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Fresh Investment Spurs Growth of East-West Trade Along Silk Road

New road and rail links are boosting economic activity along the ancient trade route in Central Asia and facilitating commerce between Europe and Asia.

Imagine boarding a high-speed train in London and getting off in Beijing 40 hours later. The 8,160-kilometer (5,070-mile) journey would take you past the fabled cities of Western Europe, across the vast steppes of Central Asia and through the densely populated center of China to Beijing. It would be the ride of a lifetime, rivaling the famed Trans-Siberian Railway in length but vastly more modern and efficient.

This scenario isn’t just wishful thinking. Chinese officials are drafting plans for such a grandiose project and have initiated talks with 17 countries in Europe and Central Asia about making it a reality. The proposal is just the latest and most ambitious attempt to build massive new transportation and infrastructure projects along the historic Silk Road, which linked the China of the Han Dynasty with the Roman Empire. Those efforts are already forging deeper commercial ties between developed Europe and the fast-emerging countries of Asia and spurring growth in the resource-rich nations of Central Asia.

Since 2001, governments and multilateral lenders, led by the Asian Development Bank, have provided more than $23 billion in financing to 120 projects, of which about 80 percent are transport-related. These projects have completed 4,000 kilometers of roads, 3,200 kilometers of railways and 2,300 kilometers of power transmission lines.

Now officials are redoubling their efforts. At the annual meeting of the ADB, opening May 2 in Astana, Kazakhstan, finance ministers and central bankers from 67 nations across Asia are expected to review and begin allocating budgets for a new, six-year, $38.9 billion program to finance 108 new road and rail links across Central Asia.

The theme of the meeting — “The Silk Road: Connecting Asia with a Changing World” — and its location in the Kazakh capital underscore just how important the region is to the ADB. The bank and other multilateral lenders are due to provide $13.9 billion in financing for the new program. Some 22 percent of the ADB’s $59 billion in outstanding loans are concentrated in the countries of Central Asia.

“Our lending is focused on regional connectivity,” says Vicky Tan, Director, Regional Cooperation and Coordination, in ADB's Central and West Asia Division. “The new Silk Road is based on connectivity. The infrastructure development provides the foundation for inclusive growth for Central Asia.”

This is the second time the bank has held its annual meeting in the region; in 2010 it met in Tashkent, Uzbekistan. Next year the bank will convene its members in Baku, Azerbaijan. “We are talking about three annual meetings held in Central Asia in a few years’ time,” says Klaus Gerhaeusser, director general of the ADB’s Central and West Asia division. “This highlights the importance of the region.”

Driving the development agenda is the Central Asia Regional Economic Cooperation (Carec) program, a ten-nation bloc within the ADB that has its own secretariat at the multilateral lending organization’s headquarters in Manila. Founded in 1997 with the bank’s help, Carec plays a leading role in identifying and financing infrastructure projects and coordinating trade-related financing and investments across the region.

The new investment program, Carec Transport and Trade Facilitation Strategy 2020, includes 76 new transportation links and 32 extensions of existing road or rail lines. In addition to the funding from the ADB and other multilateral lenders, regional governments are expected to contribute $20.3 billion and the private sector $1.8 billion. The plan still has an uncommitted funding gap of $2.8 billion.

Central Asia’s need for investment is almost as vast as the region itself. The area covered by the Carec program sprawls over some 4 million square kilometers (1.5 million square miles) stretching from western China to the Caspian Sea and touches some or all of ten nations: Azerbaijan, Turkmenistan, Uzbekistan, Kazakhstan, the Kyrgyz Republic, Tajikistan, Afghanistan, Pakistan, Mongolia and two provinces of China — Xinjiang and Inner Mongolia. Though enormous in size, the region is sparsely populated. Excluding the two Chinese provinces, Central Asia has a population of 286 million. Take out Pakistan and Afghanistan and the number shrinks to just 76 million.

But the region is well endowed with mineral deposits and large reserves of oil and gas. At a time when the rest of Asia, particularly China, needs growing amounts of raw materials to fuel its growth, those resources make the region an ideal location for the ADB to focus upon.

Investments in infrastructure are helping to raise living standards in Central Asian nations. The region’s economy has grown at an average rate of 6.5 percent a year over the past four years. In 2013 growth rates ranged from 12.2 percent in Turkmenistan and 11.8 percent in Mongolia to 5 percent in Kazakhstan and 3.5 percent in Azerbaijan, according to the International Monetary Fund. Excluding the two Chinese provinces, the region has a combined gross domestic product of $626 billion.

Most of the infrastructure spending to date has focused on transportation and energy links. The plan has poured $4.3 billion into energy transmission projects, including 2,322 kilometers of power lines, and injected $268 million into trade facilitation, aimed at streamlining border-crossing procedures. Other multilateral lenders involved in the projects include the European Bank for Reconstruction and Development and the Islamic Development Bank.

One of the most notable projects to date is a network of roads in Kazakhstan that will be the crucial link in the Western Europe–Western China International Transit Corridor, an 8,445-kilometer expressway that will run from St. Petersburg in Russia through Almaty to Xinjiang, China. The corridor project is still under development, and total cost estimates are not yet available, but the Kazakh portion was completed last year at a cost of $5.6 billion.

Currently, more than 80 percent of China’s manufactured goods reach Europe via sea routes, with transit times as long as four weeks. Improved road and rail links through Central Asia are opening up new land routes that can get goods to European markets faster and cheaper. The push for better infrastructure is already bearing fruit: Annual trade between Central Asia as a whole and China grew from $1 billion in 2000 to $19 billion in 2010, says Pradeep Srivastava, principal economist and head of the ADB’s Carec unit.

“China is playing a rapidly increasing role in this region,” Sriva­stava says. “Even though it is small in absolute numbers, the trade is rising rapidly. China isn’t only buying raw materials from these countries, it is selling goods to these countries” (see also “Growing Trade Raises Asean’s Dependency on China”).

About one quarter of the investment planned through 2020 by the ADB and its partners will be devoted to new or upgraded rail lines. Rail projects completed so far are already beginning to have an impact on east-west trade flows. Since 2010, freight companies have been able to transport goods produced in China via rail to Europe within two weeks, a significantly shorter time than that required for the traditional sea routes, notes the ADB’s Gerhaeusser. “Of course, you can use an airplane, but the cost is much higher,” he says. “Only high-value-added goods are worth airfreighting.”

DHL Global Forwarding has been offering a daily shipping service since 2010 that departs from Shanghai and runs to Europe via the Trans-Siberian North Corridor rail line. The transit time is ten to 21 days shorter than traditional sea routes, depending on the end destination in Europe. Recently, DHL introduced a second route, which will ship goods via rail and road along the West Corridor rail line from Chengdu in central China through Kazakhstan to DHL’s hub in Malaszewicze, Poland.

The rail improvements in Central Asia are feeding even bigger ambitions in China. The country has invested heavily in its domestic high-speed rail network, and although a series of accidents in recent years has put further development on hold, Chinese officials are exploring ways to extend the network abroad.

Engineers at the Chinese Academy of Engineering in Beijing are already putting together a master plan to connect the high-speed rail network to 17 nations on the Eurasian continent, from Western Europe to Southeast Asia. One proposed line would run from London to Beijing. A second project would carry trains through Russia to Germany, and a third line would extend south to connect Myanmar, Thailand, Vietnam and Malaysia.

China has opened negotiations with Turkey to build a $35 billion high-speed line that would run the length of Turkey and provide a crucial link in a longer Asia-to-Europe route. Beijing has offered $30 billion in financing for the project.

Meanwhile, Laos has hired a Malaysian company, Giant Consolidated, to build a high-speed rail line — with $7 billion of Chinese financing — that would be a key part of a Southeast Asian line.

None of these projects is likely to be built any time soon. “China is still testing high-speed rail” following its spate of accidents, says Xiaohong Yang, a Chinese national who is Director, Transport and Communications, in ADB's Central and West Asia Division and principal author of the bank’s 2020 transport strategy for Central Asia. “Extending high-speed rail outside China is still a long way off.” Yet the investments being made in Central Asia — including double tracking, improvements in signaling, upgraded communications and electrification — are providing exactly the kind of foundation that a future high-speed rail line would need.

Another big portion of the infrastructure program centers on energy. One of the biggest projects currently under way is the Trans-Afghanistan Pipeline, also known as the Turkmenistan-Afghanistan-Pakistan-India Pipeline. It will have the capacity to supply 27 billion cubic meters of gas from Turkmenistan’s Caspian Sea region to India, helping the latter nation reduce its reliance on coal-fired power plants. The ADB is acting as the primary adviser on the $7.6 billion project.

The Trans-Afghanistan Pipeline project aims to do for India what the Central Asia–China Gas Pipeline did for China. That 1,833-kilometer line, running through Turkmenistan, Uzbekistan and Kazakhstan to China, was completed in 2009 at a cost of $7.3 billion and financed entirely by the Chinese. It can carry up to 65 billion cubic meters of gas a year, equivalent to more than 40 percent of the country’s consumption.

Kazakhstan was only the 11th-largest supplier of energy to China in 2013, but analysts believe it will move higher because its natural gas can help China switch to cleaner energy sources. The country’s reliance on coal-fired electricity plants left Beijing and other major cities blanketed in smog for much of the past winter.

The recent political crisis in Ukraine, with Russia sending forces into Crimea and the local population voting to secede and rejoin Russia, has sparked nervousness in global markets. Although most analysts believe the Ukraine upheaval will not have direct consequences for Central Asia, it has underscored the importance of securing access to energy supplies.

“I think it is unlikely that the Ukraine crisis will spread,” says Jonathan Fenby, director of China research at London-based Trusted Sources UK, a research firm that specializes in investment and risk analysis in emerging markets. “Russia’s focus is on the immediate region and will not spin out into Central Asia.”

Relations among countries in and around Central Asia have been “pretty stable,” says Sean Darby, Hong Kong–based chief global strategist for investment bank Jefferies Group. “In fact, the nations in the region have become more tolerant of each other. Energy — the main glue for the region — has played itself quite well.”

The development of transportation and energy links is likely to strengthen Chinese influence in Central Asia, says Laurence Brahm, a Beijing-based lawyer and adviser to the Chinese government on environmental and economic reforms. “America’s forced experiments with democracy in Afghanistan have only left cynicism in most minds,” he says. “Most nation-states are interested in concrete results: business, investment and infrastructure. These are areas China is keen to deliver on. Right now China has the upper hand in the region.”

Besides helping Central Asia link east and west, the ADB is leading an initiative to bring market-based entrepreneurial knowledge and financing to the region. The bank is offering loans and support for the development of financial institutions in Central Asia, especially private entities that cater to small and medium-size enterprises.

In the past five years, the ADB has provided $1 billion of direct lending to private enterprises across the region. “Many [of these countries] are former Soviet states or Soviet satellite states,” says Michael Barrow, deputy director general of the ADB’s private sector operations. “In many of them laws and regulations supporting private sector development are still nascent.” But we at the ADB are working with governments to open up, to allow private sector growth. We are capacity-building.”

In 2013 alone the bank approved $300 million of lending to financial institutions that help foster entrepreneurialism and the growth of small and medium-size enterprises. One of the major recipients of the ADB’s financial sector loans in Central Asia is Berlin-­based Access Microfinance Holding. The company, which specializes in making microloans in developing countries, runs AccessBank in Azerbaijan and Tajikistan. It borrowed $50 million from the ADB last year to help it finance the opening of rural branches that can reach more than 20,000 farmers — people who previously were unable to get access to any sort of financial services.

In the past few years, AccessBank has provided $135 million in loans to 55,000 farmers in Azerbaijan. “While we initially focused on the urban clientele of small-scale traders, producers and service providers, small-scale agriculture has become a core focus in recent years,” says Access chairman Thomas Engelhardt, who is a big fan of the ADB’s large-scale public sector financing of transport linkages across Central Asia.

“For us integration and openness have two main benefits. In a direct sense we can more closely interlink our operations by exchanging staff, systems and policies,” Engelhardt explains. “Indirectly, yet more importantly, our clients have multiple contacts across borders. This spans from trade relations to family ties, common history and similar languages. These ties can play a vital role in regional integration and be an engine of growth.”

Former Rio Tinto executive Cameron McRae, a 31-year veteran of Australia’s and Africa’s mining industries, sees a massive market rising in Central Asia as a result of the region’s increasing integration with Europe and Asia. Unlike many global investors, who are bearish on emerging and frontier markets, the executive chairman of Ulaanbaatar, Mongolia–based mining investment firm SkyPath Partners sees emerging markets — particularly China — acting as a global growth engine for years to come.

“As China’s leaders increasingly focus on achieving a more sustainable, consumer-driven expansion of the economy and lower the emphasis on industrial investments, this will change the mix of imports that China requires,” says McRae, who helps global clients invest in mining assets across Mongolia, a major exporter of minerals to China. “However, even with a lower growth rate, China will still require significant amounts of energy and resources as the economy continues to develop.”

From his suite on the tenth floor of Central Tower, in Great Chinggis Khaan’s Square, in the heart of Ulaanbaatar, McRae can see on the far horizon Mongolia’s vast grasslands, which pour into Central Asia and along the old Silk Road — the route Genghis Khan and his massive Mongolian cavalry took to conquer Asia and much of Europe 900 years ago.

As the region becomes more integrated, McRae says, he will be looking for mineral resource investments outside Mongolia. SkyPath may march west just as Gen­ghis Khan did. “We are open to investment opportunities in Central Asia that have strong fundamentals and an attractive risk-reward profile,” McRae says. “When considering different markets, strong governance and rule of law are key. SkyPath and our capital partners are fundamentally value investors and therefore opportunistic.” So was Gen­ghis and his cavalry.

Almost a millennium has passed since the great khan unified east and west by conquering kingdoms along the Silk Road. This time, though, finance ministers, bankers and entrepreneurs — aided by financing from the ADB — will be reviving and unifying markets. Their creation, perhaps, will be the new Silk Road of the 21st century. • •

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