Nearly all direct trains between China and Europe pass through Russia, but alternative routes from China to Europe via Turkey are becoming increasingly attractive. After years of delay, the Baku-Tblisi-Kars (BTK) railway finally became operational on October 30, 2017. Baku in Azerbaijan is connected to China via rail ferries across the Caspian Sea and railways in Kazakhstan. Kars in eastern Turkey is linked to Europe via the Turkish rail network. Construction of the BTK railway cost more than $1 billion [Azerbaijan, Georgia, Turkey Launch 'Silk Road' Rail Link]. Notably, the project was fully funded by Azerbaijan and Turkey without involvement either by Chinese banks or by multilateral development banks. As Wade Shepard points out in an article in Forbes, geopolitics play a major role in the emergence of this rail corridor. On the one hand, European exporters of agricultural products have a major interest in using China-bound trains that bypass Russia, which imposed a ban on the transit of agricultural products from the EU. It did so in response to sanctions against Russia that are related to the conflict in Ukraine. On the other hand, the BTK railway not only allows trade flows to bypass Russia but it also circumvents Armenia. According to Shepard, contributing to Armenia´s isolation is likely to be among the motives for Azerbaijan in financing the new railway, given the long-standing territorial conflict between the two countries [How Azerbaijan, Georgia, And Turkey Subverted Russia And Isolated Armenia With New Railway]. Another Forbes report by the same author discusses Iran’s ambitious efforts to modernize its railways. Not only Chinese firms but also European companies are involved, including prominent players such as Siemens and Alstom. Like the BTK railway, the Iranian rail network is a link between Central Asia and Turkey, thus providing another possible route to bypass Russia [Iran: The Place Where The World's Rail Industry Goes To Feast].
Meanwhile, an important new development on the maritime Silk Road relates to Sri Lanka. Some years ago China provided $1.2 billion worth of loans to Sri Lanka in order to construct a container port at Hambantota, on the country’s southern coast. After it was built, the new port failed to attract much traffic despite its favourable location right next to the main east-west sea lane across the Indian Ocean. Recently, however, the state-owned China Merchant Group agreed to pay $1.1 billion for a 99-year operating lease of the port and to invest additional sums in order to improve it. As a result, the port´s management will change from Sri Lankan to Chinese. Various other Chinese companies are planning to invest in a new economic zone close to the port. China Merchants and the Sri Lankan government appear to be aiming for an approach that has been very successful in the case of Piraeus, the main Greek seaport. There, too, a Chinese state-owned company acquired an operational lease while investing in upgrading the port and attracting other Chinese companies. As a result, Piraeus is now one of the busiest ports in the Mediterranean while the Chinese company, Cosco, acquired a majority stake in the port.
China’s new involvement at the port of Hambantota is significant in two regards. First, there is the possibility that Hambantota will indeed become a major maritime hub in the Indian Ocean. And second, it shows how in the future China may deal with countries that cannot repay the money they borrow in order to finance new infrastructure. As China expands the number of OBOR projects, it is inevitable that the number of countries that have difficulty with repaying infrastructure-related debts to Chinese policy banks increases. One of the solutions then could be to convert debt into equity. Just like in the case of Hambantota, a Chinese company could step in to acquire an operational lease of the infrastructure that was built with Chinese money. The host country could then use the money paid for the lease to pay its debt to Chinese banks. The underlying idea is that, at least in some cases, major Chinese companies – given their size, financial resources and connections to other Chinese firms - might succeed where the original infrastructure operators are less successful. The outcome of this would be that some of the ports, railways and airports around the world that are currently being financed by Chinese banks and built by Chinese contractors will eventually be operated by Chinese companies [Struggling port forces Sri Lanka closer to China].
Frans-Paul van der Putten
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