Area of Influence

A container ship in the Suez Canal at Ismailia port city

In the making for 17 years, the International North-South Transport Corridor (INSTC) seems closer to becoming a reality than ever before. The agreement reached last week between Iran, Russia and Azerbaijan at a meeting in Baku, during which a 50% cut for transit tariffs within the INSTC was defined, will facilitate and accelerate the development of what could be the most important shift in regional trade in decades.

The INSTC is a plan designed to streamline trade between India and Northern Europe. More specifically, the route is envisaged to facilitate the transportation of goods from Mumbai to Helsinki, for further distribution to Northern Europe. In broad terms, the corridor would allow the bypassing of the maritime routes used today, which traverse the Suez Canal in Egypt, the Mediterranean Sea, and curve around Western Europe to reach the northern ports of The Netherlands and Scandinavia.

The INSTC will first move Indian goods via sea to ports in southern Iran. From there the goods will continue by railroad through Azerbaijan and then through Russia. Iran is now working on concluding the railroad connection between the port of Astara and the Azeri border, where it will then connect to a city also called Astara, in Southern Azerbaijan, crossing a bridge over the Astarachay River. Several other sections of the route are currently under development in Iran and Azerbaijan. Officials have suggested the corridor will be operational at some point in 2017.

The project, devised in 2000 between Iran, India, and Russia, now counts on the participation of Armenia, Azerbaijan, Belarus, Bulgaria, Kazakhstan, Kyrgyzstan, Oman, Syria, Tajikistan, Turkey, and Ukraine, which also stand to benefit from cheaper access to goods crossing the corridor.

The decision to reduce and eventually harmonize trade tariffs between the countries along the corridor is paramount to the commercial viability of the project. Competition with the traditional transport route will pose a threat. It is said that the INSTC could cut transportation from Mumbai to Saint Petersburg from six to three weeks, but the issue of cost remains, though last week’s agreement is expected to achieve just that.

As a point of reference, a large crude carrier or container ship is charged around USD325,000 to cross the Suez Canal. Per day at sea, a large carrier can cost USD10,000 to run. Bypassing the canal and reducing transport times could make transportation costs more affordable and potentiate trade.

The establishment of this trade route could also have considerable geopolitical consequences. It represents the gradual reintegration of Central Asia, and asserts both a reinforcement of Russia’s control over regional trade and Iran’s regained regional influence following the lifting of US sanctions last year.

Presently, the EU is negotiating with Russian national oil and gas company Gazprom for the liberalization of the gas markets in Eastern Europe, trying to somehow overcome the continent’s dependence on Russia for the supply of gas. The EU and Gazprom seem to have achieved a tentative agreement on March 13 regarding its antitrust disputes. Gazprom has stated it intends to facilitate gas re-exports in its long-term contracts and to liberate spot-pricing, among other issues demanded by the European Commission.

This represents a positive development in relations between the company and the EU after two full years of negotiations. Russia’s economic difficulties and the collapse of gas prices might have something to do with Gazprom’s doubling-down.

The INSTC could bring different variables into play, as Russia seeks to streamline its gas-supply relationship with the EU, on which it is financially dependent, while seeking new trade opportunities elsewhere. Naturally, the EU favors the East-West corridor that connects central Europe to Asian markets.

On the other hand, China has been pushing its “One Belt, One Road” solution for Eurasian trade, in what has been dubbed the “New Silk Road,” comprising a maritime route through the Suez Canal and a land route through Central Asia, Turkey, and Eastern Europe.

Perhaps above all others, Azerbaijan is particularly well placed to benefit from this competition in trade, as it finds itself at the crossroads of some of the globe’s most important routes.

The country has the potential to become a transport hub for the region. Seeking to diversify its economy away from hydrocarbons-dependence, this is good news. When it comes to the power struggle between the EU, Russia, Iran, and China for influence over the region’s trade, however, only time will tell.