The construction of the new railway line is an additional step designed to cement the strategic alliance between the three countries after the inauguration of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline in July 2006 and the completion of the Baku-Tbilisi-Erzurum (BTE) gas pipeline. The potential of these projects to link Europe and Asia transcends the immediate benefit of regional integration. Kazakhstan has already expressed interest in joining the three projects and Astana’s participation would thus open a door to China.

But the similarities between these projects stop here. In comparison with the other energy links, the Baku-Akhalkalaki-Kars project has received much less support from Western players in the region. The United States and the European Union are uneasy about Armenia’s de facto isolation. As a result of the Armenian lobby, the U.S. Congress passed a bill which prevents US companies from financing the construction of the railroad.

Economic costs

Armenia opposes the construction of the railway line by pointing to the already existing Kars-Gyumri (Armenia) –Tbilisi rail link, which ceased to operate in 1993 following the closure of the Turkish-Armenian border. Although Armenia argues that the railroad could be easily refurbished, Azerbaijan has stated that before it will use the railway, Armenia must first end the “illegal occupation of Azeri territories.”

The three countries will eventually finance the railroad without external support. On 13 January, Baku and Tbilisi agreed that Azerbaijan would provide a 220 million dollar loan to Georgia, repayable over 25 years with an annual interest rate of 1%. Georgia will use transit revenues from the operation of the railway line to repay the loan.

The overall cost of the Baku-Akhalkalaki-Kars project is estimated at USD 400 million. The section between Baku and Tbilisi already exists, but Georgia will build a new 29 kilometre line between the Turkish border and the town of Akhalkalaki in the Javaketi region. Turkey, for its part, will build a 76-kilometer line from Kars to the Georgian border. The Akhalkalaki-Tbilisi railway section will also be restored.

Not everyone is convinced of the project’s economic benefits. Archil Gegeshidze, a foreign policy expert at the Georgian Strategic Institute for International Studies (GFSIS) remarks that “it will be difficult in the first year to find cargo commodities for the new railway corridor.”

5 million tonnes of goods will be transported on the railway in the initial stages of its operation, while the capacity of the railroad is planned to reach 15 to 20 million tonnes in the future. However, Mr. Gegeshidze says that these figures represent the current approximate volume of goods being transported through Georgia. Therefore, one may ask from where the additional goods will come.

As in the case of the BTC oil pipeline, the project’s costs have moved some observers to argue that political considerations actually outweigh economics. A debate has started in Georgia on the railway line’s profitability for the country.

Railway against ports?

Tbilisi is certainly pursuing its own political agenda with the construction of the railway line. The Georgian government hopes to boost economic development in the Javaketi region, where the economic situation has deteriorated since the closure of a Russian military base. The aim is also to promote the integration of the region, populated by an Armenian majority, with the rest of Georgia.

Furthermore, Georgia is interested in cementing a strategic alliance with Turkey and Azerbaijan, with the goal of reducing Georgia’s energy dependency on Russia. Turkey announced on 7 February that it wants to allocate part of its gas share from Azerbaijan’s Shah Deniz field to Georgia. Negotiations are underway.

In reaction to the Russo-Georgian energy row, Azerbaijan supplied Georgia with gas in January 2006. As a sign of the importance the current government assigns to the strategic partnership with Azerbaijan, the Georgian government renamed a section of the Mtkvari River’s embankment in Tbilisi after former Azeri President Heydar Aliev, Ilham Aliev’s father.

Energy deals between the three countries have prompted opposition leader Salome Zurabishvili to ask in January 2007 whether the railway agreement is part of a compromise in exchange for receiving gas from the Shah Deniz field. She has underlined that Georgia risks jeopardizing the earning potential of its ports in this transaction.

As an argument against the profitability of the railway for Georgia, some observers say that it may undermine the potential of the Georgian Black Sea ports of Batumi and Poti as major transport gateways to Central Europe.

The Georgian ports, which are currently under renovation, and their future liaison with Black Sea East European ports, certainly represent serious competition for Turkey in the long term. Despite the two countries’ apparent shared interests, Turkish and Georgian ports may well compete in the future as gateways to Europe.

Furthermore, the European Union (EU) itself is more in favour of using Georgia and its ports as a transit link towards the Balkans and Central Europe, especially in light of Bulgaria and Romania’s new EU memberships. The original idea of the EU-funded Transport Corridor Europe Caucasus Asia (TRACECA) was to link Central Asia with Europe via the Black Sea and the Balkans rather than via Turkey. The EU has refused to include the Baku-Akhalkalaki-Kars railway project in the European Neighbourhood Policy (ENP) Action Plans with Azerbaijan and Georgia despite demands by Baku and Tbilisi. The Poti port, however, has received financial assistance for its renovation under the TRACECA framework.

The major problem is the lack of a governmental long-term strategy on how to exploit Georgia’s potential as a transit country. As Mr. Gegeshidze remarks, “Georgia should have a sophisticated view of its transit policy. There should be one government oversight body to examine these issues as a whole and to prevent the promotion of a railway system while neglecting the impact of the railway on the country’s ports. The government should develop a sound transit policy with the aim of fully exploiting Georgia’s geographic location.”

The rapid pace of privatization in the country has led some to fear that the government may sell some of Georgia’s most valuable and strategic assets.

In light of the vote of the U.S. Congress, American investment in the Georgian railway sector is unlikely. The privatization of the railway system may well interest Kazakh companies or even Russian investors which, as some believe, would eventually further Russia’s aim of controlling transport routes in the region.