ARMENIA AND GEORGIA: POTENTIAL OF MUTUAL TRANSIT IN THE CONTEXT OF TRADE, ECONOMIC, AND POLITICAL COOPERATION OF TWO COUNTRIES

Sergey Minasyan

Doctor of sciences, political studies
Deputy Director of the Caucasus Institute

 

Political and economic cooperation between Armenia and Georgia is in many ways based on trade and energy transit through Georgian territory. In its turn, Armenian direction has a great importance for Georgia in this context. However with the increase of perspectives of Iran coming out of the international sanctions regime after achieving agreement regarding its nuclear programme, and considering lingering tense Russian-Georgian relationship, Armenia can also be regarded for further perspectives for transit and regional interests of Georgia. This article highlights several aspects of the role of mutual transit potential of Armenia and Georgia in the context of long-term political and trade and economic cooperation of the two countries.

 

General Parameters of Trade and Economic and Transit Cooperation of Two Countries

Bilateral trade between two neighbouring countries is comparatively small, though it keeps gradually growing. For example, already in 2012 Georgia was the ninth largest trade partner of Armenia in export volume (up to USD 78 mln.), while Armenia was the second largest receiver of Georgian export (USD 261 mln., though a large part of this amount belongs to re-export of used cars)[1].

During the last decade certain Armenian investments were carried out in tourist and transportation infrastructure of Georgia, which in many ways is connected with the geographical and price attractiveness of the Black Sea coast of this country for the Armenian business (tourism in the first place). Certain investments are also carried out from Georgia to Armenia, for instance, in 2016 one such investment was Georgian air company “Airzena” entering Armenia, that, not being able to stand difficult competition from Turkish companies, tried to participate in creating a similar national air company in Armenia.[2]

However, with the exception of certain cases, volumes of mutual investments are in total rather insignificant. In 2013, according to the Georgian data, balance of direct investments to Georgia from Armenia was positive, equaling to approximately USD 4 mln.[3]. In 2012 it was also positive and equaled to approximately USD 6 mln. At the same time until 2011, according to the official Georgian statistical data, balance of investments from Armenia was registered as negative: in 2011 – USD 12 mln., in 2010 – USD 16.5 mln., in 2009 – USD 5.4 mln., while in 2007 – USD 5 mln.[4].

Alongside with this it must be mentioned that economics of both countries are on the whole similar in their structure, and it is in many ways due to this that they are badly integrated. They are oriented on different markets and based on different suppliers of energy resources and raw materials.

If currently there is little Armenia can practically offer Georgia in trade, economic and transit spheres, it is in many ways dependent itself on its neighbour in the mentioned spheres. It is especially important for Armenia in the light of its complicated relationship with Azerbaijan and Turkey, and decades-long blockade of Armenia’s transportation and communication ways on behalf of these states. Georgian territory conducts on the average approximately 60-70% of the entire goods turnover of Armenia, main flow of gas imported into the country and the only currently functioning railway branch[5]. Based on this, it is understandable why it is important for Armenia to keep and provide political, communication, energy, and transportation stability of Georgia.

By the beginning of 2015 the share of cargo transit between the Russian Federation and Armenia (including transit of Russian gas) in the total volume of transit transportation through Georgia almost reached 30% against approximately 20% in the beginning of the 2000s. In the geographical structure of transit land transportations between the Russian Federation and Armenia, share of the direct route (Upper Lars – Kazbegi – Tbilisi – border with Armenia) is over 60%. Share of the route involving the trans-Black Sea ferry from the port “Caucasus” to Poti and farther via Georgian railway is about 40%. However this route is more expensive as compared to the first one (due to the transshipment of cargo in ports). At the same time, it is the route through the “Caucasus” port, located at the junction of Azov and Black Sea coast in Krasnodar krai, that provides the shortest “way out” from main industrial centers of Russia and Belarus to Armenia through the port of Poti (and in the opposite direction). Currently share of Poti port in the railway-marine transportations between the Russian Federation and Armenia exceeds 80%, while share of the Batumi port does not exceed 15%[6].

As mentioned above, Armenia receives main volume of gas and oil products via Georgia. At this, Georgia receives 12% of Russian gas transited to Armenia, free of charge, as payment for transit, and recently there was information that Georgian side wants to increase its share up to 20%.[7] On the whole, total volume of mineral products imported to Armenia in 2012 equaled to USD 902.5 mln., in 2013 – USD 858 mln., in 2014 – USD 842.7 mln. Out of these, in 2012 Georgia’s share as the transit country (meaning oil products and gas imported from CIS countries, mainly from the Russian Federation) equaled to 60%, in 2013 – 61.2%, in 2014 – 75.5%.[8]

Besides export and import, during the past decades significant re-export of foreign goods to Armenia via Georgia has taken place. In the first place this concerns cars and electronic goods from third countries. In the latest period this process has, however, somewhat reduced, which considerably depended on Armenia entering the Eurasian Union and Georgia signing the Agreement on Association with EU and entering DCFTA. In 2015 re-export from Georgia equaled to 4.4% of Armenia’s entire import (besides import from Georgia itself, which equaled to another 1.9%). In 2014 re-export equaled to USD 347 mln., or 7.85% of the entire Armenian import (+1.6% import from Georgia itself). In 2013 Georgian re-export equaled to USD 414 mln, or 9.2% of the entire import, while in 2012 it equaled to USD 276 mln, or 6.5% of import.

In 2015 Armenia received 13% of its foreign goods turnover via pipeline transportation and transmission lines (two thirds – from Georgia), 21% via railway transportation (via Georgia only), 11.3% via air, and 54.7% via motor transportation (50-70% via Georgia). Thus, the total transit share of Georgia for Armenia is 55-75%. In 2014 this share equaled to approximately 67%, i.e. two thirds of the entire volume[9].

As to the passenger flow, in 2015 approximately 60% of inter-state passenger flow of Armenia went through Georgia or was bound to Georgia (approximately half of them had their destination in Georgia and did not continue their way). Excluding those, who were bound for Georgia, approximately 40% of the total transit passenger flow of Armenia went through Georgia’s territory. It mainly goes to Russia, Ukraine, Turkey and Greece (see Table 1). In 2014 58% of the foreign passenger flow from Armenia was bound for Georgia, dynamics of Georgian route’s share was: in 2013 – 60.6%, in 2012 – 54.7%, in 2011 – 50.2%, in 2010 – 48.3%, in 2009 (before Upper Lars was opened) – 41.4%. During the first quarter of 2016 Georgia’s share in the total foreign passenger flow of Armenia was 56% (see Table 2).

 

Regional Background and Political Limitations

Such important transportation and communication role of Georgia for Armenia, undoubtedly, reflects in political relationship of both countries, creating some political limitations or experiencing influence of external geopolitical factors. That is why it is quite natural that with consideration of its special role in Armenia’s transit (as, however, for Azerbaijan and other neighbouring countries as well), in Georgia there is always a rather sensitive reaction to possible changes or dynamics in the regional political landscape that could shake transit and communication significance of Georgia. For example, during the active phase of Armenian-Turkish harmonization between Armenia and Turkey in 2008-2010 (“football diplomacy”), some notes of apprehension were expressed in certain social and political circles in Georgia. As many in Tbilisi feared, possible opening of the Armenian-Turkish border and communication ways through Turkey for Armenia could have had negative influence on the special transit and regional situation of Georgia[10], and Tbilisi would have lost “its privileged position” in regional transit and economic projects.

In its turn, the project of Kars-Akhalkalaki railway construction, carried out with funds of Azerbaijani state oil fund and implying construction of a railway corridor that would unite Turkey and Azerbaijan through Georgia’s territory bypassing Armenia, was considered with apprehension. On the whole, activation of trilateral Georgian-Turkish-Azeri political, transit and economic projects is always perceived rather negatively in Armenia.

At the same time, concerns grow in Yerevan that such format, similar to strengthening of economic positions of Turkey and Azerbaijan in Georgia, gives these two countries possibilities of political lobbying against Armenia, including the issue of complicating Armenian transit via Georgia’s territory. This is demonstrated, for instance, by information that appears from time to time on the intention of the Azeri side to buy the Georgian part of the pipeline which transports Russian gas to Armenia, or by ambiguous position of Tbilisi in the issue of priority of a motorway, through which Armenia plans to connect its new building highway “North-South” from the border with Iran to the border with Georgia. Armenian side is interested in its farther continuation through Georgia via a shorter and more convenient route through the region of Samtskhe-Javakheti and to Adjara and Batumi port. However recently, according to certain information, Georgian side drew back from its previous position and suggested using a longer and more complicated route through the border checkpoint of Sadakhlo and via Azeri-populated regions of Eastern Georgia, which in Yerevan can be perceived as the result of Azeri lobbying.

Another problem, also connected with political limitations, is, for example, the issue of providing full-fledged functioning of vehicle communication from Armenia to Russia through the Upper Lars border checkpoint. It is a known fact that due to natural and climatic reasons functioning problems occur permanently, resulting in weeks or months of closed road for the transit of Armenian cargo and passenger flow to Russia and back. Theoretically this problem can be solved if the flow is directed through the South Ossetian Rock tunnel. However it is obvious that, taking into consideration the conflict potential and complicated relationship of Tbilisi with Moscow and Tskhinvali, this problem (same as a similar issue of rehabilitation of the railway through Abkhazia) will not be solved for Armenia in the long-term political perspective[11].

Construction of a new vehicle communication with Russia through Mamison Pass on the Georgian Military Road can be considered as a compensation of sorts and an alternative to the route via Upper Lars. In August 2016 government of Georgia adopted a project on rehabilitation of damaged sections of this road. However it is not completely clear whether this route will be able to become a full-fledged equivalent of Upper Lars, as the road via Mamison Pass goes through difficult climatic and geographical sections of the Main Caucasus Range at the height of almost 3 thousand meters. Besides, this issue is quite actively being discussed by certain political circles with the consideration of apprehensions in the Georgian society that in case this route is open, it will be easier for Russia to carry out a redeployment of troops and military equipment to the territory of Georgia via this section of the border[12].

Up until September 2013 Georgia and Armenia had in many ways similar approaches to the perspectives of European integration, including the perspective of signing Association Agreement with the EU and joining the common customs and economic zone with the European Union by signing the agreement on Deep and Comprehensive Free Trade Area (DCFTA). This could also reflect in perspectives of mutual transition projects of Armenia and Georgia. For example, EU began a programme of financing assistance for construction of new border checkpoints between Armenia and Georgia, which with the “one stop shop” principle would considerably simplify transit and goods turnover between two future members of the common economic zone with EU.

However, as it is known, in September 2013 Armenia made a decision to join the Customs Union of Russia, Belarus and Kazakhstan, and later – since January 2015, became a member of the CU successor – Eurasian Economic Community. At the same time at the end of November 2013 Georgia initialed Association Agreement and DCFTA in EU at the summit of the EU programme “Eastern Partnership” in Vilnius, while in 2014 already signed it and began the process of implementation. After Armenia’s refusal to join DCFTA, EU refused to continue the programme for modernization of Armenia’s border and customs checkpoints, and Yerevan had to continue fulfilling these projects on a smaller scale.

Lingering confrontation between Moscow and Brussels since the beginning of the Ukrainian crisis in 2014 led to correction of approaches of European structures to countries beyond the framework of the common European economic zone and joining common political and economic zone with Russia. Such dynamics also objectively leads to certain difficulties regarding Armenia on Georgia’s behalf, realizing the necessity of their decision. According to the figurative statement of the former Deputy Minister of Foreign Affairs of Georgia David Zalkaliani, “preserving good relationship with Armenia is difficult, but cooperation on certain common projects is necessary”[13].

Based on the mentioned political circumstances and limitations, fulfillment of long-term interests of political and socio-economic cooperation of Armenia and Georgia requires serious multilateral development of further perspectives of trade, economic, transit, and communication relationship of Yerevan and Tbilisi. Even the fact that two countries are members of various economic unions, as stated by experts, can create not only new limitations, including in regard to transit, but also new possibilities. For example, this can reflect in the practice of mutual investments for use of privileges of membership of Armenia in EAEC and Georgia in DCFTA with EU, creation of joint ventures and projects with the aim of compliance with conditions of preferential trade in the mentioned economic zones of integration[14].

 

Actualization of Iran Direction and New Possibilities for Transit Cooperation

However, political factors can create both limitations for transit and economic interaction of Armenia and Georgia, and in certain cases – also create new possibilities and conditions for them. For example, the outlined normalization of Iran’s relationship with the West can become one such possibility after achieving agreement on Tehran’s nuclear programme and removal of western sanctions. It is obvious that it will have a positive influence on the format of trilateral cooperation between Iran, Armenia, and Georgia, having decreased apprehension of Tbilisi and Yerevan on their further intensification, due to the negative position of Washington or European capitals. Success of negotiations on the nuclear programme and further removal of the majority of western sanctions against Iran will have positive meaning for the South Caucasus not only in the context of increase of goods turnover, economic activities or Iranian investments. Some experts express their hope that for Iran (as well as for Armenia and Georgia) this can create a hypothetical possibility for fulfillment of new large-scale geopolitical, communication and energy projects.

Besides the already mentioned project on construction of a new main highway “North-South” in Armenia, which after being connected with motorway systems of Iran and Armenia will be able to create the shortest and most convenient land route connecting the Black Sea port of Batumi and Bander-Abbas in the Persian Gulf, parties are also seriously considering possibilities of supply of Iranian gas through Armenia to Georgia and farther under the Black Sea to EU. There are also ideas on connecting Russia to the Iranian gas project, with the project of swap supplies of Russian gas to Georgia via the so-called “Armenian gas pipeline” and reimbursement of same volumes to Armenia from Iran. Russian participation also remains in possible projects on construction of a railway branch Iran-Armenia, which, though, due to its financial expensiveness still remains a tempting idea.

Even with the most optimistic variant, based on the considerations of economic reasonability, quick fulfillment of such large-scale regional communication or energy transit projects involving Iran, Armenia, and Georgia, is hardly possible. In particular, in short-term or even mid-term perspective it is hardly possible to fulfill ideas of construction of an Iran-Armenia-Georgia gas pipeline with its further expansion under the Black Sea (not quite clear, whether to Ukraine or Romania) for export to EU, which is every now and then brought up by journalists and political commentators in the region.

According to a number of experts, such a project faces problems of political and, even more so, economic suitability. From the political point of view, laying an extremely expensive gas pipeline via Georgia’s territory (with the presence of conflicts in Abkhazia and South Ossetia and Russian bases dislocated there) and further, via or along the Crimean shore shelf (with its current political and legal status, considering obvious Russian opposition) makes this project not less (if not more) vulnerable than other regional gas projects[15]. Economic suitability of this project, even though currently there are no reliable open calculations, also arouses questions. Especially if the following fact is taken into consideration that Iran does not yet have sufficient amount of free gas in deposits in the north-east of the country, in order to export it in commercial quantities to EU countries.

At the same time fulfillment of smaller size energy transit projects with participation of Armenia and Georgia, as well as Iran and Russia, is quite realistic in the foreseeable future. In particular, here we speak about quadripartite swap projects on supply of Russian gas to Georgia, and its reimbursement by Iran to Armenia. Both political and economic reasons (as well as existing limitations) are understandable and obvious, connected with its fulfillment for all participants of this project. This includes the negative position of third countries (for example, Iran), or domestic policy specific features, such as in Georgia, society of which predictably nervously perceives everything connected with the Russian gas and the possibility of its sale to Georgia. This brings to non-synchronized public statements of the parties to the project on possibilities of its fulfillment, nevertheless, it is quite possible that there is already some progress.

At the end of July 2016, after the meeting of Minister of Oil of Iran Bijan Zanganeh with the Minister of Energy and Natural Resources of Armenia Levon Yolyan in Teheran, Iran plans to conduct a trial export of gas to Georgia via Armenia already during the next several months. “Gas transit to Georgia via Armenia will be fulfilled through a new organization that will be established by Iran and Republic of Armenia. The same organization will be responsible for issues connected with Iran’s export of gas to Armenia, as well as transit of gas to other regional markets via Armenia”[16].

 

Conclusion

Thus, it can be said that mutual transit potential is a very important factor not only in trade, economic and political relationship of two countries, but also plays an important role from the point of view of geopolitical processes in the region and around it. On the whole the important transit role of Georgia for Armenia in this context will be preserved, its strengthening is also possible, however this is more likely in case of level increase in mutual trade and economic integration of two countries.

In its turn, activation of economic involvement of Iran and fulfillment of a number of transportation and infrastructure projects on the territory of Armenia can also promote perspectives of strengthening of “Armenian” direction from the point of view of transit interests of Georgia. In any case, transit factor, with all its challenges and possibilities, will continue to remain one of the priorities for Yerevan and Tbilisi both in bilateral relationship and regional context.

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[1] Armenia exports to Georgia construction materials, glass packages, products from rubber and plastic, agricultural products (especially grapes), medicine. Import from Georgia includes food products, nitric fertilizers, wood and timber. During the past several years re-export of used cars (from the United States and Europe) became an important part of the Georgian export. For details see: http://comtrade.un.org.

[2] “Armenian Airlines will fly to 17 direction”; March 8, 2016; Available at: http://newsarmenia.am/news/armenia/aviakompaniya-armenia-budet-letat-v-17-napravleniyakh-/

[3] National Bureau of Statistics of Georgia provides data only on net investments in the country. That is, if citizens of Georgia have invested more into the economy of Armenia than citizens of Armenia have invested in the economy of Georgia, the figure will be negative, while if citizens of Armenia have invested more in Georgia, the figure will be positive.

[4] FDI in Georgia 2013-2016 *. The National Statistics Office of Georgi; Available at: http://geostat.ge/cms/site_images/_files/english/bop/FDI_Eng-countries.xls

[5] Georgia’s leadership understands importance of gas transit issues for Armenia – president, http://arka.am/ru/news/economy/23658/, 27.01.2011.

[6] “RUSSIA – GEORGIA – ARMENIA – IRAN: new corridors are required”; Scientific Society on the Caucasus studies; Available at:http://www.kavkazoved.info/news/2015/03/30/rossia-gruzia-armenia-iran-trebujutsja-novye-koridory.html

[7]“Georgia wants to get more gas for Russian gas transit to Armenia”; The newspaper “Vzgliad”(a View). Available at: http://vz.ru/news/2016/1/20/789517.html

[8]Foreign economic activity; National Statistical Service of Armenia; Available at:http://www.armstat.am/file/doc/99493858.pdf

[9]http://www.customs.am/Shared/Documents/_CI/Customs_Statistics/General_Indicators/RA_Foreign_Trade_By_Types_Of_Transport/2015/vt_artar_transp_maqsarj_2014_2015.xls

[10] Ghia Nodia, “Pending Normalization of Turkish-Armenian Relations: Implications for Georgia”, CIPDD Policy Brief #2, January 2010.

[11] Alternative for upper Lars – a view from Tbilisi and Tskhinvali. Armeniasputnik; 24.07.2016

Available at: http://ru.armeniasputnik.am/caucasus/20160724/4493826.html

[12]“The Georgian government has decided to restore a bridge on Mamison pass”, Available at: http://www.apsny.ge/2016/pol/1470940387.php

[13] Zalkaliani, Davit, “Georgian Foreign Policy in a New Era”, Chatham House Russia and Eurasia Programme Meeting Summary, 18 March, 2014.

[14] For detail see: Economic Dimension of Cooperation of Armenia and Georgia: Facing New Challenges and Possibilities. Yerevan-Tbilisi: Caucasus Institute and Republic Institute of Georgia, 2015.

[15] Sarukhanyan, Sevak, Transit Gas Pipeline Iran-Armenia (substitute of discourse), http://www.noravank.am/rus/articles/detail.php?ELEMENT_ID=12612, 17.03.2014.

[16] “Armenia and Iran are intensifing economic co-operation”; “Press-club” “Sodruzhestvo” (Community) Available at: http://press-unity.com/analitika-stati-novosti/8533.html

 

 

Appendixes

Table 1. Volume of Border Crossing via Border Checkpoints (registration by documents presented when crossing borders, without identification*)

Border Entry

Border checkpoints 2015
Entry Exit Balance
Total Including with Republic of Armenia documents Total Including with Republic of Armenia documents Total Including with Republic of Armenia documents
Zvartnots 947 321 459 013 956 124 477 422 -8 803 -18 409
Bagratashen 1 199 411 878 048 1 227 517 899 283 -28 106 -21 235
Meghri 115 660 9 128 114 794 9 272 866 -144
Ayrum 28 688 21 272 28 610 22 543 78 -1 271
Gogavan 44 935 26 845 40 240 24 977 4 695 1 868
Bavra 353 397 156 709 363 577 163 317 -10 180 -6 608
Gyumri 18 804 11 182 20 808 13 045 -2 004 -1 863
Privolnoye 1 057 379 1 041 393 16 -14
Total 2 709 2763 1 562 576 2 752 711 1 610 252 -43 438 -47 676
Border checkpoints 2014
Entry Exit Balance
Total Including with Republic of Armenia documents Total Including with Republic of Armenia documents Total Including with Republic of Armenia documents
Zvartnots 1 044 842 534 772 1 039 345 540 324 5 497 -5 552
Bagratashen 1 094 465 802 632 1 119 842 822 212 -25 377 -19 580
Meghri 96 201 11 037 96 060 11 184 141 -147
Ayrum 36 904 27 601 36 413 29 497 491 -1 896
Gogavan 45 398 28 189 41 988 26 881 3 410 1 308
Bavra 397 795 170 953 420 926 189 893 -23 131 -18 940
Gyumri 17 593 9 612 20 310 11 871 -2 717 -2 259
Privolnoye 1 398 519 1 384 527 14 -8
Total 2 734 596 1 585 315 2 776 268 1 632 389 -41 672 -47 074

Source: Publications of National Statistical Service of the Republic of Armenia “Socio-economic situation in Armenia 2010-2016”

Available at: http://www.armstat.am/file/article/sv_12_15r_520.pdf

 

Table 2. Share of International passenger turnover of Armenia Going via Georgian Territory

mina

Estimates of author based on the publication of The National statistic service of the Republic of Armenia “Socio-economic situation in Armenia 2010-2016”

 

 

 

 

 

 

 

 

 

 

Table 3. Share of transit via Georgia in total goods turnover of Armenia (estimated data)

mina2

Estimates of author based on the data of Customs of Armenia and National Statistical Service of the Republic of Armenia about the domestic trade.

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