International North-South Transport Corridor

The Political Economics of the International North-South Transport Corridor

For India, the INSTC opens the way for trading with Iran and Central Asia, bypassing Pakistan.

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.

India Must Look to Russia for a Mutually Beneficial Energy Partnership

In order to realise the ambitions of a large-scale energy transition from coal to cleaner natural gas, India must consider importing large quantities of natural gas from Russia.

At his address to the 6th Eastern Economic Forum (EEF) plenary session, Prime Minister Narendra Modi lauded President Vladimir Putin’s vision for the development of the Russian Far East and underlined the natural complementarities of India and Russia in the development of the same. The time has come for India and Russia to significantly enhance infrastructure and joint development plans to boost bilateral trade, especially in the energy sector.

Interesting developments are taking place in global energy markets with significant ramifications for geo-politics and the world economy. The Organisation of the Petroleum Exporting Countries (OPEC) production cuts, fluctuations in world oil prices, economic sanctions, ageing oil and gas fields, insufficient implementation of energy technology and insufficient export capacity in the crude oil pipeline system have affected Russia’s capacity to export oil effortlessly. It is looking to diversify and expand its energy exports to Asian markets.

Just as Russia is actively pursuing a strategic re-direction toward Asia, so, too, should India as geopolitical instability in the Middle East and North Africa (MENA) region threatens to affect its import routes. India has been impacted by the US sanctions against Iran which have now reduced Iranian crude oil exports to almost zero. Growing at the fastest pace in the world, India’s oil demand is projected to reach 10 million barrels per day by 2030 from the current demand 5.05 million barrel per day. For an energy transition in which large volumes of coal consumption are poised to be substituted by cleaner natural gas, India has to start considering large import volumes of the same from Russia.

Also read: As Some States Warn of Power Crisis, Coal Ministry Says Supplies Have Been Sorted Out

With 86.11% of its crude oil being imported, India must explore long-term, reliable and cost-effective options. Russia, being the largest exporter of natural gas and the second largest oil exporter, has the potential to be a reliable and economical alternative supplier. India’s liquid natural gas (LNG) imports are projected to quadruple by 2040. An increase in Russia’s energy production and its ability to export that energy could lend price certainty and supply stability to India’s oil situation.

Graphic: Economic Times

These mutually aligned priorities have resulted in the exploration of a roadmap for Indian investment in infrastructure development projects in the Siberian and Arctic regions. Russia has been the single largest destination for Indian overseas investment in oil and gas projects, with cumulative investment exceeding $30 billion. But two-way trade has languished at just $10-11 billion. This is poised to change with the development of Vostok Oil, whose competitive advantage lies in its proximity to the Northern Sea Route, the arctic transport corridor which is becoming more and more accessible due to climate change.

After reaching its full capacity, the Vostok project is set to produce 50 – 100 million tons of oil per year and Rosneft aims to begin shipping oil from the planned project in 2024 via the Northern Sea Route, an alternative to the Suez Canal which shortens travels to the energy-hungry markets of Asia.

In February, 2020, the state-owned Indian Oil Corporation (IOC) signed a term contract with Rosneft for the supply of two million tonnes per annum of crude oil to India via the port of Novorossiysk (a Russian port on the Black Sea) by the end of 2020. This is the first-ever annual oil purchase deal signed between the two countries. Dharmendra Pradhan, Union minister of petroleum and natural gas as well as steel, described it as an “important milestone”.

During delegation-level talks with Igor Sechin, CEO of Rosneft, Pradhan said, “Hydrocarbon is an important pillar of the Strategic and Privileged Partnership between India and Russia. Indian oil and gas companies value their association with Rosneft, one of the important companies partnering in our energy security objectives.”

Igor Sechin, chairman of Rosneft with Dharmendra Pradhan, minister of petroleum and natural gas. Photo: PTI.

In August this year, while interacting with Russian energy minister Nikolay Shulginov, petroleum minister Hardeep Singh Puri reiterated the need for further investment by Indian companies in Russia’s upstream sector. Energy cooperation would entail strengthening hydrocarbons engagement in terms of both investment and sourcing.

Indian companies have considerable expertise in providing engineering consultancy and executing mega-projects across the hydrocarbon value chain. Russian gas producer Novatek’s agreement with Indian energy firm Petronet LNG Limited is an inimitable case of seizing a reciprocally favourable deal.

For India, importing gas and oil from Russia is imperative if the long-term strategy is to diversify the country’s crude oil supplies from non-OPEC countries, bypass the Strait of Hormuz, stabilise oil prices and provide avenues for other PSU oil refiners to enter into similar contracts for the import of Russian crude oil.

However, China must also be factored into this equation. With the “conspicuous commonalities” of being the largest and third-largest net importers of oil, China and India could consider joint ventures in Russia’s energy sector. China’s competitive technology and India’s huge input and product markets would act as perfect complements for energy engagement. The aggressive nature of China’s strategic culture is likely to be contained by the prospect of a mutually beneficial partnership in Russia.

China is building crude oil pipelines in Pakistan and Myanmar to circumvent the persistent ‘Malacca Dilemma’ but India remains a key factor affecting this plan. It could consider “equivalent exchange”, i.e., allowing an India-Russia crude oil pipeline to pass through China and could even share these pipelines.

The maritime link between Chennai and Vladivostok would enable cargo transfers in 24 days compared to 40 days it currently takes to transport goods from India to Far East Russia via Europe. The International North-South Transport Corridor (INSTC), an overland route which can connect the India-backed Chabahar Port in Iran to Azerbaijan, St. Petersburg and North Europe via Russia, providing India access to Europe and Central Asia, needs to be accelerated in view of developments in Afghanistan.

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

India’s Free Trade Agreement (FTA) with the Eurasian Economic Union – which currently being negotiated – will be hugely impacted by these new routes. With the Northern Sea Route coming into common usage, a vast resource will become more accessible and longer shipping seasons will improve Arctic logistics.

India has displayed interest in the geo-politics of the poles with the launch of its Arctic policy earlier this year. Unlike earlier projects where India had to sell to South Korea or locally, the shorter Arctic Northern Sea Route will provide Delhi with the chance to optimise the pricing of crude oil and logistics costs at any time.

Notwithstanding disapproval limiting resource development in environmentally sensitive regions, national interest and security should steer India and Russia’s Arctic policies. But even environmental pressure groups can be persuaded by highlighting the fact that Russia’s far north Vostok oil fields will be powered by the extensive use of renewables to produce “green barrels” and that India’s energy deal visualises Russian investments in new initiatives for a gas-based economy.

There is a need to intensify and reinforce our traditional friendship, which has witnessed something of a trust deficit of late given India’s growing proximity to the US and Russia’s geo-strategically weighty and economically deep relationship with China. The move to open up alternative sea routes makes economic and strategic sense for both nations and avoids the mistake of leaving Far East Russia entirely to China.

Vaishali Basu Sharma is an analyst on strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat (NSCS) for nearly a decade. She tweets at @basu_vaishali

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

With Afghanistan much less reliant on the INSTC for access to the Indian Ocean due to its decision to participate in PAKAFUZ, India won’t be able to robustly engage with the region.

India might be compelled to recalibrate its strategy if plans for a Pakistan-Afghanistan-Uzbekistan (PAKAFUZ) railway make its International North-South Transport Corridor (INSTC) redundant with respect to its Central Asian outreach efforts.

The South Asian state had hitherto expected to expand its influence into the Eurasian heartland through the project’s terminal port of Chabahar, but New Delhi’s compliance with Washington’s unilateral sanctions regime against Tehran out of fear of so-called “secondary sanctions” was a severe setback.

In the meantime, landlocked Afghanistan was approached with the PAKAFUZ proposal, which it agreed to participate in as it is a much more reliable means for it to access the Indian Ocean and thenceforth the rest of the global economy.

Furthermore, last week’s virtual foreign ministers meeting between the top Chinese, Pakistani, and Afghan diplomats resulted in a joint statement that highlighted Kabul’s connectivity potential through China-Pakistan Economic Corridor (CPEC)’s terminal port of Gwadar. I wrote about the grand strategic consequences of this development against the PAKAFUZ backdrop in my recent analysis for Pakistan’s The Express Tribune about how “The BRI-Backed Afghan-Pakistan Rapprochement Is Reshaping the Region”, which concluded that India’s Central Asian outreach plans might forever be stymied by this move. After all, with Afghanistan much less reliant on the INSTC for access to the Indian Ocean due to its decision to participate in PAKAFUZ (which will essentially function as the northern branch of CPEC that can be described as N-CPEC+), India won’t be able to as robustly engage with the region.

Also read: Why PM Modi’s ‘Dravidi Pranayam’ Failed at Chabahar

That’s not to say that New Delhi should abandon such plans, but just that it must temper its prior expectations and instead accept that it will likely be much less limited in this respect going forward. The INSTC will still serve an important function, but not what it was once thought to have been capable of doing.

This will result in India being less able to “balance” Chinese influence in Central Asia, thereby compelling a further recalibration of its relevant strategy. Instead of concentrating on Central Asia, India would arguably do better devoting much more time, attention, and efforts to expanding its reach across the Afro-Eurasian Rimland of the Indo-Pacific where it has much more opportunities than in the Eurasian Heartland.

Alternative options

For instance, Israel shared its transregional connectivity plans with India back in December 2019 whereby the South Asian state could utilise West Asia as a shortcut to accessing Europe via the Mediterranean. This initiative, which could be described as the “Trans-Arabian Corridor” (TAC), has yet to enter into effect but is nevertheless very promising for India, perhaps even more so than the INSTC.

That’s because the Gulf Kingdoms, first and foremost among them Saudi Arabia via its Vision 2030 socio-economic programme, are reforming the real-sectors of their economies to lessen their historic dependence on energy exports. India has recently cultivated excellent relations with them and Israel, so there are plenty of overlapping interests in this initiative.

Indo-Japanese Asia-Africa Growth Corridor. Photo: Facebook.

India is also keenly interested in expanding its economic influence in East and Southern Africa, not just for simple reasons of geo-economic convenience, but also because of its influential diaspora there. The seemingly forgotten joint Indo-Japanese Asia-Africa Growth Corridor (AAGC) from a few years back could be revived in the post-COVID-19 years if New Delhi focuses more on this part of the world instead of Central Asia after its recent INSTC setback in the latter region. Just like with the TAC, the AAGC would be more of a multilateral initiative that could attract many more stakeholders than the INSTC ever had a chance of doing. Of course, it would take time to find the right economic niches to target considering China’s immense influence there, but it is still doable.

Also read: Is India Finally Getting Serious About Its Connect Central Asia Plans?

The AAGC also plans to include ASEAN in its trans-continental connectivity network, which could even see it working more closely with the Western economies, like the United States, that are already deeply entrenched there. The Greater Mekong Subregion (GMS) would probably become the focal point of Indian outreach activities both because it already figures into New Delhi’s trilateral highway plans across fellow BIMSTEC members Myanmar and Thailand as well as being the site of several promising transport corridors, some of which have seen its strategic Japanese partner playing a leading role in pioneering. While the Central Asian states might be more strategic when it comes to “balancing” China, they lack the economic dividends of ASEAN.

India’s “Act East” vision of more robust engagement with all of its neighbours in that cardinal direction is already proceeding apace with respect to Russia via the Vladivostok-Chennai Maritime Corridor (VCMC) that Prime Minister Modi and President Putin announced during the former’s trip to the Far Eastern Russian city as the latter’s guest of honor for the 2019 Eastern Economic Forum.

The VCMC will naturally traverse through ASEAN’s waters, thereby enabling both to synergise their efforts for more effective economic cooperation there so long as the will is present, which is evidently seems to be. India also has a strategic interest in investing in Russia’s Arctic and Far Eastern regions as a “friendly” way to “balance” China in its own “backyard”.

With these proposals in mind, India’s new economic engagement model is beginning to take shape. It could prospectively consist of the country doubling down on relevant outreaches to its most important Afro-Eurasian Rimland partners in West Asia, East and Southern Africa, ASEAN, and the Arctic/Far East (Russia).

The AAGC might become the platform through which India jointly manages these new opportunities, taking advantage of Japanese capital while simultaneously courting more stakeholders such as the US and other countries that are also interested in economically “balancing” China across this geostrategic space. The INSTC might still play a role in these calculations, but it will likely never fulfill the lofty expectations earlier held of it.

Andrew Korybko, an American Moscow-based political analyst, writes on South Asia.