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The Transcaspian Region as a pivotal transit route of the International Economy, Part I.


The ongoing conflict between Russia and Ukraine has precipitated a significant juncture for Europe, catalysing profound political and economic transformations. Among the myriad of repercussions is the forced reconfiguration of trade routes and transit patterns, particularly concerning energy supplies and the movement of goods and services. The disruption of the Northern Route, a crucial conduit for transporting goods and energy from Asian markets through Russia to Central Europe, has underscored the burgeoning significance of an alternative passage, via the Transcaspian Region, which encompasses the Caucasus and Central Asia regions.


Outlook

In this series of four articles, the first article serves as an introduction to the subject matter, emphasising its relevance and the associated risks for European governments and corporations. Subsequent articles will delve into the specific aspects of this matter: the second will concentrate on energy supplies and the Southern Gas Corridor, while the third will explore the Middle Corridor, a multimodal transport pathway facilitating cargo movement from Asia to Europe via the Caspian Sea. Finally, the concluding article will provide insights into potential future developments and offer an outlook on the evolving landscape.

 

The Transcaspian Route on the rise

The Transcaspian Region holds immense significance from a risk intelligence standpoint due to its pivotal role as a central transit route in the 21st century, physically connecting the markets of Europe and Asia. The safe passage of goods, energy supplies, and services is of paramount importance to all stakeholders involved: companies, consumers, and governments of the states connected by this route. While the region benefits from its escalating relevance, it also harbours various political and economic risks that necessitate careful navigation by governments and businesses alike. This is precisely where the Risk Intelligence Industry plays a critical role, proactively guiding stakeholders through these complexities and uncertainties.


The Transcaspian Route, known by its two distinct names – the Southern Gas Corridor and the Middle Corridor - embodies the complex interplay between the energy dynamics and broader trade routes crucial for European economies. Both terms are intertwined, with the latter representing a broader transit pathway that occasionally incorporates energy supplies alongside the exchange of goods and services.


The Southern Gas Corridor refers to a European Commission-led initiative aimed at fortifying and diversifying energy supplies to Europe. It seeks to tap into gas resources and other raw materials from the Transcaspian Region, notably Azerbaijan and Kazakhstan, a move spurred by the geopolitical shifts following Russia’s invasion of Ukraine. European leaders, propelled by the need to diminish the region’s reliance on Russian energy, have been increasingly investing in this corridor. Azerbaijan's commitment to doubling gas exports to the European Union by 2027 underscores the increased traction and strategic importance of this endeavour. Additionally, the successful trial shipment of Kazakh oil from Aktau to Baku in March 2023 showcases the potential for linking Central Asian energy reserves with European markets, further solidifying the significance of the Southern Gas Corridor for European economies.


The broader Middle Corridor not only facilitates energy transit but also serves as a vital artery for trade between European and Asian markets, connecting the world's largest single market, the European Union's internal market, with the dynamic economies of Asia. Of particular note is the linkage to China, one of Europe's foremost trading partners. While originally recognised for its potential to streamline transit times compared to traditional shipping routes, the Middle Corridor has gained newfound geopolitical relevance in light of Russia’s aggression in Ukraine. By bypassing Russia as a transit state, the Middle Corridor presents a strategic alternative, exemplified by the notable surge of 64% in cargo transported along this route between 2022 and 2023.


The engagement of international actors further accentuates the strategic importance of the Transcaspian region. Amidst geopolitical rivalries, a dynamic interplay of competition and cooperation emerges. China's ambitious Belt and Road Initiative seeks to extend its influence, while the EU's Global Gateway Initiative aims to counterbalance this influence. The recent pledge by the G7 to allocate 600 billion dollars to counter China’s initiative underscores the global stakes involved. The Transcaspian region thus emerges as a focal point where economic imperatives intersect with geopolitical strategies, shaping the future landscape of international trade and security.


Risks ahead

Navigating the road ahead entails grappling with a myriad of complexities across, economic and political realms. One major category of political risk stems from the intricate web of the various external actors involved, each with partially or entirely divergent interests. While the EU and China, despite occasional competition, lend their support to the project's expeditious realisation, Russia adopts a conflicting stance. Russia's lack of alignment with the objectives of the Middle Corridor and particularly the Southern Gas Corridor poses a significant challenge. Instead, Russia remains invested in the Caucasus Region and the Caspian Sea as pivotal transport hubs for the development of the International North-South Transport Corridor (INSTC), aiming to link Russia with Iran and India while skirting the Bosphorus Strait and Suez Canal. Understanding Iran's role also assumes critical importance, given its aspirations to bolster connectivity with China, its principal partner, and advance the realisation of the INSTC.


In addition to risks arising from the involvement of external actors, there is a category of risk emerging from internal dynamics within the region and individual countries. This encompasses a spectrum of political instabilities and uncertainties. Political stability presents a significant risk, which is, exacerbated by currently escalating interstate and intrastate conflicts, autocratic government structures, dynastic regimes, and the pervasive influence of transnational crime and Islamist organisations. Secondly, the looming spectre of climate change adds another layer of complexity, potentially intensifying existing political risks by exacerbating socio-economic disparities and environmental degradation. Of particular concern is the issue of water security, which stands as a critical determinant of interstate relations in Central Asia. The outbreak of violence along the Tajikistan-Kyrgyzstan border in the Fergana Valley in April 2021, triggered by disputes over water access, serves as a stark reminder of the latent potential for water-related conflicts to escalate into broader regional destabilisation.


Teaser

As is evident, the Transcaspian Region has emerged as a crucial nexus in the evolving landscape of international trade and security. The ongoing conflict between Russia and Ukraine has catalysed significant transformations, prompting the exploration of alternative transit routes such as the Southern Gas Corridor and the Middle Corridor. These pathways not only offer diversification of energy supplies but also present strategic alternatives for trade between Europe and Asia. However, navigating the road ahead involves grappling with complex geopolitical dynamics and multifaceted risks.


Looking forward, the second article in this series will delve into the intricacies of energy supplies and the Southern Gas Corridor. Discover how European leaders are investing in this corridor to reduce dependence on Russian energy and delve into Azerbaijan's pivotal role as both a supplier and a connector to Central Asian reserves. Stay tuned for an in-depth analysis of the energy dynamics shaping the Transcaspian Region and its implications for European economies.

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