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17 December 2015

From China to Europe without Russia?

On the transcaucasian transit  

In early December, Russian and foreign press published the first mention of a new transport route linking China and Europe which has just come into operation. The partners of the project: Kazakhstan, Azerbaijan, Georgia and Turkey have offered Chinese industrialists express deliveries of goods to the EU by rail in 8-12 days. On December 12, the first train arrived in Tbilisi from Lianyungang: the train cars which had covered approximately 2,500 km across the territory of Kazakhstan were loaded onto a ferry in Aktau, delivered to Baku before continuing their journey to Georgia along the so-called ‘Iron Silk Road’. Obviously, one train does not make a summer. However, every project, even the largest, starts with a small step.

How efficient the new route will turn out to be and how cost-effective transportation along the route is, remains to be seen. Perhaps, it will suffer the fate of a similar project by Deutsche Bahn and Russian Railways which attempted to offer clients relatively swift (within 16 days) transportation of containers from Beijing to Hamburg along the Trans-Siberian Corridor in January 2008; the experiment was discontinued in 2009 due to unprofitability (hardly surprising, given the start of the crisis). It may turn out that the new project proves its viability. However, no matter what its fate will be, certain vital issues should be tackled today.

The most significant issue is that the new project has served as something of a ‘wake-up call’ for Russia. It is a well-known fact that Moscow has long dreamt of turning Russia into a transit corridor between China and Europe. JSC ‘Russian Railways’ officially launched a project aimed at ‘modernization’ of the Trans-Siberian Railway and BAM (the Baikal-Amur Mainline) in 2014, to which 900 billion rubles was earmarked to be spent over the coming years (I guess, the amount will have to be revisited and increased). The objective was to increase the throughput of the entire Trans-Siberian corridor to 115 million tons of cargo a year, of which up to 10% would be transit. However, let me reiterate, the demand for transit was initially low primarily because transport businesses focused on production in the north-eastern and eastern regions of China which have good seaport infrastructure. Moreover, the length of the route – approximately 9,700 km from let’s say Harbin to Berlin - meant that transportation was extremely expensive and was thereby only suitable for certain, specific types of goods shipments.

Aware of the problem, Russian leaders also offered support to another transit project – the ‘Western China-Western Europe’ highway from Xinjiang to Kazakhstan and then via Martuk towards Orenburg and Ulyanovsk to Moscow and Smolensk and on to Poland via Belarus. Officials claimed that this route had a distinct advantage: throughout the entire journey a container crosses only two borders: that of the Customs Union in Khorgos and that of the EU in Terespol (which was supposed to ensure the promptness of deliveries). However, a problem transpired from the very outset: while Kazakhstan has almost finished laying its section of the highway which is almost 2,400 km long (I will not even mention the Chinese), the Russian partners’ activity has been limited to presenting mock-up models of the planned road in Beijing for all these years and has done nothing in terms of work on the ground. Now, according to the most optimistic estimates, the Central Ring Road will be completed in 2020 at the earliest whereas the road running from the Kazakh border will, by all accounts, only be ‘modernized’ (that is, in fact, it will remain in its present shape: unsuitable for large-scale international transit).

In my opinion, the stance of the Russian party is affected by two circumstances:

On the one hand, the President of the People’s Republic of China (PRC) Xi Jinping stated in 2013 in Astana that China intended to create a ‘co-prosperity sphere’ in Central Asia based on the revival of transit routes between the PRC and Europe. This idea, entitled ‘the Silk Road Economic Belt’, received immediate and serious financial support in the form of the Silk Road Fund totaling $40 billion, earmarked for financing infrastructural projects. Apparently, Moscow interpreted these steps as a sign that China could adopt some of the costs of construction of the roads or other infrastructure of the transit project.

On the other hand, the Kremlin was appeased by the groundless assertions of Russian ‘experts’ that transit via the Caspian Sea was impossible. In the meantime, the Kazakh party has already boosted the throughput of the Aktau port to 13 million tons a year and intends to increase it to 22-23 million tons by 2020. In parallel, Georgian transportation engineers completed the construction of a new rail link ‘Akhalkalaki-Kars’ which enables shipments to Turkey last year in accordance with the plan. It may well be that many dozens of millions of tons of cargo will not be shipped annually via the Caspian Sea but that the 10-12 million tons that Russia expected to pass along a stretch of the Trans-Siberian corridor will be highly interceptable.

In other words, Moscow hoped for Chinese co-financing of the project and assumed that there could be no alternative to the route across Russia. As we can see, both elements of this ‘exact calculation’ have turned out to be wrong.

How high is the probability that ‘the southern route’ will herald the end of beautiful dreams about the transit that Russia harbored? I would like to be wrong, but the probability of which is relatively high.

In all likelihood, further development of the project will be unveiled as a part of Sino-Kazakh cooperation from the outset. The development of Xinjiang, whose gross regional product will exceed the GDP of all Central Asian states by 2025,  is vitally important for China. Exports from this region via Chinese ports are not cost-effective due to their far-flung locations (up to 4500 km). Hence, the Central-Asian route will be in high demand. Besides, China is strengthening its links with Kazakhstan (Chinese investment in its economy already exceeds Russian investment 11-fold), and expansion of the transit route ties in with this perfectly well. It is also noteworthy that Kazakhstan is also striving to attract new players to its economy (thus, for example, Russian ‘TransContainer’ is persistently being pushed out of the capital ownership of ‘KedenTransService’ – the leading container operator in Kazakhstan; its place will be taken by Dubai Port World – the most diversified logistics operator in the world, with 60 operating ports and 11 ports under construction in 31 countries making up part of its portfolio). Large global corporations are not interested in meeting the domestic needs of Kazakhstan; they enter the country only in anticipation of huge transit flows. Consequently, neither Beijing nor Astana is willing to change  its plan.

However, China does not limit its ambitions to the Trans-Caspian route. In the case of a complete normalization of Iran’s relations with the West, construction of a railway line from Kazakhstan via Turkmenistan to Iran and then on to Turkey is quite possible. Historically, the PRC has had close relations with Iran, and the latter is now extremely interested in developing international cooperation involving its companies; Turkmenistan, in turn, depends heavily on China as its main customer when it comes to gas. Hence, Beijing will not encounter major problems in its relations with these Caspian bordering countries. Therefore, it can well be expected that the main route of the ‘new Silk Road’ will follow the southern coast of the Caspian sea – just as it was in the old days. These two routes will meet the needs of China fully, in terms of a speedy (8-15 days) transit from the PRC to Europe (the entire length of the route to the countries of Southern Europe will be about 6,500 km, given that the average speed of cargo trains in China is about 1000 km per 24 hrs [in Russia, it is about 250 km per 24 hrs). And any dreams of Trans-Siberian transit (I dare not even mention more exotic options such as the Northern Sea Route) can be forgotten.

However, the prospect of losing the Trans-Siberian or Trans-Central-Asian transit routes is not the highest issue on the agenda for Russia given today’s situation (they do not generate any profit anyway, thereby it doesn’t constitute a disaster). It is much more painful that Moscow’s allies are turning their backs: clearly Kazakhstan and, perhaps, also Iran in the nearest future. Russia is used to paying for its friendship (this is the main ploy used by the Kremlin to ‘domesticate’ Belarus, Armenia or Tajikistan). However, perhaps for the first time, it is facing a situation where partners do not intend to beg Moscow for money but to earn it themselves – at the same time, not asking for anything and wanting for nothing. In many ways, today we are witnessing a rerun of that which happened in the late 2000s in relations between Russia and Turkmenistan: at that time, having blown up the gas pipeline linking the Turkmen gas grid with the Russian one, Moscow wanted to compel Ashgabat to negotiate the sale of gas on new terms. However, as a result, nearly all exports were re-oriented towards China. Today, Russia risks ending up in the same situation simply by boycotting the construction of transportation corridors across its territory. It will not be able to prevent new routes from appearing and the only real result of a ‘big game’ would be the loss of potential allies.

Let me reiterate: I am not sure that the first train that arrives in Tbilisi from China will change the configuration of trade flows in Eurasia. Even if this does transpire, it will take several years, if not decades. However, it is also obvious that by trying to ‘grandstand’ about developmental programs, Russia only irritates partners who strive to do without it, Transcaucasia and Central Asia serving as a case in point…

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