Publication: Eurasia Daily Monitor Volume: 3 Issue: 208

For almost a year, officials from Azerbaijan, Georgia, and Turkey have been engaged in intense discussions about ways to finance the construction of the strategic Kars-Akhalkalaki railway system. This rail link will bridge the gap between the Georgian and Turkish rail networks, permitting an uninterrupted flow of cargo from markets in Asia to Europe or vice versa.

Earlier this year, a Turkish firm completed a feasibility study of the Kars-Akhalkalaki project. Soon after, Turkey announced that it would finance the construction of the 68-kilometer portion of the railway on its territory ($200 million). Azerbaijan also stated its readiness to allocate funds for the project, while Georgia remained undecided.

It took several high level-meetings and intense negotiations among the three countries to hammer out the remaining differences. The major problem has been the source of funds for the construction and rehabilitation work in the Georgian segment of the railway.

A 220-kilometer (137 mile) portion of the railroad (from the Georgian-Turkish border to Tbilisi) runs through in Georgia. Some 30 kilometers (18 miles) of this rail link will be built from scratch, while the remaining 190 kilometers needs modernization. The estimated cost of the Kars-Akhalkalaki project is $450 million, of which $220 million will be spent for work in Georgia.

In a September 25 interview with a local newspaper, a high-ranking Turkish diplomat complained that Tbilisi “intentionally delays the construction of the [Kars-Akhalkalaki] railroad” (Azeri Press Agency, September 25). “Georgia is posing bureaucratic obstacles to the construction of the railway. We cannot understand [Georgia],” stated the unnamed diplomat.

The reason for delay, however, is related to negotiations between official Baku and Tbilisi. Because the major construction and rehabilitation work is to take place in Georgia and Turkey, the Georgian government had to bear at least half of the cost of the project. This created financial problems for Georgia, which does not have vast natural resources like Azerbaijan or a strong economy like Turkey.

The issue became more complicated when the Georgian government’s major financial donor, the United States, was taken out of the funding picture.

On September 30, Armenian lobbying groups managed to include a prohibition provision (Section 11) in the U.S. Senate resolution S. 3938, the Export-Import Bank Reauthorization Act of 2006. The bill prohibits the U.S. ExImBank from extending a credit or participating in “any railway connection or railway-related connection [project] that does not traverse or connect with Armenia,” thus eliminating any possibility of credit from the U.S. government to Georgia.

Nonetheless, on September 12, the general director of JSC Georgian railways, Irakly Ezugbaiya, declared that Azerbaijan had agreed to allocate a credit in the amount of $220 million to the Georgian government.

Confirmation of this offer came after Georgian Minister of Economic Development Irakli Chogovadze visited Baku on October 12-14. After trilateral discussions with Turkish and Azerbaijani officials, Chogovadze confirmed that the Georgian government would finance the project using long-term and zero-interest credit from Azerbaijan (Trend, October 13). The funding will come from the International Bank of Azerbaijan and the Azerbaijani government. The amount of the credit will be determined in early 2007 (Sharg, October 14).

In addition to Azerbaijan’s credit to Georgia, China has offered a 13-year loan with a 5.5% interest rate to Turkey. But Ankara declined the offer, stating that it has sufficient funds to finance the project by itself (Trend, August 28).

The construction of the railway is scheduled to begin in 2007 with an expected completion date at the end of 2008. Georgia alone is expected to earn $150 million annually from the cargo shipments via the Kars-Akhalkalaki rail connection (, September 7).

According to Turkish Minister of Transportation, Binali Yildirim, the railway system could accommodate a transfer of as much as 20 million tons of cargo per year (Trend, August 28). Other estimates put the volume of cargo in the initial stage at 2-4 million, with a potential to increase up to 8-10 million in the following three years (, April 20).

Besides the strategic importance of the Kars-Akhalkalaki rail connection, linking the railway networks of Azerbaijan, Georgia, Turkey — and potentially Europe, Central Asia, and China — the project has a great significance for the development of the regional economies.

Due to the landlocked geography of the Caspian Basin, strengthening the non-oil economies of countries like Azerbaijan, Georgia, Kazakhstan, and Turkmenistan depends on increased volumes of intercontinental container trade via their territories. Moreover, initiatives such as creating free-economic zones in Azerbaijan, Georgia, and other countries along the Caspian Sea coast will also depend on the successful development of the infrastructure and interstate rail and highway systems in these countries.