Keywords

1 Introduction

Until 1991 the Central Asian republics had open economies integrated into the Soviet economic space but with no connection to the global economy.Footnote 1 Their role in the Soviet economy was as suppliers of natural resources, primarily cotton, minerals, and natural gas. Transport networks reflected this focus, with effective rail and pipeline links running north to the Russian republic but no rail links to the south or east, until the first rail line between the Kazakhstan and China opened in 1990 and the first rail line between Turkmenistan and Iran opened in 1997.

With the dissolution of the Soviet Union in 1991, demand and supply links collapsed. During the 1990s, the new independent Central Asian countries established customs posts at their borders. As exporters of raw materials, they entered global markets for cotton, minerals, and energy products, but they failed to diversify exports. The Kyrgyz economy became open and developed as an entrepôt for imported goods (Kaminski and Mitra 2012), and Kazakhstan had a fairly liberal import regime. The other countries became more autarchic and largely closed to direct imports; Uzbekistan and Turkmenistan maintained state control over key exports (cotton, gold, and gas) as well as foreign exchange controls.Footnote 2

During the 1990s, the Central Asian countries signed many economic cooperation agreements, all of whose impact was minimal (Pomfret 2006, 183–95; Laruelle and Peyrouse 2012). The principal regional arrangements had secretariats outside the region: the Eurasian Economic Community (Union of Five) in Moscow, the Shanghai Cooperation Organization in Beijing, and the Economic Cooperation Organization in Tehran. Other fora for cooperation included the regional development banks (Asian Development Bank in Manila and European Bank for Reconstruction and Development in London) and the UN regional commissions in Bangkok and Geneva. The lack of regional cooperation and difficulties for trade, transport, and transit were highlighted in reports by the UNDP (2005) and ADB (2006).

2 Landlockedness and Trade in Central Asia

Explanation of Central Asian countries’ inability to diversify their exports beyond natural resource products was often ascribed to the countries’ landlockedness.Footnote 3 This disadvantage was highlighted in a paper based on a PhD thesis by Raballand (2003) and in work at the World Bank (Cadot et al. 2006; Grigoriou 2007). The difficulties facing landlocked countries were acknowledged in the establishment of the United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UN-OHRLLS) in 2001 and adoption by the UN General Assembly of the “Almaty Programme of Action: Addressing the Special Needs of Landlocked Developing Countries within a New Global Framework for Transit Transport Cooperation for Landlocked and Transit Developing Countries in 2003. Neither the office nor the programme had much impact.”

Measures of the costs of doing international trade, such as in the World Bank’s Doing Business reports, indicated that trade costs were higher in Central Asia than anywhere else in the world. The World Bank reported that in June 2014 for Ease of Trading across International Borders, the Kyrgyz Republic ranked 183rd, Kazakhstan 185th, Tajikistan 188th, and Uzbekistan 189th of the 189 countries surveyed (World Bank Doing Business 2015); Turkmenistan was not included but would have scored more poorly than the other four.Footnote 4 Other evidence reinforces the impression that the costs of international trade in Central Asia were high, with long delays and often arbitrary fees at borders and restrictions on transit such as requirements for trucks to travel in convoy or variations in maximum axle size (Pomfret 2019, 215–23).

Especially during the 1999–2014 resource boom, high trade costs did not hamper exports of oil, gas, gold, and other minerals, but they did discourage export diversification. In those years, there was little incentive to lower trade barriers or to pursue economic cooperation to reduce trade costs. The energy exporters Kazakhstan and Turkmenistan benefited directly from high prices for their exports, Uzbekistan to a lesser extent, while the poorer countries received large remittance flows from migrant workers in Russia and Kazakhstan.Footnote 5 While the Central Asian countries generally upgraded their domestic infrastructure, little attention was paid to international connectivity, apart from oil and gas pipelines.Footnote 6

3 Coming Together Again After 2006

An early indicator of the benefits of cooperation was the pipeline constructed from Turkmenistan to China via Uzbekistan and Kazakhstan between 2006 and 2009, which had win–win outcomes for all four countries. The Northern Distribution Network, by which the USA provisioned its troops in Afghanistan after 2009, also encouraged cooperation among the Central Asian countries (Yuldasheva 2013).Footnote 7 However beyond these ad hoc cooperation initiatives, cooperation remained limited, and personal relations among the autocratic presidents were rarely warm.

The only economic cooperation initiative with any success in the first decade of the twenty-first century was the Central Asia Regional Economic Cooperation Program (CAREC). CAREC had its origins in 1997 as a joint initiative of Central Asian countries and six multilateral institutions.Footnote 8 The secretariat was established at the Asian Development Bank in Manila in 2000, but progress was slow and cautious; the Transport and Trade Facilitation Strategy was not endorsed until 2007. Nevertheless, with a focus on meetings of senior officials, CAREC proved more useful than the regional organisations that were initiated at a higher level in the 1990s. CAREC identified major transport corridors in Central Asia and focussed on improving the hard and soft infrastructure in order to reduce travel times and money costs along those corridors.Footnote 9 It also played an important role in gathering information about trade costs through the Corridor Performance Measurement and Monitoring program (ADB 2014).

In 2010 Belarus, Kazakhstan and Russia formed a customs union, which moved to deeper integration in 2015 as the Eurasian Economic Union (EAEU); Armenia and the Kyrgyz Republic joined the EAEU in 2015. Although a web of bilateral trade agreements continued to exist among Soviet successor states within the Commonwealth of Independent States, the EAEU was the first effective regional trading arrangement. Operation of the EAEU became associated with competition for potential future members who might also be seeking deeper integration with the European Union under the EU’s Eastern Partnership (EaP) program; Armenia withdrew from EaP negotiations in 2013 in order to negotiate EAEU membership and, when Ukraine appeared to have shifted closer to the EU in 2014, Ukraine’s relations with Russia deteriorated. The conflict in Ukraine led to sanctions by the EU and others on Russia, followed by Russian counter-sanctions, which cast a shadow over the EAEU’s operation as sanction-busters routed trade through Belarus or Kazakhstan.

4 The Eurasian Landbridge and the Belt and Road Initiative

During the 2010s, political relations across Eurasia often seemed fraught. At the same time, economic connectivity improved as overland transport links that had stagnated for centuries were revived. Starting in 2011, the expansion of the Eurasian Landbridge rail services between China and Europe benefited Kazakhstan, which earned substantial transit fees, and encouraged future rail construction (e.g. between Kazakhstan and Turkmenistan and Iran) and a denser long-distance rail network with the potential to reduce transport costs for international traders in Central Asia. This development has become associated with China’s Belt and Road Initiative and the promise of external infrastructure funding.

Trade between Europe and East Asia has been dominated since 1500 by maritime transport. At the start of the twenty-first century, several rail lines physically connected China and Europe, but none was considered competitive to sea freight. The most prominent, the TransSiberian Railway, was little used for international traffic after the 1960 Sino-Soviet split. A rail line between Kazakhstan and Xinjiang, completed in 1990, mainly took Kazakh coal, steel, iron ore and other minerals to China in return for Chinese manufactured goods. After a Turkmenistan-Iran railway opened in 1997, a line south of the Caspian Sea from Turkmenistan through Iran and Turkey to Europe featured on UN maps as a TransAsian main line but was unused as a China-Europe link; indeed, the line operated at far below capacity due to cumbersome change of gauge operations at the Turkmen-Iran border, excessive regulations for transiting Turkmenistan and Uzbekistan, and poor track maintenance in western Iran and eastern Turkey. As its flagship aid programme to Central Asia during the 1990s, the EU promoted the route from Central Asia across the Caspian Sea to Baku and then across the Black Sea from Georgia to Europe, but changes of mode (rail-sea-rail-sea-rail) made this route commercially unattractive.

In 2008–9, block trains were commissioned by German car companies to carry components via the TransSiberian Railway to their joint venture assembly operations in northeast China (VW/Audi in Jilin and BMW in Shenyang). Similar bespoke rail services were provided from Lianyungang to car assembly operations in Uzbekistan.Footnote 10 These trips showed that overland rail transport was feasible, but they were not useful for other potential customers because they were not run to a schedule, and overland freight was still believed to be uncompetitive with sea transport apart from these special cases. The situation changed dramatically between 2011 and 2016.

The stimulus for change was China’s Go West policy that had been launched in 2001 but whose impact was only felt after a bonded train link between Shenzhen and Chongqing opened in 2010. This facility, providing imported components with minimum delay and cost, encouraged Foxconn, HP, Acer, and others to build large assembly facilities in Chongqing for laptops, printers, and other electronic equipment. The initial intention was to export the products via the Yangtze River and Shanghai, but the Yangtze River route soon became congested, especially with delays at the locks in the Three Gorges. An alternative was to send the goods by train to Europe. In 2011 and 2012, individual trains connected Sichuan Province and Chongqing Municipality with Europe, much like the block trains on the TransSiberian Railway. The important additional development was the establishment of regular rail service between Chongqing and Duisburg in 2013, with increased frequency to three times a week in 2016 and daily in 2018.

The rail companies of China, Kazakhstan, Russia, Belarus, Poland, and Germany combined to offer a faster transport service than sea and lower cost than airfreight. It was attractive to electronics firms in Western China supplying EU markets and to EU firms shipping components to their operations in Western China. Cars and electronics have been the two principal industries producing along international value chains that were often referred to as global value chains (GVCs) but were, in fact, regional (i.e., European or East Asian value chains); the rail Landbridge linked the Eurasian value chains.

The Chongqing-Duisburg route was so successful that other cities in China and Europe trialled rail connections. In 2012–15, routes from Yiwu, Chengdu, Zhengzhou, Wuhan, and other Chinese cities to Europe were offered. Some routes would be successful with regular services established (e.g. Yiwu-Madrid), and some termini would become hubs, for example Łódź (Poland) became an Eastern European hub and Klaipéda (Lithuania) a hub for southern Sweden, while other routes would be unprofitable. By May 2017, China Railway Express trains were connecting 37 cities in China to destinations in eleven EU countries. China Railway reported over 6,000 trips in 2018.Footnote 11

The creation of the Eurasian Landbridge was market-driven as rail companies responded to demand by coordinating service and agreeing on transit procedures (Pomfret 2019b). Little investment in physical capital was required. The revenues to Deutsche Bahn and China Railway Express and transit fees to Kazakhstan, Russia, Belarus, and Poland were substantial. Freight forwarders and courier services responded by offering more services, for example, arranging multimodal connections and improved tracking, consolidating part-container loads, organising clearance for goods subject to EU-Russia mutual sanctions, and including refrigerated containers in trains. It is through such service provision that hubs such as Duisburg, Łódź, and Yiwu have become popular termini. The added services appeal to GVCs, such as agribusiness, where goods may be perishable and require refrigeration, or to non-GVC traffic, while the original drivers (car and electronics GVCs) remain important as the lead firms transform what have been regional value chains in Asia or in Europe into Eurasian value chains.

In an October 2013 speech in Astana, President Xi Jinping announced the Silk Road Economic Belt, an overland connection that would be supported by funding from the Asian Infrastructure Investment Bank which was established shortly afterwards. Chinese maps showed the Belt following a route south of the Caspian Sea through Iran and Turkey, in contrast to the Landbridge routes through Russia.Footnote 12 Together with the Maritime Road announced soon afterwards, this would become the Belt and Road Initiative (BRI). In May 2017, representatives of over 130 countries attended the Belt and Road Forum in Beijing for the formal launch of the BRI.

Although the BRI is often presented as a grand overarching plan, China’s actions can be opportunistic. One week after UN sanctions on Iran were lifted in January 2016; President Xi visited Tehran.Footnote 13 On 28 January, the first train left Yiwu for Tehran with 32 containers; the train bypassed Uzbekistan by crossing Kazakhstan before following the Caspian coastal line from Kazakhstan to Turkmenistan and Iran that had been opened in 2013. Yinchuan-Tehran train service was initiated in September 2017, and by the end of 2017, two trains per month were running to a regular schedule. Reports circulated that China, Iran and Turkey were discussing an extension to a Tehran-Europe service.

A rail link between Kashi (Kashgar), the most western point on China’s rail network, and Andijan via the Kyrgyz Republic is under active discussion. That would complete a continuous line from China via Uzbekistan, Turkmenistan, Iran and Turkey to Europe, cutting out Kazakhstan and hence entirely independent of the current main Landbridge route. This southern route is actively supported by Uzbekistan, which is no longer seen as a transit-unfriendly bottleneck since the election of President Mirziyoyev in December 2016.Footnote 14 Turkey’s rail tunnel under the Bosporus that opened in 2013 added an important piece to the southern route to Europe as transfer to a ferry across the Bosporus is no longer required.Footnote 15

However, the Kyrgyz Republic is wary of contracting debt, even on concessional terms from China; the proposed line passes through sparsely populated regions and would be unlikely to generate sufficient transit revenue to service a loan.Footnote 16 Potential debt dependence became a major criticism of the BRI in 2018, largely based on Sri Lanka’s experience with Chinese loans for uneconomic infrastructure projects and highlighted in Hurley et al. (2018). At the Second BRI Forum in April 2019, China promised to address concerns about the original concept by establishing a BRI Debt Sustainability Framework and a panel of international mediators from BRI countries to resolve disputes arising from BRI projects.

The Belt portion of the BRI builds on the already successful market-driven Eurasian Landbridge. However, the BRI still matters because it publicises the new Eurasian connectivity, and China is offering finance to improve the infrastructure on existing routes and to create alternative routes. Both the Landbridge and the BRI emphasise efficient cross-border services and exclude countries that cannot guarantee such efficiency, for example, Uzbekistan when the China-Iran link was pioneered in 2016. Current traffic along these routes transits Central Asia without stopping, but with the hard infrastructure in place and in regular use, there is an opportunity for Central Asian countries to use the rail system to increase exports.

The biggest recipient of funding under the BRI has been for projects along the China Pakistan Economic Corridor (CPEC) that runs from Kashi to the Indian Ocean port of Gwadar.Footnote 17 This is a potentially important route not only for western China but also for the Kyrgyz Republic and Tajikistan, some of whose exports already travel by road over the Karakoram Highway in order to avoid transiting Afghanistan, even though the Karakoram Highway is a difficult road, especially in winter. However, the CPEC faces strong opposition from India for passing through disputed territory in Jammu and Kashmir and security threats from Balochistan Liberation Army fighters, who killed ten Chinese construction workers in May 2017, and completion of the rail link is a distant project. Even when the rail link is completed, Gwadar is not convenient to major trade routes, for example, the Kyaukpyu-Colombo route is a more convenient Indian Ocean crossing from most of China.

The important point about the BRI projects is that, even if only a fraction are implemented, China is on the cusp of greatly improved rail connectivity to the west and south, and these routes will benefit other Eurasian countries.Footnote 18 The economics literature, although subject to many methodological caveats, consistently supports the hypothesis that improved infrastructure is positively related to increased trade, diversification and growth. The strongest evidence is for a market integration link facilitating greater specialisation and gains from trading by comparative advantage; in the Central Asian context, that could mean diversification into a wider range of exports. Recent studies also identify an infrastructure-growth link via agglomeration benefits and related labour movements which have the potential to create losers as well as winners; the losers tend to be people stranded in depressed geographical regions, while the winners will be not only internal migrants to the big cities, but also international migrants whose journeys are eased.Footnote 19

5 Will Central Asia Jump Through the Window of Opportunity?

Whether Central Asian countries take advantage of the improved transport infrastructure or not will depend upon whether governments improve the soft infrastructure of international trade and the conditions of doing business in general. Since the end of the resource boom, there have been signs of increased desire to integrate into global trade networks, reflected in the WTO accession of Tajikistan in 2012 and Kazakhstan in 2015 (and increased WTO interest of Uzbekistan and Turkmenistan) and by the participation of Kazakhstan and the Kyrgyz Republic in the Eurasian Economic Union.Footnote 20 The EAEU offers smoother travel between the China-Kazakhstan border and the Belarus-Poland border and into Schengenland, while the BRI could speed up travel along a rail route south of the Caspian Sea and other spurs from and links between the main lines. Presidential change in the two largest economies, Uzbekistan in 2016 and Kazakhstan in 2019, may also facilitate economic reform.

Many studies have found a significant positive relationship between infrastructure and international trade, typically using fairly general indicators of infrastructure, such as perceptions of port quality or the length of railways or paved roads. In this tradition, Portugal-Perez and Wilson (2012) used a gravity model to identify the impact on trade of indicators of hard infrastructure (physical infrastructure, and information and communications technology networks) and soft infrastructure (border and transport efficiency, and the business environment) in 101 countries over the period 2004–7. Physical infrastructure and the business environment had the largest positive impact on bilateral trade flows; border efficiency and the business environment were more important at lower per capita GDP levels, and ICT and physical infrastructure increasingly important as per capita GDP increased. Portugal Perez and Wilson (2012) also found less robust evidence of complementarity between hard and soft infrastructure.

More recent literature emphasises the complementarity between hard and soft infrastructure and their impact on the intensive and extensive margins of trade (i.e., whether infrastructure improvements stimulate greater levels of existing trade or trade diversification into new products) and on the nature of growth (e.g. whether favouring the rich or inclusive of poorer people). This is relevant to Central Asia and other landlocked Asian countries. High trade costs have hampered diversification beyond primary product exports with a strong comparative advantage, such as cotton, oil and gas, or minerals, and have been prohibitive for small and medium-sized enterprises. Reducing trade costs by the improved hard and soft infrastructure can promote trade at the extensive margin and stimulate inclusive growth.

As long as the better hard infrastructure is supported by appropriate soft infrastructure, improved rail connectivity will stimulate economic growth through market integration and agglomeration effects across Eurasia. The rapid growth of rail freight between China and Europe since 2011 implies that it is economically viable. Non-transparent subsidies offered by different levels of government in China cloud assessment, but it seems probable that the Landbridge is sustainable and China’s BRI commitment reinforces that conclusion.Footnote 21 Despite the disruption to trade due to COVID-19, the volume of traffic continued to increase in 2019, and especially in 2020, when it was almost double the 2018 level (Table 10.1).Footnote 22

Table 10.1 Volume of traffic on China-EU-China container trains, 2015–20
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The pattern of costs of rail, sea and air transport across Eurasia suggests that there may be opportunities for rail transport to gain market share as speed, reliability and associated services improve. The relative attractiveness of rail vis-à-vis sea transport between China and Europe increased substantially during the 2010s as better services were offered, journey times were reduced, and efficiency improvements pushed down rail freight rates (Fig. 10.1).Footnote 23

Fig. 10.1
figure 1

Source Hillman (2018), reproduced from Zhang (2017). Note: based on data in Land Transport Options between Europe and Asia: Commercial Feasibility Study, U.S. Chamber of Commerce, Washington DC, 2006, and in Zhang (2017—reported in Schramm and Zhang 2018)

Time and cost of shipping a 40-foot container from China to Europe by Air, Rail and Sea, 2006 and 2017

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Meanwhile, sea freight rates fell by less and shipping times increased due to slow steaming.Footnote 24 Schramm and Zhang (2018) estimated the price in 2017 in US dollars of sending a full 40-foot container from Shanghai to Hamburg: by sea the cost was $2,410 and time 32 days, by rail $6,350 and 16 days and by air $32,490 and four days. From inland cities, the rail advantage would be greater with lower price and shorter time, for exmaple Chongqing-Duisburg 12 days and $3,700–4,500. Ship times between China and Europe are also much more variable than train times due to weather, delays at chokepoints like the Suez Canal and the possibility of piracy.

More reliable delivery time adds to the attractiveness of rail transport, especially for firms operating complex supply chains and aiming to minimise inventory costs.Footnote 25 If Eurasian value chains displace regional value chains in East Asia and Europe, potential GVC participants in Central Asia could find niches in new Eurasian GVCs. The COVID-19 pandemic may have been a catalyst for accelerated change. Traders reported that difficulties with maritime transport as ships became stranded and crews quarantined forced them to use more expensive rail services in the first half of 2020, to the extent that May 2020 was the busiest month to date for Landbridge traffic (Walton 2020). Once accustomed to reliable delivery times, many traders were reluctant to return to sea transport.

As with most economic changes, there are potential losers from reduced transport costs as well as gainers. Reduced trade costs subject import-competing firms to greater competition. Locations off the main rail lines may decline as economic activity flourishes in better-connected locations and workers migrate. The policy challenge for Central Asian governments is to implement economic reforms to increase the ease of doing business and to improve the soft infrastructure of international trading without being distracted and obstructed by beneficiaries from the status quo.

In sum, it is hard to forecast the economic impact of the BRI rail projects with any precision, but the international evidence suggests that improved hard and soft infrastructure could promote desired economic diversification and generate inclusive growth. At the same time, the BRI could exacerbate some less-desirable long-term economic development trends through migration, agglomeration and path-dependence effects. While soft infrastructure improvements tend to be low-cost and win-win, hard infrastructure projects can be expensive, and many projects have become symbols of poorly managed public spending. The potential for debt-dependency due to misguided spending is particularly acute for the smaller economies, and in the BRI context is especially relevant to the Kyrgyz Republic.

6 Conclusion

In the 2020s, the Central Asian countries could seize the opportunity to be land-linked through an expanding Eurasian rail network. The promise is that lower trade costs will encourage export diversification as agricultural and manufacturing producers exploit their comparative advantage to establish new export markets. For this to be realised, the many obstacles to doing business in Central Asia and to trading across international borders in the region will need to be reduced. Improved transport infrastructure can kickstart the process, but the hard infrastructure will have to be accompanied by improved soft infrastructure, that is, transport, trade and border-crossing facilitation.

This chapter’s positive view of the Landbridge and, by extension, of the overland part of the BRI contrasts with the view of many political analysts who see the BRI as essentially a zero-sum game. Ishnazarov (2020, 79), for example, concludes that the BRI “will give significant strategic dominance to China” and even if other countries do receive some economic benefits, that will be at the cost of increased dependence on China. However, the history of the Landbridge as a forerunner of the “Belt” part of the BRI suggests that cooperation in operating infrastructure can be beneficial to all participants; the rail companies of China, Kazakhstan, Russia, Belarus and Poland have profited, as have the freight forwarders and other service companies, and the customers, including firms sourcing inputs internationally, have benefited from increased choice on price, speed and reliability. Looking forward, there is no reason why Central Asian participants should not benefit from future improved connectivity if they implement appropriate facilitating policies.

Given the regional geography, improvement of soft infrastructure should include international cooperation as currently fostered by CAREC and potentially including further multilateral institutions, such as the OSCE. As highlighted in the Introduction to this chapter, transport, trade and border-crossing facilitation is one of the four main areas of operations of the Office of the Co-ordinator of OSCE Economic and Environmental Activities. At the December 2016 OSCE Ministerial Council Meeting in Hamburg, Decision No. 4/16 Strengthening Good Governance and Promoting Connectivity encouraged OSCE members to cooperate in creating “a conducive environment for promoting connectivity within the OSCE area” and specifically called on states “to further promote transparency, integrity and the fight against corruption in customs, cross-border operations and infrastructure development, including by improving border-crossing procedures and processes.” Such measures are at the heart of the soft infrastructure improvements emphasised in this chapter.

There is, of course, a potential gap between aspirations and achievements. The OSCE has limited funds. This impediment can be overcome through collaboration with other institutions, such as the CAREC partners. Mayer (2020) highlights potential benefits from closer collaboration on Central Asia between the OSCE and the European Union, whose 27 members are OSCE participating states; the EU has deeper pockets, but the OSCE has the advantage of being a member-driven organisation and the Central Asian countries are themselves all OSCE participating states. This advantage may be especially useful in addressing sensitive issues such as corruption at border posts and the vulnerability of foreign traders. Placing emphasis on economic as well as security matters could also help to reverse a twenty-first century pattern, identified by Mayer, of more confident Central Asian host governments exerting increasing pressure on OSCE field missions to curtail activities based on human rights, democratisation and civil society empowerment mandates. The focus would continue to be on good governance, but the emphasis on a link through trade facilitation to economic diversification and higher living standards is likely to be perceived as less confrontational.

This chapter has focussed on economic cooperation and the link to security is more tenuous. However, the Landbridge has provided an ongoing example of positive cooperation even as political relationships between the EU and Russia and China have deteriorated. For the Central Asian countries, a denser network of international economic connections is likely to improve the often-frosty bilateral relations within the region and reinforce strategies of multivector diplomacy vis-à-vis external partners.