Content from Financial Times Azerbaijan 2008 Report

Infrastructure: Silk Road railway to boost regional links
By Isabel Gorst

If the $600m South Caucasus Railway Project becomes reality, it might be possible by the end of the decade to travel by train from Baku to London.

Azerbaijan sees the project, launched last November with Turkey and Georgia, as advancing its goals of integration with world markets and diversifying its economy away from oil.

The plan involves rehabilitating hundreds of kilometres of Soviet-era tracks across Azerbaijan and Georgia. Turkey has also undertaken to build 100 km of new track linking its eastern city of Kars to its border with Georgia, as well as a railway tunnel under the Bosporus Straits, the divide between Asia and Europe.

A short section of new railway will also be built in Georgia to bypass Armenia, which has been blockaded by Azerbaijan and Turkey since Armenia seized the disputed territory of Nagorno Karabakh in the early 1990s.

This is one of the most ambitious infrastructure projects launched so far in a country where transport, power and water distribution networks are on the brink of collapse.

Following the path of the medieval Silk Road trading route between Europe and China, the railway fits with Azerbaijan’s strategy of establishing itself as a hub linking east and the west.

Heydar Babayev, Azerbaijan’s economy minister, says: “Azerbaijan is made for transit. If you look at the map, at the Black Sea and the Caspian, it is like a direct corridor from the east to Europe.”

The railway is one of three strategic transit projects supported by Azerbaijan’s state oil fund (Sofaz), where the republic stores its windfall oil profits. The fund’s mission is to secure future prosperity by investing a chunk of the windfall in infrastructure projects to reduce dependence on oil.

Sofaz was earlier tapped to pay for Azerbaijan’s share in the Baku-Tbilisi-Ceyhan pipeline carrying Caspian oil to the Turkish Mediterranean and the south Caucasus natural gas pipeline from Baku across Georgia to eastern Turkey. Both pipelines will remain a corridor for Caspian and central Asian exports after Azerbaijan’s own oil runs out.

Azerbaijan is also helping to finance Georgia’s share of the railway project with a $200m soft loan channelled through the International Bank of Azerbaijan, the state development bank.

This kind of largesse would not have been possible when the plan was first conceived in the 1990s, before the current oil boom.

However, such strategic vision has yet to manifest itself in meeting other infrastructure demands.

Gregory Jedrzejczak, the World Bank’s country manager for Azerbaijan, says the government has made the most effort to develop a strategic plan for the railways, which required urgent attention. “If they don’t make the investment now, there will be no railways left in 10 to 15 years,” he says.

Although Azerbaijan is now capable of financing big infrastructure developments, challenges ranging from the rest of the transport system to cleaning up industrial pollution appear to be met on an ad hoc basis.

“What we do is driven by the most urgent priorities,” Mr Jedrzejczak says.

“We and other international financial institutions work with Azerbaijan on roads, but still much has to be done to have consistent road communication – that you can say is fully finished and can be used for transit purposes.”

The Bank is also working to develop drinking water supplies and sewerage systems throughout the country. “There is no place in Azerbaijan that you can say is fully fixed, whether it is in Baku, where waste goes in to the Caspian, or villages where sanitation is non-existent,” Mr Jedrzejczak says.

More importantly for the country’s longer-term economic well-being, upgrading the transport system would remove an important obstacle to private investment outside the capital Baku.

Shahmar Movsumov, the executive director of the state oil fund, points out: “If there are no roads, people won’t invest.”

In the meantime Azerbaijanis can only hope that basic infrastructure needs will benefit from the same grand vision propelling the South Caucasus railway scheme.

If it opens as planned in 2010, the new route will compete with Russia’s Trans-Siberian railway to transport some of the $1,000bn worth of goods China exports to Europe each year.

It will also provide both the Caucasus and central Asia with an alternative, non-Russian window on world markets.

Caspian oil producers are expected to use the railway as a supplementary export route to western markets.

Kazakhstan, which shares Azerbaijan’s goal of becoming a strategic transit route between Asia and Europe, is expanding Aktau port on its Caspian coast to handle more oil and grain cargoes for shipment to Baku, where new import terminals are also planned.

President Ilham Aliyev says the railway will “boost regional co-operation and security”.

The railway is not welcomed everywhere in the region, however. Armenia has complained that by bypassing its territory, the line will deepen its economic isolation.

Copyright The Financial Times Limited 2008