China Moves West with a Russian Bear: A New Look at the Belt & Road Initiative (PART I)

30 April 2020

The Chinese government’s initiative to revive the “Silk Road” – called the Belt & Road Initiative – claims to be the largest and most expensive infrastructure project in world history. Its creation will have financial and geopolitical consequences for the global economy, including Ukraine. This brief analyzes, in part, the concomitant risks associated with China's infrastructure projects with a focus on the Russian Federation’s interest in this process.

China Moves West with a Russian Bear: A New Look at the Belt & Road Initiative (PART I) | ARC.UA
China Moves West with a Russian Bear: A New Look at the Belt & Road Initiative (PART I) | ARC.UA

Background.

In 2013, Chinese leader Xi Jinping announced plans to re-establish the historic Silk Road. In Ukraine, this initiative is called “One belt, one road” (based on its Russian name), while in the rest of the world, it is known as the Belt and Road Initiative, or BRI for short.

This initiative is essentially a wide-scale infrastructure project, or a large number of projects to be precise. This infrastructural leviathan does not have a precise map, but an approximate one can be found here.[1]

It is supposed to include railways and roads to Europe via Central Asia, the Middle East, Caucasus and Near East. There are also overland routes through India and Pakistan to ports along the Indian Ocean. In addition, there are plans to construct port infrastructures for the Maritime Silk Road that will run from Indochina to India, on to Africa, and then through the Suez Canal to Europe.

Officially, China says that the reason for building the BRI is to deepen economic ties between the countries of Eurasia within the framework of developing a globalized world, where goods, capital and people can move freely across the enormous expanse of the landmass. Experts estimate that, taken together, the projects will cost between $1-4 trillion.[2] However, it is obvious that BRI is more than an enormous economic project, it is geopolitical and geostrategic in nature, because only half of the projects have non-Chinese investments and only 6% of investments are coming from private (non-governmental) sources.[3]

Economic expediency.

China is devoting enormous resources to creating a BRI lobby in Europe and Central Asia, thus assessments of the program’s economic expediency range from enthusiasm about the billions of dollars to be made to the more sober observation that such expansive infrastructure projects are not actually necessary.

For example, in 2016, within the framework of the BRI, a train made the journey from Illichivsk (now called Chornomorsk, outside Odesa) to China. The train crossed the Black Sea, and then the Caspian Sea, by ferry. The train arrived at the border with China and stopped there, because there was nothing to actually load onto the train.[4] Thus, the “infrastructure solution” was a grand failure. It did not take into consideration the actual needs of business. The infrastructure project was launched for the sake of launching an infrastructure project.

China’s export-oriented economy depends on international markets. The USA remains its primary market with 1/5 of all exports. Hong Kong is, formally speaking, China’s second largest trading partner with 12% of Chinese exports. Europe is also a very important market. Individually, European countries are not significant destinations for Chinese exports. For example, Germany, Europe’s largest economy only receives 3% of China’s exports.[5]

But taken together, the countries that form the EU market account for the same volume of exports as the US. In 2019, the Europeans imported goods worth $419 billion from China, while the value of Chinese exports to the USA was only slightly lower at $416 billion. This small difference in 2019 was due to a trade war between the USA and China; in 2018 the American market imported significantly more ($480 billion) than the EU ($411 billion).[6]

Chinese exports to the USA, EU and Central Asia (Sources: World Integrated Trade Solution and International Monetary Fund )[7]

Periodic tensions in its relations with the USA make China dependent on the openness of American markets. The trade war between the USA and China started by Trump in 2018 resulted in the USA slapping an additional 15% tax on goods from China. The Chinese Communist Party responded with tariffs ranging from 5% to 25% on goods from the USA.[8] Although Beijing and Washington reached an agreement to end the trade war in January, new flare ups remain possible.[9]

China’s alternative is to expand its economic activity with Europe. However, up to 90% of China’s exports travel along maritime routes. Specifically, all of its trade with Africa, Near East and Europe goes through the Malacca Strait.[10] Up to 100,000 ships a year travel through this narrow oceanic gate, representing about a quarter of all global trade.[11] Together with the Strait of Hormuz, it is the primary route for oil deliveries. If the strait were to be blocked by the Americans, China would immediately lose access to its two largest markets. That is why it is important for China to diversify the delivery of its goods to Europe.

The alternative to maritime routes is by railway, and that is already partially functioning, through Kazakhstan, Russia, Belarus and Poland to Germany. The railway route has the advantage of speed, as it takes between 15 and 19 days for goods to reach Europe, while the maritime route takes between 33 and 38 days. The railway route, however, is more expensive and its volumes are significantly lower than by sea. A train can deliver from 50 (typically) to 200 containers. By sea, between 9,000 and 19,000 containers can be delivered on a single ship. And transport by rail costs at least twice as much as by sea.[12] The railway’s only advantage is speed, but this does not matter because most of the exports are non-perishable electronic and automotive parts.

Another serious challenge to the railway route is the climate. In the winter, the temperature drops to minus 50 degrees Celsius on some segments of the railway journey and this prevents the shipping of sensitive electronics.[13] China is trying to overcome this by investing in heated train cars (investing $100 million into train cars with diesel heating and temperature control).[14]

One example of the economic expediency of shipping over land to Europe is China’s trade activities with Hewlett-Packard (НР), transporting parts via rail from Chongqing to Duisburg.[15] There is no transport by rail, however, between November and March, because of cold temperatures. In addition, the central government subsidizes rail deliveries to HP from Chongqing. This city and the provincial governments in Chengdu (Sichuan province), Wuhan (Hubei province), and Zhengzhou (Henan province) are all involved in BRI and are competing for government subsidies to create this infrastructure.[16]

Another significant drawback for rail transport between China and Europe are insufficient loads from Europe. While the trains deliver goods from China to Europe, they return to China underfilled, or they are sent across the Black Sea, which also lowers the cost effectiveness of rail transport. This reality is a result of the disbalance in trade between Europe and China. In 2016, Europe imported $190 billion more in goods than it exported. According to some estimates, 60-70% of containers travel to the west while only 30-40% of containers travel to the east. Regardless, trade disbalance is a feature of the global economy." According to global shipping giant Maersk, up to $1 billion is spent on transporting empty containers. China subsidizes container delivery in the amount of $1,000 to $5,000 per container, which represents about half of its value. According to one study, Chinese subsidies amounted to $7,000 per container in 2014.[17]

Perhaps BRI’s only economic advantage is access to Central Asian resources. The poor countries in this region are suffering from an investment famine, while the Chinese economy is very hungry for minerals and hydrocarbons. In 2016, China surpassed the USA to become the world’s largest importer of raw oil by volume. In 2019, they imported a record 506 million tonnes.[18] Thus it comes as no surprise that China invested $27.6 billion into 55 projects in Kazakhstan, half of which went into oil and gas extraction. Here, both sides have direct economic interests, so infrastructural solutions make sense.[19]

Infrastructure as the primary driver of economic growth.

It is highly likely that the Chinese Communist Party views infrastructure as its economy’s life buoy.[20] During the global economic crisis of 1998, the Chinese government decided to invest in infrastructure, a traditional measure in macroeconomic theory. And in the late 1990s, it paid off: not only did China’s economy continue to grow, but that growth even accelerated.

The Chinese economy is currently experiencing some slow down, and it appears the government pulled out its old economic strategy to overcome the crises it’s facing.[21] However, according to economists from Oxford, China’s infrastructural solutions in the form of enormous projects are not cost effective and serve only to increase sovereign debt.[22] According to their prognoses, this will lead first to a crisis inside the country and then to a worldwide recession. Indeed, China recently became the birthplace of a new economic crisis, not because of gigantic railway and road building projects, but due to the spread of the coronavirus epidemic.[23]

Geopolitics.

The BRI has a clear geopolitical or geostrategic calling that overrides its ambiguous economic role. China is expanding its influence westward to Central Asia. It’s doing so using finances and a soft power strategy.

Along with Chinese investments into Central Asia and the Caucasus, the Chinese are extending their cultural influence by opening Confucius Institutes to promote Chinese language, culture and history abroad.[24] China wants to foster loyalty to itself among local elites. Promoting geopolitical projects and doing business is easier with people who speak the same language and are familiar with your culture. The Chinese do, however, encounter problems along the way.

Firstly, there is a tradition of Sinophobia in Central Asia that is a leftover from Soviet times. For example, agreements between Kazakhstan’s president Kassym‑Jomart Tokayev and Beijing were met with domestic resistance in the form of protests against the construction of Chinese industrial enterprises.[25] Local Sinophobia is further bolstered because Chinese mistreat minorities living in the Xinjiang Uyghur Autonomous Region (in addition to Uyghurs, there are Kazakhs, Kyrgyz people and Tajiks living there).

Secondly, the Chinese language is difficult to learn, and the money spent on trying to teach it is thrown to the wind as students are unable to complete the courses. And the youth there prefer to pursue a Western education if it is available. So China has to share influence in the region with Russia. Russia is traditionally dominant here in terms of military presence, and, in some of the countries, ethnic Russians comprise a large part of the population.

Local ruling elites, however, often see China as a counterbalance to Russia, and try to maneuver between the two behemoths. The other player in the region is the USA, which recently adopted a new “United States Strategy for Central Asia 2019-2025”. The Americans, however, have less influence than Russia and China do in the region, and it is unclear what impact the resources spent on building democracy in Central Asia will actually have. The local regimes have duplicated democratic structures, but their rule is far from democratic. This disconnect between legal forms and actual realities lead to tensions whenever governmental rule changes hands.

In 2005 and 2010, there were coups in the Kyrgyz Republic. A civil war raged in Tajikistan from 1992 to 1997. Purges occurred in Turkmenistan and Uzbekistan when governmental rule changed hands in 2007 and 2016 respectively. There has been no development of political parties in the countries of Central Asia over the course of the last 20 years. Instead, these states have a “one-and-a-half party system,” wherein the ruling political force is supplemented by a party that claims to be in opposition. Russia and China both understand the local realities very well, so their respective influence is aimed at the local elites.

Roads to the West will ensure a path to the East.

China needs trade routes into Europe that are not controlled by the USA. The fact that up to 90% of Chinese exports to Europe are shipped through the Malacca Strait has already been mentioned. If the strait is closed to Chinese traffic, and if China loses the American market, this will lead to a contraction of 40% of its export-oriented economy. That is why China is prepared to build a railway across mountain ranges to seaports in Pakistan and India. If China ensures it has alternate routes to deliver its goods to Europe, it can strengthen its military presence in the East China Sea and South China Sea. China, just like Russia, is using its current technological leap to build weapons capable of inflicting great harm to the USA. While it is unlikely China will win, or even dominate in a military conflict with the USA, China can try to create a significant buffer zone of influence.

Russian interests.

The BRI partially undermines Russian interests in Central Asia and the Caucasus in China’s favour. Russian experts have noted China’s growing economic presence in the region, but Moscow is unprepared to challenge China because of the Western sanctions in place.[26] It is also noteworthy that Putin needs China’s market for the export of hydrocarbons. In 2018, Russia delivered 71.5 million tons of oil to China, a 19.7 % year-over-year increase, and Russia became the number one country exporting to China.[27]

In addition, huge railway infrastructure projects have attracted foreign investment, including from Europe. Russian railways are exempt from sanctions, and this lets Siemens stay in Russia’s market.[28] Siemens is the primary supplier of rolling stock for high speed rail projects.

Siemens’ Russian operations have been involved in two scandals. In the more recent of the two, Siemens sold turbines to Russia that ended up in Crimea. The company was not held responsible, because it had sold the turbines to a company in the Russian city of Taman and their agreement included a provision prohibiting the turbines use in Crimea.[29] But the Russian company went bankrupt and its assets were sold at auction.

In 2009, Siemens was at the center of another scandal in Russia, when the World Bank alleged that Siemens had paid Russian officials $3 million in bribes.[30] Years later, this fact cast doubt that Siemens did not know where its turbines would be used. That the Russian railways are ripe for foreign investment is a message that is being repeated by Ulf Schneider (СЕО of Nestlé), who leads an eponymous consulting company working to attract investments to the Russian market.[31]

China’s BRI creates a single economic space in Eurasia. This goes hand in hand with Russian initiatives to create a single economic space from Lisbon to Vladivostok, a plan that was partially realized in 2014 with the creation of a Eurasian Economic Union. The EAEU and the BRI formally share a common ideological platform. Both initiatives aim to create a single economic zone wherein goods, capital and workforces can move freely. Currently, Russia and China are open to compromise and respect each other’s geopolitical interests. It is unlikely, however, that this will remain the case in the long term, as both states are vying to strengthen their influence in Central Asia. For now, it appears that Moscow and Beijing are content to use one another, each with a view of becoming number one in the future.

Brief developed by: Oleksandr Kiryukov, Oleh Magdych, Stanislav Hreshchyshyn, Stephen Bandera, Diana Rusnak, Ivanna Pavliuk

References:

[1] Thomas S. Eder. Mapping the Belt and Road initiative: this is where we stand. [The Mercator Institute for China Studies (MERICS)]
[https://bit.ly/2ypQFwv]

[2] Belt & Road: Manage risks with new opportunities [Refinitiv]
[https://refini.tv/34U0f70]

[3] Belt & Road: Manage risks with new opportunities [Refinitiv]
[https://refini.tv/34U0f70]

[4] Новий Шовковий шлях: карта руху першого рейсу поїзда Україна-Китай. (оновлюється) [Міністерство інфраструктури України]
[https://bit.ly/2XMnvlL];
Український поїзд "Шовкового шляху" застряг у Китаї: немає замовлень. [Економічна правда]
[https://bit.ly/2VJChXS]

[5] China Exports By Country and Region 2018 [The World Integrated Trade Solution (WITS)]
[https://bit.ly/3boW2uo]

[6] Exports and Imports by Areas and Countries – IMF Data [International Monetary Fund]
[https://bit.ly/3brlwqQ]

[7] China Exports By Country and Region 2018 [The World Integrated Trade Solution (WITS)]
[https://bit.ly/3boW2uo];
Exports and Imports by Areas and Countries – IMF Data [International Monetary Fund]
[https://bit.ly/3brlwqQ]

[8] A quick guide to the US-China trade war [BBC Business]
[https://bbc.in/3anl77x]

[9] Тарас Качка. Новий виклик для України: що означає припинення торгової війни США та Китаю [Європейська правда]
[https://bit.ly/3bmex2E]

[10] Mei Xinyu.China should focus on benefits of ‘One Road’. [Global Times]
[https://bit.ly/2S0bRA5]

[11] Krishnadev Calamur.High Traffic, High Risk in the Strait of Malacca [The Atlantic]
[https://bit.ly/3aiFvGY];
Tomas Hirst. The world’s most important trade route? [World Economic Forum]
[https://bit.ly/2RRQOPT]

[12] Mei Xinyu.China should focus on benefits of ‘One Road’. [Global Times]
[https://bit.ly/2S0bRA5]

[13] Jing Yang. Silk Road subsidies undermine rail link [South China Morning Post]
[https://bit.ly/3ezz45I]

[14] Jing Yang. Silk Road subsidies undermine rail link [South China Morning Post]
[https://bit.ly/3ezz45I]

[15] Jing Yang. Silk Road subsidies undermine rail link [South China Morning Post]
[https://bit.ly/3ezz45I]

[16] Jing Yang. Silk Road subsidies undermine rail link [South China Morning Post]
[https://bit.ly/3ezz45I]

[17] Jonathan E. Hillman. The Rise of China-Europe Railways [Center for Strategic and International Studies CSIS]
[https://bit.ly/2XRfc8j]

[18] Carla Sertin. China loses its appetite: The impact of coronavirus [Oil and gas]
[https://bit.ly/3cs3jK2]

[19] Natalia Konarzewska. Kazakhstan's President Visits China Amid Troubles at Home [The Central Asia-Caucasus Analyst]
[https://bit.ly/2wU1wOD]

[20] Atif Ansar, Bent Flyvbjerg, Alexander Budzier, Daniel Lunn. Does infrastructure investment lead to economic growth or economic fragility? Evidence from China. Oxford Review of Economic Policy, Volume 32, Issue 3, AUTUMN 2016, Pages 360–390. [Oxford Review of Economic Policy]
[https://bit.ly/34Wuavk]

[21] David Ho,Elise Mak. As China's economy slows, the poor take the brunt [AL JAZEERA]
[https://bit.ly/2KjEZxJ];
Keith Bradsher. China’s Economic Growth Hits 27-Year Low as Trade War Stings [The New York Times]
[https://nyti.ms/2VIP8JW]

[22] Atif Ansar, Bent Flyvbjerg, Alexander Budzier, Daniel Lunn. Does infrastructure investment lead to economic growth or economic fragility? Evidence from China.Oxford Review of Economic Policy, Volume 32, Issue 3, AUTUMN 2016, Pages 360–390. [Oxford Review of Economic Policy]
[https://bit.ly/34Wuavk]

[23] Atif Ansar, Bent Flyvbjerg, Alexander Budzier, Daniel Lunn. Does infrastructure investment lead to economic growth or economic fragility? Evidence from China. Oxford Review of Economic Policy, Volume 32, Issue 3, AUTUMN 2016, Pages 360–390. [Oxford Review of Economic Policy]
[https://bit.ly/34Wuav]

[24] Nurlan Aliyev. China's Soft Power in the South Caucasus [The Central Asia-Caucasus Analyst]
[https://bit.ly/34UanfV];
Nurlan Aliyev. China's Soft Power in Central Asia [The Central Asia-Caucasus Analyst]
[https://bit.ly/2KogOhI]

[25] Natalia Konarzewska. Kazakhstan's President Visits China Amid Troubles at Home [The Central Asia-Caucasus Analyst]
[https://bit.ly/2wU1wOD]

[26] Nurlan Aliyev. China-Russia Security Cooperation in Central Asia [The Central Asia-Caucasus Analyst]
[https://bit.ly/3bs121k]

[27] Meng Meng, Chen Aizhu, Tom Daly, Joseph Radford. Russia seals position as top crude oil supplier to China, holds off Saudi Arabia [Reurters]
[https://reut.rs/2Km7hb9]

[28] Jing Yang. Silk Road subsidies undermine rail link [South China Morning Post]
[https://bit.ly/3ezz45I];
Gleb Stolyarov, Joern Poltz, Gabrielle Tétrault-Farber, Polina Devitt,Edmund Blair. Russian Railways keeps plan to order extra trains from Siemens: TASS [Reurters]
[https://reut.rs/2S1kQ42]

[29] Наталя Кокоріна. Як турбіни німецької компанії Siemens завезли до Криму в обхід санкцій [Громадське Телебачення]
[https://bit.ly/3boOs2Y]

[30] Vanessa Fuhrmans. Siemens Settles With World Bank on Bribes.[The Wall Street Journal]
[https://on.wsj.com/2xRGPDr]

[31] Jing Yang. Silk Road subsidies undermine rail link [South China Morning Post]
[https://bit.ly/3ezz45I];
SCHNEIDER GROUP – website.
[https://bit.ly/2VLPy29]