Russia’s role in the New Silk Road: Opportunities and challenges

Since China announced its Belt and Road Initiative, dubbed “the New Silk Road,” in 2013, 70 countries have already joined. It encompasses the construction of a giant transportation system, including railways and highways, sea and air communications, power lines and pipelines. These projects have the potential to become an engine of economic development for many Russian cities. Political scientist Mikhail Magid spoke with Strelka Magazine about how the New Silk Road is developing and why it is important for Russia to maintain its place along it.

40% OF THE PLANET’S GDP

Globalization, which has long been discussed, is now an integral part of reality. Individual countries are becoming nodes in a single trade, financial, industrial, and informational system. A lot of modern products, whether industrial or agricultural, are being assembled more and more like LEGOs. For example, crops grown on Russian soil from foreign seeds are harvested using equipment purchased from the European Union by workers from former Soviet republics. In such conditions, the central challenge becomes one of communication and logistics, and whichever country is able to build optimal transportation routes to new markets receives an advantage.

On October 30, an important part of the route opened; the Baku-Tbilisi-Kars transportation corridor (BTK) is at the heart of the emerging Eurasian market, which covers 65 percent of the population, 75 percent of energy resources and 40 percent of the planet’s GDP. China in the east; Turkey and Europe in the west; Russia in the north; and Iran, the Middle East and India in the south.

In total, the New Silk Road is expected to create a single giant market with a population of over 4 billion people.

The International Monetary Fund (IMF) fully appreciates the importance of the New Silk Road for the global economy. Analysts believe that the scope of foreign investment from China alone in these infrastructure projects could reach $1 trillion over the next 10 years. So far, there are 70 countries included in the initiative, but this number could grow to 100.

BATTLE AGAINST DISTANCES

There is another fundamental reason for the New Silk Road project. Improvements in production processes and communication devices bring increased challenges for the transportation industry. People are finding it easier to work online from the comfort of their own homes. Continued development in robotics is expected to bring production closer to the consumer, as cheaper and more efficient robots will make it less profitable to import products from outside of the country.

In addition, super-cities are being formed. The economic life of whole countries is concentrated within these urban areas, while large swathes of territory are being abandoned. Swedish economist Kjell Nordström goes so far as to argue that we are now witnessing the birth of multi-metropolitan corporations instead of multinational corporations.

In such conditions, the survival of the transportation industry is reliant on the creation of a denser, more user-friendly communication system that is capable of delivering the desired goods as quickly as possible and as cheaply as possible to the right destinations.

The transportation industry, however, is struggling to find its place in the sun, as the New Silk Road is expected to reduce the time of transporting goods from China to Europe from 30 days to 12-16.

CHINA’S TURN

Globalization does not mean that nations and national interests are going to disappear, at least not any time in the foreseeable future. But national interests are being transformed. Governments, worried about slowed economic growth, are making efforts to ensure more efficiency and modernization in their economies.

Over the past 30 years, China has built its development largely due to its maritime communications system with the United States. Americans have exported a significant part of their industry to China, as the labor force was dozens of times cheaper than in the US. So, once they began producing goods for American markets, China was able to dramatically increase their profits. After this, even more Chinese companies oriented themselves to American markets or worked as subcontractors for American companies.

However, in recent years, this model has begun to fail. The average salary in China is growing steadily and has already exceeded $600 per month. This, along with cheaper fuel prices in the US and Trump’s anti-Chinese rhetoric, may lead to a re-industrialization process in America. Some businesses have already returned home.

Although China's huge domestic market remains attractive for investment, Chinese economic growth is slowing down.

Therefore, the Chinese are looking for new opportunities for development and are pinning their hopes on the New Silk Road. First, there are hundreds of thousands of new jobs surrounding the construction of new railways. Secondly, these new routes are expected to help increase the export of high-tech equipment and other Chinese products.

THE MARITIME SILK ROAD

On top of building railways, China is attempting to radically transform the shipping industry. The concept of the Maritime Silk Road (MSR) would complete the New Silk Road. China, according to Russian researcher Irina Komissina, has already built large modern ports in a number of friendly countries: Gwadar in Pakistan, Hambantota in Sri Lanka, Chittagong in Bangladesh, and Kyaukphyu in Myanmar, with plans for the construction of even more.

One of the primary goals is to redirect the flow of capital and goods to regions that have not yet fully developed their connection to global trade, for instance countries in Africa. The MSR’s mission is to link the Chinese economy with such regions. In addition, the plan includes new connections between Asia’s various subregions – the Middle East, the Indian Subcontinent, and Southeast Asia – which will form a united trading system aided by a strong shipping network. In sum, the transportation systems over land and sea are intended to complement each other.

SKEPTICAL VOICES

Against the background of nearly universal optimism, there are still some skeptical voices to be heard. The transportation communication systems built by China and its partners may not fully justify the expectations they carry with them. For example, the BTK railway line was fully financed by Azerbaijan and Turkey, in spite of the World Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development refusing to support the project, which they found to be unprofitable.

Russian sinologist Alexander Gabuev writes about the markdown of the New Silk Road’s value. In his view, there are almost no exports to Europe from China’s western regions, as the major export-oriented industrial centers are concentrated on the east coast of China. Therefore, goods are cheaper to ship by sea. And most importantly, China itself does not have a clear vision of the New Silk Road. Gabuev argues that all the maps describing the "Chinese vision" of the route are informal by nature, and the state media is strongly advised against publishing maps with specific transport corridors.

‘THE NORTHERN HIGHWAY’

While there are some disputes, China and the other interested countries continue to move forward on the project.

Economist Andrey Movchan has written that since Russia is located between the Asia-Pacific region (APR) and Europe, more than $1 trillion could flow along a potential trade route, bringing an annual growth rate of 4-5 percent. Assuming that Russia would be able to secure just half of the commodity flow between the APR and Europe after constructing an effective "northern silk road," and that the gross transit revenue will be 7 percent of circulation, then gross revenue from this business would exceed Gazprom's foreign revenue.

At the same time, the transportation infrastructure will work for domestic needs, creating many jobs and attracting a significant number of foreign workers and visitors each year, which would ensure the growth and development of the regions along the road. In principle, Russia could receive up to $50 billion a year from this industry.

The New Silk Road would help transform Russia into the world's largest trade route through which goods and capital would flow from west to east and from east to west. This, in turn, could bring more modern technology to Russia.

However, there are some foreign policy obstacles between the Russian Federation and its partners. Observers point out that the attractiveness of the BTK, which is already an established section of the New Silk Road, may result in the transportation corridor bypassing Russia completely. This helps businesses avoid sanctions on the import and transit of many EU goods. And so, European/American sanctions and Russian counter-forces have become the bottleneck of the New Silk Road.

Text: Mikhail Magid
Translation: Maxwell Koopsen
Photo: Istockphoto.com