INSTC Could Undermine Suez Canal’s Importance

Iran and Azerbaijan inaugurated a short railroad in early March with far-reaching implications.

A mere 10 km long, the new link is one of the missing final pieces of a 17-year effort called the International North-South Transport Corridor, which aims to connect Russia, Iran and India. Slated for completion later this year, the corridor could affect economic patterns not only along the route, but also between Europe and Asia.

After more than a decade of delays, many factors are driving the project forward. Changes in international sanctions have made the project more feasible for Iran and more valuable for Russia.

Since international sanctions on Iran were lifted in January 2016, the country has attracted foreign investment and expertise to expand its railroad network. Conversely, Russia’s decision to block food imports from the European Union has increased the value of expanding economic ties with India, a major agricultural producer, reads an article in The Nikkei—a publication of the world’s largest financial newspaper.

The emergence of other regional transportation projects has also provided momentum. Under its One Belt, One Road Initiative, China has proposed a number of new overland and maritime route corridors. Far from undercutting INSTC, some of these proposed connections would make it even more feasible.

By participating in both efforts, Azerbaijan and Iran are seeking to establish themselves as regional hubs between Asia and Europe. Leaders from across Asia are now competing to tap into these emerging transport networks.

Reflecting this trend, INSTC has received increased high-level attention from Moscow to Mumbai.

Russian President Vladimir Putin has called the initiative a “flagship project”, and it topped the agenda of a trilateral summit attended by Russia, Azerbaijan and Iran last summer.

Likewise, Indian President Narendra Modi discussed the project in meetings with the Russian and Iranian presidents last year. Since the effort was launched in 2000, the roster of participants has grown to include at least 11 other countries.

Political support will be critical, but the corridor will rise or fall on its economic merits. Trials suggest it has real, although modest, potential.

In 2014, a dry run suggested shipping times roughly twice as fast as existing routes, reducing the journey between Mumbai and St. Petersburg from 40 to 20 days.

Last October, a trial shipment took 23 days without the rail connection between Azerbaijan and Iran. Some experts believe the corridor has stronger economic fundamentals than some of the emerging overland routes between Asia and Europe.

To succeed, the corridor needs to provide a compelling alternative to maritime shipping for a share of global trade. In terms of goods, the most likely candidates are agricultural products from India and raw materials from Iran and Russia.

In terms of markets, trading partners further inland will generally find the route more competitive. For the vast majority of products and destinations, however, slower but cheaper shipping options will remain dominant.

While the corridor’s infrastructure could be completed this year, much work remains to improve related transportation regulations. Exporters using the route must navigate a maze of rules, with different requirements for different countries. Officials and trial tests have underscored the need for a unified transportation document.

India’s recent accession to the Customs Convention on International Transport of Goods is an important step toward addressing some of these challenges. But overall, progress has been limited.

  Growing momentum

Looking ahead, the corridor could help revive related regional connectivity efforts.

The commercial case for extending Iran’s railroad network to its southern port of Chabahar, for example, would be much stronger. Having invested in Chabahar, India hopes it can compete with Gwadar Port in Pakistan.

Similarly, the completion of other emerging rail lines could gain momentum. Iran is pursuing new routes with Afghanistan, Iraq and Turkmenistan. Azerbaijan has made major investments in its port and free trade zone in Baku as well as a new railroad running into Georgia and Turkey.

While each connection offers specific gains, all would broadly benefit by joining a stronger regional network.

Of course, the corridor’s success will not only create winners. By redirecting some existing transportation routes, it could also put pressure on those who benefit from the status quo, particularly maritime hubs.

Traffic through the Suez Canal is already declining, as more ships opt to take advantage of low fuel costs and take a longer journey around the Cape of Good Hope. Egypt’s forecast for the Suez Canal traffic has already proven overly optimistic and new routes overland and through the Arctic could add to its growing financial burden.

The far-reaching potential of the relatively short Iran-Azerbaijan railroad is also a reminder that networks are becoming increasingly important. As new connections emerge across Asia, the prize will go to those who can tap into them and create hubs in a larger network.

There is no simple recipe for success, which will require both cooperation to remove barriers as well as competition to attract investment and business.

If that competition remains within the economic realm, Asia, Europe and the rest of the world could benefit greatly.