The C5 countries that
were earlier part of the former Soviet Union had to rely on railroad
infrastructure that was developed through a centrally planned economy from
Moscow.
The Soviet railways
system spun outward like a web from Moscow. Thousands of kilometers of
broad-gauge tracks were laid in Central Asia. However, the system was designed
to serve the Russian homeland. Out of five Central Asian countries, only
Kazakhstan (with China) and Turkmenistan (with Iran) have rail connections with
other countries outside the former USSR. Thus, these countries had very little
connection with other transregional markets. Not only outside the borders of
former Soviet Union, intraregional trade within the erstwhile Soviet Union also
got severely restricted and remained unexploited due to lack of feasible
connectivity.
With the end of the
Soviet Union, the rail systems inherited by Central Asia were cut off from
their primary destination (Moscow) by a new international border and deprived
of the Soviet expertise that had built and maintained them. Kazakhstan
inherited the majority of the Soviet Union’s rails in the region. They have over
14,000 kilometers of railways, followed by Uzbekistan (3,500 km), Turkmenistan
(2,900 km), Tajikistan (680 km) and Kyrgyzstan (470 km). Thus, Kazakhstan is
more connected with Russia and China, which also makes them its largest trading
partners. Uzbekistan follows Kazakhstan in the same way. In terms of GDP growth
rate, we also find the same pattern. The growth rate is highest in Kazakhstan,
followed by Uzbekistan and Turkmenistan. Tajikistan and Kyrgyzstan have minimal
rate of growth that is driven mostly by remittances of people who go and work
in Russia or Kazakhstan.
In the early 1990s, when
Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan became
independent countries, they had to face a sudden interruption of economic
relations that existed under the Soviet Union. Unprepared, all the five
countries faced a deep economic crisis.
Present scenario
In Turkmenistan, a
market economy exists only marginally, and the political system is dictatorial.
Authoritarian governments in Kazakhstan and Uzbekistan are dominated by family
clans who have implemented limited economic reforms. Tajikistan’s oligarchy
took power after a bloody civil war whose consequences are preventing an
economic recovery—making it one of the world’s poorest countries. Kyrgyz
Republic is the only country that has pursued drastic political and economic
reforms. Kyrgyz democracy is stabilizing, offering hope for a robust political
framework to revive the economy.
However, with changing
leadership from older generation to a younger generation, all the five
countries are trying hard to make a transition to market led economy. Lack of
infrastructure, corruption and rent-seeking PSUs in this region is a major
bottleneck that impedes their growth rates (same as India that followed similar
economic pattern till 1991 when LPG reforms were initiated).
India has strategic agreement with both Kazakhstan and
Uzbekistan on account of their economic potential. In terms of military and
security point of view, India has strategic agreement with Tajikistan as
Tajikistan lies exactly above Pakistan Occupied Kashmir (PoK) and can be used
to open a second front towards Afghanistan. India has an overseas military base
in Tajikistan called Farkhour. Additionally, India had also proposed another
base in Tajikistan called Ayni. After the intervention of Russians, Tajikistan
dropped the idea of allowing further access to India.
Since India has a strategic partnership agreement with
Kazakhstan, Uzbekistan and Tajikistan, our focus shall be one these three
countries. Turkmenistan is important on account of TAPI Pipeline project.
Our next lectures shall
focus on these countries
How does Russia enjoy a
leverage in Eurasia?
Since the economies of
Kyrgyzstan, Tajikistan and Uzbekistan are weak, most of the people in these
countries migrate to Russia or Kazakhstan in search of better economic
opportunities. This is not the case with Kazakhstan and Turkmenistan as both
possess huge reserves of oil (in the former case) and gas (in the latter case).
The highest number of
these labor migrants still go to Russia. Russia benefits from the availability
of cheap labor while labor migrants can send remittances back to their home
countries. In terms of their share in GDP, the share of remittances is greater
than 50% in Tajikistan and Kyrgyzstan while it is 30% in Uzbekistan. These are
the most conservative estimates that does not involve illegal migrants.
If these countries
refuse to abide with the decisions take by Russia, Russia can deport them.
Absorbing new entrants in domestic economy would therefore a big burden for
these countries that are already struggling to attain stable GDP growth rates.
Now since the
Eurasian countries are making a transition from command economy to market led
economy, they are opening their markets. However, a close look at this part
of the world will show that some of them are landlocked and some are double
landlocked.
Landlocked countries
develop slower than the ones that are connected to the sea/ocean as the bulk
of merchandise trade happens through the ships. The volume of goods/
containers that can be carried through ships is far more than the ones that
can be carried through rails, which makes them more economical.
Double landlocked
countries are the ones that are located behind another landlocked country.
Hence any product or commodity that enters of exit such country must cross
two borders before it starts the journey in the ocean through a ship.
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With slowdown in global economy, Eurasia offers a bright spot. So, how can we access this vast market that is developing so much fast in Eurasia?
As mentioned earlier, India’ options include China, Pakistan and Iran. Iran offers access to Central Asia through the port of Chabahar and Bandar e Abbas. Earlier there were logistical issues in providing seamless connectivity from Chabahar port in Iran to Russia and CIS countries. However, with Iran’ recent pivot to Eurasia to dilute the impact of sanctions, it has vigorously pushed forward to build roads and railways connecting Eurasia and the Persian Gulf. With Mashhad-Sarakhs-Tajan railway becoming operational in 2014 connecting Iran, Turkmenistan and Kazakhstan (ITK), the logistical issues are now almost resolved. It connects the landlocked Central Asia to the Persian Gulf. ITK railway line is now part of INSTC
For Iran, Turkmenistan acts as a bridgehead in its pivot to Eurasia. You can find more details here
With sanctions on Iran,
Iran is trying to make full use of the potential of its northern neighbors.
(Chabahar port is exempted from the US led sanctions on Iran)
Iran has developed the
following dry ports, where Indian companies can invest. All of them lie on the
routes that are vital for India to establish its footprint in Central Asia,
Caucasus and Eastern Europe
·
Zahedan Logistics
Centre, Sistan and Baluchestan Province
·
Sahlan Special Economic
Zone, Tabriz, East Azerbaijan Province
·
Sarakhs Special
Economic Zone, Khorasan Razavi Province
·
Motahari Rail Station,
Mashhad, Khorasan Razavi Province
·
Incheh borun multi
modal border point, Golestan Province
Special Economic Zones in Iran
Being
located on the mainland, a Special Economic Zone (SEZ) is where business and
trade laws differ from that of the rest of the country. To facilitate export
and import in these areas, they have been exempted from country’s customs
regulations.
Although
there might be some similarities between Free Trade Zones (FTZ) and
Special Economic Zones (SEZ), they are different in many aspects. For instance:
- While there is a
15-year tax exemption in FTZ, tax regulations in SEZ are like the rest of
the country.
- Retail sale in SEZ
are allowed just for foreigners, but in FTZ both Iranians and foreigners
can do so.
- Visa regulations
in SEZ are just like the general rules of the country, but in FTZ visa is
given in the borders.
- Labour regulations for hiring foreign workers in FTZs are special for those regions while in SEZs it is according to the country’s laws
As
a rule and as the names suggest, investment facilities in FTZs are more
expanded than SEZs.
Special Economic Zones in Iran
Source: Iran Partner, Supreme Council of Free
Trade and Special Economic Zones
Now,
there are 23 special economic zones throughout the country. However, as we see
in the map, these 23 SEZs are in only 14 provinces of the country among which
Tehran has the highest number. The main advantages of SEZ in Iran are:
- Customs exemption
up to the value added and payments for extra customs of foreign parts used
in the production process
- Importing
necessary machinery for the production line as well as office requirements
free from customs duty
- Offering
construction and completion licenses free of charge
- No time limit for
abandoned goods
- Many other
advantages for each of SEZ locations according to their local legislation
The International North
South Transport Corridor
The International
North-South Transport Corridor (INSTC) is a multi-modal transportation corridor
that was approved in 2000 by the signing of an intergovernmental agreement in
St. Petersburg between India, Russia and Iran. On January 18, 2012, a meeting
of the INSTC member countries to discuss modalities for moving forward on the
INSTC project was held in New Delhi. During this meeting, it was pointed out
that support of countries like Turkmenistan, Uzbekistan, Kyrgyzstan and Turkey
will be sought in order to complete the missing links in the North–South
corridor.
The Bandar Abbas port
and Chabahar port in Iran are the gateways for India into the Central Asian
markets. The Bandar Abbas port is connected via rail to Bandar Anzali (a port
located in Southern Caspian Sea) from which the freight will be shipped to the
Northern end. The northern end of the port will be linked to the Turkmen Kazakh
rail line which will transport the freight in Turkmenistan and Kazakhstan. The
freight destined for Russia would be transported to St. Petersburg, which is
the terminal point of the corridor.
The proposed
international corridor INSTC is expected to slash time for transportation of
cargo to Russia from India to about 30 days, just half of the time presently
taken. It is expected that cargo by this route would reach Russia in about
25-30 days as against the present route through Suez which takes about 45-60
days. In May, India and Tajikistan agreed to enhance connectivity between them
including through the INSTC and other regional transit arrangements to boost
trade. Further, according to the officials working for the INSTC project, it
could also serve as the route for Southeast Asian countries to send their cargo
to Europe instead of the Suez Canal route to cut down on both cost and time.
There is also a likely
possibility of connecting the INSTC with the Ashgabat Agreement Project” of
2011 which is a railroad transit pact established in 2011 between Uzbekistan,
Iran, Turkmenistan and Oman.
The Foreign Trade
Policy of India, 2015-20, has highlighted the importance of the International
North-South Transport Corridor (INSTC) in expanding India’s trade and
investment links with Central Asia.
The importance that
India attaches to INSTC is evident from the fact that India was quick to sign
the Chabahar port project in May 2015 even before the Iranian nuclear deal was
finalized. Although the Government of India signed the deal in 2003, the
international pressure on Iran due to its nuclear program stalled the deal.
However, the deal has got a new push in 2015 with the Indian government
investing $195 million to upgrade the port.
Challenge
A lot of renovation is required in railways to make them more efficient and high speed, since they use the outdated Soviet tech.
Additionally, the rail
system in Eurasia operates on broad gauge (60 inches or 1.520 m) which imposes
at technical challenge. Most of the countries operate on standard gauge which
is (1.435 m). Moving cargo between Iran and Eurasia would involve two-gauge
changes.
The first involves a
switch to the Russian broad gauge. The second involves a switch from the Russian
broad gauge to the European standard gauge. At each gauge change, containers
are transloaded from one train to the other, side by side, in a thru port like
facility. Although containerization enables an efficient transfer of cargo,
this still involves additional costs and delays.
Recently, India has
signed the UNESCAP led TIR convention. This will help to integrate the economy
with global and regional production networks through better connectivity, which
will improve the pace of movement of goods across the continent which earlier
involved a lot of delays due to compliance issues and corruption on the
borders.
India intends to use this an instrument for movement
of goods along the International "North-South" Transport (INSTC)
Corridor, (India, Bhutan, Bangladesh, Nepal) BBIN corridor and Bay of Bengal
Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) corridor
Adopting TIR in
selected UNESCAP (United Nations Economic and Social Commission for Asia and
the Pacific) countries including India will save $ 35 billion in transit costs
over five years
FICCI's Role as NIGA
FICCI has been
appointed by the Central Board of Excise and Customs (CBEC) as National Issuing
& Guaranteeing Association (NIGA) for the operation of TIR system in India.
TIR convention
'TIR' stands for
Transports Internationaux Routiers (International Road Transport) and is an
international harmonized system of Customs control that facilitates trade and
transport while effectively protecting the revenue of each Country through
which goods are carried.
TIR is an
international Customs transit system for goods carried by road which
facilitates international movement of goods across the borders of countries
that have ratified the TIR Convention, while offering a high level of
security. It streamlines procedures at borders, reducing the administrative
burden for customs authorities and for transport and logistics companies. It
cuts border waiting times significantly, saving time and money.
According to a study
in the UNESCAP region, it is estimated that implementing TIR could generate
economic benefits ranging from 0.14 to 1.31 percent of national GDP.
The TIR System has
proved to be extremely successful and is the only global Customs transit
system in existence. It covers the whole of Europe and reaches out to North
Africa and the Middle East. Today, it has 71 contracting parties and 59
operational countries, including India. (India acceded to the TIR convention in
2017)
For further details,
pls see the following video
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Map of UNESCAP led Trans Asian Highway
Although not discussed,
Iran is vital for India due to its strategic geography. It connects to Europe
and Eurasia through its land boundaries. Adhering to US led sanctions on India
restricts India from taking full advantage of its export potential.
Iran and India have
started discussions on bilateral preferential trade agreement (PTA). India is
also engaging with European Union and Eurasian Economic Union in some form of
PTA, the details of which are not disclosed yet. Removal of sanctions on Iran
will help India use Iran, as a bridgehead to increase its footprint in these
countries.
Iran has already signed
Free Trade Agreement with Eurasian Economic Union. Iran is also trying to create
a Persian Gulf – Black Sea Trade Corridor. Indian companies can relocate in Iran
or connect it with their global supply chains to reexport their products in
these markes.
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India EaEU FTA faces
challenges of compliance of Russian standards. Similar, case can be made for India-EU
FTA. Such standards act as non-tariff barriers to trade.
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Ashgabat
agreement
The
Ashgabat agreement is a multimodal transport agreement between the governments
of Kazakhstan, Uzbekistan, Turkmenistan, Iran, Pakistan, India and Oman for
creating an international transport and transit corridor facilitating
transportation of goods between Central Asia and the Persian Gulf. The
agreement came into force in April 2016. Ashgabat in Turkmenistan is the
depository state for the agreement.
The
agreement was originally signed by Iran, Oman, Qatar, Turkmenistan and
Uzbekistan on April 25, 2011. Qatar subsequently withdrew from the agreement in
2013, the same year Kazakhstan applied for membership, which was eventually
approved in 2015. Pakistan has also joined the Agreement from November 2016. India
formally joined in February 2018.
The
objective of this agreement is to enhance connectivity within Eurasian region
and synchronize it with other transport corridors within that region including
the International North–South Transport Corridor (INSTC).
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