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 A New Silk Road – Russia’s Position

 A New Silk Road – Russia’s Position

The first version of the Silk Road is placed by analysts at the beginning of the westward expansion of the Han Dynasty (206 BC - 220 AD). Chinese products (silk, porcelain, spices or other goods) that were highly prized began to be delivered to Europe, with the Chinese importing precious metals, glass and other products in return. Trade routes were plied by caravans connecting to Europe through Central Asia. This region gradually became the epicenter of the first wave of globalization, which made it possible for the area to connect remote regions, generate prosperity and connect very complex cultural and religious traditions. The impressive economic growth and increased openness to the external environment that China registered in the latter part of the 20th century and in the first two decades of the 21st century, focused on export-led industrialization, brought China the resources and vision to consider the necessity of investing new trade routes. Paradigm shifts have also occurred at the political level, with China's top leadership publicly presented in 2013 the concept of a “New Silk Road” (morphed into the currently named Belt and Road Initiative through the addition of a Maritime Belt) as a complex and ambitious logistics network consisting of ports, railways and highways, supporting infrastructure, as well as oil or natural gas pipelines that will sustainably connect China with the states of Europe and East Africa. The EU has since become China’s largest trading partner.

As in ancient times, the land-based logistics network runs through Central Asia. The New Silk Road is already showing its benefits to China, the states of Europe and Central Asia. The Russian authorities perceive this complex architecture specific to the new partnership with great hostility, although its exclusion from the project would bring it great losses. The biggest losses that the Russian leadership speaks less about, but is seriously considering, are those in terms of its influence in the region and the vulnerability of the expansionist strategies of its foreign policy planners. The model of economic growth promoted by China as well as the other East Asian states is one focused on exports and investment in fixed capital. Although they are beneficial to emerging economies, these development fundamentals also contain areas of vulnerability due to international developments that lead to demand compression and reduced imports. Economic as well as non-economic events (such as the coronavirus period) can profoundly affect economic development. For several decades, China has recorded annual growth rates of over 10%, but these extremely favorable times were severely short-circuited with the outbreak of the global economic and financial crisis in 2008. Since then, the Chinese authorities have had to resort to strong stimulus measures in order to maintain the pace of economic growth at satisfactory levels. The events of the last two years have seriously affected the internal macroeconomic balance of this country, and there has to be a revision of the growth model successfully promoted for so many decades.

The experts of the International Monetary Fund forecast for 2020 an increase of the Gross Domestic Product of China not more than 6.4%, a level significantly lower than in the glory periods of this country’s growth. Because investments were the engine of the development of the Chinese economy, the intensification of investment placement in the neighboring economies, especially diverting excess capacity from China, represented a strategic priority the decision makers in the field of economic policies but also of the Chinese corporate environment. China is somehow taking over the Japanese model of development, according to which, in many cases, the periods of economic downturn have been weathered through the launch of important infrastructure or infrastructure investment projects.[1] One of the reasons for a decline in the economic growth of the Chinese economy can be considered to be the slowing down of external and internal demand which led both to the decrease of imports of intermediate goods and to the decrease of exports of processed products. The Chinese authorities hope that, by activating the New Silk Road project, the economic growth process can be restarted. Collaboration with the states of the Caspian Sea region can stabilize the flows of energy resources and raw materials to the Chinese economy.

The strategy designed to operationalize this impressive infrastructure and industrial network envisages the completion of several components:

  • A first component is dedicated to the infrastructure dimension transiting the Central Asia region, this being called the “Silk Road Economic Belt”; it has a central component that transits the opposite area to the Caspian Sea, using the ports of Actau and Baku and continues to Turkey through Azerbaijan and Georgia. In its entirety, this first component also concerns the south wing passing through Turkmenistan and heading for Iran.
  • The second component is the maritime one and links the Indian Ocean to the Persian Gulf. The operationalization of both components involves impressive investments, most of which are expected to be realized by the Chinese state in concert with state owned enterprises and major private investors.

An important role will also be played by the Asian Infrastructure Investment Bank (AIIB), set up in 2014 by China along with 37 states in the region and 20 states outside the region, and is expected to make available over $100 billion to fund important projects. By the time it becomes fully operational, this hub and spoke mechanism will facilitate access to a very large market for large Chinese companies that have significant production capabilities of complex machines, steel products or construction materials. There will be an increase in the total volume of trade with the states located on these trade routes, but also a significant decrease in transaction costs and an increase in the speed of movement of goods to their end users. The Silk Road will facilitate the arrival of Chinese products to European markets under higher safety conditions, lower costs and much faster travel speeds, or at least fewer interruptions along the way, through logistical optimization (shorter stays in Customs, no more need to switch to another railway gauge etc.). The same infrastructure networks that make it easier for Chinese producers to reach their end consumers will make it possible and efficient for the Chinese economy to buy much higher volumes of raw materials, energy resources and intermediate goods, contributing to switching from “trade in goods” to “trade in tasks”, which will facilitate the inclusion of China, but also of the states in the area, in the new techno-industrial paradigm.

In order to prepare an integrated economic landscape, the Chinese authorities have announced since 2010 a strategy that aims to acquire the status of international currency for the renminbi. Efforts to operationalize a banking-type architecture in which the states grouped under the acronym BRICS can participate may contribute to the redefinition of the Chinese national currency at the level of the international monetary system. Despite the efforts of the authorities in Central Asian states over the past 30 years, the economies of these states still have a long way to go to achieve normal levels of mutual interdependence, macro and microeconomic complementarity and openness to the regional external environment. All these states are subject to specialization schemes in a small range of products, usually with a low degree of processing, which diminishes their aggregate added value, failing to capitalize on all the sources of competitive advantage they have and maintaining their dependence on economic powers in the vicinity or more from a distance. Even if, after three decades, their dependence on the Russian economy has not diminished by that much, the announced strategy of the Moscow authorities to reintegrate these republics into the sphere of influence of the great regional power can only cause concern in both the capitals of these states. as well as in the chanceries of the other major geo-political and geo-economic powers.[2]

The New Silk Road can contribute to solid progress in the development of this region, allowing China to maintain its high growth and become an exporter of capital. Several analysts believe that there are real premises for China to become the dominant power in this region in the long run, surpassing Russia. Statistical data shows that, in recent years and in more and more states in this region, Russia no longer holds the position of principal investor nor that of strategic trading partner. Continuing in this direction, the prevailing status of Russia will be lost in virtually all states in the region. For the republics that have important sectors of raw materials and energy resources (Kazakhstan, Turkmenistan and Uzbekistan), China has already become the major destination of these products. The reality shows that the strategy used by the Russian authorities in the relationship with Central Asian states “is not focused on new developments and investments in infrastructure, it is focused rather on securing Soviet legacy”.[3] This attitude leads to the pursuit by Russia of small investments, focused on the maintenance of the existing infrastructure, and only the one that connects these countries to Russia. Focusing most efforts on gaining and maintaining dominance over these economies has paved the way for other powers, especially China, to gradually gain prevalence in the economies and societies of this region. 

Notes:

[1] Rodrick, Dani (2015). Premature Deindustrialization. John F. Kenedy School of Government. Harvard University, Cambridge, MA.

[2] Stanojevic, Natasha (2016). The New Silk Road and Russian Interest. The Review of International Affairs. No 1161, January-March, pp. 142-161.

[3] Fedorenko, V. (2013). The New Silk Road Initiatives in Central Asia. Rethink Institute, Washington DC.

 
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OEconomica No. 1, 2016