The Silk Road to Nowhere

By Alexander Gabuev

It will take years for Russia to increase trade with China. To do so, Russia will need to strengthen its institutions, overcome non-tariff barriers to the Chinese market, and enhance its reputation among Chinese investors.

On May 14–15, 28 heads of state, including Vladimir Putin, attended the Belt and Road Forum for International Cooperation in Beijing, an event that was supposed to showcase the success of Chinese leader Xi Jinping’s Silk Road revival.

It didn’t. 

The joint declaration issued at the conclusion of the forum is rife with platitudes about supporting the common good and opposing evil that were included to assuage fears that China is using the initiative to drag other countries into its sphere of influence. Instead, Beijing came off as disingenuous.

Perhaps most importantly, the Belt and Road Initiative suffers from a lack of performance criteria. Although Xi Jinping did announce five broadly defined areas of cooperation in 2013, Beijing never set any concrete goals. Chinese planners simply shrug off questions about key performance indicators, saying that the Silk Road incorporates too many countries and involves too many variables over which Beijing has no control.

While China’s partners think this uncertainty is problematic, it’s seen as a good thing inside China, including by Xi Jinping himself.  After all, the lack of performance criteria allows the government to declare anything a success.

Beijing isn’t doing anything new with the Belt and Road Initiative. Long before plans to revive the Silk Road were made public, Chinese companies built infrastructure in other countries, ran pipelines and fiber-optic networks across Eurasia, and handed out loans, while Beijing invested billions in enhancing its soft power. It’s not surprising, then, that many of China’s old projects, like the construction of Gwadar Port in Pakistan, which began in 2002, are touted as the Belt and Road’s flagship achievements.

Developing transcontinental routes between Europe and China is in fact the only new and large-scale vector of the Silk Road initiative that Xi Jinping has discussed. Beijing has numerous reasons for devoting resources to this effort, one of which is geopolitical: Chinese military officials want to create land routes for cargo shipments (primarily oil) to bypass the Strait of Malacca in light of the current tensions over the South China Sea.

Other factors are purely economic: EU-China trade volumes are incredibly high, totaling 1.5 billion euros per day. Labor costs are increasing in coastal provinces but still low inland, making it an attractive place for investment. China has been constructing infrastructure in these areas since 2000 as part of the government’s program to develop the country’s western regions.

What’s more, land shipments save time: they take twelve to sixteen days, as opposed to thirty days or more by sea. If China concentrated on working out its land routes to Europe, it would hardly find a faster route than through the Eurasian Customs Union (Russia, Kazakhstan, and Belarus).

Still, actual trade numbers have thus far failed to live up to expectations. For now, overland and maritime transit costs are about equal, but sea transit is expected to again be at least 1.5 times cheaper than land in the future. And at the end of the day, delivery time, which Chinese officials love to talk about when they advertise the Silk Road, is not as important to businesses as the cost of shipping.

In the past three years, projects facilitating transportation links between China and Europe have received much less Chinese investment than many analysts, including this one, expected. This is particularly true in the post-Soviet states. Beijing has thus far failed to act on the list of 40 potential transportation projects prepared by the Russian government and the Eurasian Economic Commission. The Chinese have also slowed down the construction of a high-speed railroad between Moscow and Kazan, insisting that the project be commercially viable, which is rather unlikely.

What changed? Why is China, which once generously invested heavily in dubious construction projects all over the world, calculating its risks more carefully now?

This change has to do with Beijing’s reassessment of bad debt levels in China’s financial system, which began to rise two years ago. The Chinese stock market crashed in the summer of 2015, reducing market capitalization by $4.5 trillion. China managed to avoid a serious financial crisis, but the authorities did launch a comprehensive audit of the country’s entire financial sector, including state banks and leading development institutions like the China Development Bank and the Export-Import Bank, which had been seen as important sources of financing for the Silk Road initiative.

At the same time, Beijing started cleaning up debt pyramids accumulated by local governments, which had reached almost $4 trillion by the end of 2014. Money was borrowed through nontransparent mechanisms used to finance money-losing and superfluous infrastructure projects, which created economic growth, jobs, upward mobility for government officials, and, of course, opportunities for graft. By the end of 2015, it had become clear to Chinese authorities that it would be extremely dangerous to continue down a similar path internationally.

The work of the Silk Road Fund (SRF), with its $40 billion in capital, clearly illustrates this policy change. Created in 2014, the fund was slated to become the main driver of investment in the Silk Road project, but has closed only six deals in the past three years. Instead, Beijing now uses the SRF as a political purse: it is not linked to the global financial system and can therefore finance politically controversial projects. In fact, the Chinese used the SRF to invest in Yamal SPG and Sibur, which are co-owned by the head of the Russia-China Business Council, Gennady Timchenko, a close friend of Putin’s who is on Western sanctions lists. These two politically motivated investments are arguably the only tangible results of Russia’s participation in the Belt and Road Initiative.

This doesn’t mean that Russia should shy away from attracting Chinese investment and increasing trade with China. In 2016, Chinese companies invested over $225 billion overseas, twice as much as in 2014. Just as before, most of this investment went to European, American, and Australian markets, while Russia received only 2 percent of the money. To compete for Chinese money and increase trade with China, Russia will need to improve its investment climate.

It will be particularly difficult to do so now, as Moscow picked all the low-hanging fruit following the annexation of Crimea in 2014. Russia now needs to strengthen its institutions and overcome non-tariff barriers on China’s market (and be ready for stiff competition once it gets there). Russia also needs to enhance its reputation among Chinese investors. It will take years of persistent work to accomplish this—work that is unlikely to bring swift victories or praise for government officials and businessmen. Still, it is the only realistic way forward.

The New Silk Road has led nowhere so far. The idea of a Great Eurasian Partnership (a union of the SCO, EAEU, ASEAN, and even the EU), which Vladimir Putin spoke about in Beijing, is no less futile. It would be a mistake to spend the government’s limited human resources on this pipe dream instead of directing them to specific small-scale projects for Russian and Chinese businesses.
 
 
Carnegie.ru
 
 
05.06.2017
 
 

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