A Bet on Belt and Road: Can Kazakhstan become the success story of Central Asia?

 

Central Asia sends connotations of vast steppes, mountainous areas and memories of the ancient Silk and Spice Routes that enabled the region to become a hub for trade in Eurasia before and during the Middle Ages. While the region may have seen its importance in global trade diminish with the inception of sea and air trade routes, it never lost its geographic edge at the heart of Eurasia. This old advantage is now being rediscovered through the Belt and Road Initiative (BRI); and interest in the region, among governments and companies, continues to rise. 

According to a recent article, Kazakhstan is the most attractive Central Asian state to invest in, along with Azerbaijan and Uzbekistan. Landlocked Kazakhstan is the biggest of the Central Asian countries by land mass and possesses abundant oil and natural gas reserves. With a GDP of roughly 160 billion US$, its economy is larger than that of all other Central Asian states combined; while its location makes it an attractive trade and logistics hub between China, Europe and South Asia. The Chinese quickly realized these strengths, and as such it comes as no surprise that President Xi Jinping decided to unveil the BRI in Kazakhstan. After all, the country serves as a critical component of the BRI land bridge through Eurasia.  

Plans to utilize Kazakhstan’s location as a hub for improved connectivity actually precede the BRI by more than three years. In 2010, China and Kazakhstan agreed to upgrade their common border area at Khorgos. From the Kazakh side this involved developing the Khorgos dry port through improved access to railway transport and construction of commercial centers. Simultaneously, China ratified a new special economic zone in Yili, on the other side of the border in northwestern Xinjiang. Infrastructure to facilitate container transportation, smooth clearing of goods at the border, and procedures for tourists were all put in place in the zone.

The outcomes of past efforts are visible today under the BRI framework. Once seen as one of the most remote places on earth, the Khorgos dry port is now poised to rival Germany’s inland port in Duisburg by becoming the biggest dry port in the world and handling up to 30 million tons of rail freight per year in the long run. One major advantage that Eurasian rail freight has in the ‘BRI era’ is that it is increasingly cost efficient, because it is cheaper than air and faster than sea freight. A train from Yiwu in China’s East into Europe through Khorgos only takes 15 days, in contrast to about 35 days by sea. As rail costs continue to fall, Khorgos is premising its hopes on capturing market share from sea routes which still dominate Eurasian trade.

 

 

 

 

 

 

 

 

 

 

 

The changes happening in Khorgos and surrounding area can make us think of the region as the new ‘Wild East’. The vast number of railways, pipelines and highways that are being built attest to that. The size of Khorgos’ ambitions are epitomized by the construction of a new town, Nurkent, designed to accommodate the expected increase in local population. Nurkent will offer free housing, educational facilities and recreational activities to over 100,000 residents that are expected to work in industries related to the dry port. One of them is Zhaslan Khamzin - CEO of the company operating the Khorgos dry port - he firmly believes that the ‘logistics rush’ is underway and that Nurkent will lead the region into “the future”. 

Developments in Khorgos show that Kazakhstan is seeking to position itself to benefit from growing Eurasian connectivity and aims to reshuffle global transport routes. However, the real question is whether or not Central Asian countries such as Kazakhstan are also able to reshape their domestic industries according to the needs of BRI such that they can derive maximum benefits for the local population. Here the outlook is mixed. 

Kazakhstan stands out as a unique BRI partner as it, in 2015, aligned its national development strategy with that of China in order to boost Kazakh trade, industrial capacity, energy and technology. This involved Kazakhstan tying its flagship ‘Bright Road’ (Nurly Zhol) economic plan to the BRI. The Bright Road foresees US$ 40 billion in spending until 2020 on projects related to logistics, infrastructure, public services and SMEs. China and Kazakhstan have also signed over 50 deals – amounting to US$ 26 billion -within three years of the introduction of the BRI.

Large upfront investments into Kazakhstan are important to fuel its growth outlook, however it is crucial that the country is also able to diversify its economy in order to become less dependent on natural resources. National, inclusive and widespread economic development premised on the rise of Eurasian connectivity and the BRI is not a given; Kazakhstan simultaneously needs to build up its manufacturing and technological capacities and create new opportunities for its emerging service sector. 

BRI can provide opportunities in this regard. For example, the Digital Kazakhstan 2020 program specifically outlines the creation of a ‘Digital Silk Road’ that focuses on the development of digital infrastructure in the Central Asian state. In practice, this means that Chinese telecommunication companies will contribute to the development of smart cities and smart infrastructure in Kazakhstan. Additionally, the increase in Chinese capital flowing through the region is expected to foster urbanization by bringing more migrant labor and tourism to smaller towns in the country.

Kazakhstan needs to ensure that it becomes more than just a transit point on a BRI map and therefore is also aiming to become a Central Asia finance hub. This caters to a growing appetite shown by governments and investors towards Central Asia. Buoyed by the rise of Eurasian connectivity, countries in Europe and the US have rediscovered their interest in Central Asia as a destination for trade, finance and diplomacy. Particularly, large emerging market investors, including JP Morgan and Blackrock ,have their eyes on Astana. Due to the fact that still no trusted platform for international financial dealings exists in the region, the Astana International Financial Center aims to become the go-to platform between London, Shanghai and Dubai. Clearly this move is another bet that is part of a larger BRI gamble. Frederick Starr, chairman of the Central Asia-Caucasus Institute says that “you can list 10 reasons why it will fail, but there are at least ten reasons why it won’t.” 

While BRI offers new opportunities for Kazakhstan, two key challenges revolving around political tensions and the risk of dependence on China and Russia remain. Political stability has long been an issue in the region and can have knock on effect on the regional investment climate. Last year, 77 year old President Nazarbayev, whose remaining time in office is unclear, initiated a political reform process that decentralized political power by giving parliament more control over key responsibilities such as managing the economy. The outcome of these reforms and potential political transition could have a decisive impact on the already complex regional security architecture that has been woven by Kazakhstan’s skillful diplomacy since the fall of the Soviet Union. Additionally, neighboring countries have longstanding political tensions, particularly surrounding the asymmetric distribution and access to water supplies. Historically, these tensions have strained relations between Central Asian states, and consequently made it difficult to smoothly plan and implement cross-border investment projects. A number of these infrastructure projects have suffered from unexpected cost increases and delays.

At the same time, Kazakhstan faces the complex challenge of simultaneously preserving its autonomy and boosting its prosperity. Infrastructure and connectivity is more than just an economic issue, but is quickly becoming a geopolitical one. The BRI is not the only connectivity initiative spreading through the region; but Russia’s Eurasian Economic Union, the North-South Corridor from Russia to India and the Ashgabat Agreement are all present too. Kazakhstan needs to find a way to harmonize different interests originating from different initiatives, while simultaneously avoiding potentially harmful repercussions of a growing economic reliance on either Russia or China, who alone buy 25% of Kazakh oil output. Already a fierce debate is underway in Kazakhstan about how it should delicately balance the geopolitical ambitions of its neighbors by finding new partners and looking beyond Chinese Belt and Road opportunities. In hedging against both Russia and China, Kazakhstan has also looked to the European Union for support; the EU has committed $1.2 billion to Central Asia by 2020. 

Analyzing Kazakhstan’s involvement with the Belt and Road shows that it is taking a big bet on successful BRI integration and becoming the primary connectivity hub in Central Asia. To do this successfully, it will not only need to ensure a smooth political transition at home, but it also needs to balance its plans against geopolitical ambitions emanating from abroad. More importantly, it needs to become more than just a transit point for BRI trade and take the opportunity to develop its own economy in the areas of infrastructure, technology and finance. If the country manages to achieve these objectives, while simultaneously balancing its relationship with China, it has the potential to become one of the largest success stories of BRI engagement in the region. 

 

 

Geopolitical, FinanceMaximilian Römerkazakhstan, CHINA, BeltandRoad, INFRASTRUCTURE, NURLY ZHOL1 Comment