Abstract. Trans-Eurasian energy transportation routes connecting countries of the Central Asia-Transcaspian region, Kazakhstan in particular, with European and East Asian markets could become a region-building instrument that would unite the wider Eurasia on primarily economic grounds, promoting peace and cooperation. Existing geopolitical divisions and mistrust between the West and the larger part of the non-western Eurasia should be overcome to enable such unification. Without a cooperative energy production and transportation regime strategic competition policies in the region will prevail, leaving everyone worse off than before. It is in this context that the project of the Eurasian Economic Union (EAEU) becomes viable and beneficial to all member states. The EAEU currently bleak economic performance should not be taken as an indicator of its true potential. However, to make full use of the cooperative gains that the EAEU model can bring to all of its member states, regional cooperation in Eurasia should be based on economic, not political reasoning. The development of the member-states national energy sectors should proceed in coordinated fashion and under the supervision of a joint supranational body. Moreover, the EAEU potential will only flourish if the organization finds its place in the transregional networks of trade developed by the European Union, on the one side, and China, on the other side.
The future of the Eurasian region is connected to the development of modern transportation infrastructure covering both human movement and commodity transportation. The principal development of oil and gas pipelines and fields in the region had only started after the end of the USSR. Azerbaijan led the way, as it signed most of the productionsharing agreements (PSAs) among all of the former Soviet Union countries. The 100,000 bbl/d (barrels of oil per day) capacity Baku– Novorossiysk pipeline started functioning in 1997; the 145,000 bbl/d Baku–Supsa pipeline was opened in 1999, and the 1,000,000 bbl/d Baku–Tbilisi–Ceyhan (BTC) pipeline started pumping oil in 2005. Parallel to that, in 2007 Azerbaijan started exporting natural gas via the South Caucasus pipeline, also known as the Baku-Tbilisi-Erzurum (BTE). The pipeline’s capacity is 300 bcf (billion cubic feet) of natural gas, potentially upgradable to more than 700 bcf.
After the 1998 merger of BP and Amoco, the newly enlarged company radially increased its activities in the Caspian Sea littoral. By 2004, BP’s interest in the ACG (Shirag) oil field in Azerbaijan exceeded 34 percent. By late 2010, BP owned 37.4 percent of operating interest in the ACG, while the sum total of the stakes controlled by the US-headquartered Chevron, Exxon and Hess amounted to 22 percent. As a result, by 2010, Britain and the USA accounted for more than half of all foreign direct investment inflows in Azerbaijan's economy. Even though their combined share went somewhat down in subsequent years, to about 40 percent of the total FDI inflows’ volume, the United Kingdom remains the largest source of foreign direct investment for the Azeri economy. Among all of the UK-headquartered transnational corporations, BP clearly stands out as a single most important business partner and investor into Azerbaijan’s petroleum sector. Since its entrance into the local market in 1992, the company emerged as the largest foreign investor in the country.
The pipeline wars
The BP-led consortium, which includes Azerbaijan's state oil company SOCAR (25% stake) built the Baku-Tbilisi-Ceyhan (BTC) export pipeline at an estimated cost of US$4 billion, 70 percent of which was covered by public moneys. BP is the largest shareholder (30.1%), followed by SOCAR, Chevron (8.9%), Statoil (8.7%). TPAO (6.5%), ENI (5%), Total (5%) and others. The pipeline with the planned capacity of 50 million tonnes of oil a year was opened in 2005 and pumped 790,000 bbl/d on average in 2009. Although the pipeline capacity was expanded to 1.2 million barrels per day, or near 53 million tonnes a year, the actual volumes stayed at or near the 2009 level. In 2014, the BTC carried about 28.5 million tonnes of oil, and in 2015 – 28.8 million tonnes, 5.5 million of which came from Kazakhstan and Turkmenistan (Mamedova 2016). In less than ten years of exploitation, BTC supplied near 300 million tonnes of oil to the world markets (ABC.az 2016).
The situation with the northern route has been much more dramatic. In 2013 the Russian government annulled the 1996 contract on transportation of the Azeri oil via Novorossiysk because of the chronically low volumes of transit. A new agreement was reached between Russia’s pipeline operator Transneft and Azerbaijan’s SOCAR in February 2014. Only 1.75 million tonnes of Azeri oil went through the Baku-Novorossiysk pipeline in 2013, 0.9 million tonnes in 2014 and 1.2 million tonnes in 2015. The 2016 promise of SOCAR to send at least 1.4 million tonnes to Novorossiysk may or may not come true. Both Russian and Azeri analysts agree that, whether you judge it from a political or economic perspective, the northern route might well be heading into oblivion.
With most of the Azeri oil destined for Ceyhan, Russia had refocused its attention on Kazakhstan and the east Caspian littoral. In 1992, the government of Kazakhstan entered into negotiations with the Sultanate of Oman to estab
lish the Caspian Pipeline Consortium (CPC). The Russian government had soon joined the deal and became the CPC third member. The project connected the western Kazakhstan oil field of Tengiz with the port of Novorossiysk – Russia’s Black Sea coast main oil terminal.
In 1996, half of the consortium shares were sold to producing companies, which included Rosneft and Lukoil, Russia’s first joint stock oil company. Other investors were Kazakhstan’s national oil company (currently, KazMunai- Gas), the US-based Chevron and Mobil, British Gas, Agip S.p.A. of Italy and Oryx Energy (Qatar). The pipeline was commissioned in 2001, with a capacity of 684,000 bbl/d. After a series of consolidations, 31 percent of its shares ended up with the Russian government (24 percent managed by the oil transportation monopoly Transneft and 7 percent – by the CPC Company). Producing companies controlled by the Russian interests hold further 20 percent. Kazakhstan’s KazMunaiGas controls 19 percent of the stock. The largest international investors are Chevron, with 15 percent, and Mobil Caspian Pipeline Company, with 7.5 percent.
In 2011, CPC partners began the expansion of the pipeline capacity to 1.4 million bbl/d, or 67 million tonnes a year, to be finished in 2016 (KazMunaiGas 2015). The CPC ended up as an important instrument of Russia’s economic and political influence in the region, even as another Caspian-Black Sea oil transportation artery under Russia’s partial control, the Baku-Novorossiysk pipeline, fell into relative neglect because of constant disputes between its Russian and Azeri operators.
Of course, Russia’s Gazprom still controls the 2800 bcf capacity Central Asia – Center (CAC) natural gas pipeline, commissioned more than 40 years ago. However, after many years of operation, its capacity went down by near 50 percent, to 44 billion cubic meters (bcm), or 1550 bcf approximately, by 2009 (Alexander’s Gas & Oil Connections 2009), and even deeper, to roughly one-tenth of its original throughput capacity, by 2012 (Mammadov 2015). As Azerbaijan steadily worked to overcome its former reliance on Russia’s technological inputs and infrastructure in oil production and transportation, so did Turkmenistan, seeking to weave itself off overreliance on the Russia-controlled natural gas transportation network.
Parallel to the decline of the Russia-controlled infrastructure, the newly built oil and gas pipelines bypass Russia altogether, thus further undermining its previously unchallenged positions of Eurasia’s number one energy giant. With the steady growth in independent export capabilities of countries as Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan, Russia’s positions of the formerly principal exporter and transit operator for the exports of the Eurasian hydrocarbons on the world market have been eroding. Russia seems to be losing what industry analysts describe as the "pipeline war" with the West and China alike – the “war” over who gets to control the primary export routes for the Transcaspian energy resources. While the Kazakhstan-Russia CPC pipeline is still leading, having transported 42.8 million tonnes of oil in 2015, BTC over the same period pumped 29 million tonnes to Ceyhan, and the Kazakhstan- China pipeline – 11 million tonnes to China. Thus, the volumes are now roughly comparable, while in the future the other post-Soviet countries may start outpacing Russia’s oil and gas exports from the Central Asia-Transcaspian area.
The only country among the major oil and gas producers in the region that managed to maintain extensive cooperation ties with Russia, particularly via joint usage of major pipelines and oil refining facilities, is Kazakhstan, and its case is quite illustrative for both benefits and challenges of such cooperation.
Is economic integration viable? The case of Kazakhstan
By the turn of the century, Kazakhstan produced 30 million tonnes of oil and oil condensates, while Azerbaijan produced less than half this amount (Shoemaker 2013: 255; Today. Az 2005). Although the gap between the two somewhat narrowed in 2007-2010, it increased again in 2011-2015. Kazakhstan remains by far the largest energy producer after Russia in the whole of the post-Soviet space, with a total in liquids production of 1.72 million bbl/d in 2015, according to the U.S. Energy Information Administration. By comparison, Azerbaijan’s average in 2015-2016 has been projected at 880,000 bbl/d (U.S. Energy Information Administration 2016).
However, Kazakhstan’s growth has been handicapped by limitations inherited from the past. Historically, Kazakhstan had to rely on transportation networks and refinery facilities located in Russia. For the first few years after the proclamation of independence, all of the new republics’ energy exports were heading north and north-west, to Russia; there was simply no other way to reach the world market. Throughout the first post-independence decade, the Uzen-Atyrau-Samara pipeline, with a throughput capacity of 17.5 million ton, was Kazakhstan’s major export route to the world. It linked to Russia’s Transneft distribution system, which delivered Kazakh oil to the Russian Black Sea port of Novorossiysk or ran it through the Dru- zhba pipeline, across western Russia, Belarus or Ukraine. The Black Sea route has been subject to regulation and even obstruction, on the environmental and safety grounds, by Turkey. The Druzhba route has seen periodic disputes with Ukraine over transit fees. Finally, the loss of the Kazakh oil because of theft en route became a problem with the rise of criminal activity in the Samara oblast’, where the Transneft security recorded 1322 illegal siphons over ten years (Kazantseva 2013).
Kazakhstan was forced to seek diversification of its export routes. Because of the inherited vast dependency on Russia’s transit network, it had to proceed decisively, yet diplomatically, without antagonizing its northern neighbour. The construction and operation of the CPC (Tengiz-Novorossiysk) pipeline provides an ample illustration. At the same time, Kazakhstan’s official strategy for some time has been overcoming the one-sided reliance on one export transportation route only. As early as 1995, speaking to the attendees of the World Economic Forum in Davos, Switzerland, Kazakhstan’s President Nursultan Nazarbayev stressed that his country, being in possession of huge natural resources and qualified labor force, was considering exporting energy carriers both to the West and to the East. In his 1997 Address to the People of Kazakhstan Nazarbayev specifically stressed that “only a big number of independent export routes can prevent dependence on one neighbor and the monopolistic price dependence on one customer” (Nazarbayev 1997).
And this is how the country proceeded. In 1997, an agreement with the Chinese oil major CNPC provided for the joint development of oil fields and construction of an export pipeline to China. By 2003, Phase 1 of the future Kazakhstan-China pipeline, the Kenkiyak-Atyrau segment, was completed. By the end of 2005, the Atasu-Alashankou trunk had crossed the border with China and became Kazakhstan’s first independently built export pipeline. Thus, the project’s Phase 2 was completed. Phase 3 connected the Kenkiyak oil field to the Kumkol oil field in the southern part of central Kazakhstan in 2009. Tying all three sections with the Soviet-built Kumkol-Atasu line and reversing the flow of oil in the Kenkiyak-Atyrau segment from its original east-west direction to the opposite launched the next stage of the Kazakhstan-China project, which allowed doubling the original capacity of the pipeline to 20 million tons a year, or 400,000 bbl/d.
The loss of Kazakhstan’s oil, now channeled eastwards, means that transportation networks to Europe may remain underutilized. Significantly, the starting point of the Kazakhstan- China pipeline is basically the same as the starting point of the Atyrau-Samara pipeline, which brings up to 15 million tonnes of oil into the Russian Transneft network annually. Hence, Russia is now competing with China over Kazakh oil. The Chinese are not happy that the 20 million tonne capacity Atyrau-Alashankou pipeline pumped less than 5 million tonnes of crude in 2015 (Delovoi Kazakhstan 2016). Russians are concerned that the removal of sanctions on Iran will further suppress crude oil prices, making Kazakhstan to roll back production and lower the volumes of oil channeled via the CPC pipeline. Azerbaijan has been arguing for some time that the best route for the Kazakh oil to reach international markets is across the Caspian and via Baku’s Sangachal Terminal, continuing to the Black Sea or the Mediterranean coast by the pipeline.
The North Caspian Operating Company (NCOC) consortium, which operates the Kashagan field, does not include Russian participants. Its members are Kazakhstan’s KazMunaiGas (16.87%), transnational oil majors Exxon Mobil (16.81%) and Royal Dutch Shell (16.81%), the Italian ENI (16.81%), the French Total (16.81%), China’s CNPC (8.4%), and Japanese Inpex (7.56%). Recently, they have agreed on an export strategy that would combine sales to the European Union and China. Given the fact that oil prices hit twelve-year low in January 2016 against the sluggish demand in Europe and elsewhere, the attraction of China’s market grows – to the extent that Russian producers increase the supply through Kazakhstan’s transit networks to China, while taking away from Russia’s own Transneft system.
In both Kazakhstan itself and in the West voices have been raised doubting the economic rationale of Kazakhstan’s participation in the Eurasian Economic Union (EAEU), where western sanctions against Russia reverberated throughout the whole common economic space. The ruble’s devaluation affected intra- regional trade and currencies of other EAEU member states. As a result the trade between the core countries of the EAEU – Russia, Belarus and Kazakhstan – shrank by roughly one- third in the first year since the Union’s inauguration.
Nonetheless, the EAEU’s prospects are not necessarily bleak. In fact, Kazakhstan’s economists noted certain improvements in the structure of trade, e.g. growth in the machinebuilding share of exports (Trotsenko 2016). The World Economic Situation and Prospects 2016 report, published by the UN Department of Economic and Social Affairs (UN/DESA), notes that the establishment of the Eurasian Economic Union “opens new possibilities for increased trade and investment in the region, although many aspects of the regional integration still have to be negotiated” (United Nations 2016: 127).
The very model of Eurasian regional economic integration has to be negotiated, too. At the moment, it appears too politicized because of the precarious situation Russian finds itself in international and global politics. However, once the situation in Ukraine normalizes and western sanctions against Russia are removed, the EAEU is poised for a take-off. As US Principal Deputy Assistant Secretary of State for South and Central Asian Affairs Richard E. Hoagland mentioned, “the Eurasian Economic Union should be trade-liberalizing rather than trade-restricting, should not become overly politicized, and should not impose conditions or restrictions on its members’ ties with other countries” (Hoagland 2015).
Russia’s trade war with the West and the worsening of economic and trade relations with Turkey severely affect Kazakhstan and create political and economic dilemmas that Astana would rather not face. One way to make sure that the EAEU will not evolve along that path of self-imposed isolationism is to combine the membership in its structures with participation in multilateral trade regimes. From this point of view, Kazakhstan’s accession to the WTO is a step in the right direction. Parallel to that, an inter-regional, transcontinental linkages should be developed and strengthened. EAEU’s ties to the Shanghai Cooperation Organization, Economic Cooperation Organization and, of course, the European Union, will help cast aside misconceptions as to the organization’s purpose and future. A cooperative trade regime making full use of the region’s central location on the intersection of trade routes from the east to the west and from the north to the south will boost trade and maximize the participants’ welfare.
Toward the cooperative network regime
There may be two ways to deal with the problem of sellers’ competition in the Eurasian regional market of energy resources: positive and negative. The first one is defined as actions by which “a seller tries to make his product cheaper, bigger, better, or more appealing to the buyer.” The negative way to deal with competition include “efforts to reduce the saleability or availability of competitors' products” (Machlup 1952: 83). The Western, and more specifically, Anglo-American efforts to undermine Russia’s positions in the export markets of hydrocarbons under the pretext of “diversification of supply” appear the prime example of negative competition, insofar as they attempt to reduce the availability of Russian oil and gas in the European market in particular.
The positive way to compete would be to combine the efforts of energy producers and energy infrastructure operators in the Central Asia-Transcaspian area for the purposes of joint usage of the existing transportation networks, thus replacing the “pipeline wars” mentality with the idea of regional economic cooperation and integration.
As I have argued elsewhere, the region’s oil and gas reserves and the transportation networks can be seen as either a bone of contention or a unified common resource shared by all the states of the region. For both consumers and exporters’ sake, it is important to construct a multilateral cooperative regime in the area. Such a regime, implemented in the form of a socioeconomic network, will allow diffusing the economies of scale effects throughout the region, and will also result in manifold positive spillovers on other sectors (Molchanov & Yevdokimov 2004).
Until a cooperative international regime for the development of the region’s energy resources is created, self-serving interests of the individual actors – national governments and transnational corporations – will stall collective welfare maximization. Bilateralism will undermine multilateralism. Meanwhile, a cooperative regime in the energy sector of the Central Asia-Caspian region could promote sharing of knowledge and technological transfers between the national oil and gas industries of the participating countries, as well as rapid domestication of progressive methods of work brought by foreign investors. Such a regime would reduce transaction costs and initiate economies of scale in the energy sector, while helping to strengthen security and sustainability in the area. While stopping short of cartelization, it could also improve profit margins of the national energy champions and transnational oil and gas companies currently engaged in a winner-takes-all competition for the market share.
One specific economic integration instrument that most countries of the Central Asia- Transcaspian region have at their disposal is the abundance of natural resources, oil and gas in particular. Russia is the world’s largest exporter of natural gas and the second-largest exporter of oil. Kazakhstan is in the top 20 of the world’s largest petroleum and other liquids producers, and Azerbaijan is in the top 25. Kazakhstan is also the world’s largest producer of uranium. Turkmenistan is number 33 in the world’s petroleum producers’ rankings, according to the US Energy Information Administration. It is also the sixth largest natural gas reserve holder in the world according to the Oil and Gas Journal, and was among the top 15 dry natural gas producers in 2014.
It is little wonder that energy production, transportation and trade has shaped out as one industrial cluster that can help bring all these countries together, as the best possible instrument that the Eurasian Union member states may utilize to lay out a solid economic foundation for the new regional entity. Energy cooperation may potentially become the backbone of regional integration initiatives going well beyond the energy sector. The benefits that such multilateral cooperation could bring to all countries of the region, including energy producers and energy transit countries, is quite obvious. Thus, it is quite paradoxical that most energy cooperation initiatives so far were conceived and implemented as bilateral undertakings. The Customs Union bodies have had little say over the scope and direction of energy deals between Kazakhstan and China, or Russia and the EU countries. The Eurasian Economic Community was not consulted in the bilateral negotiations between the Russian energy companies and their Central Asian counterparts. The Eurasian Economic Union today still has to show its strength as an institution independent from the Russian diktat and acting in the interests of all its members, as a truly multilateral regional entity.
Yet another regional organization with a huge economic potential of its own is the Shanghai Cooperation Organization, which unites China and Russia with the Central Asian states of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Afghanistan, Belarus, India, Iran, Mongolia, and Pakistan have an observer status, and the process of admitting India and Pakistan as full members had started in July 2015. Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey are dialogue partners. Even the current member states, according to expert estimates, hold more than 50 percent of the world deposits of natural gas and near one quarter of the world’s oil. Moreover, these states also control 35 percent of the world’s coal deposits and near half of all of the uranium found on the planet (Bushuyev and Pervukhin 2012). Some of the lengthiest and most important oil and gas pipelines in the world traverse the territories of these countries: the CPC, the Kazakhstan-China, the East Siberia—Pacific Ocean (ESPO) oil pipelines and the Central Asia–China gas pipeline are well known examples.
The idea of the SCO Energy Club was proposed by Moscow back in 2006. However, the proposal remained on paper and, for some time, had not been followed through. The preference that regional players show to bilateralism over multilateralism in the energy sector was one of the reasons that delayed implementation of the promising idea. The fact that the energy sector in the post-Soviet countries is, according to some estimates, one of the most corrupt and non-transparent industrial sectors overall did not help either. Finally, the national priorities differed. Even as all of the SCO member states subscribe to the notion of energy security, security of energy suppliers (Russia, Kazakhstan, Uzbekistan) differs from security of energy consumers (China, Tajikistan, Kyrgyzstan). Energy exporters implicitly compete with one another, and so do energy importers. Diversification of energy transportation routes, presumably a good thing for all, is not embraced by a dominant transit country (say, Russia or Kazakhstan) with the same degree of enthusiasm as by its partners.
As a major energy importer, China is interested in promoting regional energy cooperation in Eurasia. Chinese bilateral ties with energyproducing SCO member states have become supplemented with more active promotion of multilateralism after the formal institutionalization of the SCO Energy Club in 2013. If successful, the Energy Club could lead the way in the creation of a common energy space for the participant countries, which would require an agreement on price liberalization, standardization of energy transportation tariffs, development of a unified approach to taxation, and coordination of supply in order to avoid unnecessary competition between suppliers. In short, to grow into something more than the platform for a bilateral Russia-China dialogue with few other countries watching it may require institutionalization of a multilateral regulatory body.
At present, such a body is missing, and the Energy Club itself remains a more or less empty shell, a proposition waiting for its practical implementation. Among the SCO member states, Kyrgyzstan and Uzbekistan have not yet signed the memorandum on its creation. While Turkey participates, neither Azerbaijan nor Turkmenistan have shown much interest at this point. It is instructive that two year past its creation, Vladimir Putin had to use the platform of the SCO 2015 Ufa summit to plead with the participants about filling the Energy Club agenda with “concrete tasks.” Even more telling is the fact that a recent decision to start the construction of a major, 33 bcm a year Turkmenistan- Afghanistan-Pakistan-India (TAPI) natural gas pipeline was reached without any mediation or involvement of the SCO structures. Similarly, the construction of the 16 bcm Trans-Anatolian natural gas pipeline (TANAP) and the work on the South Caucasus Pipeline Expansion (SCPX) project started upon the conclusion of the agreement between Azerbaijan and Turkey, and, once again, heeding of the third power preferences had not played a major part in the outcome of the bilateral negotiations.
Connecting to the New Silk Road
In a recent article Russia's reputed periodical Expert Online suggests China is pushing Russia to link its Eurasian Economic Union (EAEU) project with China's plans for the New Silk Road -- a transcontinental network of railroads and highways allowing direct transit of China's exports to the European Union. The article draws a picture of Russia's reluctant acceptance of the inevitable Chinese expansion to the west and the subordinate role that the EAEU will play in such expansion.
The reality is somewhat different. The linking of the two projects will give a huge boost to the EAEU development and bring direct dividends to the Russian economy in particular. The speculations of whether China will prefer the so-called "northern route" (via Russia) or the "southern route" (via Turkey) for the land transit of its goods will be put to rest. It will use both.
Moreover, both Russia and China will be well advised to develop the "in-the-middle" option, which will streamline the transit and shorten the travel time comparing to other alternatives. This third route would go via Kazakhstan and the southern Russia (or Georgia), across the Crimean peninsula and then, by a short ferry, to the Black Sea ports of the EU members Bulgaria and Romania.
The Expert Online article mentions China's Silk Road Fund investments in Russia, of which the most noticeable so far has been buying of the 9.9% stake in the liquefied natural gas (LNG) Yamal project in Russia's Far North. The opening of a plant for the production of refrigerators of the Chinese Corporation Haier in Tatarstan is another noteworthy project.
Yet the bigger prizes lie elsewhere. China may facilitate construction of the Kerch Strait bridge by the Russian contractors by giving both money and know-how. The bridge, to be completed by 2018, will connect Russia's mainland with Crimea. China may further invest into the development of Russia's Azov-Black Sea port infrastructure and the Ukrainian port of Odessa, while extending a trunk of it New Silk Road via Ukraine. Beijing's money may cool heads in both Kiev and Moscow, thus facilitating the Ukrainian-Russian rapprochement.
The Kerch Strait bridge project was once approved by Ukraine's government, only to be denounced after the Maidan revolution. Perhaps, Kiev will reconsider its decision if granted a share in the international consortium that may still be established for the joint exploitation of the bridge. After all, Ukraine's attempts to challenge the construction of the bridge by means of an international legal action will probably lead to nothing. Yet, Ukraine's demanding a piece of action because of its rights to the internal waters of the Sea of Azov may still work.
Of course, it leaves the larger question of sovereignty over Crimea and the legality of its annexation by Russia open for the time being. Ukraine will never accept the legality of annexation nor should it. But, as the example of Taiwan shows, unofficial acceptance of the status quo does not require renunciation of sovereignty, and in the meantime both sides derive substantial benefits from normalization of their cross-Strait relations. Perhaps, this may serve as an example to follow.
Conclusion
Trans-Eurasian energy transportation routes connecting countries of the Central Asia-Trans- caspian region, the member-states of the Eurasian Economic Union, and the broader Shanghai Cooperation Organization community could become that region-building instrument that would unite the wider Eurasia on primarily economic grounds. Existing geopolitical divisions and mistrust between the West and the larger part of the non-western Eurasia prevent such unification. Without a cooperative energy production and transportation regime strategic competition (beggar-thy-neighbour) policies in the region will prevail.
Regional coordination is necessary to transcend the inbound, self-interested behavior of individual business players and national states for the sake of welfare maximization on a transnational, regional level. It is well known that cooperation brings larger collective benefits than any form of strategic competition that seeks to maximize benefits of one player at the expense of the others. Competition policy experts argue that “a change from inbound-, national-welfare- focused competition policies to such pursuing supranational and suprajurisdictional welfare goals, as well as cooperation on concrete, specified cases, is necessary from an economic perspective. However, both topics are hardly compatible with the contemporary governance principles…” (Budzinski 2015: 141).
In the absence of regional coordination, market development proceeds under conditions of anarchy. Large-scale infrastructure projects, such as the construction of transcontinental oil and gas pipelines, require massive investments of money, labour, technology and know-how and can only be successful on the basis of at least some cross-border, international cooperation. Any project of such scale and nature should be based on a comprehensive preliminary assessment, scrupulous planning and purposeful self-organization among producer groups to limit market anarchy and reduce the attendant risks (Jessop 2015).
One way to reduce the arising uncertainty is through the harmonization, or approximation of policies; creation of a more or less uniform international policy regime with a properly authorized international agency at its helm. The WTO regime may serve as an example of harmonization of policies along these lines. Another way is policy coordination, or the establishment of a functioning regime of systematic multilateral cooperation based on mutually agreed-upon rules of behaviour “around which expectations converge” (Young 1980: 332). Such rules must be followed by all participants voluntarily and without any one of them taking upon itself the task to enforce the rules in an authoritative fashion. This is a path of soft regulation by means of joint elaboration of standards, their voluntary acceptance and implementation, negotiations of individually tailored modifications of policy and/or partial exceptions as necessary, and carrying out of multilaterally acceptable agreements that are based on the principle of fair treatment of all of the participants.
Of course, countries of the Eurasian hinterland are vastly different in terms of size, economic potential and geographic location. For most Central Asian states today, China is more important than Russia. The transportation potential of these countries also varies greatly. Belarus, Kyrgyzstan and Tajikistan are landlocked countries; Azerbaijan, Kazakhstan and Turkmenistan have direct access only to the inland Caspian Sea; India, Iran, Pakistan and Turkey are all sea powers, and Russia’s shores are washed by three oceans. The rail density, according to the World Bank data, varies from 2.2 km or rail line per 1,000 square kilometres of land area in Kyrgyzstan to 4.4 in Tajikistan, 5.2 in Russia, 5.4 in Kazakhstan, 9.85 in Uzbekistan, 22.7 in Georgia, 25 in Azerbaijan and near 27 in Belarus.
Azerbaijan in particular is very well positioned to develop as a major transportation hub for both energy and cargo traffic. The Baku- Tbilisi-Kars (BTK) railway project, to open the rail cargo transport in 2017, will become the shortest route connecting Asia to Europe. Adding to the existing Trans-Caspian transport route, the BTK serves China’s ambitions of resurrecting the ancient Silk Road under Beijing’s current One Belt, One Road initiative. The $40 billion Silk Road Fund that China had established to finance infrastructure projects in Central Asia will further improve the east-west transportation links.
Azerbaijan is also a key member of the International North–South Transport Corridor (IN- STC) connecting northern Europe to India via Russia and Iran. Other INSTC members include Armenia, Belarus, Kazakhstan, Kyrgyzstan, Oman, Syria, Tajikistan, Turkey, and Ukraine. Bulgaria has an observer status. The successful activation of the corridor is expected to help connect India to Russia within 16 to 21 days at competitive freight rates. At the January 2016 meeting in Baku Azerbaijan, Georgia, Iran and Ukraine signed a memorandum of understanding on implementing the INSTC project along the third – western – route via Georgian Black Sea ports of Batumi and Poti, in addition to the already tested Caspian shore routes via Russia.
What it shows is that, although political-economic interests of the Eurasian countries with respect to the improvement of their transportation options essentially coincide, concrete ways to implement various particular projects may differ and even work at cross purposes. Rather than being complementary, these countries’ economic policies are frequently at odds with each other. If Russia would like to consolidate oil and gas transportation infrastructure on a regional basis, others are much more interested in diversification of the export-import routes than their consolidation. China and India compete for the Caspian oil and gas supplies, while Iran competes with other petroleum-exporting nations as a major supplier. The cooperative development of the SCO Energy Club could help resolve some of these issues. The necessity to consolidate the region without reducing national welfare of any single state dictates creation of a cooperative energy transportation regime on a truly multilateral basis.
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