By Emil Avdaliani
Amid the reshuffling of Eurasian connectivity as a result of the Ukraine conflict, the South Caucasus has grown in importance as a vital transit hub between the European Union (EU) and China. Comprising of Georgia, Armenia and Azerbaijan, this region serves as the shortest geographic point between these two Eurasian economic hubs. Consequently, the South Caucasus nations have attracted attention from both Beijing and Brussels.
According to Chinese customs statistics, during the period from 2001 to 2020 trade between China and the South Caucasus increased from US$25 million to US$3.7 billion, while the collective Caucasian national statistics put recent figures as trade valued at US$1.1 billion in 2009 to almost US$4 billion in 2020.
However, China’s place in the ranking largest trading partners of the countries the region is still not very large. The World Bank data shows that in 2005-2018 period China’s trade turnover with Armenia increased about 2070%, with Azerbaijan 380% and with Georgia around 1885%.
More recently, from 2016 to 2020, bilateral trade between China and the South Caucasus region almost doubled, from US$1.9 to US$3.6 billion.
In 2020 China was the 4th largest trading partner both for all three countries of the South Caucasus combined, and for Azerbaijan and Georgia separately (after the EU, Russia, and Turkey). At the same time, the share of China in the trade turnover of countries region ranges from a minimum of 7.5% to Azerbaijan to a maximum of 13.6% in Armenia and is growing steadily, if slowly.
As is typical for China’s trade with the developing world, China’s imports from the South Caucasus are dominated by raw materials (ores and oil), while exports are dominated by machinery and equipment. From the South Caucasus, China mainly imports ores and oil, while imports of other goods are extremely insignificant: in 2020, more than 97% of China’s imports from Armenia were copper and molybdenum ores/concentrates (in fact, almost a third of Armenia’s exported copper ore and 85% of molybdenum ore accounted for to China), 94% of all Chinese imports from Georgia are copper and precious metal ores/concentrates (more than half of Georgian exports of these goods go to China), 89% of China’s imports from Azerbaijan are oil and oil products.
The raw material component of exports of the South Caucasian countries to China is therefore pronounced and can even be considered excessive. All of the countries of the South Caucasus as regards their China trade are experiencing trade balance deficits.
According to their national statistics, in 2020, Armenia’s imports from China exceeded exports to China by 2.3 times (674 against US$290 million), Georgia – by 1.5 times (709 against US$477 million), and Azerbaijan – 3.3 times (1414 against US$477 million. Armenia as a regional South Caucasus nation has the least developed economic relations of the three.
In 2017, China and Georgia signed a free trade agreement, based on the Georgian government hoping the country’s location on the Black Sea would prove a transit benefit. Yet this did not materialize. Reasons vary, but they mostly range from geographic disconnect to geopolitical aspects.
The South Caucasus is poorly connected to Central Asia where China has been building its presence, as was apparent at the latest successful summit held in May in Xi’an between Chinese and Central Asian states’ leaders.
Some of the regional projects such as the BTK railway corridor have thus far failed to deliver what was promised in terms of volumes, although a late recognition in terms of resolving BTK bottlenecks is now underway.
Although China does not yet consider the South Caucasus as a primary region for extending its economic influence, Georgia and Azerbaijan have always been considered in the context of the historical Great Silk Road right from early 1990s. On a practical level, the TRACECA project initiated by the EU in 1993, the INOGATE project starting in 1996 and later supported by US through the Silk Road Strategy Act adopted in 1999. Dozens of silk road projects are still functioning successfully today.
For the period from 2014 to 2019 accumulated direct foreign investment (FDI) of China in countries of the South Caucasus exceeded US$700 million per annum.
Between 2000-2017, China invested US$581 million in Azerbaijan. Beijing has also provided loans to Baku to purchase Chinese goods for smaller projects, such as the expansion of an aluminum plant in Ganja.
Chinese businesses are active in a number of Azerbaijan’s industries such as oil, banking, finance, banking, and communications. For instance, in October 2018 a memorandum of understanding was signed on the creation of a joint venture between SOCAR and the China National Petroleum Corporation (CNPC).
In Armenia the overall level of Chinese investment is smaller. In 2011, China announced that it would invest around US$500 million in Armenian iron production. Yet the investment promise made by Hong Kong’s Fortune Oil did not materialize. In another case, a Chinese company from Guangdong pledged to invest about US$100 million in furniture production which also did not proceed. In 2019, a Chinese aluminum company announced plans to invest US$100 million to develop an aluminum industrial zone in Armenia.
However, a new “Smart Science City” will be built in Armenia with Chinese investments of US$10-15 billion. Another project is based on a 15-year project agreement between China Technology Academy, China Technical Development Company and ADCARS Agency for Reconstruction and Development of Armenia.
Traditionally major Chinese investment in the South Caucasus have been going to Georgia. For example, in 2019 investments worth US$671 million were sent as outbound investment. In 2022 Chinese investments reached US$109 million. the numbers remain negligeable. In the same year Georgia received US$$2 billion in total inbound FDI. Investments in Georgia or other South Caucasus countries are dwarfed by what China sends to Central Asian states or Pakistan.
The largest project implemented during this period was the construction of a special economic zone in the suburbs of Tbilisi called Hualing Tbilisi Sea New City, for which the Eximbank of China provided a loan of US$195 million. China funded the construction of the Khadori Hydropower Plant. Another project is the US$100 million Nenskra hydropower plant, funded via the AIIB.
In 2017 the AIIB provided Tbilisi with US$114 million to improve the country’s connectivity. One of the elements of the planned project is the bypass road around Georgia’s port city of Batumi with the goal to increase international transit from China to Europe. In 2019, the Chinese company China Railway 23rd Bureau Group (China Railway) announced that it will build the new 22.7 km Kvesheti-Kobi road in Georgia. The total cost of the project is estimated at 1.2 billion laris (US$428.6 million). China Railways will build 13 km of the road, which is part of the International North-South Transport Corridor.
There is also work going on along the Khulo-Zarzma road, which will represent the shortest route between Georgia’s poorly connected Samtskhe-Javakheti and Adjara regions. The refurbished section will go from Khulo and to Zarzma village in Adigeni via the Goderdzi Pass significantly reducing travel time between Georgia’s two southern regions.
Overall, China has a tailored geo-economic approach to each of the three South Caucasus state. The countries recognize that China’s economic interests overlap with their own development goal of transforming their respective countries into full-fledged connectivity hubs between Europe and Asia. For China, cooperation with Georgia and Azerbaijan will remain central as both countries represent a continuous transit corridor on the route to the EU. Increasing investment into the South Caucasus countries can be expected as a result of the INSTC development and the Middle Corridor routes.
Emil Avdaliani is a professor of international relations at the European University in Tbilisi, Georgia, and a Belt & Road Initiative scholar.