georgia are expected to play a greater role in container transit between Asia and Europe in the years to come. A close ally of the US and NATO that has made significant troop contributions to Afghanistan, Georgia needs greater support for its security from the US as well as from multiple actors interested in Georgia’s growing transit potential.

Recent developments

On November 8, 2014, the bulk cargo carrier Thor Friendship, currently sailing under a Singaporean flag, delivered 2,280 steel pipes from Japan to the Georgian port of Poti, owned by APM Terminals, a global firm headquartered in the Netherlands. The US-Georgian joint venture Pace Group, which leases several berths in Poti from APM, received the cargo and stored it at its own newly developed New Port Pace Terminal. From there the 48-inch pipes are being shipped by the Georgian Railway to Azerbaijan to be used for expansion of the South Caucasus Pipeline (SCP). The Swiss-based global logistical company Panalpina is contracted by BP, the operating company for the Shah-Deniz consortium, to provide logistical services for this project. SCP links the Azerbaijani Shah-Deniz gas field to Turkey via Georgia, and is soon to be connected to new pipeline systems that will deliver Azerbaijani gas directly to European customers in Albania, Bulgaria, Greece, Italy, and other countries. This project vividly reflects Georgia’s growing participation in the globalized economy.

The expansion of SCP is part of a massive $45 billion project designed to serve export needs for the second phase of the Shah-Deniz natural gas field development operated by BP. These investments and the project itself highlight the beginning of the next stage of development of the Caspian hydrocarbon resources. While the late 1990s were all about getting Caspian oil to Europe, now the focus is on the strategic linkage of natural gas reserves with European markets. Georgia will serve as a transit country for the additional 16 billion cubic meters of Shah Deniz gas shipped to Turkey and Europe. The expansion envisages the development of a parallel line to the existing SCP pipeline for so-called looping, allowing the shipping of larger volumes. Overall, over a two-year period, half a million tons of cargo will be received and transshipped by the Pace Group for this project. In addition to pipes, Georgia will also receive equipment for two compressor stations to be placed on Georgian territory to push natural gas coming from Azerbaijan into Turkey and beyond. The cost of equipment and construction of each of the compressor stations is $1 billion. Through this project, in next two years Georgia will receive the largest foreign direct investments in its history.

The Shah Deniz expansion project has particular significance in the context of growing tensions between Europe and Russia over the conflict in Ukraine as it is one of several ways in which Europe can gradually reduce its dependence on Russian gas. In particular, it is of key importance for those Eastern European countries that have no ability to receive alternative supplies, such as liquefied natural gas.

Beyond energy

Energy and pipeline development over the past twenty years stimulated substantial infrastructure development all the way from Georgia’s Black Sea coast to Central Asia. This was followed by a growing interest in the emerging potential transportation linkage between Asia and Europe. This has, in turn, spurred infrastructure developments, few of which have made headlines in the West. First, considerable upgrades of railways and highways have been undertaken in Afghanistan, Azerbaijan, Georgia, Kazakhstan, Tajikistan, and Turkmenistan. Second, the Baku-Tbilisi-Kars railway system is nearing completion. Following the completion of the Marmara railway connection under the Bosphorus, this is the last missing link in a railway connection that could transport goods from Hamburg to Hanoi. Third, the littoral states of the Caspian Sea have invested substantially in upgrading their port facilities. Thus, much greater potential now exists in transit through Kazakhstan’s Aktau port, Turkmenistan’s Turkmenbashi port, and Azerbaijan’s port of Alat. Fourth, there have been numerous terminal upgrades as well as new port facilities constructed on Georgia’s Black Sea coast, including the Poti Port, the Batumi Port, New Port Pace Terminal, and the Kulevi oil terminal. Soon, development will start at a port facility in Anaklia, further north. The Georgian government received multiple responses from different companies on a call for the development of this new deepwater port. Fifth, in addition to infrastructure development, there are clear signs of greater coordination between the transit countries. Azerbaijan, Georgia, Kazakhstan. and Turkey — within the framework of the so-called Silk Wind project — have agreed to create a common customs and tariff structure for container trains shipped from China to Europe. The railway companies of Azerbaijan, Georgia, and Kazakhstan have also agreed on a common tariff on grain and liquefied petroleum gas. As a sign of greater collaboration between Georgian and Azerbaijani railways, container block trains resumed regular operations in July of 2014 between Baku and Poti, allowing containers to move from the Caspian port to the Black Sea port in about 30 hours.

The Port of Poti plays a particularly important role in regional trade, being a receiving and redistribution point for construction materials, ferrous and non-ferrous metals, coal, grains, as well as food products. On November 22, 2014, the Georgian company Agricom partnered with US grain trader Bunge and the Pace Group to inaugurate an upgraded grain storage facility at Poti. Agricom and Bunge will be able to trade about 400,000 tons of grain annually through this new facility. This will include transshipment of grains in and out of the region, with particular emphasis on export of grains from Kazakhstan.

When seen in a broader context, these developments make it clear that Georgia plays a key role in transit and trade for the Caucasus and Central Asia, serving effectively as the mouth of this east-west corridor. This strengthens Georgia’s strategic position and economic potential. It also serves the strategic interests of the entire transatlantic community, allowing access to this important region for both trade and military security purposes.

Georgia’s security cannot be taken for granted

It is only possible to develop a thriving transportation system in a stable security environment. Unfortunately, global private sector actors cannot take security and stability in Georgia for granted. Moscow does not welcome the growing energy and transportation corridor from Asia to Europe since it does not cross Russian territory. As a result, Moscow is putting increasing pressure on Azerbaijan and Georgia.  The most recent example of that pressure is Russia’s decision to impose an agreement on “alliance and strategic partnership” with Georgia’s breakaway region of Abkhazia, and a “comprehensive agreement on integration” with the Georgia’s other breakaway region, South Ossetia. These agreements effectively imply the de facto annexation of parts of a sovereign state by the Russian Federation, in violation of the UN Charter and international law. Russia clearly aims to destabilize Georgia in order to disrupt both Georgia’s process of Euro-Atlantic integration as well as the growing transit through the South Caucasus. These developments, of course, take place in the context of Russia’s actions in Ukraine. Russia is moving forward with its plan to assert control of the former Soviet space and to reduce the independence and sovereignty of its neighbors to no more than a formality.

The international community needs to respond to Russia’s actions with a clear strategy. The US has a special role to play. At stake is the vital US interest in access to Central Eurasia, and the stability of this strategically important region in which the United States has made considerable financial and political investments over the past twenty years. US interests in this case converge with the interests of major Asian powers like China and India, as well as other regional states that are looking forward to greater commercial engagement with Europe via Central Asia and the Caucasus. This convergence of interests creates favorable preconditions for successful engagement.

Twenty years ago, US diplomatic efforts made it possible to initiate and successfully implement energy projects that helped European and global energy security, and strengthened sovereignty and independence of the states of the South Caucasus and Central Asia. US leadership was critical for regional governments as well as multinational corporations involved in energy projects.

The United States needs to use that experience and lead a concerted effort to assist Georgia by engaging all actors interested in trade and access between Asia and Europe. The current geopolitical environment makes China’s participation in this effort of particular importance. China is looking for transportation options that will shorten the delivery time for products produced in western China that are destined for Europe. The South Caucasus transportation corridor via Georgia and Azerbaijan is one of the alternatives under consideration.

With the United States advancing toward a Transatlantic Trade and Investment Partnership with Europe, and China increasingly involved in the rules-based global trade system, it is natural to seek greater political support and security guarantees for the functioning of the transportation corridor that serves the interests of multiple actors. Recent visits by Russian President Vladimir Putin to China, Turkey, and India indicate Russia’s growing interest and dependency on those countries. If managed properly, the United States and the European Union could benefit from working with these states to balance Russian pressure on its South Caucasus neighbors thus bringing more stability to the region. This will require strong US leadership and clear strategy focused on development of the Asia-Europe transportation network. By harmonizing multiple interests, the United States will achieve its strategic goal of facilitation of global and regional stability.

Mamuka Tsereteli is the director of research at Central Asia-Caucasus Institute at Johns Hopkins University’s School of Advanced International Studies. He teaches class on Energy Markets for Middle East and Central Asia at SAIS. He was a member of the Atlantic Council’s Georgia Task Force.

Source: Atlantic Council