Thursday, 08 October 2015

Kazakhstan's revival of the Silk Road Initiative: the challenges ahead

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By Rafis Abazov

October 8th, 2015, The CACI Analyst

During his recent visit to China, Kazakhstan’s President Nursultan Nazarbayev signed a series of trade agreements and Memorandums of Understanding (MOUs) on 48 projects valued at about US$ 30 billion. The Minister of Economic Affairs, Yerbolat Dosayev, has called the Chinese market one of the “main markets for Kazakhstan.” The Kazakh government also reiterated its support for the Beijing-instigated “Silk Road Economic Belt (SREB)” initiative and agreed to continue working on several large infrastructure projects. But opinions of Kazakh experts on the SREB are divided. Some believe China’s financial backing will strengthen trade and lead to economic growth, but others are skeptical, claiming it would conflict with the U.S.´s “New Silk Road” initiative. 

BACKGROUND: Following Nazarbayev’s visit to China, numerous media reports and discussions among experts have reminded us that the concept of promoting a new Great Silk Road has been actively discussed for the last 20 years. The idea is to revive the trade route that for many centuries connected China and Europe via Central Asia, and thereby bring prosperity and better collaboration between the countries along the way. This would mitigate the negative impact of remoteness from major global markets, which has tended to pose a limitation for the land-locked Central Asian countries.

Indeed, there have been repeated efforts to revive economic cooperation between the countries in the Central Asian region, not only by the national governments but also by several international players. One such attempt is Washington’s “New Silk Road” (NSR) initiative, introduced by then Secretary of State Hillary Clinton in 2011. NSR was established with a single political objective: to politically stabilize Afghanistan and by extension Central and South Asia by promoting South–South cooperation, closer links and political dialogue.

Beijing announced the “Silk Road Economic Belt” (SREB) in 2013 concurrently with the “Maritime Silk Road” (MSR) as part of its “One Belt, One Road” (OBOR) initiative. The SREB was introduced as a means for promoting East–West economic cooperation and stability in Central Eurasia by developing tools for building a joint supra-regional market and maintaining a stable movement of goods, investments and services. In fact, Beijing from the very beginning highlighted economic issues and economic and financial tools in promoting the SREB initiative. Beijing also established the Asian Infrastructure Investment Bank (AIIB) in 2014 as a financial tool for implementing the SREB and MSR.

Kazakh and Central Asian experts have suggested that the economically inspired SREB is not a rival initiative to the U.S.-led NSR program.

IMPLICATIONS: For several years, Kazakhstan’s government has been working closely with the World Bank to reform its economic and financial institutions, including efforts to address specific areas that according to the World Bank’s Global Competitiveness Index would help the country upgrade its institutional and legal frameworks to international standards.

The governments of Kazakhstan as well as other Central Asian republics embraced the SREB as an opportunity to deal with major challenges. These included three important aspects of development: upgrading their aging highway and railway infrastructure; attracting Foreign Direct Investments; and boosting trade and economic cooperation in a difficult period following a sharp decline in energy and other commodity prices on the international market.

For the last two years, China has provided significant financial and technical resources for rebuilding Kazakhstan’s transportation and communication infrastructure, and has in some areas constructed completely new systems on Kazakhstan’s territory. Indeed, distances are enormous in Kazakhstan, which is the ninth largest country in the world, and the lack of international-quality highways and railways significantly undermines the country’s attractiveness to international investors and increases the cost of doing business.

Officials in Kazakhstan believe that the Chinese infrastructure investments will also help the country become more competitive as a transit country for the overland movement of containers between China and the European Union (EU). According to Kazakhstanskaya Pravda, the country handles about 250,000 containers a year (or about two percent of the total container movement between China and the EU), and Astana aims at doubling this number within two to three years.

Several bilateral agreements and MOUs between China and Kazakhstan have also helped improve the investment climate and investment volumes between these two countries. Kazakhstan has attracted investments from China not only targeting its road infrastructure, but also energy, communications, manufacturing, tourism and lately the agricultural sector. Some estimates suggest that the volume of FDIs from China to Kazakhstan has nearly doubled during the last four to five years.

One area of great concern for Astana is international trade, as it sees a strong need to diversify trade in light of the sharp decline in energy revenues from Western markets. Growing trade with China has helped soften the negative impact of the volatility in the international commodity markets. According to official estimates, trade between China and Kazakhstan increased from US$ 337 million in the mid-1990s to US$ 22 billion in 2014. Importantly, since the introduction of the SREB, the two countries have signed trade deals and investment projects valued at US$ 70 billion, although several projects have been delayed for various reasons.

CONCLUSIONS: The SREB could indeed contribute to increasing economic cooperation and cross-border trade between Kazakhstan on the one hand, and China and the Central Asian states on the other. In order to realize this potential, both Astana and Beijing should clearly state that the SREB does not compete with the U.S.-led New Silk Road initiative. They should also work on creating synergies between two programs in the areas of economic cooperation; improve cross-country and regional business integration, and support capacity building in business and management both in the private and public sectors along Silk Road countries.

In this regard, Beijing and Astana should not only cooperate in building roads and communication infrastructures, but also promote the new highways and railways to attract local and international businesses to move their goods on these networks. Both governments should also work to integrate Kazakhstan’s businesses, especially job-creating small and medium-size businesses (SMEs), into the Chinese manufacturing and supply chains in order to boost cross-border trade and collaboration, including access for Kazakh goods to Chinese markets. For example, the Kazakh agricultural sector could start integrating into China’s consumer food supply chain. Finally, yet importantly, China – with its strong experience in dealing with international trade, business and investments – should collaborate with Kazakhstan to build capacity in management and development, in both the private and public sectors, in order to help improve the international competitiveness of Kazakh enterprises.

AUTHOR’S BIO: Rafis Abazov, PhD, is a visiting professor at Al Farabi Kazakh National University and a director of MDP/Global Classroom Program. He also teaches at SIPA, Columbia University, NY. He is the author of The Formation of Post-Soviet International Politics in Kazakhstan, Kyrgyzstan and Uzbekistan” (1999)The Culture and Customs of the Central Asian Republics” (2007) and “The Role of Think Tanks in the Policy-Making Process in Kazakhstan” (2011), and a contributor to the UNECE Innovation Performance Review of Kazakhstan (2012). He is also an editor of book series “Literary heritage on the Great Silk Road” (2012-2015).

Image Attribution: www.washingtonpost.com, accessed on Oct 8, 2015

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The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.

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