Silk Road Headlines_29th May, 2019

One of the consequences of the Belt and Road Initiative is that it has stimulated non-Chinese governments and companies to also improve transregional transportation networks. In some instances these efforts strengthen both their own and China’s trade links to the rest of the world. This was the case with the railway link that connects Azerbaijan, Georgia and Turkey, which constitutes an important segment of the overland route between China and Europe via the Caucasus. Another example are the ongoing efforts by UTLC ERA (a joint venture of railway companies from Belarus, Russia and Kazakhstan) to improve rail transport between Kazakhstan and Belarus [From Kazakhstan to Belarus in 4.5 days now possible]. But there are also initiatives that bypass China, such as the new Japan-Russia-Europe rail service [First train Japan-Europe through Russia on track]. It is not clear whether this service benefits from financial support from either the Japanese or the Russian governments. If no subsidies are involved and if this service proves to be commercially viable, this could be an indication that the China-Russia-Europe rail freight services may also be commercially viable if and when Chinese regional governments terminate existing subsidies. It is believed that Chinese state subsidies currently account for up to half the shipping costs of container transport from China to Europe by rail.

An article by MIT’s Yasheng Huang discusses the reverse debt-trap risk of BRI [Can the Belt and Road Become a Trap for China?]. He points out that perhaps it is not so much the borrowing countries but China as a lender that risks becoming trapped. As he writes: ‘China may fall victim to the “obsolescing bargain model,” which states that a foreign investor loses bargaining power as it invests more in a host country. Infrastructure projects like those under the BRI are a classic example, because they are bulky, bolted to the ground, and have zero economic value if left incomplete’. Once infrastructure construction has started, the leverage of the projects’ host countries vis-à-vis China increases. This may put them in a position where they are able to renegotiate the terms of the original project agreement. Indeed this appears to have happened in several instances, which may be one of the reasons why the Chinese government now shows an increased interest in adopting ‘multilateral rules and international best practices pertaining to project development, operation, procurement, and tendering and bidding’ [China is paving a Belt and Road 2.0]. If China does indeed move in this direction then this could be the start of BRI 2.0, as Pradumna B. Rana and Xianbai Ji state.

By Clingendael