China, the new Silk Road and the EU’s eastern neighbourhood

05 Jul 18

By Michal Makocki, Senior Associate Analyst, European Union Institute for Security Studies

Introduction

China’s regional approach to the EU’s neighbourhood is shaped by its flagship Belt and Road Initiative. Reviving the image of the ancient Silk Road, through this massive infrastructure project Beijing aims to re-connect Europe and Asia and to link China to markets in Europe and beyond. This has inevitably attracted the attention of countries in Eastern Europe and the South Caucasus, which in ancient times contained key transit and trading posts before the land routes were gradually superseded by maritime routes which proved faster and more economical. China-backed overland routes boost expectations among these countries of tangible benefits such as new infrastructure construction, transit fees, modernisation of the trade sector, improved connectivity with China’s booming market and ultimately enhanced geopolitical significance. Chinese engagement is also welcomed as it helps diversify Eastern Partnership (EaP) countries’ trade relations beyond their traditional markets, in particular the Russian market. Or so the Chinese slogan promises. Too often Chinese plans lack concrete details: doubts over their implementation, feasibility and viability abound. And most importantly, China’s official slogans focus on economic benefits but gloss over the geopolitical reality of the new routes which may potentially alter the balance of power in the region. This chapter firstly describes the implications of China’s Belt and Road project for the EU neighbourhood, then goes on to examine the region’s responses to the initiative and, finally, attempts to gauge the geopolitical consequences of the project, with a focus on Russia and the EU.

Reactions in the region

Belarus has acquired (together with Russia and Kazakhstan) a pivotal role for the Chinese corridors. Proximity to the European market gives Belarus an edge in attracting Chinese investments, sought not only because of their economic value but also because they offer a coveted source of diversification from the dominant economic partnership with Russia. China has invested in the creation of the Great Stone China-Belarus Industrial Park, which is supposed to support joint production and logistics hubs. Few companies have actually made use of the park so far, but direct connections to Shenzhen (China’s innovation hotspot on the border with Hong Kong) may change that.

Ukraine’s geographical position rivals that of Belarus but the conflict with Russia means that China has adopted a cautious attitude towards the country. Ukraine offers the shortest route between China and Europe (through Kazakhstan, Rostov and Donbass) but due to continued hostilities in Donbass as well as Russia’s transit ban, China has until recently suspended sending its cargo through Ukraine to Slovakia and further on to Europe. The conflict between Ukraine and Russia has also derailed other potential investments from China. Before the annexation of Crimea China was planning to build a deep-sea port in Crimea, a plan which was obviously forestalled by Russia’s annexation of the peninsula. Currently other Ukrainian Black Sea ports are being discussed as alternatives for Chinese investments but without any concrete results at this stage.

Ukraine’s signature of a Deep and Comprehensive Free Trade Area (DCFTA) agreement with the EU offers significant opportunities for cooperation with other countries, including China, but until the conflict subsides and Russia lifts its transit ban there is little scope for increased cooperation with China. Ukraine’s key objective in its engagement with the Chinese Silk Road initiative will be to find an alternative supply route which would circumvent Russia. A trial train project was launched immediately after the imposition of the Russian transit ban to transport Ukrainian cargo to China via the Trans-Caspian corridor but it never became fully operational. In terms of infrastructure investments, Ukraine’s upgrading needs are substantial but so far the experience with Chinese projects has been discouraging. A Chinese loan for the construction of a high-speed rail link between central Kyiv and Boryspil airport has been linked with corruption under the Yanukovych administration and had to be renegotiated.

Azerbaijan is being forced by low commodity prices to diversify its economy beyond its traditional reliance on hydrocarbon exports and welcomes the opportunities offered by the Chinese project. Infrastructural improvements in the port of Baku have taken place, helping establish regular connections with Kazakhstan’s Caspian port of Aktau. With the recent opening of the Baku-Tbilisi-Kars (BTK) railway, the corridor will be able to rely on a connection from the Azeri Caspian coast through Georgia and Turkey to the European railway network. However, expectations of significant cargo flows from China have to be assessed against their business rationale. The Trans-Caspian corridor is more expensive than other Chinese routes as it involves a number of points where cargo has to be shifted from trains to vessels or vice versa, thereby increasing the overall costs. It is also interesting to note that Azerbaijan has suddenly acquired importance on the crossroads not only of East-West but also North-South routes, as it is primed to be a transit point along the so called North-South Transport Corridor linking Russia with Iranian ports (however, substantial investments are still necessary on the Iranian portion of the railway, to be financed with Azeri loans). Whether any of these corridors brings Baku benefits beyond not-so-substantial transit fees, will depend solely on Azerbaijan as it firstly needs to build its industrial base virtually from scratch. Chinese investments and the outsourcing of Chinese overcapacity may indeed facilitate this.

Georgia has quickly grasped the potential offered by trade diversification and signed a free trade agreement with China. Together with the DCFTA with the EU, it offers an attractive regulatory package for Chinese investors looking for facilitated access to the EU market. It is also working to improve logistical connections with both of its trading partners. In particular the above-mentioned Baku-Tbilisi-Kars railway link and new port on the Black Sea coast in Anaklia (built by a Georgian-American consortium) will be pivotal.

Moldova and Armenia seem to have been largely left behind by the Chinese initiative. China Shipping Group has launched container services in Giurgiulesti, the only Moldovan port on the Danube. But other than that Moldova does not present much interest to China in terms of the BRI. Similarly, connections through Armenia do not seem to offer much added value for China.

Eastern promises…

The Belt and Road project holds two major promises for the EaP countries. First, expanded trade relations with the world’s second-biggest economy will lead to trade diversification. Many countries in the region suffer from tense relations with Russia, which leverages its trade policies for political purposes. Moscow has for example imposed a transit ban on Ukrainian goods. In 2006, at a time of deteriorating relations with Moldova and Georgia, it banned imports of wine from both countries. It may also suspend trade benefits attached to the Commonwealth of Independent States’ Free Trade Area (CIS FTA) or use sanitary and phytosanitary rules to impede access to its market, even for members of the Eurasian Economic Union (EAEU). From this perspective, the Chinese market offers significant potential for diversification. However, while growing in importance, China’s share of the region’s trade remains small (for example, in 2016 Ukraine’s trade with China amounted to €5 billion or 8% of Ukraine’s total trade). The significance of the Chinese market may change with the improved transport connections. Geopolitically, the Trans-Caspian route in particular offers a way to circumvent Russia, thwarting any future attempts by Moscow to use the transit ban against any of the EaP countries.

The second promise of the Belt and Road initiative is that of increased investments in infrastructure. However, Chinese investments may not be a silver bullet for EaP countries’ infrastructure deficit. China’s model of infrastructure deals is less attractive than that of the EU, which involves grants rather than loans, especially under the Neighbourhood Investment Facility.

…and challenges

The initiative also presents certain challenges. The EaP countries will need to make sure they do not serve as mere transit points but rather are able to use the new corridors to increase their market share in China. For the time being, the fastest growing market will be the EU, with China possibly trailing even behind the US and Turkey. This will justify prioritisation of scarce domestic resources for infrastructure connections with Europe rather than China. Also it is important to remember that customs and trade facilitation often brings faster and much cheaper improvements in logistical efficiency than costly infrastructure investments. On another note, improved connections with China will increase imports and, hence, competition among domestic producers. If such competition compels them to move up the value chain, so much the better, but it might trigger economic dislocation.

Chinese pragmatism is double-edged. While China helps Ukraine circumvent Russian transit bans, Chinese companies have shown interest in building a bridge between annexed Crimea and the Russian mainland. Chinese investments in separatist territories in the region may further fuel conflicts. Beijing’s own rapprochement with Moscow may limit China’s potential to play a positive role in the neighbourhood. For example, Russia forced China to formally acknowledge Russia’s role in the post-Soviet space and agree to consider the ‘interests of Russia during the formulation and implementation of Silk Road projects’. China has already demonstrated that it will respect Russia’s perceived sphere of influence and displayed reluctance to invite interested countries such as Ukraine and Moldova to join the so-called 16+1 platform for cooperation between China and the EU.

For the EU, the Chinese initiative is also a double-edged sword. Firstly, China may aim to tap into Caspian energy resources and compete with the EU for access to them. Chinese energy companies have been cooperating with Turkmenistan to develop offshore gas deposits and have built a network of pipelines from the region to China. Secondly, the Chinese project may bring economic growth and help build the region’s resilience. But that will only happen if Chinese projects are placed on a sustainable footing, do not undermine EU reforms and do not facilitate corruption.

Conclusion

It remains to be seen if China’s ambitious project will bring the benefits to the region that Beijing has often promised. Transit countries enjoy little value added. Fear of dependence on Russia drives many countries to welcome connections to China’s market. But multiple corridors will mean that ultimately it will be China who will maintain the geopolitical leverage thanks to the ability to switch between them whenever conditions so dictate. Also China’s growing economic presence, coupled with skilful diplomacy, may eventually herald mounting political influence in the region. This would add a new layer of complexity to an already complicated political landscape.

This article was originally published as a chapter in Chaillot Paper No. 144, “Third powers in Europe’s east” (EUISS, March 2018), and is reproduced here with the permission of the Institute. Please click to read the full article.

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