How the China’s New Silk Road is Shifting Geopolitics

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Yves here. I thought this would be a useful companion post to our update today on the TPP, since the TPP is one of the US’s answer to China’s efforts to stand at the center of a new geopolitical web of alliances. Notice in particular how some of China’s new ties are fragile and how the US is dialing down its efforts to foment a new cold war with Russia.

By Robert Berke, an energy financial analyst with experience as a government consultant to the State of Alaska. Originally published at OilPrice

In Part 1 of “The New Silk Road,” we examined the China’s plan for rebuilding the Silk Road, stretching from Europe to Asia.

In Part 2, we look at currently proposed projects, and geopolitical rivalries that could stall and hamper progress.

Silk Road Projects:

It is important to understand that the new “Road’ is not a formal plan in any sense but merely a broad outline of goals, a work in progress, being filled in, opportunistically, with projects as they are developed, and as negotiations with target countries allow. The Road is also not a ‘start-up’ from scratch, but builds upon and extends a number of projects that have been ongoing with China’s partners.

The Iran-Pakistan-China project (described in Part 1) is one of the few that provides more details, but it is still very much in the planning stage. The second proposed project, only recently made public, focuses on Russia. China is also proposing a partnership with India for its third project.

The Pakistan program is an important economic development project that ties in with the Road as one of the connecting dots along the way, while the proposed program for Russian could become the nexus for the entire Road project, and the proposed India project could become the crucial piece in tying it all together.

Russia and China, the Emerging Partnership:

What makes Russia important enough to include in the plan? A better question might be: how is it possible to leave out Russia, the largest country in Eurasia, from a plan to build across the entire region?

In a recent meeting in Moscow, celebrating the 70th anniversary of the allied victory in World War II – which saw Indian, Chinese, and Russia troops parading in Red Square – China and Russia signed multiple agreements to tie development of the Chinese sponsored Silk Road to the Russian sponsored Eurasian Economic Union (EAEU).

The EAEU plan is a Kremlin-sponsored trade union between Russian, Kazakhstan, Kyrgyzstan, Belarus and Armenia, that has been pilloried in the western press as part of Russia’s supposed underlying agenda to re-establish the Soviet Union. With Russia’s inclusion, the plan for the Silk Road will extend from Beijing to the border of Poland. The blossoming cooperation between Russia and China is not something to be ignored, according to former Indian diplomat M.K. Bhadrakumar:

Clearly, the cold blast of western propaganda against the EAEU failed to impress China…China’s integration with the EAEU means in effect that a real engine of growth is being hooked to the Russian project. In reality, China is the key to the future of the EAEU. Significantly, Xi has combined his visit to Moscow with a tour of Belarus and Kazakhstan, the two other founder members of the EAEU….This is vital for the implementation of the Silk Routes via Russia and Central Asia.

The Chinese/Russian agreements cover eight specific projects, starting with the development of a high speed railway that will connect Moscow and Kazan (Tatarstan Republic), and will be extended to China, connecting the two countries via Kazakhstan. China’s Railway Group has won a contract for $390 million to build the road, with China contributing an initial $5.8 billion toward total estimated costs of $21.4 billion. Eventually, the planners hope to link this project to Russia’s planned high speed railway to Europe.

Also, China’s Jilii province has offered to build a cross-border high speed railway link between the two countries connecting with Russia’s major Pacific port city, Vladivostok. In addition, the two nations are expanding their energy partnership through a variety of projects. As Oilprice reported in a May 12 article, “the Russian hydropower company RusHydro and China Three Gorges Corp. have signed a deal to cooperate on a 320-megawatt hydroelectric power project in Russia’s Far East…near the border between China and Russia.” As described, this is the largest dam project in China or Russia, already under construction, and is expected to generate 1.6 trillion watts of electrical energy per year, with an estimated cost of around $400 billion.

China has also proposed developing an economic corridor between Russia, Mongolia, and China, a plan likely to include the EAEU member states, the initial step in development of one of the major components of the Silk Road, the Eurasia Economic Corridor, a preferential trade zone stretching across the region.

Several smaller joint project deals were also signed, including establishing a $2 billion agriculture financing fund.

Geopolitics on the Silk Road:

Until very recently, it was widely assumed that the US would lead its western allies in a campaign against the Russian/Chinese deal to develop the Silk Road, but events have been reversing with remarkable speed.

With Obama desperately trying to keep the wars in Yemen, Syria, and Iraq from metastasizing across the region, Obama’s Middle East policy is at a crossroads, with none of the big issues likely to be resolved before his term ends. Clearly, the US President wants to concentrate on Asia and reduce the US presence in the Mid-East, a region that has bedeviled every President for more than a generation.

The Deal to Get Out:

In the midst of all this, and after more than a two year absence from Russia, Kerry and his entourage requested an immediate urgent meeting with Putin and Lavrov that was granted by the Kremlin.

There is widespread speculation over what might have taken place in the Kremlin meeting on May 8th. Yet, the fact that the meeting took place at all may be more important than any agreements reached, because it clearly shows some form of thaw in a relationship that’s in process.

The rumor out of Russia is that Kerry requested Putin’s help in resolving the ME conflicts and closing the nuclear deal with Iran, with the Russian President agreeing. The quid pro quo for Russia was the US lowering tensions in Ukraine. The issue of Crimea was apparently not even raised, while the visit ended with Kerry’s unprecedented warning to Kiev to abide by the Minsk 2 agreement for a truce in Ukraine’s eastern provinces.

Much of the news media is speculating that the US is starting to remove the ‘crime scene tape’ around the Kremlin. Whether this is really a US offer of an olive branch to Russia is still pretty much guesswork, and even if it were, how far the US is willing to go in accommodating the Kremlin is largely unknown. Stratfor, the popular internet intelligence newsletter, speculates that the US is willing to start easing sanctions on Russia.

Israel and the Gulf Kingdoms:

For the Israelis, any easing of tensions with Iran and Russia is very bad news. In the Middle East, Israel is the canary in the coal mine, and is always among the first to discern the faintest signs of political unrest in its region.

There’s no denying the significance of Israel’s reaction to the US/Iran nuclear deal and US coordination with Iran and Russia in Syria and Iraq. Israel placed all of its chips on its ability to stop the deals, and lost badly, while perhaps severely damaging its relationship with it largest ally, the US.

Now, the howls of protest and betrayal pour out of every media source in the country, and Israel is not the only one. Saudi Arabia also feels left out in the cold with the Iran deal.

Proposed Partnership with China and India:

If it were possible to put politics aside, there’s no question that China’s single best partner for the Road would be its giant neighbor, bringing together the two most important markets for traders on the original ancient Silk Road. As the Associated Press reported on May 14, 2015:

“Both countries are members of the BRICS grouping of emerging economies, which is now establishing a formal lending arm, the New Development Bank, to be based in China’s financial hub of Shanghai and headed by a senior Indian banker. India was also a founding member of the embryonic China-backed Asian Infrastructure Investment Bank.

The cooperation between China and India is only growing, and their needs appear to be compatible, as the AP goes on to note:

China is looking to India as a market for its increasingly high-tech goods, from high-speed trains to nuclear power plants, while India is keen to attract Chinese investment in manufacturing and infrastructure. With a slowing economy, excess production capacity and nearly $4 trillion in foreign currency reserves, China is ready to satisfy India’s estimated $1 trillion in demand for infrastructure projects such as airports, roads, ports and railways.”

If India chooses to partner with China in the Silk Road, it could keep China building for the rest of the century, in a project that would combine the world’s most populous nations, with more than 2.6 billion people. With Russia already a partner, and Iran waiting in the wings to join, the project could add almost another quarter of a billion people, with a combined total of over one third the global population. A better fit would be hard to find.

But there is no shortage of historical baggage between China and India, ranging from a half century of unresolved border disputes; China’s growing relationship with Pakistan, India’s longtime adversary; and India’s close relationship with the US and Japan, both opposed to China’s claims in the South China Sea.

In a recent meeting in Beijing, China and India signed agreements for $22 billion in development projects, disappointing to many observers when compared to the $47 billion committed to the China/Pakistan deal. A former Indian diplomat, Bhadrakumar, argues, “that strategic distrust cannot be wished away,” and “…that India is not ready to replace the west as its development partner.”

It seems like the US influence with India has at least slowed prospects of recruiting India as a major Silk Road partner. Yet, the results are not so simple to predict since so many countries involved are dependent upon trade with China to the tune of hundreds of billions of dollars annually, and are also active trading partners with both Russia and Iran.

Even in the cold war, India became adept in its studied policy of co-existence with the Soviet Union and the US, which allowed India to play both sides. For pragmatic India, the choice of development partners may depend on the simple formula of ‘following the money’, given the fact that China is one of the few countries in the world with sufficient resources to finance the rebuilding of India’s infrastructure.

The rush of western allies, including India, to join China’s sponsored Asian Infrastructure Bank speaks clearly to the fact that western business is eager to take part in the Road projects. There are probably few banks in the world that would hesitate to finance major components of the project. However, whether the recent sea change in the US/Russian dynamic is a prelude for US support of the Silk Road project remains an open question.

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  1. Older & Wiser

    As the summation of these Silk Road projects is multi-trillion and decades-long… could China’s + Russia’s + India’s gold reserves (official and private) possibly stand behind ?
    Or are these millenary countries just foolishly hoard gold because of “tradition” as per Helicopter Ben Bernanke’s official testimony at the Humphrey-Hawkins hearings ?

    Yes, it’s a 6000-year-old monetary “tradition” that has stood the test of time over and over and over again.
    That’s what the Silk Road project has behind, not IOUs with pictures of dead presidents.

    1. Older & Wiser

      Sometimes it could also be dead musicians and/or dead poets and/or dead or live queens, princesses, frightening animals, islands in dispute, etc., etc., usually in fancy colors which make for excellent decoration.

      The point being that if any of all those elaborate (read: expensive) Silk Road projects need decades-long financing, it surely will not be in paper fiat money of any sort.

    2. susan the other

      i really don’t see how gold could ever have anything to do with this, or anything else for that matter. Gold is a lot like toilet paper – it can be hoarded. So what. This is so much bigger than gold it is mind boggling. And I, for one, love it all. As long as the environment is respected religiously.

      1. MyLessThanPrimeBeef

        While loyal subjects trust their governments, governments don’t trust each other.

        Proof? Just look at how much every nation, except the Pope, on army divisions.

        Remove the hegemonic might, “we will talk if you have gold. Why should we trust your fiat money?”

        For a slave, the promise of the master is enough to be accepted meekly. Among equal slave owners, it’s ‘trust but verify (gold).’

        No group of politicians is going to trust another foreign group of politicians.

        They know each other too well.

      2. Older & Wiser

        Susan, your charming candor is feverishly lovable.
        Particularly your …”…anything else for that matter…”…

        Do central banks hoard toilet paper because they’ll need to use it ?

        [ 6000 (six thousand) years of monetary history are carefully listening to both of us ]

        1. Skippy

          “[ 6000 (six thousand) years of monetary history are carefully listening to both of us ]’

          1. the amount of time a belief is held does not grant it validity.

          2. monetary history is a quite narrow set of optics wrt human sociological, anthropological or other planetary sciences, hence more of a quasi-religious pursuit.

          3. in reference to toilet paper – some have likened it too philosophical stripes, which are exceedingly bound to their canons proclamations and pontification.

          Skippy…. yes… yes…. the Creator of the Universe – is – fixated on this “object of desire”….

  2. oho

    “China has also proposed developing an economic corridor between Russia, Mongolia, and China, ”

    I’d add that the US cozing up to Japan (especially the Abe’s hard right-wingers) has sent the clear sign to South Korea that the US definitely plays favorites amongst our allies.

    So it seems Korean gov’t that’s spreading its long-term bets between Beijing and Washington with the Korean government’s participation in planning for direct rail routes from the southern tip of Korea to Germany via China, North Korea and Russia.

    1. craazyboy

      Well, first China will have to invade Mongolia, then S. Korea will have to invade N. Korea….

  3. Ben Johannson

    That old “countries need money” saw at work again. India needs yuan to mobilize its own resources? I suppose one could argue they need yuan to buy Chinese products, but the U.S. never has. Nor is buying technology from China a good answer; if technology transfers developed economies most of the planet would be highly developed.

    No, this is not a matter of national need or interest. International investment is a matter of enriching domestic elites. China and India can’t get away with just dumping money into the accounts of their industrialists, so the fairy need for capital is concocted. The Chinese government backs investment into India which generates billions in profits for the Chinese plutocrats selling things, while the same happens for India’s plutocrats as they skim off their cut of the flows going back to China.

    1. Skippy

      Methinks the Chinese need a place to export toxicity, soon, whilst keeping liquidity growing.

      Skippy…. barking mad I know….

      1. craazyboy

        Yes – Siberian trade opportunity – pollution for ice. No money needed at all. Just barter. But maybe set up a computerized trading system to quote the market pollution-to-ice exchange ratio. Then the banks will have something to do too.

        1. MyLessThanPrimeBeef

          Does Russia have any toxic mortgage securities to export to China?

          By the way, if we can somehow befriend Mongolia, that will cut the Silk Road in half.

    2. Nick

      Indeed. For example, who is going to pay to ride on a ‘high speed train’ from Russia to Beijing? This is the Sochi Olympic (heist) on steroids.

      1. alfred wilhelm meier

        Apple computers, iPhones, luxury brand apparels and top fashion labels will. It’s not about people or you and me, it’s about big money coming/going from East to West and viceversia.

      2. MyLessThanPrimeBeef

        Siberian mosquitos get to ride for free!!!

        “I have never seen anything so big.”

    3. jgordon

      Old saw indeed, however another old saw is that “resources” aren’t a scarce and dwindling commodity. Every resource mobilization that transpires is another day cut off from the mineral and ecological life of the nation and humanity To say that plutocrats are being enriched by this process is analogous to saying that plutocrats are gathering a huge pile of cyanide pills and when it gets big enough they’ll swallow them.

  4. EoinW

    A policy shift in Washington? Does Washington have just one foreign policy, or separate policies for every special interest group(domestic and foreign)? Toss in the word “coherent” and one is entitled to be skeptical of the idea the USA has a coherent foreign policy. Given the support of America and its allies for ISIS, the Jewish Taliban and Ukrainian Nazis one would hope they are utterly clueless. I might even suggest they are making everything up as they go along. If it looks like a duck and quakes like a duck…

    1. abynormal

      “SEPTEMBER 1, 1939

      I sit in one of the dives
      On Fifty-second Street
      Uncertain and afraid
      As the clever hopes expire
      Of a low dishonest decade:
      Waves of anger and fear
      Circulate over the bright
      And darkened lands of the earth,
      Obsessing our private lives;
      The unmentionable odour of death
      Offends the September night.

      Accurate scholarship can
      Unearth the whole offence
      From Luther until now
      That has driven a culture mad,
      Find what occurred at Linz,
      What huge imago made
      A psychopathic god:
      I and the public know
      What all schoolchildren learn,
      Those to whom evil is done
      Do evil in return.

      Exiled Thucydides knew
      All that a speech can say
      About Democracy,
      And what dictators do,
      The elderly rubbish they talk
      To an apathetic grave;
      Analysed all in his book,
      The enlightenment driven away,
      The habit-forming pain,
      Mismanagement and grief:
      We must suffer them all again.

      Into this neutral air
      Where blind skyscrapers use
      Their full height to proclaim
      The strength of Collective Man,
      Each language pours its vain
      Competitive excuse:
      But who can live for long
      In an euphoric dream;
      Out of the mirror they stare,
      Imperialism’s face
      And the international wrong.

      Faces along the bar
      Cling to their average day:
      The lights must never go out,
      The music must always play,
      All the conventions conspire
      To make this fort assume
      The furniture of home;
      Lest we should see where we are,
      Lost in a haunted wood,
      Children afraid of the night
      Who have never been happy or good.

      The windiest militant trash
      Important Persons shout
      Is not so crude as our wish:
      What mad Nijinsky wrote
      About Diaghilev
      Is true of the normal heart;
      For the error bred in the bone
      Of each woman and each man
      Craves what it cannot have,
      Not universal love
      But to be loved alone.

      From the conservative dark
      Into the ethical life
      The dense commuters come,
      Repeating their morning vow;
      ‘I will be true to the wife,
      I’ll concentrate more on my work,’
      And helpless governors wake
      To resume their compulsory game:
      Who can release them now,
      Who can reach the dead,
      Who can speak for the dumb?

      All I have is a voice
      To undo the folded lie,
      The romantic lie in the brain
      Of the sensual man-in-the-street
      And the lie of Authority
      Whose buildings grope the sky:
      There is no such thing as the State
      And no one exists alone;
      Hunger allows no choice
      To the citizen or the police;
      We must love one another or die.

      Defenseless under the night
      Our world in stupor lies;
      Yet, dotted everywhere,
      Ironic points of light
      Flash out wherever the Just
      Exchange their messages:
      May I, composed like them
      Of Eros and of dust,
      Beleaguered by the same
      Negation and despair,
      Show an affirming flame.”
      W.H. Auden, Another Time

    2. Jim Haygood

      From a Defense News article posted in yesterday’s links:

      Under a follow-on package endorsed in principle by US President Barack Obama during a March 2013 visit to Tel Aviv, Israel wants “$4.2 billion to $4.5 billion” in annual FMF (Foreign Military Financing) aid, a security source here said.

      With Washington investing billions each year in troops and treasure to preserve its interests in the Middle East, Israelis and their US supporters on Capitol Hill argue that Israel is the bedrock of democratic, pro-American stability in a region roiling from unprecedented turmoil.

      AIPAC’s Howard Kohr said, “new realities of the rapidly changing Middle East have also led to many unexpected costs for Israel, including the need to build a $360 million barrier along Israel’s southern border with Egypt and a similar, more modern one at its northern border with Syria.”

      Subsidizing Israel’s Berlin walls is like growing wheat in Saudi Arabia: an absurdly costly vanity project to produce an unnatural result with vast injections of money and technology.

      It’s not just the direct cost, which is large. It’s the diversion of US foreign policy and investment from the big opportunities in Asia to a squalid little colonial project in Israel that will keep sucking up US resources and prestige till its unsustainable apartheid model collapses.

      AIPAC’s Howard Kohr is basically informing Republican presidential candidates (all of which they’ve vetted) of the expected payoff for funding their campaigns. OPM, comrades: Other Peoples’ Money (ours).

      1. susan the other

        We are dividing up the markets of the world. The 21st C. will go down in history as the century of global cartels. We want to launch our corporations beyond our national constraints because of this. Our prize, since 1945, has been Europe and we know this not just from obviously different political and economic structures, but from the fact that we fabricated out of whole cloth the “iron curtain” in 1946. Europe was that important to us at the time. So we could maintain our capitalist system. Now flash forward. Europe, into which we have poured much heart and soul, is still the most important thing to us. Without Europe as our loyal trading partner we are toast. Israel is a distant second. Control of the Mid East is a closer second. But it’s all Karma. Because for Europe, the Silk Road system would be very beneficial. Could even save them from the absurdities of the EU and austerity. Which we obviously cannot do. So what will happen?

        1. different clue

          For Europe, the New Silk Road means deep poverty and a long-lasting fourth world status.
          China’s long-term goal for the Silk Road is to transfer all the thing-making industry in Europe to maquiladoras all the way along the New Silk Road back to China. Perhaps China will be so gracious as to maintain Europe as a cultural petting zoo after all Europe’s thingmaking has been relocated along China’s silk road.

          ( Mah fellah Amurr’cans . . . don’t laugh. China plans to turn us into their New Overseas Tibet. Well . . . the Pacific Coastalists all supported MFN for China so let them breathe mercury and eat tuna now and on into the future. As for the rest of us . . . oh well . . . )

          1. MyLessThanPrimeBeef

            I understand those Coastalists had retreated, check that, repositioned further east.

    3. sufferin'succotash

      China and Russia have foreign policies. The US has legacies (rolling back Communism, brave little Israel, 25-cent-a-gallon gasoline, war on terror) perpetuated by internal political and economic forces which the current administration at least can’t or won’t overcome. Kerry’s Canossa trip to see Putin was a useful bit of damage control, but that’s all.

  5. yan

    The Hydro Project value is a typo…millions instead of billions. Makes a little difference ;)

  6. Nick

    Pivot to Asia and strengthen military alliances (Japan, Aussie, Philippines, Indonesia ect…), assist India with continued rapid economic growth (faster than China at this point), meanwhile push ahead to ensure domestic energy independence – fracking and transition to renewable energy infrastructure. Maintain pullout of US forces from MENA, which Obama has pretty much completed, except for Afghanistan – as we see with formation of Arab Military Alliance, they are quite prepared to clean up their own backyard (with plenty of US advice, training, and hardware of course).

    Oil continues to fall, dollar continues to strengthen.

    Wait for the China bubble to pop in a year or so, USA comes up all ACES.

    1. craazyboy

      China is looking like a paper tiger at this point. Lots and lots of bad paper.

      ‘Course that still could be the pot calling the kettle black. The intertwined finances of the so called Western World (which includes Japan) don’t give one much confidence either.

  7. Jose Garcia

    WOW!!! What a new world we are entering! And not a “new world order” as seen from a Western perspective. “I did not tell half of what I saw, for I knew I would not be believed….” Marco Polo on his death bed, 1324.

  8. Mel

    I simply can not see how this new “Silk Road” would not happen, or how it could be prevented outside of dreams.
    1 manufacturing giant + 1 resource giant and they’re right next to each other
    China’s hoarding gold will give it some weight in buying internationally, but won’t strictly be needed in really close trade relationships.

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