Blocks on the Silk Road into Eurasia

Mutual distrust between Russia and China is among the problems plaguing a major project aimed at linking the Eurasian Economic Union with China’s Silk Road. The questionable economic feasibility of certain rail routes along the way is adding to the road blocks.
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Linking the EAEU and SREB is a good opportunity for Russia to gradually integrate into international value chains. Source:Maxim Kashirin / TASS

The first anniversary of the signing of an agreement on a massive Sino-Russian political project - linking the Eurasian Economic Union (EAEU) and the Silk Road Economic Belt (SREB) – was May 8. Although too early to look for results, difficulties that are hampering the project have already become apparent. The main problems are the questionable economic feasibility of some railway routes, and mutual distrust between Russia and China.

Both countries looked like winners at the time of signing the agreement. Russia received a powerful symbol of support from the world's second largest economy during its confrontation with the West; a chance to upgrade its infrastructure with Chinese money and the first international agreement concluded between the EAEU and a country outside the former Soviet Union.

China appeared satisfied with an acceptable formula to stake out spheres of influence between the two major powers in Central Asia. The agreement also gave substance to the SREB initiative, which was then very raw. Beijing also earned goodwill from Moscow at a time when the U.S.-China rivalry was heating up.

However, no project outline within the framework of the existing agreement has been launched. All problems between the linking of the EAEU and the SREB can be divided into objective and subjective ones; the former related mainly to logistics, the latter linked to mistrust between Russia and China.

Objective problem: Logistics

The most favourable option for China is to build corridors to Europe through which a train could pass non-stop in the shortest possible time (seven to ten days). Russia and Kazakhstan, however, want the trains to stop for unloading and reloading of goods as many times as possible so that money comes into the regions through which the SREB runs.

A lot of routes are being worked out within the SREB, but only three are being seriously considered within the framework of the EAEU.

The first and most obvious is the corridor from Western China to Western Europe, from China through Kazakhstan and Russia to Europe, already partly functional. The second is the route along the Trans-Siberian mainline through Russia's Far Eastern border cities of Grodekovo and Zabaikalsk. The third is the Trans-Caspian route without Russia, but with Kazakhstan, a member of the EAEU, as well as Azerbaijan, Georgia, Turkey and Ukraine.

All three routes face many difficulties associated with modernization of infrastructure (in the first case), the railways themselves (in the second), and the need to off-load cargo on to a ferry to cross the seas (in the third). The total cost of transporting one container on the first route from China to Europe works out to $3,900, while on the third, it is $7,950 (according to Aleksander Kava, an advisor to the Ukrainian Minister of Infrastructure). Transporting the same container by sea costs $1,300.

Regardless of the volume of investment, none of these routes is likely to match the profitability of maritime transport, bypassing the EAEU, Timofei Bordachev, the Valdai Club’s Programme Director for Eurasia, said.

“A modern container ship takes around 19,000 containers on board, travels from Shenzhen to Hamburg in 24 days," he said in an interview to Kommersant. By rail, a train takes a maximum of 150 containers and travels in one and a half weeks. The figures are not comparable."

Bordachev said if the main objective of the SREB was an inflow of economic benefits, the project would have no prospects. Clearly, the political aspect is primary.

Subjective problem: Mistrust

The fear that Russian authorities and companies have about Chinese intentions within the SREB is also coming in the way of cooperation.

"The idea of the SREB evoked mixed reactions in Russia from the very beginning,” said Igor Denisov, senior researcher at the Centre for East Asian and Shanghai Cooperation Organization Studies “It looked like an attempt to pull Central Asia away from Russia's orbit."

The peculiarities of Russia's ‘defence consciousness’ have left a strong imprint on the project even without this.

“You care more about security, and we care more about economic benefit,” said Guan Guihai, Associate Dean of the School of International Studies at the Peking University. “We do not always understand your strategy. You need to make it clearer. We must fight the myths that prevent us from developing relations.”

Chinese skepticism about the idea of the EAEU also has a negative impact on the project. According to a source in the international strategic community, Chinese officials say one thing about the Eurasian project at Russian platforms and another at international gatherings.

“Unfortunately, both the U.S. and China do not see anything in the EAEU except Moscow's efforts to keep Central Asia within its orbit of influence,” the source said. “At some events, Chinese experts often say that there is no point in the EAEU. In real politics, they prefer a bilateral dialogue with each of the EAEU countries, instead of dealing with them collectively.”

Russian experts also do not trust the SREB. A Kommersant source in Russian Railways said the entry of Chinese companies into railway infrastructure projects in Russia was very unlikely in the near future.

“The SREB is a project for the enslavement of Central Asia by China and, in the long term, of Russia,” the source said. “The only thing we achieved by signing this 'pairing' is the fact that we pushed ourselves further into the queue for a takeover.”

The source added that the company is not going to ask for money from the Silk Road Fund. “This is a position of principle,” he says. “Not only for us, but also other Russian companies as well.”

The pairing is possible

However, Valdai Club Programme Director Bordachev believes that hesitation and a long decision-making process is normal. “Russia is not a country that will hand strategic assets, including infrastructure, over to foreign control,” he says. “Here, we need to carefully calculate the benefits and the form of participation. It can't be done quickly.”

He believes that the projects are not competitors for each other by their very nature and, therefore, the solution to the problems will eventually be found. “The EAEU is an organization, while the SREB is an initiative,” he said. “They can co-exist in the same area, without competing.”

Linking the EAEU and SREB is a good opportunity for Russia to gradually integrate into international value chains. It would also help to restructure the economy, increase the density of contacts with China necessary for mutual trust, and gradually prepare for competition under 21st century conditions. These will be defined by associations like the U.S.-initiated Trans-Pacific Partnership, Veronika Nikishina, the Eurasian Economic Commission's Minister of Trade, said in March 2016.

“Unfortunately, despite the obvious need for integration into large mega blocs, we often continue to think in conservative terms,” she said. “We need to rethink our approach to participation in the international trading system. What will we be like in 20 years, when these blocs will almost cover the entire world?”

Beijing needs to understand that Russia does not see itself either as a transit country for transportation of goods from China to Europe or as a place to dump dirty industries, from which northern China is literally suffocating. A compromise would be to create joint ventures to upgrade Russian infrastructure and those of other EAEU countries, as well as the construction of railroads, with final stops in the centres of Russia and Kazakhstan.

“This format would make sense from a commercial point of view, too,” says Alexei Bezborodov. “It will always be cheaper and better to transport goods to Europe by sea, but it is quite possible to deliver them by train to the Urals and the European part of Russia.” Such an option does not preclude the creation of transit-only routes, but they are not a good bet.

“It seems reasonable that the pairing between the EAEU and the SREB should go along two tracks,” Stanislav Voskresensky, Russia’s Deputy Economy Minister told Kommersant. “Firstly, it is the conclusion of a trade agreement with China that also involves SCO [Shanghai Cooperation Organization] members. Secondly, it promotes joint projects in infrastructure and areas that Russia sees as its strength in value chains – IT and high-tech sectors."

This in an abridged version of an article, first published by Kommersant in Russian.

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