Belt and Road 2.0 Initiative and Russia

Journal Title: Far Eastern Affairs

Issue Edition: Vol. 48, No. 1

Author: Boris Heifetz, Nikita Stepanov


Belt and Road 2.0 Initiative and Russia

Authors:

Boris A. Heifetz, D.Sc. (Economics), chief researcher, RAS Institute of Economics, professor, Financial University under the Government of the Russian Federation. E-mail: bah412@rambler.ru

Nikita S. Stepanov, Ph.D. (Economics), senior researcher, RAS Institute of Economics. E-mail: nikitosstepanov@gmail.com


Source: International Affairs, Vol. 66, No. 1, pp. 31-46

http://dx.doi.org/10.21557/FEA.58785237

Abstract:

This article analyzes the six-year period of implementation of the global Chinese project One Belt, One Road (OBOR), or the Belt and Road Initiative (BRI). Its positive aspects are highlighted: expanding the number of participants and their areas of interaction, creating a powerful financial base, creating new transborder transportation routes, increasing trade and investment among the countries participating in the project. Prob- lems have been identified, including the lack of transparency of OBOR pro- jects, insufficient consideration of national interests and local needs of China’s partners, increasing their geopolitical risks, and the “debt trap” of Chinese loans. Possible ways of deepening the Russian-Chinese interaction at the new stage of BRI 2.0 development are proposed.


Keywords:

One Belt, One Road, soft power, hybrid economic partner- ship, debt trap, conjugation with the EAEU, fourth industrial revolution, Northern Sea Route (NSR).


The First Results of the OBOR Project

In March 2019, six years passed since Xi Jinping proclaimed the new geopolitical and geoeconomic project the Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSR) of the 21st century. The terms One Belt, One Road (OBOR) and Belt and Road Initiative (BRI) appeared due to the expansion of the project’s horizons and the desire to give it a more concise name. But more importantly, rebranding gives a clearer indication of its main purpose: to create a belt (network) of partners (friends, allies) based on common, primarily economic interests. . . .

OBOR is a reflection of China’s soft power policy, which envisages China’s consistent and gradual foreign policy and foreign economic expansion in the global economy. It is expressed in a number of strategic projects: SCO, BRICS and BRICS plus, Partnership on the New Industrial Revolution, etc. At the same time, OBOR may become the most successful such project due to its coverage of a large number of countries and constant expansion of cooperation areas, taking into account changing development conditions.


There is another crucial prerequisite for the implementation of OBOR. This is the serious material base that China has for the project. At the beginning of 2017, the Big Four of China’s state-owned commercial banks – the Bank of China, the Agricultural Bank of China, the China Construction Bank and the Industrial and Commercial Bank of China–financed loans and share purchases for the BRICS project. The State Chinese Development Bank accounted for 38% of this finan ing and the Export-Import Bank of China for only 11%, as well as some new organizations that have just begun operations (the Silk Road Foundation, the Asian Infrastructure Investment Bank and the BRICS New Development Bank).


In this respect, OBOR seems to be a more attractive project for third countries than the similar idea put forward by Russia in 2016 to create a Greater Eurasia from Lisbon to Vladivostok, which has no such economic backbone.

OBOR Issues

It would be a mistake to believe that the OBOR project has no serious opponents among both developed and developing countries. Many projects under the OBOR initiative are cancelled, revised or delayed. Host countries are rethinking the costs and benefits they will derive from cooperation with China. With OBOR, China is implementing a financing model in which the majority of loans actually go to Chinese companies – construction firms, manufacturers of various necessary goods and service providers. That is, lending to “themselves.”

At the same time, one should not overestimate the relatively small fee for such loans. Chinese companies participating in such projects can put their rate of return in the price of the goods and services they supply, which will give a completely different assessment of the cost of Chinese loans. In addition, China insures its loans by taking liquid assets as collateral from the credited states. For example, loans to Venezuela, Angola, and Ecuador are secured by oil.

The Center for a New American Security experts’ report identifies seven main problems that have manifested themselves in OBOR implementation. Among them are the following:

(1) Subversion of national sovereignty.
Chinese investments give “control over individual infrastructure projects through equity participation agreements, long-term leases or multi-year operating contracts.”

(2) Lack of transparency.
Chinese projects often involve “nontransparent bidding procedures for contracts and financial terms that are not subject to public scrutiny.” The situation is complicated by the mechanism of project implementation, mainly with the help of Chinese contractors.

(3) Increased financial instability.
Higher default risk, difficulties in repayment of loans and in payback of a number of projects.

(4) Insufficient consideration of local needs.
Chinese contractors do not transfer skills to local workers, and sometimes use unfair profit-sharing mechanisms and are not oriented toward local economic needs.

(5) Geopolitical risks.
Projects implemented by China may jeopardize the telecommunications infrastructure of the recipient country.

(6) Negative impact on the environment.
In some cases, ongoing projects did not have adequate environmental impact assessments, which could lead to serious public health consequences.

(7) Potential for corruption.
In countries that have a high level of kleptocracy, projects have already brought serious revenues to politicians and bureaucrats. . . .

Conclusions

The OBOR project has actually entered a new stage of its development, when its main contours, methods, and forms of interaction have been more clearly defined and many implementation problems have become apparent. IMF Managing Director Christine Lagarde called this stage BRI 2.0, when it is necessary to learn from the work done and to address new more complex tasks. In her view, BRI 2.0 could benefit from increased transparency, open procurement with competitive bidding and better risk assessment in projects preparation.


OBOR is not a panacea for project participants, it can only become an important supporting tool for their economic progress. The main burden of structural and technological modernization and social stability of the project participants lies precisely on them as sovereign states. On the other hand, they have full responsibility for making decisions about the degree, forms, and risks of participation in China’s OBOR.


In this regard, Russia, which is in a difficult geopolitical and economic situation, faces very difficult tasks. In order to handle them, it is necessary to make better use of China’s opportunities in the areas of infrastructure, the development of high value-added industries, and a number of technological activities.


A very important area of interaction between the two countries should be the development of informal ties “from below” – at the level of private companies, primarily small and medium-sized businesses, regions, nonprofit organizations, etc. It is these communications that are becoming increasingly developed in the context of the Internetization and digitalization of the global economy and are defining a new stage of globalization (Globalization 4.0).


At the same time, it is necessary to take into account our own experience of cooperation with China, as well as the already manifested negative consequences of other countries' participation in OBOR, and constantly adjust the existing mechanisms of cooperation. Only such a balanced and flexible approach can become a rational route for Russia along this difficult Chinese route.

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