Azerbaijan becoming key logistic hub between Europe and Asia EU bets on TRACECA

The other day, Bloomberg reported on the 11th round of anti-Russian sanctions being drawn up by the European Union: it is expected that the EU may completely ban high-tech products from delivering to third countries via Russia. This is an expected measure in the context of the worsening geopolitical situation amid the war in Ukraine. For this reason, the European Commission (EC) already outlined a set of measures to diversify logistics vectors via alternative routes last year. In particular, Europe intends to noticeably expand communication with Azerbaijan, Georgia, and Central Asian countries, using the potential of the Transport Corridor Europe-Caucasus-Asia (TRACECA).

According to Bloomberg, the EU countries are gearing up to adopt a new, 11th package of anti-Russian sanctions: the next set of restrictive measures will include about 30 new sanctions, and along with severe restrictions on a number of Russian firms and government agencies, sanctions will also hit ships and tankers that disable navigation systems that allow them to track their movements. Although EU diplomatic chief Josep Borrell said on arrival in Luxembourg for a meeting of EU foreign ministers that they were not yet ready to agree on a new package of sanctions against Russia, it is nevertheless clear that it is only a matter of time.

The most serious sanctions measure should be the introduction of a ban on the transit through Russian territory of a number of high-tech goods, equipment and some types of vehicles. As noted by Bloomberg, a number of countries bordering Russia, including Finland and Estonia, have seen an unusually high surge in trade with Central Asian countries. Often, these products, including dual-use goods produced in the EU and the US, do not reach their destination - in the process of transit, some cargoes remain in Russia or are re-registered and re-exported from third countries.

As a reminder, according to investigations by the media and a number of relevant international agencies, last year Armenia increased imports from the EU and the US by 80% and at the same time became a regional transshipment base for re-exports of electronic goods and chips, computers and IT peripheral equipment, machine tools and industrial equipment, cars and car parts to the Russian Federation. Most of these can be classified as dual-use products. Not long ago, EU sanctions envoy David O'Sullivan told the Financial Times that Western countries were investigating a sharp increase in exports from Russia's post-Soviet trading partners. Armenia is on the list of suspects, and Armenian Prime Minister Nikol Pashinyan was recently warned harshly during a visit to Germany that "parallel export" channels and bank transfers to sub-sanctioned Russia should be closed.

But it appears that this time the Western allies intend to go beyond warnings and exhortations and, as part of the 11th package, the European Commission intends to completely close off the transit channel for high-tech products manufactured in Europe, the US and a number of other countries to move through Russia.

In particular, according to the Financial Times, the US recently provided Switzerland, Austria, Italy and Germany with a list of dual-use goods that Russia is trying to buy from the listed countries to circumvent sanctions restrictions. The list includes optical goods, semiconductor converters, voltage and power measurement equipment, as well as user-programmable gate arrays. With the adoption of the 11th package, the transit of such or similar high-tech products through Russia for delivery to third countries will be completely banned. Moreover, it is possible that the sanctions list of products banned for transit through Russia could be further expanded. According to Bloomberg, Poland, Estonia and Lithuania are insisting that the EU impose a ban on all kinds of goods and technology that could be used in Russia's military, aviation and space industries and could also contribute to Russia's industrial development.

Among the minor group of products not yet included in the updated EU restrictive list are Rosatom products needed to generate electricity in nuclear power plants, which is explained by the position of several European countries (e.g. France, Hungary), for which the supply of fuel elements for nuclear power is extremely important.

Against this backdrop, Brussels is planning to do everything possible to promote Western high-tech goods and equipment along alternative routes that do not link with the "Northern Corridor" that runs through Russia. Moreover, the European Commission focuses on expanding freight traffic along the Transport Corridor Europe-Caucasus-Asia (TRACECA) initiated by the European Union 25 years ago. By the way, the EC's efforts in the second quarter of last year have already led to the diversification of transit of energy and non-commodity goods (agricultural raw materials, chemical and mineral products, grain, metal concentrates, rolled steel, consumer goods) from Central Asia to the EU through the TRACECA corridor.

The scale of logistics change in the Eurasian region can be seen in the cargo transshipment figures through Azerbaijan, the key transport hub of the Europe-Caucasus-Asia vector. According to the recently published updated data, in 2022 the volume of traffic through Azerbaijan within TRACECA amounted to 51.420 million tons with an increase of 29.8%, and the share of transit cargo transported through the corridor in the reporting period exceeded 13.634 million tons, providing growth of 54.5%. The increased volume of cargo transportation, including transit via TRACECA, increased Azerbaijan's income by 36.1% up to over 734.912 million manats, including revenues of the country from transit cargo handling approached 312.403 million manats with a 59.3% growth. Moreover, last year Azerbaijan's income from passenger transportation on this corridor grew by almost 28%, amounting to about 43.436 million manats.

Similar trends were observed on the other side of the Caspian Sea: the Central Asian republics consistently diversify their own and transit cargo deliveries to the West through the Europe-Caucasus-Asia corridor. Kazakhstan has been the most active in this regard, increasing the transhipment of non-oil products and containerised cargo by almost a third and, since March 2023, restoring crude oil shipments via the Baku-Tbilisi-Ceyhan pipeline, which were interrupted in 2014. Moreover, the Kazakh government approved a draft agreement on a single transit permit for the international cooperation programme between the European Union and the TRACECA transport corridor partner countries, according to which a single transit permit applies to road transport travelling through the territories of the participating countries, simplifying transit freight traffic many times over.

The other day, during the 4th session of the ad hoc Legal and International Cooperation Committee in Switzerland, initiatives of the permanent secretariat of the TRACECA intergovernmental commission (IGC) were discussed, in particular the digitalisation of transport documents, which will play an important role in ensuring the efficiency of international freight transport and in further developing multimodal transport in the 13 countries participating in the corridor.

Notably, since the second half of last year, the European Commission has expressed its willingness to extend its support to TRACECA member countries within the framework of technical assistance projects, significantly improving the conditions for international transport. These include the digitalisation of transport documents, legal harmonisation, expansion of container multimodal transport, optimisation of pricing, liberalisation of tariffs and cross-border procedures, as well as support for combined transport from the EU and China, among other promising areas of development in the corridor.

All these transport reforms are fully supported in Azerbaijan, the key logistics hub of the region and a significant beneficiary of increasing TRACECA freight traffic. It is also clear that Baku will also benefit from the EU's imminent decision to diversify the transit of high-tech goods via alternative routes.