China And Central Asia: Trade And The New Silk Road Economic Belt

Via the Carnegie Endowment, an interesting look at China’s growing influence in Central Asia:

China has come to displace both the United States and Russia as the great power with the most influence in Central Asia. Chinese President Xi Jinping just ran a ten-day victory lap through the region. Rarely has a leader of a major power accomplished so much in such a short time.

Xi’s trip included state visits to four countries, an appearance at the Shanghai Cooperation Organization (SCO) summit in Bishkek, and a stop in Moscow for the G20 meeting and bilateral talks with Russian President Vladimir Putin. The economic potential of the joint projects that were inaugurated, the bilateral and strategic partnerships that were signed, and the themes underscored in Xi’s major addresses testify to China’s importance in the region. By adopting policies that avoided the formal or even informal invoking of a “Great Game,” China is emerging as the big winner, with successful engagement on its terms and only in issue areas relating to its direct national security.

This does not mean that either Russia or the United States has been fully displaced. But Beijing’s strategy of developing investment projects that both sides find genuinely beneficial, and avoiding all discussions of domestic political affairs, has made it an increasingly more attractive foreign partner.

Different Approaches

China’s leaders seek to win over their Central Asian counterparts by demonstrating respect, offering generous trade and loan terms, and taking a hands-off approach to domestic issues. What Central Asian leaders find most appealing about this approach is that in contrast to Russia, China doesn’t bind them into restrictive trade policies or seek to influence political outcomes from behind the scenes. China’s way stands out from that of the United States as well. Unlike Washington, Beijing doesn’t press Central Asian leaders to agree to a timetable and agenda for internal reforms.

The differences in approach are clear on the ground. No U.S. president has ever traveled to Central Asia. The last U.S. vice president to visit the region was Al Gore, who went to Kazakhstan in 1993, during the administration of Bill Clinton. Trips to the region by U.S. secretaries of state have been few and far between.

By contrast, in 1994 the then Chinese prime minister, Li Peng, took a tour of the region, and Jiang Zemin was the first Chinese president to travel to Central Asia, in 1996. Hu Jintao went as well. Most famously, Hu visited Turkmenistan in December 2009 to inaugurate a gas pipeline to China by opening a valve, an event in which the presidents of Kazakhstan, Uzbekistan, and Turkmenistan also participated.

The absence of high-level U.S. visits is not the result of distance—U.S. President Barack Obama has traveled to Afghanistan, which is roughly an hour’s flight away from most Central Asian capitals. It is not because senior U.S. policymakers are simply too busy; as one Central Asian diplomat pointedly said to me, “it’s not like the president of China isn’t also a busy man.”

U.S. leaders don’t travel to the region because they are loath to “reward” the heads of these nondemocratic countries, especially because it would involve tangling with outspoken critics in Congress.

A Focus on Energy

Despite the distance, U.S. policymakers and their EU counterparts have long pressed for multiple pipelines to move Central Asian gas to European markets. Yet, it is China that made the Central Asian states’ goal of market diversification a reality. Beijing funded the construction of a pipeline system across Turkmenistan, Uzbekistan, and Kazakhstan that would supply China’s energy needs.

While in Turkmenistan, Xi joined Turkmen President Gurbanguly Berdymukhammedov in pushing the button to start operations at the second-largest gas field in production in the world, Galkynysh (formerly known as South Yolotan). The project, led by the Chinese National Petroleum Company (CNPC), is the first of such size to be developed without a “major” international oil company in the consortium, and there was a lot of initial skepticism in the oil industry that the CNPC group would not be able to successfully develop the field.

Turkmenistan now exports more gas to China than it sells to Russia’s energy giant, Gazprom. The quantity is slated to go from 20 to 25 billion cubic meters (bcm) of gas in the near term and to reach 65 bcm by 2020. This latter figure is roughly what Turkmenistan used to export via Russia.

Some of this gas will be carried in a new pipeline, the construction of which is slated to begin in 2016. Simply labeled route “D,” it will move gas through Uzbekistan into Kyrgyzstan and on to China. This will provide Kyrgyzstan with access to Turkmen gas, making the country less dependent upon higher-priced gas from long-term supplier Uzbekistan, and it could put China in a position to help bring about improvement in Kyrgyzstan’s relations with Uzbekistan,. It could also transform Gazprom’s role in the transportation of this energy source. The Russian company took over Kyrgyzstan’s gas network in July with the promise of insuring that Bishkek has a stable and affordable supply.

While in Kazakhstan, Xi shored up another energy deal. President Nursultan Nazarbayev and Xi formally agreed to the CNPC’s purchase of an 8.33 percent share of the giant Kashagan oil field, previously owned by ConocoPhillips. Kazakhstan exercised its rights of preemption to prevent the international consortium that holds the license to develop the field from selling that share to the Indian National Oil Company. The two leaders also inaugurated a new gas pipeline linking Kazakhstan’s southwest and southeast, helping gasify the southern part of the country. The Beineu-Bozoi pipeline, originally supposed to come on line in 2014, will begin sending gas to China in 2015.

Energy featured in Xi’s visit to Russia as well. The CNPC bought a 20 percent stake in independent Russian gas producer Novatek’s liquefied natural gas project at Yamal. France’s Total also holds a 20 percent stake in the $20 billion project.

Moscow likely feels some sense of urgency to get final agreement on a deal to sell East Siberian gas to China that has been under negotiation since 2006. While still short of a final deal and with no agreement on pricing, Russia and China reportedly reached a basic framework agreement on what would be a 38 bcm per year arrangement. Russia risks being shut out of China by its Central Asian neighbors if it doesn’t agree on a pricing formula soon.

But a price agreement with China will also mean less-than-projected earnings from the gas sector. The Europeans want to diversify their suppliers away from Russia. The Chinese are buying Central Asian gas for roughly a third of the price Gazprom receives on the European market, and there is no reason for Beijing to pay a premium for Russian gas.

Trade and the New Silk Road Economic Belt

Helped in large part by the opening of the gas pipeline network, China is rapidly becoming the leading trade partner for all the Central Asian states. It trades an increasingly diversified selection of goods with these countries.

Even Uzbekistan, which was initially quite wary of doing business with the Chinese and restricted the access of Chinese businessmen by limiting the number of visas given to them, now welcomes Chinese investment. Today, China is Uzbekistan’s second-largest trade partner and largest investor in Uzbekistan’s transportation sector. Bilateral trade increased by 60 percent year-on-year during the first six months of 2013.

Some of this gain comes at the expense of trade with the EU. But Russia is the one feeling the pinch. It is pressing hard for Central Asian states to join its Customs Union with Kazakhstan and Belarus.

Beijing is determined to fight for its market share. Xi called for the creation of a Silk Road Economic Belt at an address made at the Kazakh-funded (though U.S.- and UK-led) Nazarbayev University in Astana. In a speech that invoked Zhang Qian, the Han dynasty envoy who first traveled the “silk road,” and the nineteenth-century Kazakh nationalist Abai Kunanbaev, Xi defined Chinese policy in the region, both in style and in substance.

With Nazarbayev looking on at the English-language university that bears his name, the Chinese president invited 200 teachers and students to go to China in summer 2014. And Xi offered 30,000 Chinese government scholarships for SCO students over the next ten years as well as free study tours for an additional 10,000 students and teachers at Chinese-government-funded Confucius Institutes throughout Central Asia.

These offers were China’s contribution to enhancing the understanding between peoples, the fifth and final point in a speech that began with the reference to China’s Han envoy. Xi also called for bolstering policy communication and coordination to stimulate regional economic integration and offered China’s support in enhancing transport connectivity from the Pacific to the Baltic Sea, promoting unimpeded trade, and improving monetary circulation. Trade promotion and enhanced monetary circulation are at the center of China’s proposal that all trade within the region be handled through intraregional local currency convertibility.

What China is effectively trying to do is reduce Russia’s advantage with Customs Union states and effectively absorb the whole Customs Union into a single trading system without compromising the WTO commitments made by any of the countries. This policy would also undermine many of the aims of U.S. trade policy in the region, which is predicated on local currency convertibility to an internationally recognized standard (such as the dollar, euro, or a currency basket).

In virtually all important ways the SCO summit held in Bishkek on September 13 was an anticlimax on Xi’s trip. The “Bishkek Declaration” signed at the summit clearly reflects Russia’s current foreign policy priorities. Syria took center stage in what was intended to be a meeting that focused on Afghanistan. Kabul got scant mention save a note that national reconciliation in Afghanistan was a matter for the Afghan people and the government of their choosing.

None of this took the shine off Xi’s accomplishments, and it may have made Putin feel less threatened. Chinese policy in Central Asia is advanced through its bilateral agreements. This makes it easy for Beijing’s leaders to give Moscow space at the SCO or to even call for enhanced cooperation with Russia in the region, but they don’t turn to Moscow for advice in formulating their bilateral initiatives.

Russia can no longer effectively counter China’s economic ties with its Central Asian neighbors. And preoccupied with withdrawing from Afghanistan without destabilizing the region, the United States needs Beijing to help stimulate Central Asia’s economic development. All of this leads to China coming out on top in the region.

This entry was posted on Sunday, September 22nd, 2013 at 5:37 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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