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The Political Economics of the International North-South Transport Corridor

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For India, the INSTC opens the way for trading with Iran and Central Asia, bypassing Pakistan.
International North-South Transport Corridor. Photo: Twitter/@I30mki

On June 11, two 40-foot containers of wood laminate sheets departed from St. Petersburg on a journey to India. Travelling from the Astrakhan Port in southern Russia to the Iranian ports of Anzali on the Caspian sea and Bandar Abbas on the Persian Gulf, the consignment will reach the west coast of India, docking either at Nhava Sheva or Mundra port. If there are no major impediments, the consignment should reach India by the first week of July.

The test consignment from Russia, commencing trade on the International North South Transport Corridor (INSTC) route, has generated plenty of enthusiasm in government circles. Aside from the fact that this North-South route saves nearly two weeks of travel time, the positioning of the INSTC as an alternative to the traditional deep sea Suez Canal route is the focus of geostrategic and economic diplomacy, primarily for India, Russia and Iran. 

The legal basis for the INSTC multi-modal network of ship, rail, and road for moving freight was provided by India, Russia and Iran at the Euro-Asian Conference on Transport in St. Petersburg on September 12, 2000. Other members include Turkey, Oman, Syria, Belarus and Ukraine; the Central Asian nations of Tajikistan, Kyrgyzstan, Kazakhstan; and Caucasus nations Armenia and Azerbaijan.

Pakistan, Turkmenistan and Afghanistan are not party to the INSTC agreement but are interested in using the transport corridor. 

For years, policy makers and academics have lamented the delays in making the INSTC operational. The realisation of the trade potential of East Europe, the Persian Gulf and India began to be actively pursued only after the formation of the Eurasian Economic Union (EAEU) free trade agreement (FTA) in 2015, led by Russia.

For the EAEU, the transport corridor has special significance both as an important alternative economic development corridor and as a response to the economic and political influence of the European Union (EU). Countries along the  North–South axis have been keen to interact with the EAEU, beginning in May, 2018 with the signing of an FTA with Iran. A similar FTA is being negotiated between the EAEU and India.

The requirement for an alternative logistics route was starkly felt during the COVID-19 pandemic and the subsequent supply chain disruptions. In March, 2021 the Ever Given container ship was stuck in the Suez Canal, virtually halting cargo traffic between the Red and Mediterranean Seas. And now, as the conflict in Ukraine has intensified, there is more competition between the EAEU and the EU over the economic integration of Eastern Europe.

Also read: Ever Given: The Physics of Big Ships Clogging the Suez Canal

The current test consignment is moving along the Western and TransCaspian route of the INSTC, along the ports of Baku and Bandar-e Anzali, reaching Bandar Abbas overland and thereafter crossing the Gulf of Oman and the Arabian Sea. There were previous dry runs on the 7,200-km-long INSTC route in 2014, 2016 and 2021, all of which confirm the average time using either the road section, from Bandar Abbas to Baku; or the Caspian sea route, from Bandar Abbas to Amirabad to Astrakhan, would take an average of 18 days.

In terms of cost, a study conducted by the ‘Federation of Freight Forwarders’ Associations in India (FFFAI) found the route is “30% cheaper and 40% shorter than the current traditional route.”

India’s interest in the development of the INSTC is manifested by its $2.1 billion investments, including the construction of the port of Chabahar in Iran and the construction of a 500 km Chabahar-Zahedan railway line. Chabahar is now capable of processing ultra-large container ships.

For India, the INSTC opens the way for trading with Iran and Central Asia, bypassing Pakistan. This, naturally, has implications in terms of reaching out to both Afghanistan and Central Asia, significant corners in our extended neighbourhood. The corridor will also provide access to potential markets in the wider Eurasia region. 

Nhava Sheva port in Navi Mumbai. Photo: A.Savin/Wikimedia Commons, FAL

Obstructions on the route

At present, there are many hindrances in terms of the optimal operationalisation of the route. Iran and Russia, key INSTC countries for the purposes of expansion of international freight traffic, are facing US economic sanctions. This creates difficulties for Moscow to make major investments in infrastructure projects in other INSTC member states; and for other member states to invest in Iran.

Although Indian investments in Chabahar do not attract US sanctions, private investors remain wary of dealing with Iran and secondary sanctions that apply to third-country businesses involved in joint projects with Iranian companies. Although the shipping lines between Iran and India are unlikely to be interfered with by Washington, which itself is trying to resurrect the Iran nuclear deal and wishes to see India as a counterweight to Chinese expansionism, the effect of sanctions on the INSTC may be significant.

Also read: Why India Can’t Bank on the International North-South Transport Corridor

There are issues with clearances and completing construction of transport infrastructure facilities, among others. Even though Armenia is a party to it, the 2020 conflict in Nagorno-Karabakh prevented its access to international markets through INSTC infrastructure.

There are more objective difficulties faced by the INSTC in its progressive development. Foremost are the unfinished railway sections in Iran and Armenia, the two key states undertaking the bulk of overland freight. Different customs regimes, high harbour duty rates charged by the Caspian ports, the absence of the relevant legal framework agreements on international road transport, and most importantly, the absence of a single multimodal operator all prevent the merger of the various international transport sections into a single logistical mechanism, and gaining a competitive edge over other transport corridors. 

Future pathways

Compared to China’s Belt and Road Initiative (BRI), the INSTC is still in its nascent stages of operationalisation. Nevertheless, it offers a geostrategic counter to the sprawling network of the ‘New Silk Road’. Having that as a strategic option, there is, on the other hand, a sound foundation for cooperation between the China-Central Asia-West Asia Economic Corridor and for the INSTC to become a larger transport and logistic hub.

There has been quiet and steady expansion of transit and multimodal corridors in the Caspian region. The corridor can be extended up to the Baltic, Nordic and Arctic regions. 

Once the initial glitches are sorted out, there is likely to be a huge trade expansion in INSTC freight traffic, estimated at 14.6-24.7 million tonnes per year. By 2030, incremental freight traffic between them and the countries of South Asia and the Persian Gulf may amount to 245,000–501,000 TEU (4.4–9.0 million tonnes), or about 75% of total potential container traffic.

Again, this depends on how transport infrastructure is improved and how far digitisation of the international corridor is achieved. 

Given the recent upheavals in international trade logistics, the pursuance of the INSTC assumes special significance; for India in terms of exploring diversification of energy import destinations; for Iran as the main transit hub on the North-South and East-West corridors; and for Russia taking the lead in Eurasian trade and connectivity. 

Vaishali Basu Sharma is an analyst on strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat for nearly a decade.

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