Russia Is In A Unique Position To Either Make Or Break The New Silk Road Investment
IIKSS- Russia is a natural land bridge. The country stretches from the farthest fringes of the east to the brink of the west; it spans across nearly the entirety of the Eurasian landmass, from the Bering Sea to the Baltic. As the New Silk Road begins coming together, with five parallel land and sea corridors linking China with Europe readying for operation, Russia is at a position where it can either be one of the emerging network’s predominant bridges or one of its biggest bottlenecks.
Russia has always maintained a rather inconsistent position when it comes to the development of the New Silk Road and China’s Belt and Road initiative. On the one hand, Russia participates, profiting from customs duties and the additional stimulus of new economic horizons--two of the three operational overland corridors of the Silk Road Economic Belt pass through Russian terrain, often utilizing Russian-run or invested dry ports and logistics zones. On the other hand, Russia maintains policies that run counter to the "win-win" nature of Silk Road development, and have partially resisted China’s plan to lay a network of new economic corridors through Central Asia and Eastern Europe--regions they still perceive as their backyard.
The Russian-led Eurasian Customs Union was actually one of the core developments which cleared the way for what is now the booming “New Silk Road” rail network, which now has 39 lines extending between China and Europe.
China and Russia are working more closely together
“The biggest breakthrough was when Kazakhstan and Russia together with Belarus did sign the Customs Union,” said Ronald Kleijwegt, HP’s director of logistics who quarterbacked the first regular China to Europe rail service in 2012. “Why this was a breakthrough was because originally you had to cross borders between Kazakhstan and Russia, [where] by default there was a 10% physical inspection required. Which means on a container train of 50 containers you'd have five containers for physical inspection, which at the least will take two days or more.”
Russia is currently working out the details with China for a prospective high-speed rail line between Moscow and Beijing that would make it possible to ship passengers and freight between the two capitals in a mere two days.
Russia has even expressed interest in connecting their Trans-Siberian Railway with Gwadar Port in Pakistan via the China-Pakistan Economic Corridor (CPEC), a core component of Beijing’s Belt and Road initiative.
Trade with and investment from China is also on the rise in Russia, as the two countries partner in industries such as aerospace, science, finance and infrastructure development--such as a $15 billion high-speed rail line between Moscow and Kazan.
Ban on EU agricultural products
However, Russia still presents a major bottleneck for New Silk Road development: their reactionary sanctions against most EU agricultural products (along with those from the US, Australia, Canada, and Norway). These sanctions, which were initially issued in 2014 in retaliation for Western sanctions against them over the Ukraine conflict, bans products like French cheese, Dutch veal, Polish apples, all beef, pork, fish, and most dairy products from entering or even transiting through Russian terrain. The biggest problem with this--other than the loss of trade revenue--is that many of the products which are banned by Russia are exactly what would otherwise be shipped by rail from Europe to the booming consumer markets of China.
This barrier to trade has greatly limited the capacity for European companies to fully utilize the emerging overland Silk Road corridors.
The bottleneck moment
“The big problem that we face is that there are still sanctions in Russia to move perishables over from Europe to China or Europe to Kazakhstan through Russia. That's the bottleneck at the moment,” explained Jan Koolen, the CEO of Unit 45, the Dutch company that makes climate-controlled shipping containers that could otherwise carry items such as fresh meat and produce from Europe to China.
The state of the art Khorgos Gateway dry port in Kazakhstan on the Chinese border. Although it cost the Kazakh government upwards of $250 million to build, 80% of cargo from China is being handled in an old terminal to the north because of a pre-standing agreement with Russia.
“We are hoping that in the near future it will be possible that restrictions on exports will diminish and we will be allowed to export our meat, fruit and processed foods to China," said Witold Stepien, the marshal of Lodz region in Poland who was instrumental in developing one of the first China-Europe rail services.
“What we are seeing is a very good response from pharmaceuticals, from the chemical industry, from automotive, from luxury products, as well as perishables, fruits and vegetables, although at this moment they are limited with the Russian embargo,” echoed Kees Kuijken of New Silk Way Logistics.
Pre-embargo, EU food exports to Russia were worth in the ballpark of $13 billion per year and comprised 10% of the EU’s total Russia-bound exports.
“We hope that in the future the sanctions will disappear, and if the sanctions disappear then I think we will have a kind of balanced trade between China and Europe, with a lot of perishables to China and a lot of computers and other stuff from China to Europe,” Koolen posited.
Don't expect sanctions to be rolled back
However, we probably shouldn’t hold our breath. Various media entities continue rolling out stories about how these sanctions have bolstered Russia’s domestic agriculture sector, with exports of farm products now reportedly making more money for the country than the export of arms for the first time in history.
Russia’s reactionary sanctions were initially issued for one year in 2014, but have since been renewed twice--most recently last July, ensuring that they will remain in place at least until the end of 2017.
Because of this, the newly emerging Southern Rail Corridor, which goes across the Caspian Sea and through Azerbaijan, Georgia and Turkey, completely bypassing Russia, is looking more and more attractive to EU agricultural producers and freight forwarders.