China’s Influence in Developing Central Asia’s New Silk Road

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By Dezan Shira & Associates

As a New Silk Road project is being developed, new growth opportunities and new challenges are appearing. The competition between China and Russia for influence over the former Soviet republics in Central Asia is increasing, and new economic ties are reconstructing one of the most promising regions in Eurasia.

Situated between Russia, China, and the Middle East, Central Asia has a highly important strategic location. In the past, the land-locked countries of Central Asia suffered by being positioned at the edge of the Soviet Union, bordering China and other geopolitical players such as Iran and the conflict-ridden Afghanistan. Their time might now have come as China wants to diversify its import and export channels.

For Kazakhstan, as the region’s leading economy, China’s diversification strategy has already begun to pay off. The resource rich country increased its oil exports to China in 2013 by about 14 percent, covering about 4 percent of the country’s oil imports. There is potential to increase this further by the end of the decade. Another country to benefit from China’s growing demand for natural resources from different sources is Turkmenistan. The country provided (with minor contributions from Kazakhstan and Uzbekistan) almost 50 percent of China’s natural gas imports in 2013, covering an overall stake of 15 percent of China’s drastically increasing gas consumption.

But the export of natural resources is not the only way in which Central Asia can benefit from China’s ambitious diversification strategy. Since the German railway giant, Deutsche Bahn and the national Russian railway company, RZD, formed their joint-venture in 2008 to provide regular train logistics services between Europe and China, new economic opportunities have emerged for the Central Asian countries.

A faster and cheaper logistics route to Southeast Asian, Middle Eastern, and European markets via reliable or even high speed railway links would enable the land-locked countries of Central Asia to utilize more of their economic potential.

The opportunities for those countries can be divided into three groups: transportation and logistics, exports, and imports.

Transportation and logistics

The easiest way for Central Asian countries to benefit from the so called “One street – one belt strategy” is related to the railway and logistics business itself. On the one hand, the countries may benefit from foreign infrastructure investments, the corresponding construction and maintenance, as well as from fees charged for the use of local infrastructure.

On the other hand, the local economy may benefit from a knowledge transfer and the development of supporting industries. As well as the construction and maintenance industry, there are opportunities involved in the development of the railway industry itself. Even though the Central Asian manufacturing and service industry is not of great significance in Europe and Asia, there are promising examples of the development of such industries, such as the activities of Kazakhstani Railways, the largest employer in the country. Kazakhstan Temir Zholy employs more than 155,000 people, not only in the sphere of logistics and transportation, but increasingly in the manufacturing of locomotives and railcars in one of the world’s most modern factories.

Export

Besides the production of oil and gas, Central Asia offers further opportunities that will become more feasible as local infrastructure is improved. Currently in Kazakhstan, about 60 out of the 110 elements of the periodic table can be extracted, with about another 10 that may become economically feasible for extraction in the future, and various reserves not fully explored.

Enormous reserves have not been touched so far due to a lack of necessity or economic justification to exploit them, as well as a lack of corresponding legislation, which is now being created. In addition, Uzbekistan and Kazakhstan are especially capable of the production of substantial amounts of food at relatively cheap labor costs.

Looking forward, these enormous resources, combined with corresponding investments in the workforce, bear large potential for the local production of intermediate goods and value added goods. Taking into account the current growth of the Eurasian Economic Union (EAEU), Kazakhstan in particular may benefit from better access to intermediate goods from the West and East, which could be assembled locally for export to the EAEU and other neighboring countries as a substitute for products currently assembled in Russia.

Import

Until now, the land-locked nature of Central Asian countries caused the transportation of goods to be rather expensive compared with transport between the coastal production sites of China and the major harbors of Europe or Northern America. With the further development of railway links to those regions, imports into Central Asian countries may become cheaper and faster, which would be beneficial for both consumers and the local economies.

In comparison with Russia, a better transport link between Central Asia and China and an increasing inflow of products from Southeast Asia, seems to bear little threat for the local economy, as the Central Asian production sector is largely underdeveloped. Taking into account the fact that Russia is currently the main importing country, a better connection to the East may result in a healthy diversification of suppliers. Also, market barriers established by the Customs Union may lose their significance due to lower transportation costs.

To summarize, it seems obvious that the better connection of Central Asia with hubs in the East and West bears enormous potential of various kinds if they are accompanied with sustainable and wise investments. Both Western and Eastern partners can benefit from investment in this region, as it will create great opportunities. It should, however, be taken into account that Central Asia is famous for extravagant promises in terms of political will and governmental investment which, in reality, are either never executed or have limited effectiveness. An example of this is the development of the railway and logistics hub of Khorgos on the Kazakhstani-Chinese border.

While on the Chinese side of the border substantial investments were made and administrative changes were implemented to advance developments, the Kazakhstani side has so far failed to do anything similar. Last year in November, The Economist summarized their efforts thus; “For all its promises, Kazakhstan has dumped a few rusty kiosks in the desert.” Nevertheless, the number of containers passing Kazakhstan on their way to Europe increased by 80 percent since the Khorgos link opened in 2012, and representatives of Deutsche Bahn described the transportation through Kazakhstan in the past as “working like clockwork.”

In addition, the finalization of the new railway connection between Kazakhstan, Turkmenistan, and Iran shows that there may well be success stories to come out of Central Asia. The link was finalized in late 2014 and is currently used mainly for transporting wheat from Kazakhstan’s agricultural north to Iran. Nevertheless, the increasing trade between Kazakhstan, Turkmenistan, and Iran bears further potential, as latest figures indicate a strong increase in trade between the two former Soviet States. Further projects are currently under consideration and may also bear potential for foreign investors in the Caspian region.

 

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Silk Road Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, India, Indonesia, Russia & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Asian and Eurasian region. We maintain offices throughout China, South-East Asia, India and Russia. For assistance with OBOR issues or investments into any of the featured countries, please contact us at silkroad@dezshira.com or visit us at www.dezshira.com

 

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