Beyond oil – examining relations between China and the Republic of Azerbaijan
Introduction
China recognized Azerbaijan’s independence in December 1991 and established official diplomatic channels with the South Caucasus country shortly after in April 1992. (Jafarli, 2020, September 22) The two countries have maintained close diplomatic ties with numerous high-level visits. In 1994, Azerbaijan’s then-President Heydar Aliyev made his first visit to China. Likewise, current President Ilham Aliyev has visited China five times since his tenure as president began in 2003. (Jintao, 2021, May 10) Azerbaijan’s energetic foreign policy, for example, its term on the UN Security Council and its current role as head of the Non-Aligned Movement, as well as its efforts to build international understanding and support for its position in the conflict with Armenia over Karabakh, are likely factors in Baku’s engagement with Beijing.
Azerbaijan’s location on the shores of the Caspian Sea and as the only country bordering Russia and Iran makes it a critical partner in any energy, telecommunications, or transportation routes that seek to connect Europe with East or South Asia that don’t cross either Russian or Iranian territory. With transit routes extending to Georgia, Iran, Turkey, and Russia that Azerbaijan has upgraded or built, the country is an ideal partner for China’s Belt and Road Initiative (BRI). President Xi has thus called for bolstering Azerbaijan-China bilateral relations on the eve of the 30th anniversary of their diplomatic relationship. (Xinhuanet, 2021, June 3)
From Nonessential Partnership to Full Cooperation
Although Azerbaijan and China have historically cooperated, until recently they did not consider each other to be important partners.
China’s Belt and Road Initiative, introduced in 2013, has been a key turning point in bilateral relations between the two countries. The strategic positions of Azerbaijan and the Caspian Sea in connecting East and West make Azerbaijan a lucrative partner for China. Chinese companies have opened railways from China to the ports of Aktau (Kazakhstan) and Turkmenbashi (Turkmenistan). Goods are transported from these locations by ferry to Baku, and from there further west to Turkey, and finally to Europe.
China has connected trade routes east of the Caspian Sea, and from there, the shortest route to Western markets is through Baku. China manages the Baku International Sea Trade Port (Baku Port for short), which is part of Azerbaijan’s Alat Free Economic Zone. The port’s strategic location is important for a key proposed route of the Belt and Road Initiative and is often discussed in conjunction with the larger Trans-Caspian International Transport route. China has invested nearly $2 million in equipment at the Alat port and allocated a grant of $70 million for port operations.
Many analysts believe that the strategic and geographic importance of Alat port preceded the Belt and Road Initiative and was a conscious effort by the Azerbaijani government to divest from oil and gas. The expansion of the port by the Azerbaijani government in 2007 was seen as a way to wean the economy from dependence on oil and gas through the development of cargo and transportation services. China is capitalizing on this opportunity for its strategic advantage.
Azerbaijan as a Bridge between China and Turkey
While China’s economic interests in Azerbaijan are significant, China also values its relations with Azerbaijan for its potential to build connections with another important economic partner in the region, Turkey. Azerbaijan plays a key role in bridging the gap between Turkey and China, whose economic and political relations have been expanding rapidly in recent years.
Despite China’s investments in industry, energy, transport, and telecommunications in Turkey, major deals have yet to materialize. Talks of China investing heavily in Turkey’s railway network have come to nothing, and negotiations for a third nuclear power plant have also stalled.
In the report for GLOBSEC, Selcuk Cholakoglu of Turkey’s Center for Asia-Pacific Studies has suggested that Ankara is reluctant to offer lucrative contracts to Chinese firms it sees as competitors.
In addition, Turkish President Erdogan was one of the first world leaders to heavily criticize human rights violations in China’s Xinjiang region.
Azerbaijan helps to bridge the gap between Turkey and China by providing a faster and more efficient route for goods to be transported between the two countries. China has invested in the Baku-Tbilisi-Kars railway, which is a major transportation project connecting Azerbaijan, Georgia, and Turkey. The project is expected to increase the volume of trade among the three countries and will also provide a direct link between China and Europe. (Mammadova, 2022)
In addition, China has also invested in the Baku-Tbilisi-Ceyhan pipeline, which is a major oil pipeline connecting Azerbaijan, Georgia, and Turkey.
In conclusion, Azerbaijan can play an important role in bridging the gap between Turkey and China by providing a faster and more efficient route for goods to be transported between the two countries, and by acting as a mediator between them.
Azerbaijan’s open door to China
Azerbaijan has “opened its doors to Chinese businessmen” allowing for a more robust economic partnership.
In a 2019 speech, President of Azerbaijan Ilham Aliyev emphasized the steps the country took to facilitate cooperation between China and Azerbaijan. In this context, removing visa restrictions for Chinese citizens has eased travel to Azerbaijan, and establishing Azerbaijan’s trade missions to China has opened up new opportunities for both countries to cooperate in various areas. “Our doors are open to Chinese businessmen. As I have already said, we would like to see them as investors, trading partners, and contractors. There are many areas we can cooperate in. Of course, Chinese companies are operating in Azerbaijan, including in the energy sector. But I think that this is not enough. This applies to contracting and trading projects. I think that we should do this together, and this issue is one of our main priorities”, said Aliyev in his speech, highlighting the importance of trade and investment between the two countries. (Network, 2019, January 21)
These increased bilateral trade relations between Azerbaijan and China suggests that China is using its economic leverage to gain more influence in the region.
Economic Relations
In 2015 during President Aliyev’s official visit to China, the Azerbaijanis signed a memorandum of understanding (MoU)[1] for jointly promoting China’s Belt and Road Initiative. (Jafarli, 2020, September 22) There was a striking 28,190 percent increase in average Chinese official financial commitments between 2014, the year before signing the MoU, and 2016, the year after. By 2017, five BRI projects were being implemented in Azerbaijan, valued at $54 million. (Malik, 2021, September) Nevertheless, unlike many other countries participating in BRI-related efforts, Azerbaijan has financed most of the projects in the country itself. Such projects include the Baku-Tbilisi-Kars railway and the construction of the new Caspian seaport/free trade facility at Alat, including the construction of new ships connecting Alat with ports in Kazakhstan and Turkmenistan. This ability to call on its financial resources or to raise funds on its own may be a reason why Azerbaijan has the second-shortest average implementation time for BRI infrastructure projects among countries with five or more active BRI projects at only 307 days. For comparison, Nigeria has the longest average implementation time for BRI infrastructure projects, with five or more active BRI projects at 3,333 days.
Geographic realities make Azerbaijan and China integral components of each other’s overland transit ambitions. Azerbaijan launched the Trans-Caspian International Transport Route (TITR) or Middle Corridor, to consolidate the rail companies of China, Kazakhstan, Azerbaijan, Georgia, Turkey, Romania, and Poland to shorten overland rail travel. (Bucsky, P. & Kenderdine, T., 2020, December 8) The initiative seeks to link rail companies with China’s West 2 CR Express corridor to connect Chinese cities with European countries via rail. Key to this effort, in October 2017 Azerbaijan opened the Baku-Tbilisi-Kars Railway to connect Kars, Turkey, and thus the European rail network, with the Baku International Sea Trade Port, which opened shortly after in January 2018. (Technology) This system forms the shortest east-west transit route, cutting travel between Europe and China to 12 days. (Mammadov, 2021, April 29)Azerbaijan’s desire – and efforts – to assemble a trans-Eurasian rail network gives it a strategic edge as a transit hub for Chinese goods and positions Azerbaijan and the surrounding region to benefit from intensified trade with China. (Mammadov, Azerbaijan could be a transit hub for Chinese goods., 2019, September 2)
At the same time, Azerbaijan actively seeks Chinese engagement in projects to help build its industrial sector and diversify the economy away from its long-standing dependence on oil and natural gas production. Such projects are key to the country’s long-term development and creating jobs for its young and growing population. Thus, numerous joint projects have been enacted since the MoU, such as the $800 million economic package in 2019 to intensify non-oil sector investment. (Baghirov, 2019, May 29) According to the agreement, China National Electric Engineering Company (CNEEC) pledged to invest $300 million in a tire factory, generating 800 new factory jobs. Other projects in the agreement included a new greenhouse complex in the Kurdamir region, agrological industrial parks, an agreement on Azerbaijani exports of wine to China, and an Azerbaijan Trade House in Chengdu, China.
Bilateral trade between the two countries has increased but with imbalances. In 2019, Azerbaijani exports to China were valued at $760 million making China Azerbaijan’s sixth-largest trading partner. On the other hand, Azerbaijani imports from China equaled $820 million, ranking Azerbaijan as China’s 121st largest trading partner. Furthermore, imports from China increased between July 2020 and July 2021 by 69.4 percent while exports to China dropped 70.7 percent. (OEC)
As of 2023, Azerbaijan is the largest market in the South Caucasus for Chinese goods. (Sahakyan, 2023) Although a small market by Chinese standards, Azerbaijan is a large market by comparison to other South Caucasus countries.
China’s Visible Presence
China has also been involved in the development of Azerbaijan’s telecommunications sector. Chinese tech companies are providers of technology that provide free public Wi-Fi in Baku, the capital of Azerbaijan. China’s presence in Azerbaijan can be seen mainly on billboards advertising Chinese products on the main roads of Baku.
Security Relations
In a similar fashion to Armenia, China has engaged in arms sales with Azerbaijan. In 2018, Azerbaijani Defense Minister Zakir Hasanov announced additional purchases of Chinese military-defense equipment, including radio electronic facilities and short-range tactical missiles. (Abrahamyan, 2018, August 22) Elkhan Shahinoglu from the Atlas Research Center in Baku argued that Moscow could not object to Chinese armament sales to Azerbaijan because it is not a Western country. (Mehdiyev, 2018, May 4)
The Azerbaijani public and politicians generally see China as nonthreatening because of its geographical distance from the South Caucasus country. (Valiyev, 2019, October 28) However, China has remained wary of Turkey’s expansion into the Caspian region and sees any Pan-Turkic solidarity as perhaps supporting the Uyghurs in China’s Xinjiang Uyghur Autonomous Region and thus undermining Chinese security. (Tanchum, 2021, January 21) Azerbaijan and Turkey enjoy extremely close relations, and China is concerned that Turkey’s growing soft-power influence in the Caspian region could tilt the scales in favor of Ankara.
Conclusion
Overall, China has established a strong presence in Azerbaijan and benefits from its relations with the country. This is due to several key areas of collaboration between the two countries, particularly in the areas of natural resources, infrastructure, and transit.
Azerbaijan’s geography makes it key to any middle route across Eurasia. Moreover, it is a Caspian Sea littoral country with large reserves of proven hydrocarbon resources. Therefore, Baku should expedite the completion of the Alat Free Economic Zone. The Alat seaport on the Caspian Sea coast, merely 40 miles from Baku with modern rail and marine connections facilities, makes it an ideal location for a free economic zone with assembly and manufacturing as well as logistics activities. The completion of the Azerbaijani vision for Alat, which includes a separate legal regime that would follow international business-law best practices, including preventing nationalization and confiscation measures, as well as allowing transactions in any currency, is attractive to Chinese investors. The completion of the legal regime would increase the flow of Chinese FDI into the country, boosting economic activity in Azerbaijan and perhaps in the region more broadly as well.
In addition, Azerbaijan should strive to be a bridge for China with other regional actors. Azerbaijan has already shown an interest and ability to play on the broader international stage, e.g., through its leadership of the Non-Aligned Movement. Azerbaijan is also active in European and Islamic fora. There could well be a role for Azerbaijan in helping facilitate communications and understanding between China and the region, including acting as a bridge between China and Turkey.
Azerbaijan is already a key player in Trans-Caspian relations and trade and would serve as an optimal linkage between China and the West. Its robust infrastructure and attractive investment environment are prime for Chinese businesses looking to expand into the Caspian Region. Azerbaijan should maintain this outlook to benefit from Chinese engagement in the region while also improving its economic situation to increase its accessibility to foreign investors.
References
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[1] – A memorandum of understanding, or MOU, is a nonbinding agreement that states each party’s intentions to take action, conduct a business transaction, or form a new partnership.
Write by Meysam Nazari
