Research

• Commentary
• publication date:2023/11/22

International North-South Transportation Corridor and Russia-NIS: Growing Interest in and Importance of War and Sanctions

MEIJ Commentary No.3

Mizuki Chuman,

Research Fellow,

Japan Association for Trade with Russia & NIS (ROTOBO)

  

Introduction

Over six months since Russia’s invasion of Ukraine on February 24, 2022, the war between the two countries continues. In addition to the relations between Russia and Ukraine, the war has brought about several shifts in international relations. One of these changes is foreign economic relations, especially in logistics and trade.

As sanctions against Russia intensify, primarily from the US and Europe, Western countries have focused on developing logistics and trade routes that bypass Russia. On the other hand, Russia is also trying to avoid the impact of sanctions by shifting logistics and trade that had previously centered on the “West” to the “East” and “South.” The International North-South Transport Corridor (INSTC) has attracted attention amidst this, and this paper addresses the significance and importance of the INSTC for Russia and NIS countries. Why are we seeing so much interest in realizing the INSTC now, more than 20 years after it was proposed? What are the bottlenecks that prevented its materialization? Let us consider these questions from the perspective of Russia and NIS.

 

1. Russian Politics, Economy, Diplomacy, and Connectivity

December 1991 saw the collapse of the Union of Soviet Socialist Republics (hereafter, the “USSR”), the largest country in the world. Each of the 15 republics that made up the Union became independent states, with Russia retaining the largest area and population. Although smaller than the Soviet Union, Russia, which has the largest territory in the world (17.07 million km²), adopted a “federal system” consisting of 89 (then) federal entities called republics, provinces, outlying regions (krai), autonomous oblasts, autonomous regions, and special cities. President Yeltsin, who gained popularity as the hero who led the coup against Gorbachev, the first and last president of the Soviet Union, aimed to democratize and marketize the economy, but both politics and the economy of the region were in turmoil in the 1990s. In terms of foreign affairs, Russia joined the United Nations as the successor of the Soviet Union and inherited the position of a permanent member, but domestic turmoil made diplomacy an impossibility.

Given this chaotic background, Prime Minister Putin (at the time) suddenly appeared in 1998 and became President (acting) at the end of 1999, succeeding President Yeltsin. During this period, the resource-rich Russia entered a period of high economic growth due to a surge in oil production and an almost simultaneous increase in international oil prices. As economic growth increased people’s incomes and purchasing power, Russia’s attractiveness as a market increased, leading to the expansion of trade with the West (mainly the OECD and EU countries) and investment, including from Japan.

After ensuring domestic stability by establishing a single-party system and a policy of centralization, President Putin was finally able to focus on diplomacy, with the goal of reviving Russia as a “great power” in the international community. Immediately after the September 11, 2001 terrorist attacks, Putin called on then-President Bush for support and unity in the “war on terror,” and US-Russia cooperation progressed from that point. When Russia joined the G11 in 2002, it promoted cooperation with the West, including hosting the G7 summit in St. Petersburg in 2006. Russia also strengthened its multilateral ties and regional cooperation frameworks with the launch of the Shanghai Cooperation Organization (SCO) in 2001 and the Collective Security Treaty Organization (CSTO), striving for pragmatic and all-round diplomacy.

Russia’s external economic relations were centered primarily on Europe and extending westward, but China, relations with which had improved after border demarcation in 2005, surpassed Germany as Russia’s largest trading partner in 2010, and trade with East Asia also continued to grow. When the West imposed sanctions against Russia following the invasion of Crimea in 2014, Russia’s “shift to the East” became evident.

Trade and investment relations with the West became more limited after the invasion of Ukraine in February 2022, and Russia’s trade with the “South” began to grow rapidly as a game changer even as it strengthened its relations with China and other Asian countries. Turkey, which was Russia’s sixth-largest trading partner by volume in 2021, became second only to China in 2022. India, which was 14th in 2021, became fifth, and trade with Iran, although with a share of less than 1%, also grew by 20% year-on-year in 2022.

Thus, Russia’s foreign (economic) relations developed with a focus on the West after the collapse of the USSR, but started to turn eastward with the rise of China. This “East-West” axis of Russia's relations with other countries declined with the deterioration of relations with Western countries after its invasion of Ukraine, instead increasing its interest in the “South.”

 

2. International North-South Transport Corridor and Russia

(1) Overview of the International North-South Transport Corridor

The INSTC is a 7,200 km long multimodal transport corridor connecting Mumbai, India, and Moscow, Russia via Iran, through rail, ship, and road (automobiles) (Figure 1). Its construction is intended to attract transit cargo from India, Iran, and other Gulf countries to Russia via the Caspian Sea, as well as to Northern and Western Europe^※1.

 

 Figure 1: Regional Map of the INSTC

(Source: Eurasian Development Bank)

 

On September 12, 2000, at the Second International Euro-Asia Conference on Transport held in St. Petersburg, Russia, the respective ministers of three countries, namely India, Iran, and Russia, signed an intergovernmental agreement on establishing the INSTC in May 2002. In addition to the three founding members, 10 countries (Azerbaijan, Armenia, Ukraine, Oman, Kazakhstan, Kyrgyzstan, Syria, Tajikistan, Turkey, and Belarus) subsequently joined the agreement, with Bulgaria joining as an observer. Turkmenistan applied for membership most recently, and Russia reportedly agreed to its participation^※2. However, the INSTC has been slow in its progress, and both visibility and interest have been low in comparison to other international economic corridor projects^※3.

The basic route of the INSTC is from India to Iran and from Iran to Russia via the Caspian Sea. However, several other branch routes are under consideration, including a Western route connecting Iran to Russia via Azerbaijan and the western side of the Caspian Sea by land, an eastern route between Russia and Iran via Turkmenistan and Kazakhstan on the eastern side of the Caspian Sea, and a route from Iran to the Black Sea via Armenia and Georgia.

For Russia, the INSTC is an important transportation route between northwestern Europe, the Caspian coast, the Persian Gulf coast, Central Asia, South Asia, and even ASEAN countries, with the potential for further development of European and Asian transportation by reducing time and economic costs. Compared to routes via the Suez Canal, the INSTC will halve the transportation distance and reduce the transportation costs to one-third^※4.

 

(2) Russian Regions and the INSTC

The INSTC is important not only as an international logistics route but also for the development of Russia. Southern Russia, a transit point in the INSTC, is a region with low economic development, where the Russian government has been promoting economic growth through individual development programs. The Russian railway network (St. Petersburg–Moscow–Ryazan–Volgograd–Astrakhan) that forms part of the INSTC covers a total length of 2,531 km, accounting for more than 30% of the total INSTC. In particular, the port city of Astrakhan, which faces the Caspian Sea, is expected to develop as a hub for the international logistics corridor, and the transportation infrastructure is being modernized.

 

(3) Invasion of Ukraine and the INSTC

The INSTC concept was proposed more than 20 years ago, but it is now that progress is being made toward its realization. Needless to say, one of the triggers was Russia’s invasion of Ukraine in February 2022. After the invasion of Ukraine, President Putin’s first overseas trip was to Turkmenistan (and Tajikistan). There, he attended the 6th Caspian Sea Summit held in June 2022 in Avaza, a special tourism zone on the Caspian Sea coast of Turkmenistan, and spoke of Russia’s aims to expand its port infrastructure in the Caspian Sea region. Noting that the “INSTC is a very ambitious project,” he stressed that “the goal of the ‘Agreement between the Caspian Littoral States in the Field of Transport’ signed last year is to transform the Caspian region into an international logistics hub and is designed to facilitate the rapid launch of INSTC^※5.”

Furthermore, the following month, in July 2022, President Putin visited Iran for his second foreign trip and held a trilateral summit meeting with Turkish President Erdogan.

The Second Caspian Economic Forum was held in Moscow on October 5­–6, 2022, where Prime Minister Mishustin, who led the Russian delegation, said, “In our country [Russia], we understand that sanctions are long-term. However, they only contribute to fundamental changes in the world. New centers of development are gradually developing, one of which is the Caspian region. To unlock the potential of the region, we need to take measures to develop the transport logistics capabilities. We will double the INSTC cargo volume by 2030.”^※6 Prime Minister Mishustin also mentioned the INSTC at a government meeting on rail infrastructure development on October 10, explaining that “freight transport using the INSTC has increased from 14 million tons in 2021 to 14.5 million tons in 2022 and is expected to double by 2030.”^※7

Speaking at the annual meeting of the Russian Union of Industrialists and Entrepreneurs (RSPP) on March 3, 2023, Putin shared his views on the prospects of the INSTC. He said he regretted that the government had not been able to fully implement the necessary investment decisions, noting the need to accelerate the work. Putin also noted the urgent requirement for a 162 km railway linking Astara and Rasht on the route through the western side of the Caspian Sea, saying, “This project is of great interest not only to us but to all players involved in world trade. It will function like the Suez Canal and the Bosporus-Dardanelles, while also being a cheap route,” and directed government officials to speed up this process^※8.

Thus, on May 17, 2023, Russia and Iran agreed to build a railroad between Rasht and Astara, with Russian Minister of Transportation V. Savelyev and Iranian Minister of Roads and Urban Development Bazrpash signing a contract worth $1.6 billion. Under the contract, a 162 km section of the railroad will be built between Rasht, a town on Iran’s Caspian Sea coast, and Astara, a town near the Azerbaijani border^※9. Speaking online at the signing ceremony in Tehran, Putin said, “The idea of 20 years ago is finally beginning fruition,” noting that the INSTC will diversify global logistics flows, strengthen Russia and Iran’s potential as transit countries, and contribute to global food security^※10.

At the Russia-Africa Economic Forum on July 27, 2023, President Putin said, “Russia is actively working to reorient transportation and logistics towards the countries of the Global South and, of course, Africa. The INSTC, which we are developing, aims to provide Russian products access to the Persian Gulf and Indian Ocean, and from there to the African continent via the shortest possible route.”^※11 He stressed that the INSTC will transport Russian agricultural products and contribute to the supply of food to Africa.

Participating online at the BRICS Summit in South Africa on August 22, 2023, President Putin said, “The important thing for BRICS cooperation is to create new and stable transportation routes. A permanent committee on transport should be established within the framework of BRICS, to address the development of interregional and global transport logistics corridors including the INSTC. If there is an agreement, we can work on this idea as the 2024 Presidency,” he said, expressing his desire to diversify transportation routes.

Thus, within just a year and a half since the invasion of Ukraine, Russia has been intensifying movements toward the INSTC both at home and abroad. The main intention of these moves seems to be a means of circumventing trade and logistics restrictions on Russia from Western sanctions^※12.

 

3. INSTC and Central Asia/Caucasus

Russia is not the only country interested in realizing the INSTC. Eight of the 13 countries that are official signatories to the agreement are former Soviet Union countries, and the project seems to be particularly important for Central Asia and the Caucasus, which will be the direct route; therefore, they will be briefly covered here.

 

(1) Central Asia

Initially, the main route for the INSTC was through the western part of the Caspian Sea, but infrastructure development was completed on the eastern route. In December 2014, a 900-km-long rail route between Kazakhstan, Turkmenistan, and Iran (KTI) was opened. In July 2022, the first freight transport from Russia to India via KTI was realized. In December 2022, Russian Railways, Kazakhstan Railways, Turkmenistan National Railways, and Iranian National Railways decided to reduce the 2023 container kilometer fee for the use of infrastructure on the eastern Caspian Sea route^※13. In April 2023, KTZ Express, RZD Logistics, and the Transport and Logistics Center of Turkmenistan signed a memorandum to establish a joint venture during the 27th TransRussia 2023 International Exhibition for transport logistics. The purpose of the venture was to create a single logistics operator for the INSTC Eastern Route^※14.

Turkmenistan also applied to join the agreement in August 2022. Turkmenistan is increasingly interested in connecting with the INSTC, and on February 23, 2023, President Berdimuhamedow of Turkmenistan during a visit to Bahrain signed an MOU on railroad connectivity^※15. On May 31, 2023, President Berdimuhamedow visited Iran and on May 31, 2023, met with Supreme Leader Khamenei of Iran, where he stated that “Iran is determined to complete the INSTC” and that “the corridor will link Turkmenistan with the coastal countries of the Gulf of Oman.”^※16 In July 2023, Russia reportedly approved Turkmenistan’s membership^※17.

 

(2) Caucasus

In the Caucasus, which stretches west of the Caspian Sea, Azerbaijan is a transit country on the Western route. In September 2022, representatives of Russia, Azerbaijan, and Iran signed the Baku Declaration on the development of INSTC in Baku, Azerbaijan.

Meanwhile, neighboring Armenia, which is involved in a territorial dispute with Azerbaijan, has also joined the INSTC agreement and is strengthening its own interest in the realization of the INSTC. Iran borders both of these countries, has approximately 20 million Azeris in the northern part of the country, and as a Muslim nation as well, has close relations with Azerbaijan. It, however, has a contentious relationship with Armenia. Although an agreement was reached on a basic plan for a railroad connecting Iran and Armenia in 2014, it has not been realized. However, Iran has improved its relations with Armenia rather than Azerbaijan since the second Nagorno-Karabakh conflict in 2020^※18, which is believed to be due to its interest in a route through Armenia to the Black Sea.

In November 2022, Iran’s Minister of Transportation visited Armenia and discussed routes from Armenia to Iran and the Gulf states. In March 2023, Armenia proposed the connection of India and Russia through the Persian Gulf-Black Sea corridor. In April 2023, the foreign ministers of Iran, Armenia, and India met in India, and Iranian Foreign Minister Abdollahian said that Armenia’s cooperation was indispensable to completing the INSTC^※19. Against this backdrop, Azerbaijan is strengthening its ties with Pakistan and Turkey. India has reacted to this, raising the possibility of a route bypassing Azerbaijan^※20.

On September 19, 2023, Azerbaijan conducted a military attack on Nagorno-Karabakh, a disputed region within its borders that has many Armenian residents, under the guise of a “counter-terrorism operation.” The Nagorno-Karabakh authorities, who effectively controlled the area, announced the following day, on the 20^th, that they would accept disarmament, and a ceasefire agreement was reached. Representatives from Azerbaijan and Nagorno-Karabakh met on the 21st. Although a final peace agreement has not been reached, these developments could determine the future of the INSTC.

 

Conclusion

As discussed above, with over 20 years since the proposal, the INSTC is very important for Russia, whose logistics and trade with Europe to the West have been restricted due to sanctions after its recent invasion of Ukraine, in terms of securing transportation routes to avoid over-reliance on the east. At the same time, southern Russia is one of the least developed areas in the country, and the development of the INSTC itself is expected to lead to the development of this region as well. In addition, the growing interest in the INSTC from countries outside Russia cannot be overlooked.

However, there are reasons why it has not yet been realized. One of the bottlenecks is the development of infrastructure in each country. In particular, it is difficult to attract investment because Russia and Iran are under sanctions. During a roundtable held on November 28, 2022, in the Russian Federation Council on “Issues in the Development of INSTC,” experts noted that the INSTC is a stable trade tool that enables Russia’s logistical and geopolitical “independence,” and that it is also a large-scale international logistics corridor, which requires time and investment. The conflict and diversity of the countries involved also impact development. For example, the conflict between Iran and Azerbaijan brought Iran’s interest in the Armenian route. There is also a deep-seated mutual distrust between Russia and Iran, which are major countries. These issues will be a key focus for the future progress of the INSTC.

 

*Ms. Mizuki Chuman is a Research Fellow of the Japan Association for Trade with Russia & NIS (ROTOBO).

 

 

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