BUSINESS CONFIDENCE RETURNING TO THE SOUTH CAUCASUS TRANSPORT CORRIDOR

Russia’s invasion of Georgia in August caused partial and temporary disruptions to the transport corridor for Caspian oil and other commodities through that country. The two-pronged corridor, running from Azerbaijan to the Georgian Black Sea coast and via Georgia to the Turkish Mediterranean coast, is now functioning at nearly the same overall capacity as it did prior to the conflict.

Business confidence in this transport route is rebounding fast, driven by Kazakhstan and Azerbaijan in the region and encouraged by the U.S. government. The return of confidence reflects both the West’s strategic stake in this route and the Caspian oil exporters’ imperative need to use this unique westbound outlet.

On September 19 the recently appointed head of Kazakhstan’s oil and gas state company KazMunayGaz, Kairgeldy Kabyldin, announced that Kazakhstan would go ahead with the earlier plan to ship oil to Baku for pumping into the Baku-Tbilisi-Ceyhan (BTC) pipeline. The additional oil volumes from Kazakhstan would increase that line’s throughput from the current annual rate of 37 to 40 million tons (800,000 to 850,000 barrels per day) to 50 million tons (1 million barrels per day) of oil annually by 2009-2010. Moreover, KazMunayGaz proposes to participate with Azerbaijan and Turkey in a project to build an oil refinery and petrochemical plant at the Ceyhan terminal.

“I would not say today that the risks of [using] BTC have increased owing to the Russia-Georgia conflict. On the contrary, the transit of Kazakh oil in this direction will add an element of stability in the region,” Kabyldin told Kazakh media (Panorama [Almaty], September 19).

On September 24 President Nursultan Nazarbayev, inspecting oil infrastructure projects on Kazakhstan’s Caspian littoral, confirmed the plan to develop the Kuryk seaport as a major oil export terminal “for handling large volumes of crude from Kashagan” (Kazakhstan TV Channel One, September 24). Kuryk is projected to serve the giant Kashagan offshore oilfield, part of whose future output is intended to be shipped by sea tankers to Baku. From there, two continuation routes are envisaged: the BTC pipeline (boosting its throughput to ultimately 70 million tons annually or 1.4 million barrels per day) and Georgian Black Sea export terminals. In all of these cases Kazakhstan’s and Azerbaijan’s reliance on the South Caucasus corridor will keep growing.

On September 27 KazMunayGaz’s transport subsidiary KazTransOil confirmed its earlier plans to invest in Georgia’s Batumi harbor and oil export terminal. The investment program, which envisages capacity expansion and equipment modernization, remains in force. KazMunayGaz and KazTransOil intend to reach the targets previously set for 2008 and 2009 in terms of investment and transshipment at Batumi (Interfax, September 27).

KazMunayGaz has dropped its earlier intention to build an oil refinery in Batumi at an estimated cost of $1 billion for an annual processing capacity of 5 to 7 million tons. This was unrelated to the Russia-Georgia conflict or risks to the transport corridor. The Kazakh company made this decision some months ago, citing differences with the Georgian government over some of the proposed contract terms. Meanwhile, KazMunayGaz and KazTransOil continue investing in the oil transport corridor to Batumi. The Kazakhs acquired the sea port and oil terminal in February of this year from the Danish-led Green Oak Group (Interfax, Civil Georgia, Reuters, September 24).

According to Kabyldin, the company is also interested in sharing the Baku-Supsa oil pipeline capacity with BP and Azerbaijan, with its terminal on the Georgian Black Sea coast. The line, closed for two years, was about to reopen when the Russian invasion occurred and is undergoing tests at present. Meanwhile the Georgian coastal terminal Kulevi, owned by Azerbaijan’s State Oil Company and paralyzed during the August conflict, has resumed operations (Turan, September 9; Panorama [Almaty], September 19).

The one likely setback to the transport corridor is unrelated to oil. Kazakhstan’s Agriculture Minister Akylbek Kurishbayev informed parliament on September 22 that his ministry had recommended to the government to drop the planned construction of a grain export terminal in Georgia’s harbor of Poti. The ministry cited “international problems and the current situation in Georgia” as reasons for its recommendations. The Kazakh government has yet to announce its decision on the matter. The agreement with Georgia, signed in 2007, envisaged a terminal with a capacity of 500,000 tons, equal to one tenth of Kazakhstan’s annual grain exports at present. Poti is closer to Kazakhstan than any other possible open-sea outlet for exporting grain (Kazinform, Reuters, September 22).

Russian forces vandalized parts of the Poti harbor in August, but the port is rapidly recovering. The Investment Authority of Ras Al Khaimah (United Arab Emirates, UAE) acquired a 51% stake in the seaport, along with management rights and the free industrial zone, in April of this year. The UAE’s Saqr Port Authority (SPA) operates the port. According to the company’s CEO Venkatesh Govinda, once the Russians withdrew, “it is business as usual in Poti,” with port services for Georgia, Armenia, Kazakhstan, and Azerbaijan returning to normal. The UAE operator expects cargo volumes to increase significantly, due to Western aid coming into Georgia (Gulf News, September 12).

The South Caucasus transport corridor appeared vulnerable during the Russian invasion of Georgia and its immediate aftermath. The Russians did not inflict major or long-term damage to the corridor. Rather, they demonstrated their ability to interrupt its functioning temporarily, for example, by blowing up the Kaspi railroad bridge, which Georgia has since restored. Moscow almost certainly does not seek to disable the existing corridor but rather to prevent its planned expansion by discouraging major investments.

Countries in the region and their Western partners, however, are guided by a different logic. They realize that the greater the turnover of goods and commodities, the higher the international stake in this strategic corridor, thus decreasing the risk of Russian mischief in the future.