Opening Up the Siberian Silk Road from Moscow to Beijing

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By Dezan Shira & Associates

The traditional Silk Road scholars tend not to take much notice of Siberia when it comes to the impact it had on trade. However, Chinese merchants often headed north, across the Gobi (there is an ancient monastery and temple at Erdenedalai at the edge of the northern Gobi in Mongolia where merchants used to pray for a safe journey or give thanks for surviving one), heading towards Urga (now Ulaan Baatar) to trade tea and other consumables for Siberian furs.

In fact, today there is still considerable trade with both Mongolia and Siberian Russia. Mongolia is well known for having extensive mineral reserves, including coal and iron ore, and China has been a huge customer over the years – the coal for its energy needs and the iron ore to make steel and help sustain its construction boom. Although in more recent times the Chinese economy has slowed, when it picks up, the Mongolian mines will be busy once again. Much of this trade is carried out via the Trans-Mongolian Railway, which runs from Beijing up to Ulaan Baatar and then re-joins the Trans-Siberian Railway at Ulan-Ude.

The Chinese city of Manzhouli, in far north Inner Mongolia, sits on the Chinese border with both Mongolia and Russia and is an interesting case study. Manzhouli is located on the lesser known Trans-Manchurian Railway, which connects through to Harbin and joins the Trans-Siberian Railway at Chita. Manzhouli is home to China’s only timber commodities exchange, where one can purchase futures in various woods. Huge wood processing factories are dotted about, mainly Chinese and Japanese invested. The rolling stock leaves Manzhouli empty and returns several times a day loaded with massive Siberian pines. If any place was a symbol of the problem of a sparsely populated Siberia rubbing up next to the hundreds of millions of Chinese labor, it is Manzhouli.

Siberia as part of the Silk Road Economic Belt may well be a relatively new concept, but it is one both the Chinese and the Russians take very seriously, and during these decades of global warming, may open up areas of Siberia to mining exploration, settlement, and agriculture. China is also connected to Siberia via a highway that runs from Urumqi to Novosibirsk.

The main issues concerning Siberia are typically regarded as being the inhospitable climate and sparse population. However, the density of population in Siberia and the Far North East is 2.3 pers./sq. km, which is not dissimilar to Australia (2.8 pers./sq. km), Canada (3.5 pers./sq. km), and is nearly five times the population of Alaska (0.5 pers./sq.km). As we have seen in other countries, improving technologies are permitting access to more inhospitable areas, and it is interesting to note that heating costs in Siberia are equivalent to air-conditioning costs in San Francisco. Human resources is however a huge development inhibiting factor, as is wealth. Due to necessity, HR and investment into Siberia have been concentrated in the larger cities. Yet, what is not so well appreciated is that some of these cities, according to rankings issued annually by the Russian “Finance” magazine, regularly place in Russia’s “Wealthiest” Top Ten. In 2013, six cities located east of the Urals (Tyumen, Novokuznetsk, Krasnoyarsk, Kemerovo, Novosibirsk, and Irkutsk) were ranked.

This means that despite a previous brain drain of talent leeching away to Moscow or elsewhere, intellect is starting to return, together with migrant workers from other parts of Russia and Central Asia. In short, Siberia can offer some skilled and increasing amounts of unskilled labour. It is also true that China would be able to provide contracted labor for future projects, as well as technical expertise. There would certainly be a motivation to do so. Siberia and the Russian Far East are extremely rich in natural resources. They account for 10 percent of the world’s explored oil, about 25 percent natural gas, 12 percent of coal, 9 percent of gold, 7 percent of platinum, 9 percent lead, 5 percent iron ore, up to 14 percent molybdenum, and up to 21 percent of nickel. Also, the regions possess large reserves of shale energy, 16 percent of the world’s fresh water (excluding groundwater), about 21 percent of the world’s forests, as well as 22 percent of Russia’s viable arable land, much of it now fallow and unused since the collapse of the Soviet Union. Finally, the marine bio-resources of the Russian Far East are one of the richest in the world – Kamchatka is already essentially a brand name for excellence in sea food.

Siberia’s immediate destiny, however, is likely to be connected to energy. It should also be noted that with the opening up each summer of the Northern Arctic Sea Route, which allows Chinese vessels a far shorter route from Arctic drilling back to its east coast refineries, equipment can now be relatively easily shipped to northern Siberia to be used in onshore exploration. With Russia able to satisfy both the European and Asian markets desire for oil and gas, development of Siberian fields can be expected to occur sooner rather than later.

Yet the energy resources of Siberia are not just restricted to fossil fuels. Russia produces 4.5 percent of the world’s hydropower, and its hydropower reserves (9 percent of the global index) are second only to China. As much as 80 percent of Russian electricity generation is concentrated in Siberia and the Russian Far East. The hydropower usage from Siberia is only 20 percent of its potential, and in the Far East (with only three hydroelectric power plants operating) just 4 percent.

The hydropower plants concentrated in the South of Siberia and the Far East may later serve as the nucleus for the development of an energy-intensive industries cluster, from aluminum smelters to centers of storing and processing information (relevant units of the leading IT companies like Google or Facebook consume huge amounts of electricity).

These resources may well spur Siberia on to become an important player in the Asia-Pacific region, bordering as it does the United States, with Canada and the entire West coast of the US within relatively close proximity. The ancient Silk Road spur that lead up into Siberia bought back furs. The inclusion of Siberia as part of the Silk Road Economic Belt can be expected to bring back rather more.

The development of Siberia by China, however, is raising concerns in Russia. A recent proposed deal to lease 285,000 acres of land in the Trans-Baikal region of Eastern Siberia for 49 years for a fee of US$ 448 million has raised eyebrows. The Chinese agricultural company Huae Sinban has made the proposal, and intends to use the land for agricultural purposes, including dealing with the intense cold, yet sunny winter months by using hi-tech solar powered greenhouses. Should the agreement go ahead – it was expected to be signed in 2016 – concerns have been raised about what happens after the 49 year lease expires. Would the Chinese just continue to possess the land? These are very real concerns in Russia, where Siberia remains under-populated. Answers could be in the insistence that Chinese workers learn Russian and that educational facilities for children born in the region are also conducted in Russian, and not Chinese. That would breed a new generation of Siberians. Whether or not the proposed deal includes the Russian infrastructure needed to ensure Chinese migrants essentially become Siberian Russians is a key political issue.

The reality is that China’s population is sufficient enough for it to place several cities of 5 million populations across Siberia to redevelop the land, extract resources, or generate food. This is especially pertinent as we enter a period of global warming and Siberia itself becomes easier as a territory to work in. However, the key to this development, desirable or not, remains the wariness that Russia has over any longer term potential China may harbor in walking in and refusing to leave. The lessons learned over China’s possession of Tibet are close to the surface in Siberia. Such fears will need to be overcome for the region to realize anything other than sporadic potential anytime soon.

 

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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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