Realising the Potential of the Middle Corridor

Annex A. Country chapters

Azerbaijan

Economic overview

With respectively 0.4% and 0.5% of the world’s proven oil and natural gas reserves for approximately 10 million inhabitants, Azerbaijan has undergone an important oil-based economic expansion since its independence. The country’s economy is highly dependent on the oil prices, and therefore GDP growth is erratic and fluctuates with its variations. Since 2010, Azerbaijan’s real GDP has grown at an average annual rate of 1.7%, with negative growth rates in 2011, 2016 and 2020. Year-on-year inflation reached 13.8% in 2022. The unemployment rate was equal to 5.9% in 2022 (IMF, 2023[1]).

The significant remaining reserves of oil and, above all, natural gas ensure important export revenues for the future, but the country is trying to address the challenge of diversification to reduce its vulnerability to external shocks. Indeed, Azerbaijan’s share of oil in exports reaches 90%. The main sectors in terms of contribution to GDP in 2022 were mining and quarrying (35.8%), transportation and storage (16.9%) and wholesale and retail trade (8.6%).

The government launched a strategic plan for the diversification of the economy in 2016, identifying 11 sectors to develop in priority. For now, most efforts have been dedicated to agriculture and tourism. As part of this strategy, authorities opened industrial estates in several regions and a free trade zone dedicated to non-oil activities in the port of Alat.

Trade profile

Azerbaijan’s exports of goods and services accounted for 60.0% of GDP in 2022, while imports accounted for 27.0% in the same year.

Between 2017 and 2021, Azerbaijan’s main exports partners were Italy, with 33.3% of total exports, Türkiye (12.6%) and Israel (5%). Europe represents 60% of total exports, while Asia represents 32% of total exports. Azerbaijan’s exports are not diversified, as 90% of total exports are mineral fuels. It should be noted that Russia is Azerbaijan’s first export partners for non-oil products, with an important share of food products.

On the other hand, Azerbaijan’s mostly imports machinery and equipment (34.1% of total imports), but still imports raw materials (24.0%). Between 2017 and 2021, the three main imports partners were Russia (17.3%), Türkiye (16.1%) and the United Kingdom (8.5%). The country imported a significant quantity of goods from Europe (32.1%) during this period (OEC, 2023[2]).

In 2022, Azerbaijan’s exports skyrocketed due to an increase in oil and natural gas prices. In the coming years, natural gas will account for most of the growth in exports, given the important remaining reserves. In this respect, the country signed a Memorandum of Understanding with the European Union on a strategic partnership in the field of energy, including the commitment to double the capacity of the “Southern Corridor pipeline”.

Figure A A.1. Azerbaijan’s trade composition

Source: OEC (2023)

Survey overview

For Azerbaijani businesses interviewed, the main reasons preventing them from using the Middle Corridor as their main transit route are non-competitive transport costs, limited digitalisation of services and limited rail and port infrastructure. The main infrastructure-related delays are located at the border crossings between Azerbaijan and Georgia and between Türkiye and Georgia, and on the Azerbaijan-Georgia section of the route. At these border points, the main bottleneck encountered was the lack of standardised customs documents. It comes as no surprise that Azerbaijani businesses cited “streamlining border regulations for consistency” and “simplifying and standardising border procedures” as the most important actions to be taken to facilitate trade along the Middle Corridor.

The Middle Corridor represents a solid alternative to other routes as Azerbaijani businesses stated that “political stability” was one of the main reasons why they were choosing to operate on the Middle Corridor.

Georgia

Economic overview

Thanks to important economic reforms between 2003 and 2014, Georgia successfully transitioned to a free market economy. Since 2010, Georgia’s real GDP has grown at an average annual rate of 4.7%, with a constant evolution (IMF, 2023[1]). The country’s economy revolves around tourism, agriculture and mining (manganese and copper). The main sectors of the economy in 2022 were Wholesale and retail trade (15.2% of GDP), Manufacturing (11.1%) and Real estate activities (9.9%).

Though the Georgian economy is very vulnerable to external shocks, Russia’s invasion of Ukraine unexpectedly boosted the country’s activity, with a 11% year on year GDP growth in 2022. The appreciation of the Iari should allow for a reduction of inflation, which reached a peak in 2022 with 11.9%.

The effect of Russia’s war of invasion on the long run is still unknown. The prolongation of the conflict could affect the Georgian economy through exports, tourism or transfers from emigrants. On the other hand, the return of Russian immigrants could put an end to the financial windfall they brought. The unemployment rate remains high (18.7% in 2022) and the country must attract well paid jobs to address the demographic challenge caused by an important emigration.

Trade profile

Georgia’s exports of goods and services accounted for 52.8% of GDP in 2022, while imports accounted for 63.0% in 2022. The country has a structural trade deficit.

Between 2017 and 2021, Georgia’s main exports partners were Russia (11.8% of total exports), Azerbaijan (11.1%) and China (9%), followed closely by Bulgaria, Türkiye, Armenia and Ukraine. The exportations are diversified, with copper ore being the first contributor, followed by second-hand cars, ferroalloys and wine.

The importations are also very diversified. Between 2017 and 2021, the two main commodities imported were refined petroleum (8.23% of total imports) and cars (8.17% of total imports, due to Georgia developing as a car reselling hub for the region). During the same period, Georgia’s main suppliers were Türkiye (16.4%), China (11.1%) and Russia (9.6%) (OEC, 2023[2]).

In 2022, The European Union made up 20.5% of Georgia’s foreign trade, representing the country’s main partner when considered as a whole. The Association Agreement signed in 2014 between the EU and Georgia introduced a preferential trade regime, the Deep and Comprehensive Free Trade Area.

Georgia’s foreign trade has been steadily growing since 2016, with an acceleration of the dynamic after the pandemic. In 2022, exportations grew by 31.5% compared to 2021, reaching $5.6B, and importations grew by 33.8% to reach $13.5B. The arrival of immigrants with a high purchasing power from Russia, Belarus and Ukraine contributed to the rise of interior demand and the growth of importations.

Figure A A.2. Georgia’s trade composition

Source: OEC (2023)

Survey overview

Georgian businesses surveyed indicated that the main reasons preventing them from using the Middle Corridor as their main transit route were the lack of rail infrastructure, weak demand from clients compared to other routes and limited digitalisation of services. As for Azerbaijani businesses, the main infrastructure-related delays are reported at the two border crossings with Azerbaijan and Türkiye. Georgian respondents also point out a lack of coordination between rail and port infrastructure. For them, the most important actions to take to improve the competitiveness of the Middle Corridor are on the infrastructure side to grow and improve the rail rolling stock in the Southern Caucasus, and on the trade facilitation side to harmonise freight related regulatory standards and to develop electronic exchange of data.

Despite the challenges cited above, Georgian businesses interviewed decided to operate on the Middle Corridor mainly to access to the growing domestic markets in the Southern Caucasus and in Central Asia.

Kazakhstan

Economic overview

With approximately half of Central Asia’s GDP for 19 million inhabitants, Kazakhstan is the region’s biggest economy both in absolute terms and per capita. The country’s important reserves of oil, minerals and metals endured a solid economic growth since 2000. After a 10% average real GDP growth between 2000 and 2007, the annual expansion has declined just under 4% since 2008. Though Kazakhstan’s growth fluctuates depending on oil prices, 2020 was the only year since 1999 with a contraction of GDP. The unemployment rate is low, equal to 4.9% in 2022 (World Bank, 2023[3]).

Kazakhstan’s economy is still very dependent on the extractive sector. In 2022, the most important sectors of the economy were Wholesale and retail trade (16.4% of total GDP), Mining and quarrying (14.5%) and Manufacturing (13.4%).

High commodity prices and new projects in the hydrocarbons sector will ensure a solid growth of GDP, between 3.5% and 4% from 2023 to 2025. In the coming years, agriculture should represent an opportunity for diversification, with the country’s geography and the high prices of grain ensuring a potential for important non-oil exportations. Despite this, the country will have to address the challenge of high inflation (15.0% year on year in 2022) and low productivity to avoid a tendential slowdown of GDP growth.

Trade profile

Kazakhstan’s exports of goods and services accounted for 42.1% of GDP in 2022, while imports accounted for 26.6% the same year.

Between 2017 and 2021, Kazakhstan most important export partners were China (14.2% of total exports), Italy (12.6%) and Russia (9.6%). During the same years, mineral products and metals represented 84% of the country’s exportations. Crude petroleum alone corresponded to 52.7% of exportations, and its weigh can be more important in bilateral trade, representing 94.4% of exportations to Italy for instance).

Importations are more diversified in terms of types of goods. Among the main categories of products imported by Kazakhstan between 2017 and 2021, the three most important one were Machines (29.4% of importations), Metals (14.5%) and Transportation (14.5%). On the other hands, importation partners are less diversified than export partners. Russia and China are by far the 2 most important suppliers of Kazakhstan, with respectively 34.9% and 27% of importations (OEC, 2023[2])

Exportation have been growing strongly in value in 2022, due to a rise in the prices of commodities. In 2023, exportations slightly decreased following oil prices, while importations were growing strongly due to the global inflation and important investments in the country (QazStat, 2023[4]).

Figure A A.3. Kazakhstan’s trade composition

Source: OEC (2023)

Survey overview

The main reasons preventing the surveyed Kazakh businesses from using the Middle Corridor as their main Transit Routes are non-competitive costs and long, unreliable and unpredictable transport times. For them, the most important infrastructure-related issues are located at the border crossing between China and Kazakhstan and on the Caspian Sea crossing. Kazakh private stakeholders consider that the most important actions to be taken in terms of infrastructure enhancement is to increase the Caspian vessel fleet, and in terms of trade facilitation to introduce and develop the use of automated border procedures. Given the size of its territory, Kazakhstan is the only country where businesses mention the limited speed of certain segments as an important setback. They indicate that they operate less on the West-East route (from Europe to Central Asia and China) because of an underdeveloped regional market in Central Asia.

Nevertheless, the main reasons motivating the operations of these businesses on the Middle Corridor are the access to regional and international markets, in particular the access to the Turkish market, and the existence of sufficient rail links.

Türkiye

Economic overview

With a GDP of about $906 billion in 2022, Turkey is the 19th-largest economy in the world. Services and Industry are the main driver sectors of the Turkish Economy. Between 2018 and 2022 services sector has contributed to 23.7 % of the GDP whereas industry sector has contributed 19.5%. Since 2010, Türkiye’s real GDP has grown at an average annual rate of 5.9%, with a slight decreasing trend. Following a strong COVID-19 pandemic-related recovery, in 2022 the Turkish economy grew by 5.6% where private consumption and export of goods and services were the main drivers.

Manufacturing sectors contributed to 22.1% of the GDP in 2022. The second largest sector is “wholesale and retail trade” (13.5%) followed by “transportation and storage” (10.0%).

Year-on-year inflation reached 72.3% in 2022. The unemployment rate was equal to 10.5% and the share of the working age population was 68.1% in 2022.

Trade profile

Türkiye’s exports of goods and services accounted for 38.6% of GDP in 2022, while imports accounted for 42.6% the same year. The average trade growth has been recorded as 9.7% over the 5 last years. The average growth of export and import for the same period were recorded 9.8 and 10.0% respectively. Significant increase was observed in total international trade in 2021 (27.6%) and in 2022 (24.4%) following Covid 19 Pandemic. The export growth was 12.9% in 2022 while the import growth was 34.0% in 2022.

Since the country has highly diversified manufacturing basis and strong know-how on production, its export market is also diversified. Manufacturing products are the main driver of the Turkish exports. In 2022 the share of manufacturing industries products was 94.2% in total export. The country mainly exports basic metals (10.5%), motor vehicles, trailers, and semi-trailers (10.4%), and food products (8.0%) in 2022. The share of high technology and medium-high technology industries export in total export is 36.9% in 2022.

The main import product group is intermediate goods which has 80.4% share in total import recorded as 363.6 billion USD in 2022. The country mainly imports manufactured products (71.6 %) like basic metals (15.6%), chemical and chemical products (12.6%), and machinery and equipment (7.3%) in 2022. Energy imports account for a significant proportion of total import, with oil, natural gas and coal representing 10.1% of imports in 2021 (OEC, 2023[2]).

Türkiye’s main trade partner is by far the European Union. The share of EU in total export is 40.5% while 25.6% of total imports originate from the EU in 2022. Türkiye mainly export industrial products to European Union. The main export partners excluding EU; are United States (6.6%), Iraq (5.4%), United Kingdom (5.1%), and Russian Federation (3.7%) as of 2022. The main import partners are Russian Federation (16.2%), China (11.4%), Switzerland (4.2%), and United States (4.2%) in 2022.

Türkiye exported 10.8 billion USD worth of goods to Central Asia and Caucasus countries whereas Türkiye imported 8.1 billion USD worth of goods from the region in 2022. Türkiye’s export to Middle Corridor countries and import from MC countries were 6.5 billion USD and 5.2 billion USD respectively. Türkiye mainly exported machinery and mechanical appliances (13.7%), electrical machinery and equipment and parts thereof (8.3%), and plastics and articles thereof (6.4%) while mainly imported mineral fuels, mineral oils and products of their distillation (39.8%), copper and articles thereof (25.4%), and aluminum and articles thereof (4.7%). The top destination for trade among MC countries for Türkiye is Kazakhstan (5.1 billion USD) followed by Azerbaijan (3.3 billion USD) and Georgia (3.2 billion USD).

Figure A A.4. Türkiye’s trade composition

Source: OEC (2023)

Survey overview

According to the interviewed Turkish businesses, the main setbacks in using the Middle Corridor as their main transit route are non-competitive transport costs and transport times, and limited digitalisation of services. The surveyed Turkish businesses encountered the most delays due to infrastructure issues at the border crossing between Azerbaijan and Georgia and on the Caspian Sea crossing. They reported that the most important bottlenecks were related to delays in transloading at border points, and inconsistent and unpredictable crossing times. For them, the priority actions to be taken in the infrastructure field are the growth of vessel fleet in the Caspian Sea and the enhancement of multimodality in Caspian ports. On the trade facilitation side, the most important measure for Turkish private stakeholders is to improve capacities and skills of customs and border personnel.

Despite these constraints, the businesses surveyed in Türkiye indicated that they had chosen to operate on the Middle Corridor because of sufficient road connections, and to access regional and international markets, particularly in the Southern Caucasus.

References

[1] IMF (2023), World Economic Outlook.

[2] OEC (2023), OEC Data visualisation tool, https://oec.world/en.

[4] QazStat (2023), Foreign trade turnover of the Republic of Kazakhstan, https://stat.gov.kz/upload/iblock/fac/kribedoy4fj7j0jcolua3jcvkje3miut/Foreign%20trade%20turnover.pdf.

[3] World Bank (2023), Kazakhstan Economic Update, Spring 2023: Economic Recovery During Challenging Times.