Is China’s Economic Expansion in the South Caucasus a Myth?

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Is China’s Economic Expansion in the South Caucasus a Myth?

In Eastern Europe, the reality of China’s investment does not match the rhetoric. How about in the Caucasus?

Is China’s Economic Expansion in the South Caucasus a Myth?

The leaders of Azerbaijan, Georgia, and Turkey inaugurate the Baku-Tbilisi-Kars railway at a ceremony in Baku, Azerbaijan (Oct. 30, 2017).

Credit: Pool Photo via AP

Although China’s economic engagement was initially embraced by most states in Central and Eastern Europe, it has been recently reported that the 16+1 framework established by China as a means to deepen its footprint in this region faces overwhelming challenges. Particularly, the countries joined this project are unhappy with the fact that Beijing’s promises tend to fall through, its investments come with strings attached, and China prefers to provide loans rather than cash. This discontent calls into questions the true nature of China’s economic engagement with the region.

South Caucasus, a region that has recently captured Beijing’s attention as a “middle corridor” in its Belt and Road Initiative (BRI), projects a picture that is slightly different, in spite of some similarities. China’s presence in the South Caucasus is growing thanks to both the Belt and Road and regional economic dynamics.

Until recently the South Caucasus has not seemed like a priority region for China’s economic expansion across the world.  By the early 2000s, the EU and Russia had already initiated comprehensive engagement with the regional countries in nearly all spheres, but China maintained a low profile in the political and economic map of the region. Nor did the South Caucasian countries, which were more focused on either the market of the post-Soviet countries or of Europe, demonstrate a real interest in China.

This passivity in the China-South Caucasus relationship started to change markedly with the inception of Beijing’s giant BRI project, along with economic slowdown or stagnation in the economies surrounding the region (i.e. Iran, Russia, and Turkey). The regional transportation and energy projects – such as the launch of Baku-Tbilisi-Kars (BTK) railway on October 30, 2017 and recent developments in the Trans-Caspian International Transport Corridor (TITR) project — have brought new dynamics to this relationship. This is seen by many regional and external observers as an extension of China’s economic influence into the South Caucasus, which can bring about also geopolitical consequences.

However, a sober analysis of the regional dynamics shows that, although Beijing demonstrates interest, though to varying degrees, in the regional projects connecting China with Europe, a solid base for its deeper strategic and economic engagement with the South Caucasus has yet to be established.

Chinese Economic Expansion: Between Myth and Reality

South Caucasus countries are seeking to bolster their political and commercial ties with Beijing. All three South Caucasus countries – Armenia, Azerbaijan, and Georgia — recognize that China’s BRI overlaps with their own foreign policy goal of transforming their respective countries into a full-fledged connectivity hub between Europe and Asia. Regional countries, in particular Azerbaijan and Georgia, are heavily invested in the rapid development of the Trans-Caspian International Transport Corridor (TITR).

Azerbaijan, the largest economy of the region, holds a very positive view of China. The two countries share similar development strategies based on interconnectedness and outward-looking investment policies. Until now, China has invested $779 million in the Azerbaijani economy. The trade turnover between Azerbaijan and China has grown  approximately 800 times larger in this period, rising from $1.5 million in the early 1990s to $1.3 billion in 2017 (around 6 percent of Azerbaijan’s overall foreign trade). Currently, China is Azerbaijan’s seventh largest trade partner.

Although the Baku-Tbilisi- Kars railway, a main component of the TITR that is also called “a middle corridor” in China’s Belt and Road Initiative, has been financed primarily by Azerbaijan and Turkey, China involved in other regional projects. In 2016, the China-led Asian Infrastructure Investment Bank (AIIB) approved its biggest loan yet at the time for the construction of a gas pipeline connecting Azerbaijan to Turkey and Southern Europe. The AIIB lent $600 million to the Trans-Anatolian Natural Gas Pipeline Project (TANAP), which, when completed, will transport natural gas from fields in Azerbaijan across Turkey and then onward to markets in Southeastern Europe.

Similar progress has been made also in China’s economic relationship with Georgia. The bilateral trade between the two countries has been on a steady rise since the collapse of the Soviet Union and reached $939 million in 2017, increasing from its 1990s level of $3.68 million and making China Georgia’s third largest trade partner (accounting for around 9 percent of overall foreign trade).

Over the last few years, China has taken the second largest share in Armenia’s foreign trade (5.3 percent of overall trade). According to official Armenian statistics, the trade turnover between the two countries rose by nearly 50 percent, to $342 million, in the first half of 2018. It is reported that Beijing has sent $37 million in economic aid to Armenia since 2012. The donation of hundreds of public buses and ambulance vehicles to Armenia signifies considerable Chinese interest in this South Caucasian country. More recently, in August 2018, China also opened a state-of-the-art school in the Armenian capital, where up to 405 students aged between 10 and 18 will have intensive language courses taught by Chinese teachers. The school cost the Chinese government $12 million.

Despite all of this, because of the small size of the market, the South Caucasus still is a low-priority region for Chinese companies to expand into. Just like in Eastern Europe, the reality of China’s investment drive in the region does not match the official rhetoric. The promises of the BRI fall short of the reality on the ground. Most of the promised investments have not yet realized and most joint undertakings announced remain in the planning stage.

For instance, in 2015, Tbilisi and Beijing signed a memorandum on the Silk Road economic development cooperation, which envisioned three-year action plan for cooperation in 2016-2018. In 2017, Georgia signed two cooperation agreements with CEFC China Energy Company: an MoU on the Joint Establishment of the Georgian Development Bank and a Strategic Cooperation Framework Agreement on the Joint Establishment of the Georgian National Construction Fund. However, these initiatives have not yet resulted in increased Chinese investment flows to Georgia.

Tbilisi had been proposing signing a free trade agreement (FTA) with China for several years, but Beijing became interested in free trade with Georgia only after the latter concluded the Deep and Comprehensive Free Trade Area (DCFTA) with the EU. For Georgia, the FTA with China, which took effect on January 1, 2018, means more Chinese investments and joint business projects, whereby goods are produced in Georgia to qualify for the EU rules of origin under the DCFTA. Georgia hopes that its free trade regime along with duty-free access to the EU market will increase China’s interest in Georgia as an investment hub.

However, China’s investments to Georgia, mainly in the construction and real estate sectors, after an initial surge to $220.1 million, started to decrease, falling to $40.3 million. In January to April of 2017, China accounted for 9.9 percent of Georgian total exports; for the same period in 2018, China accounted for only 3.3 percent of Georgian exports.

In a similar vein, despite the above-mentioned engagement of China with Armenia, Chinese investment in Armenia’s most needed sector, transportation, has yet to come. As Armenia has been left out in the major transportation projects in the South Caucasus — due to the embargo imposed by Azerbaijan and Turkey in the wake of Armenia’s occupation of Azerbaijani territories — it seeks to break its isolation by joining China’s BRI. For this purpose, Yerevan promotes the establishment of the “Persian Gulf–Black Sea” multimodal transport and transit corridor to link Iran with Europe via Armenia and Georgian Black Sea ports. However, this project, which is expected to cost more than $3 billion, is beyond the financial means of Armenia, whose annual GDP is only around $10 billion. The Armenian leaders’ consistent efforts to draw Chinese money into it have so far been unsuccessful.

Although over the last few years, the South Caucasus states have found themselves at the center of Beijing’s BRI, they should not exaggerate the amount of investments they might get and benefits they might reap from these investments. While China’s growing presence in the region is a new reality and the Chinese investments might significantly boost regional development and growth in the South Caucasus, it remains to be seen whether the promises of these investments actually materialize.

Dr. Vasif Huseynov and Ayaz Rzayev are Research Fellows at the Center for Strategic Studies (SAM) in Baku, Azerbaijan.