• 2017 September 29

    Caucasian barriers

    Barriers for cargo transportation in the Caspian region on example of Azerbaijan and Georgia, possible solutions and future prospects.

    During recent years, transit cargo flow through the territory of Georgia significantly decline, up to 50% or more. Oil terminals use of about 1/5th of its throughput capacity. Number of port calls reducing in line with cargo flow reduction. Traders and prime suppliers are not talking about barriers and problems; they find alternative routes, which are cheaper, safer, and faster.

    Which are the main Barriers for cargo transportation and for companies to become regional logistics providers?

    What are Solutions for improving position of companies registered in the region, and changing declining cargo volumes and negative statistics to positive and growing numbers?

    There are following Barriers: tax code, infrastructure, one way tariff preferences, geopolitics & state interests, personal interests, and internal transport rates, which prevent resident company’s, regional transport and corridor efficiency and development:

    But there are Solutions to barriers: changes in taxation, optimization, both way tariff preferences, free transit, IT platform, and review tariffs, which governments and relevant authorities may consider, in order to transform challenges to opportunities. 

    We will review each of barrier, and same time seek possible solution to it:

    Tax Code

    Most of regional shipping, logistics, and trading companies prefer registration in low tax, tax free or offshore jurisdictions. Why? Reason is simple: Tax exemption for international business operations.

    Barrier in Georgia: Companies registered in Georgia, are subject to non-resident tax 10-15% from total cost of service, for the services received from companies registered in countries, with whom Georgia don’t have double taxation avoidance agreement.

    Ship owners in Georgia are subject to Property tax, which is 1% from cost of property. For shipping industry, which is capital-intensive business, such taxes are not acceptable.

    Result: Operating from Georgian company as international logistics provider, or trader, or ship owner and operator is unprofitable and unreasonably expensive.

    Solution to Tax Code: In order to avoid migration of regional service companies, changes in tax code required.

    Some exemptions already exist in Georgia: Free Industrial Zones (Poti, Kutaisi, Tbilisi - Georgia), Free Tourism Zone (Kobuleti - Georgia), Estonian Taxation model (From Jan. 1, 2017 - Georgia).

    Above exemptions are not enough for Service companies, as they need legislation, designated for international business operations of trading, logistics, and shipping segments.

    Georgian tax code, until 2010, was exempting ship owners flying with Georgian flag, from Property tax, but after several amendments, that exemption disappeared.

    One way tariff preferences

    On general tariffs for transportation of cargoes originating from Caspian sea countries (Kazakhstan, Turkmenistan, Azerbaijan) to Georgia - Black sea, discounts are granted, and preferential tariffs considered.

    For transporting cargoes from Black sea Georgian terminals and railway to Caspian sea countries no discounts granted and no preferential tariff scheme exists. Sometimes West to East rates are 3 times higher, than East to West.

    It is difficult to find backhaul cargoes, after cargo delivery from East to West. Probably because of no incentives in force, to attract additional volumes.

    Why do traders prefer to deliver cargo from Black sea to Caspian sea countries through the Volga-don canal by ships, in spite of using terminals and railway through Georgia and Azerbaijan? The question can be another argument that sea freight is cheaper.

    Solutions to One way tariff preferences - Both way preferential tariff for transportation.

    For increasing efficiency, market needs both way preferential tariff for transportation. Most of campaigns and forums, concentrate facilitation of the trade and transport from East to West, from China to Europe, but efficiency requires both way movements.

    Transporting cargoes from Black sea Georgian terminals and railway to Caspian sea countries must be promoted, along with relevant preferential tariffs, and mechanism, in order to attract additional volumes and make our corridors: TITR, Lapis Lazuli, more efficient.


    Is the Caspian ferry connection, bottleneck for TITR and OBOR?

    Caspian ferry (13 vessels), connects Kazakhstan and Turkmenistan, to Azerbaijan, for further transportation of cargoes by rail through Azerbaijan, Georgia, and Turkey to Europe. Annual transportation capacity of Caspian ferries equal 95,000 railway wagons or 4,5 million tons of cargo. In average annual quantity of railway wagons carried presently, amount half of capacity, or sometimes up to 70%. Countries and market players expect huge amount of cargo flows from TITR and OBOR, but remaining free capacity on Caspian ferries today is only about 1 million ton from Kazakhstan and another 1 million ton from Turkmenistan, which includes also neighboring markets and corridors. Unless, new solutions will be developed in Caspian connection. It is also important to consider, that the weather conditions on the Caspian Sea adversely affect the sea traffic and the predictability of transit time.

    Does Georgian terminals lack flexibility to respond market needs?

    Batumi/Kulevi terminal use only about 18-24% of its capacity. Shore tanks in Georgian terminals, are mainly designated for handling Crude oil. However, due to competition of pipelines: such as Atasu-Alashankou (connecting Kazakhstan with China); Makhachkala-Novorossiysk (connecting the terminal on the Caspian Sea from Makhachkala to the Black Sea terminal in Novorossiysk, Russia); the BTC oil pipeline (Baku-Tbilisi-Ceyhan, connecting the Azerbaijan Sangachal terminal from the Caspian Sea, with the terminal in Ceyhan, on the Mediterranean Sea in Turkey); the pipeline from the Neka terminal in Iran (connecting the Caspian terminal and feeding country's northern refineries); the CPC pipeline (the Caspian Pipeline Consortium connecting Kazakh oil fields with the Black Sea terminal in Novorossiysk, Russia); and the possible barriers, the volume of crude oil transportation through Georgian railway and terminals, decreasing every year.

    There are shortage of CPP (clean petroleum products) shore tanks in Georgian terminals for accepting large volumes (aframax tanker parcels of 80-85 thousand tons) of Gasoline, Gasoil, Jet fuel cargoes, as well as shortage of DPP (dirty petroleum products) tanks with heating for handling large volumes (aframax tanker parcels of 80-85 thousand tons) of Fuel oil and Vacuum Gasoil simultaneously.

    Solution to Infrastructure

    Optimization of Caspian connection required, to increase efficiency of ferry connection, in order not to limit throughput of transportation corridors TITR, Lapis Lazuli, and neighboring countries surrounding corridors. Optimization of Georgians terminals required, to respond to market needs.

    Modernization of three major Kazakhstan refineries, will increase volumes and depth of processing, creating excess production of Clean petroleum products (CPP).

    Consequently, it creates need for more clean storages at transshipment locations, for accumulating export volumes for foreign markets.

    Geopolitics & Interests

    BTC (Baku-Tbilisi-Ceyhan) pipeline source oil from Caspian sea countries, and deliver to Turkish Mediterranean port Ceyhan.

    BTC throughput capacity 1,2 million barrel/day equivalent of about 50 million ton per year.

    Presently pipeline is loaded with about 28 million ton per year.

    Main source for BTC is ACG (Azeri-Chirag-Guneshli) field, producing Azeri light Crude oil.

    Production peak was in 2010 about 820 000 b/d, there after have production has stable drop. In 2016 production was about 660 000 b/d.

    Consequently, BTC operators are working to attract additional volumes from other producers in Caspian sea countries: Turkmenistan, Kazakhstan, and Russia, but such efforts to attract volumes should not directly or indirectly influence the alternative route options. Supplier’s choice to deliver Crude oil using Azerbaijani and Georgian railways and terminals must not be limited.

    What does efforts to fill up BTC pipeline, means for Caspian producers, and alternative routes?

    Recently market players start or planning diverting volumes which was previously transported by BTC or Georgian railway and terminals, to alternative routes, as described above, such as Neka, Makhachkala, actively developing CPC pipeline as well with support of Tengiz field and Kashagan production increase in Kazakhstan.

    Solution to Geopolitics & Interests

    Exploration companies in Caspian sea countries must have freedom of choice, of alternative routes (Pipeline or Railway and Terminal) in other words Free Transit.

    Railway transport, enables exploration companies to market its Crude oil with a brand name.

    There are lot of unique brands in Caspian countries, with well known names: Kumkol, Buzachi, Tengiz, Cheleken, Okarem, Kiyanly, and suppliers must have freedom of choice whether they go as blend in pipeline or with a brand name to end users using railway transport and transshipment terminals. On the other hand, certain refineries too should feel comfortable  receiving standard quality and brand Crude oil.

    Personal Interests

    As an emerging international trade and transport hub, competing commercial interests, whether political or private, are increasingly been seen to disadvantage or damage the free flow of goods and services to the detriment of primary suppliers, with profound impact upon the economy.

    In other words, in the region, and corridor, there are certain commercial organizations, which has influence on transit logistics. They have administrative and political power, and often they use it, to support personal interests in certain commodity trades, and for the companies they are associated with. As a result, we see continuous drop of cargo volumes through our corridor, in favor of alternative routes, which has negative impact on service companies, terminals, ports, economy, and overall development of the region.

    Solution to Personal Interests

    Once upon a time in Georgia, it was very difficult to buy a train tickets, book hotel room, or receive public services. Today it is in the past, with internet services and applications development. Georgia became very efficient, providing electronic services to its visitors and citizens.

    Accordingly, transportation industry too, requires development of IT solutions, and only fair and open IT platform development, will enable increase transparency and simplify administrative procedures, for smooth organization of transportation business, which will benefit free flow and trading development throughout the region.

    Fair and open IT platform, must be monitored by independent institutions to prevent possible intervention, and that would then overcome personal interests and preferences, and benefit free flow of goods and services.

    Internal Transport Rates

    Why does companies prefer trucking of oil products, instead of railway transportation for intracountry or cross-country deliveries? Because railway tariff is in average 3 USD per ton higher, compared to transportation by trucks. For cross-country deliveries, railway cost is sometimes two times higher then trucking.

    Solution to Internal Transport

    Shifting of road freight to rail, would have positive impact for: Efficient transport system facilitation for market players; Environmental impact, by achieving GHG emission reduction; Unloading of roads, overloaded by vehicles; Reduce governmental expenditures on road repairs.

    In order to increase attractiveness of rail versus trucks, it is important to Review and lower internal rail transport rates and have other innovative mechanism and marketing campaign promoting rail versus trucks.

    There is another big challenge, such as increasing speed of rail transport, and it goes far away, with deeper needs of capital-intensive projects, which would improve overall efficiency.

    Opportunities of innovative approach and Value added solutions based on FTA’s of Georgia Free Trade Agreement (FTA) involves lifting trade barriers between countries. Georgia has FTA’s or duty free entry agreements with many countries:

    CIS countries: Ukraine, Belorussia, Moldova, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan;

    CIS and Neighbors: Turkey, Azerbaijan and Armenia;

    GSP - Generalized System of Preferences with USA, Canada, and Japan;

    DCFTA – Deep and comprehensive FTA with EU countries and FTA with EFTA countries;

    Peoples Republic of China;

    Future prospects of FTA with India and USA;

    FTA’s of Georgia has to be the backbone for development of value added services through the country, converting into the platform of trade and logistics, developing logistics centers, processing, blending of commodities, and many other solutions for connecting commodities and services between Europe, USA and Asia.


    If no Solutions will be confronted to Barriers, in spite of huge opportunities, Georgia will continue to see diminishing cargo flows, but in the meantime, alternative routes will be developing, and our corridor will transform from potential Hub to Cul-de-sac.

    “Big problem is a big opportunity. If there is no problem, there is no solution, and no reason for a company to exist”

    Jaba Tarimanashvili
    Director of Trans Logistic LLC – Maritime services and Transportation company in Georgia
    Business Administration Doctoral Student at Batumi Shota Rustaveli State University in Georgia