Mises Wire

Russia, China and the Geopolitics of the Silk Road

The most prominent feature of the geopolitics of Russia and the West pivots upon a relatively obscure feature of the geopolitics of Russia and China. The mainstream media in the U.S. has covered minimally and only rather incidentally the estimated $900 billion construction of a complex matrix of strategic transport routes known generally as the “New Silk Road” or the “Belt Road Initiative” (BRI) project initiated by Beijing in 2013. It is one of the largest infrastructure and investment mega-projects in history, covering more than 68 countries, equivalent to 65% of the world’s population and 40% of the global GDP as of 2017.

The project has been the central factor in Moscow’s intensified relations with Beijing despite the fact that, at the outset, Russia hesitated out of concern over China’s territorial objectives. Since then the partnership has grown aggressively and has been a particular boon to Moscow’s sphere of influence. One of the immediate positive consequences for Russia has been for Eurasian countries and Iran to grow closer to that country, a development of potentially explosive repercussions vis-à-vis the West since energy geopolitics of the Caucasus have been a source of tension with both the EU and the U.S. But it is energy geopolitics that comprise the entire basis of the Russia question in the East-West endgame, with the Mideast the locus of rising tensions to come.

China’s current position is such that to date, “more than 90 percent” of container shipments from China to Europe are delivered by sea. Beijing’s plan is a plethora of diverse transit options through a network of transcontinental land routes; Central Asia and the Mideast obviously play a key role and all intersect with Moscow’s interests. China also wants access to the Arctic where one major part of the planned routes will be constructed as an addition to the continental corridor across Eurasia (and a planned Indo-Pacific maritime route). In fact, China has declared itself a “Near Artic state” and aims to build what it is calling a Polar Silk Road.

What’s more, this new Sino-Russian economic strategy, combined with China’s decision to back the yuan with gold as part of a larger Russia-China move to move off dependence of the petro-dollar, comes at a time when Beijing has recently introduced the “gold-backed petro-yuan”. One cannot underestimate the major shift in global energy markets that this could cause given that, among other factors, up until now any nation wanting to buy oil had to first buy dollars in order to pay for the trade. With the launch of the petro-yuan denominated oil futures contract on the Shanghai International Energy Exchange, the exchange will handle seven kinds of crude, particularly from the Middle East, including Iraq’s Basra Light, Dubai and Oman crude. This will create an Asian crude oil benchmark in pricing for the oil imported and consumed in Asia, the world’s top importing region.

The move is designed to give China more power in crude pricing as well as promote its currency as a bona fide global one. The timing here is interesting particularly in view of the fact China obviously has little fear of retribution by the United States.

Russia is ambitiously welcoming all of this. “Despite initial misgivings in Moscow, China’s penetration of Central Asia under the Silk Road banner has not, so far, done any substantial harm to Russian interests”, wrote Russian scholar Artyom Lukin in an article of February 8 in The Washington Post. China’s ambitions have, in fact, done quite the opposite

On November 9 of last year, Vladimir Putin and Nursultan Nazarbayev of Kazhakstan announced plans for one of the railway routes from China to Europe via the territories of Russia and Kazakhstan. In realizing this project, “the geopolitical and economic consequences will affect not only Kazakhstan and Uzbekistan, but also the other countries in and around the Central Asian region”, noted Lukin, a professor at the Far Eastern Federal University in Vladivostok. The Kremlin’s influence in Central Asia and the South Caucasus will only strengthen as a result of Russia’s domination of Eurasian land routes.

The benefits to Moscow could not come at a better time given the country’s economic position with the West over the past dozen years: the first ‘energy war’ with Europe over Ukraine’s 2006 Orange Revolution; the disruption of gas deliveries to the Continent in the wake of the civil war in Ukraine after 2014; competitive energy geopolitics in the Caucuses; sanctions and, as of this past weekend, new sanctions. The focus is not eastward and it works thus: Chinese cargos bound for Europe must cross Kazakhstan and then transit through the Russian railway network. Central Asian “stans”, nonetheless, are wary of China’s desire for a free-trade zone fearing that they will be essentially eaten alive. Populations in Central Asia, particularly in Kazakhstan and Kyrgyzstan, tend to be Sinophobic in a way “that by far exceed any resentment they might feel toward Russian imperialism”, writes Lukin, the scholar quoted above. In short, Central Asian nations are not going to abandon Russia in favor of China and they will need Moscow even more to hedge against Beijing’s ever-rising economic influence. All of this works to Russia’s great favor.

Then there is Iran, which for its part, is also major part of the Silk Road project. This features an approximately 2000 mile connection between Urumqi, the capital of China’s Western Xinjiang province, and Tehran, from which point that connection would join Iran’s network running through Turkey into Eastern Europe and then throughout the rest of Europe via developing rail routes from southern Iranian points to Azerbaijan. The route “will become a tailwind for transport of goods and energy between Iran and China, which have set a long-term bilateral trade target of $600 billion/year”, according to Iran’s English-language Financial Tribune. For Iran, the line is part of wider rail development plans stipulating the electrification of all railroads by 2025. The country is aware of its capacity regarding global transport and logistics: Iran, Russia and Turkey are regarded in the region as the carriers of Eurasia into the future.

It goes without saying that the energy sector is Russia’s number one economic priority. Energy revenues were key to the recovery of its economy and hence allowed for Moscow’s stance in the international sphere. Energy earnings “enabled the Russian state to pay back all Soviet and post-Soviet foreign debt, to enlarge the country’s stabilization fund and the currency reserves of the Central Bank of Russia and to maintain a non-deficit budget for many years”, according to one white paper of the University of Leeds (UK), which allowed for a certain independence on the world stage.

The loss of Ukraine, the second-largest post-Soviet economy, a market of about 44 million people, and with whom Moscow sought to create an economic bloc economically equal to the European Union. Precipitated the rush eastward. “Lacking a market of sufficient size to create its own viable geo-economic area, Russia was left with the only option of moving into another nation’s economic orbit”, writes Lukin. In 2015, Russia hesitatingly joined the China-controlled Asian Infrastructure Investment Bank, and the most decisive step came a few months later in May, when Xi and Russian President Vladimir Putin met in Moscow to pledge to work toward a “link-up” between Russia’s Eurasian Economic Union and the Silk Road Economic Belt.

U.S. actions and new sanctions against Russia are viewed in Moscow as ultimately designed to upset this growing geostrategic energy policy with China and the Middle East. Combined with increasingly provocative statements from Washington concerning actions toward Iran in view of next month’s review of the “nuclear deal” of 2015, the next decade could prove the worst yet in Russian-U.S. relations (if that could be at all possible). How this all plays out on a regional game-board of pipelines, and powerbrokers may turn out to be less a case of clever multidimensional chess as it does the same predictable moves in the same predictable game that cannot tell its kings apart from its pawns.

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