ITC North-West economic zone: the testing ground for coordination between CIS/EAEU/SCO/BRICS

Obviously there is a need for a new multilateral agreement on developing the North-South International Transportation Corridor (MTC): to assure the transition from the objective of the main ITC infrastructure development to the objectives of forming the common trade and industrial space by the participants of such agreement.

The agreement/memorandum itself has the potential of becoming a flagship project demonstrating the possibilities of economic coordination inside SCO and BRICS.

North-South MTC as a trading and economic route

Vladimir Putin, the President of the Russian Federation, in his speech at the BRICS forum defined the Northern Sea Route âand the North-South ITC as flagship routes open for participation of the SCO and BRICS member states. In essence they represent the contribution of Russia to the development of Eurasian and transcontinental shipments of the geopolitical associations of «the majority of the world»: «these continental routes are intended to assure quick and beneficial trading routes, to connect major industrial, agricultural and energy hubs with the consumer markets. The North-South transportation corridor connects Russian ports on the Northern seas and in the Baltic with the terminals on the shores of the Persian Gulf and the Indian Ocean. This is the key for increasing the shipped volumes between the Eurasian and the African continents» [1].

It is a certain paradox that the intergovernmental agreement about creating the North-South MTC was signed in September 2000 by Russia, Iran and India during the Eurasian Transportation Conference in Saint Petersburg. 24 years passed since then, Azerbaijan, Armenia, Belarus, Kazakhstan, Oman and Syria joined this agreement, and in fact over 15 states participate in using this route. However, the legal framework of the agreement has not been updated, there is no coordinating body and no publicly open development strategy for the route. UAE, contrary to Oman, did not sign the North-South ITC agreement; the agreement on the Free Trade Zone (FTZ) with EAEU is still under development. However, despite all these things, the goods turnover between UAE and Russia reached the record-high USD 11 bn.

Based on the outcomes of the BRICS summit in Kazan we can see the scenario, under which the North-South ITC will continue to develop as a transregional project using the tools that the association has. In particular, the New Development Bank intends to further increase the investment into the trunk infrastructure of BRICS: mainly into terminals in the ocean ports. In this sphere the priority investment proposals of the Russian government will be examined by the team of Maxim Oreshkin, the special emissary of the RF President for financial and economic cooperation with the BRICS member states.

These prospects for investment within BRICS is in line with the new Russian strategy of developing the export infrastructure. According to the Federal project «Development of the international export infrastructure», by 2030 13 sites of transportation and logistics infrastructure are expected to be built abroad. 

In connection with this, it makes sense to propose the creation of the pool of investors participating in developing the North-South ITC infrastructure. The previously created Logistics Group in the BRICS Business Council is in charge of setting up the digital coordination platform and the re-insurance pool of BRICS to offer the respective services to the shippers using the North-South ITC.

The North-South ITC can also perform as the testing ground for a number of digital services connected with banks, which do not have relevant interests in the USD zone and make payments either in crypto currency or in national currencies. It makes sense to expand the mechanisms of modern barter schemes and of investing the received currency into the industrial sectors of the countries of origin of such currency (e.g., the option of investing Russian revenues from selling oil to India received in rupees into the Indian shipbuilding sector).

The North-South ITC as an element of the Eurasian transportation framework

The main macroeconomic «ideologists» of the North-South ITC project are infrastructural banks – Eurasian Development Bank (see their report «Eurasian Transportation Framework. Key Conclusions») and VTB performing as the base bank in the shipbuilding sector of the RF and doing strategic analysis of capital expenses within the North-South ITC [2]. The Autonomous Non-Commercial Organization «Transportation Corridors Directorate» (a consulting organization with the RF government) makes significant contribution into uderstanding the outlook of this route.

The need for cooperation in the systemic development of ITC with the partners in SCO and BRICS is highlighted in the reports of EADB and VTB. However, it should be noted that the key industrial capabilities underlying the ITC cargo base is concentrated in the countries of the «Caspian Five» – in fact, this is the core of the North-South project as of today. Nevertheless, SCO and BRICS represent an external contour for the North-South ITC economic zone.

Remember that in 2023 the turnover between Russian and SCO member states grew by almost 25% vs 2022 and reached USD 333 bn; direct Russian investment into SCO member states are now making USD 10.2 bn; and approximately the same amount was received by Russia from the participants of this association. As for BRICS, by the end of Q3 2024 Russian Railways transported 222.7 mln tons, i.e. 7.1% more YoY; the container shipments grew by 14.1%. In this case, the main flow of shipments is formed by Chinese export/import supplies, but also by Belarus, the Central Asian countries, as well as by the South Asian Region (India and Pakistan joined the SCO in June 2017). 

Partnership in developing the North-South ITC economic zone

The idea to establish a conventional partnership for developing the North-South ITC economic zone is based on the logic of transportation, logistical and industrial projects implemented within the SCO and directly affecting the operations within this zone. 

The region of the North-South ITC is a kind of a testing ground. Various services may be tested here: from financial and banking platforms (payments assurance, insurance, currency swaps under contracts) to other numerous issues on the agenda of building new foreign economic gates to Russia.

The Memorandum on establishing the North-South ITC economic zone (probably within the extended Free Trade Area [FTA] of EAEU) will include new infrastructure agreements including the ones about developing electric power grids providing the incentives for bilateral agreements on mutual commodity turnover, for digitalization of shipments; it will be developing a set of specialized incentivizing tools (joint ventures inside the Free Economic Zone), construction of new terminals on the Persian Gulf and on the shores of Africa.

Why was the North-South ITC selected to become the testing ground for new financial and economic instruments of foreign trade activity?

Contrary to other trunk corridors like the Eastern Domain, the Black Sea and the Baltic Sea Russian ports, the North-South ITC may be operating only if clustered with the «neighboring belt» of the Russian Federation.

It is obvious that in future there will be a need for either political and economic association or at least for the economic integration zone along the North-South ITC. Currently this function is to a certain extent performed by the interaction of Iran and the Persian Gulf countries with the EAEU and CIS group by way of bilateral and multilateral formats, such as the FTA EAEU Agreement.

Partnership in developing the North-South ITC economic zone could become the element of such interaction. The logic of forming the North-South ITC partnership (fixed in the form of a Memorandum or an Agreement) is based on the following:

1. The need for at least one macro-economic project, transportation and industrial in this case, as a testing grounds for economic coordination at different levels: CIS/EAEU/SCO/BRICS.

On particular, the North-South ITC region should become the territory of testing the new payment infrastructure solutions. Formation of the North-South ITC economic zone as an additional team for «assembling» Russian partners united, on one hand, by the common economic objective within more far-reaching and flexible structures, such as SCO and BRICS, and on the other hand – by the CIS and EAEU formats, which are closer to Russia. It makes the North-South ITC economic zone will be a specialized unifying hub.

2. Communications within the North-South ITC belong to the key feedstock transportation routes for exporting strategic goods to the feedstock markets of the «majority world»: grain, fertilizers, petrochemical problems, and in future – the mining industry products.

While the new infrastructure sites will be commissioned step by step, the importance of the North-South ITC for supplying (mutual trade flows) within SCO and EAEU will be growing – from current 14-17 mtpa up to 27-30 mtpa by 2028-2030.

Pulse crops may become one of the key commodity groups in ITC. Traditionally, the top-5 importers of Russian grain (wheat, barley, pulses) are the leaders of the North-South ITC economic zone: Turkey, Iran, Saudi Arabia, Egypt, India.

According to the Strategic Partners consulting firm, the shortage of certain food products will remain in India until 2030-2035. The most acute situation is in the edible oils segment. In 2022 the self-sufficiency rate in this segment was 22% and it will reach 40% by 2030. Hence, India is critically dependent on imports. In the agricultural products imported into India the share of edible oils today makes 63%, and the total imports of food make USD 34.4 bn. In 2022 India bought edible oils in the external markets for USD 21.6 bn. The total crops share in the agricultural products imported into India makes 24%. The self-sufficiency rate of India in the pulse crops segment is 91%, and it will remain the same until 2030, which opens the opportunities for Russian exporters.

At the same time, the edible cereals segment remains the most attractive one from the standpoint of export to India. It pertains to quinoa, sorgo, millet and other small grains. According to the forecast, the shortage of this group of products in the Indian market will be only growing, and this is a good chance for all grain manufacturers in the North-South ITC economic zone.

3. Developing the distributed export strategy. The trunk lines within the North-South ITC are the testing grounds for building new foreign trade gates for Russia.

Recent changes to the Federal Law «On industrial policy» (dated 26 October 2024, No.357-FZ) allow for combining the industrial communication tools with the distributed export strategy via external hubs and ports beyond the territory of the Russian Federation. The provisions of the law allow for building warehousing infrastructure and any kind of industrial sites across the entire world [3].

Hence, the legal framework was created for implementing the Federal Program «Development of foreign export infrastructure». Its preliminary budget funding until 2025 is planned at the level of RUB 837.1 mln, in 2026 and 2027 – RUB 1 bn each year. Despite the quite modest funding, these monies may be channeled to the investment projects pool as additional government investment within the public-private partnership. 

If we look at the total provision of funding such sites within the national project «International cooperation and export», we can see a more impressive picture. According to the plans of the RF Ministry of Industry and Trade, the total of RUB 1.07 tln are to be allocated for funding all the programs within the national project until 2030 according to the base (the most ambitious) scenario or RUB 621 bn under the conservative scenario. The most expensive Federal project is «Industrial export»: RUB 331.5 bn under the conservative scenario or RUB 455 bn under the base case. The second most expensive project is «Agricultural export»: RUB 205 bn under the conservative scenario or two times more under the base case (RUB 415 bn). The third Federal project from this standpoint is «Systemic development measures»: RUB 58 bn under the economical option and RUB 100 bn under the base case. And finally, the fourth project is «Development of foreign export infrastructure», the RF Ministry of Industry and Trade proposes to allocate RUB 27 bn under the economical option and RUB 100 bn under the base case. 

The following key areas are planned for investment into the foreign export infrastructure: terminals in the Persian Gulf, «dry ports» (transportation and logistical hubs in Iran); separate projects in UAE, India and Pakistan are also reviewed by government experts.

Interaction with African countries is one of the examples of the distributed export strategy. In particular, there is a serious potential for build-up of Russian projects with Tanzania in such spheres as energy, natural resources, agriculture and pharma. Due to its beneficial geographical location on the Eastern shore of Africa and transportation links with the countries to the South of the Equator, Tanzania could become the single point of entry to the Dark Continent for Russian goods, as well as the continuation of the North-South ITC economic zone [4].

Parameters of the North-South ITC economic zone 

The partnerships (both bilateral and multilateral) formed within the North-South ITC economic zone associated with their functioning and objectives are to a great extent concentrated in the Caspian Region, and at the same time they have the capability of expansion to the Persian Gulf and the Indian Ocean basin.

The RF Chamber of Industry and Trade assessed the turnover between Russia and the «Caspian Five» countries at the level of USD 38 bn. At the same time, the trade flow within the «Caspian Five» economic zone constitutes USD 40 bn.

The turnover between the Caspian countries as the end of 2023 looks as follows:

• Turkmenistan – Iran: USD 2.1 bn;
• Azerbaijan – Turkmenistan: USD 740 mln;
• Kazakhstan – Iran: circa USD 700 mln;
• Azerbaijan – Kazakhstan: USD 529 mln;
• Kazakhstan – Turkmenistan: exceeded USD 500 mln;
• Azerbaijan – Iran: circa USD 400 mln.

Let us analyze how the North-South ITC economic zone looks for Russia and the Union States within the overall macro-economic review. We will take several groups and vectors of integration.

1. Russia – Iran

Interaction along the lines of defence industry sector, the prospects for bringing the main exported goods to the port at the Persian Gulf, the prospects for creating the oil-and-gas hub.

At the end of 2023 the mutual trade turnover reached USD 5 bn. After the new preferential agreement between EAEU and Iran comes into force in January 2025, the trade turnover between Russia and Iran will grow by 27% next year, and by 2030 – by 68% (according to Dmitry Volvach, the Deputy Minister of Economic Development) [5].

2. Russia – Azerbaijan

The Western segment of the North-South ITC, the transportation hub for the inland connection with Turkey and other countries of the region, performing as the sluice for «parallel import», food security resources, reserves for developing petrochemical industry.

The trade turnover between Russia and Azerbaijan in 2023 grew by 17.5% up to USD 4.358 bn. In January-September 2024, it made USD 3.499 bn, which is 11.6% above the same indicator of the last year.

3. Russia – Kazakhstan

Kazakhstan is the flagship economy of the region, the main agricultural producer within the EAEU, the key Russian partner in the oil-and-gas sector in the Caspian Region and in Central Asia, polypropylene producer, and the gate to Central Asia.

At the end of 2023 the trade turnover between Kazakhstan and Russia reached USD 26 bn.

4. Belarus – the South Caucasus – Iran

Cooperation with Azerbaijan in the agricultural sector, the prospects for expanding the potash fertilizers export and nitrogen-based fertilizers production.

In 2023 the trade turnover between Belarus and Azerbaijan exceeded USD 400 mln, with export from Belarus making USD 370 mln growing up to 77% vs 2022. The trade turnover between Iran and Belarus makes USD 130 mln [6].

5. Russia – Turkmenistan

The transportation hub for the Eastern section of the North-South ITC region, additional route for communication with Uzbekistan and Afghanistan.

At the end of 2022 the trade turnover made USD 1.6 bn. During seven months of 2024 it grew by 58% in monetary terms YoY.

6. Russia – Uzbekistan

The key center of attraction for Russian investment in 2020s is the economy with potentially highest consumer market with great development potential. The companies operating in the Russian-Uzbekistan economy zone may use some sections of the North-South ITC (e.g., Turkmenbashi – Astrakhan line). Moreover, the future trans-Afghanistan railway is also in line with the North-South ITC development strategy.

The turnover in 2024 is estimated as USD 12 bn. The expected growth during the period of 2024-2030 is USD 30 bn. 

7. Partnership with the Persian Gulf countries (access to the ports of the Indian Ocean and Africa).

For Russia the base country in the Persian Gulf area is UAE. In the end of 2023, the trade turnover between the two countries was USD 11 bn – the leading position in the group of the Middle East states from the standpoint of trading with the RF. In the context of interaction with the EAEU Russia, the Eurasian Commission and UAE are in the advanced phase of preparing the free trade agreement. In addition to direct UAE investment into Russia (USD 1.6 bn in 2022) and Russian investment into UAE (circa USD 680 mln), we can observe the growing activity of Russian mid-size businesses in the real estate and tourism markets, the informal status of the Emirates as the «Asian London» for Russian financial elites, as well as the availability of training programs (the agreement between the Russia – UAE International Cooperation Center in Moscow and the branch of the gymnasium named after E.M. Primakov in Abu-Dhabi).

All this is developing on top of any integration frameworks, in particular, contrary to Oman, UAE did not sign the Memorandum on the North-South ITC. Nevertheless, this October Russia received the first delivery by a container train from UAE using the Eastern Caspian segment of the North-South corridor. The shipment was delivered jointly by Russian Railways Logistics and DP World.

Thus, UAE is an international hub for the North-South ITC on the opposite shore of the Persian Gulf connected with the key centers of Asia and Africa via marine routes.

Conclusion

Creation of the North-South ITC economic zone can contribute to resolving the issues of interaction between BRICS and SCO in the regional scale. All the required instruments are already on place, and the overall development vector for this project is more or less obvious.

First of all, it is securing investment into the international trunk infrastructure: development of port and warehousing capacities for storing goods in the territory of partner countries and in the long run – creation of the exchange trading system (BRICS grain exchange project); creation of new processing sites, development of various chemical production sites, production and delivery of fertilizers; growth of the agricultural sector and food processing sites.

Secondly, the growth of mutual investment at the strategic and middle levels will provide incentives for structural transformation of the economies of states participating in the North-South ITC economic partnership, will contribute to the expansion of ties and regional integration between the member states, promote comprehensive technological upgrade.

Thirdly, the North-South ITC economic partnership will be another step towards further structurization of the FSU area engaging Russian partners from the «external contour». In future this process will be contributing to the growth of the overall Eurasian influence of Russia.