Issue 6, 2015. December-January


OP-ED: The New Silk Road and What it Means to Georgia

On the 15th and 16th October, the Georgian Government held the Tbilisi Silk Road Forum. This discussed the challenges and opportunities of developing this trade and energy corridor and included a large delegation from China with senior Chinese Government officials and approximately 300 Chinese business people. George Welton, Executive Director of AmCham, reflects upon what a New Silk Road, with significant Chinese involvement, might mean for Georgia.

Silk Road Forum in Tbilisi

The core idea of the New Silk Road is to create an effective transit corridor from the Black Sea across Georgia, Azerbaijan and Central Asia to China and beyond.This idea is built on Chinese and Central Asian trade routes that reached their height in the 10th Century and, while it has many elements, is largely driven by trade and energy issues.

Trade is potentially huge. $1.8 trillion of trade transited between Europe and Asia in 2014 and between just the EU and China was $600 billion.According to speakers at the forum, transit time by ship from China to Europe is around 45 days, but by land it can be as low as 9 days. Therefore, even though land transit is more expensive, this route will make sense for some goods.

The New Silk Road also about energy. Central Asia has some of the largest unexploited hydrocarbon reserves in the world, and those reserves need to be connected to markets. More investments and more pipelines are needed to create an energy Silk Road that connects to the East and West.

A range of different international institutions have been operating for a long time to support the development of this New Silk Road. For example, the Central Asian Regional Economic Cooperation program (CAREC), which was launched with the support of ADB in 2001, and has so far mobilized $24.2 billion in investments and the International Transport Corridor, Europe Caucasus Asia (TRACECA), which was initiated by the EU in 2003 and mostly focuses on technical assistance.

China and the $40 billion "One Road, One Belt"

But since both Asia-Europe trade and the oil/gas transit questions have been around for a long time, what makes the Silk Road interesting now? Part of the answer certainly relates to regional changes generally, which are fueling integration and infrastructure improvements. The other main reason is China and the potential for Chinese infrastructure investments. In 2013 Chinese President Xi Jinpeng raised the possibility of helping to re-create a new Silk Road, under the umbrella of'One Road, One Belt' (or OBOR).

This concept is backed by a Chinese Silk Road Fund worth $40 billion to facilitate trade and infrastructure development across the region and has more support from individual regions of China. This finance is particularly interesting since the concept of a New Silk Road aligns with broader Chinese foreign policy. Therefore, it is assumed that infrastructure support will not need the short-term returns required by commercial investment decisions. This makes many infrastructure investments far more likely.

Georgia's future as regional hub

Georgia has good reason to see itself as part of the developing Silk Road story and a potential large recipient of this investment. It has already proven its place for hydrocarbon transit. Since the Baku Tbilisi Ceyhan Oil Pipeline (BTC) and the Southern Corridor Gas Pipeline (SCP) were finished in 2005/6 Georgia has transited around 1% of global demand for hydrocarbons. This will increase significantly when the SCP pipeline upgrade is finished. Worth $2bn in Georgia alone, this upgrade will triple gas supply through the pipeline.

Georgia has also upgraded its transport infrastructure in recent years, with dramatic improvements in the East-West Highway, a new railway line from Azerbaijan to Turkey, new roads, and the promise of a new deep water port at Anakhlia.

Also, while hydropower has been talked about in Georgia for many years, without a lot of actual investment taking place, things are now beginning to move and Georgia is increasingly looking like a credible regional hub for electricity production. This is most evidenced by the high level of investor activity in the area, with the World Bank, Asian Development Bank and EBRD committing loans in hydropower, the US-firm, Schultz Global Investment committing $100 million to small hydro investment and the recently signed deal with Kwater to build a $1 billion, 280MW Nenskra hydro power station in Svaneti.

However, Georgia's greatest strength may lie in its trade relationships and the continuing openness of its business environment. In particular, Georgia is the only Silk Road country that has negotiated an Association Agreement and DCFTA with the EU. This privileged access, makes Georgia a natural country to consider as a base of manufacturing, assembly or logistical operations for companies looking to export into the EU. Georgia is also the easiest market in the region in which to operate, has the most open market generally and has FTAs with Turkey and across the region.

Clearly, the Georgian Government is enthusiastic about leveraging long-term Chinese investments to develop the potential of the Silk Road route and to increase FDI. The opportunity is certainly credible and builds on the back of burgeoning Georgia-China commercial relations.There is already enthusiastic talk of a Georgia-China Free Trade Area. The recent Silk Road Forum brought the Governor of Xinjaing, which is China's largest province. The delegation also brought around 300 Chinese businessmen.This is significant because, after BP, the Chinese Company Hauling was the biggest FDI investor in Georgia last year and will probably be again in 2015. Also, one of the bidding Consortiums for Anakhlia is led by a Chinese firm.

More than just the Caucasus

Not that a betting onChinese-led Silk Road development is entirely without its issues. For a start, the Silk Road that China has most explicitly elaborated does not actually include the Caucasus. While the CAREC and TRACECA's vision for the Silk Road certainly includes the region, the Chinese Government plan for Silk Road Development, that was released in March 2015, focuses on a land Silk-Road that moves down from Central Asia, across Iran and Turkey, cutting out the Caucasus altogether. This may not be a problem, as the Chinese vision (and the original Silk Road) allows for multiple routes. But it should certainly chime a note of caution for the most bullish supporters of this idea.

Also, because a China-financed Silk-Road clearly has geopolitical, as well as commercial, intentions one should probably consider its geopolitical consequences. Could it, for example, create conflicts with the overall Western trajectory of Georgian commercial and foreign policy? Probably not. While Chinese Foreign Policy expansion in Asia may create areas of conflict with US interests, that seems unlikely in the Caucasus. As discussed already, a developed Silk Road from Georgia to Asia would, if anything, solidify Georgia's Western orientation, as it would provide another commercial benefit to Georgia's EU-integration.

Chinese development of a Silk Road across the Caucasus will, however, inevitably come into conflict with Russia. The Silk Road that Georgia and China imagine is, after all, primarily about ensuring non-Russian routes for goods and energy across Eurasia. Since Russia is trying to shore-up economic control of the same geography through the Eurasia Customs Union, the two plans ultimately compete.However, for Russia it seems likely that Central Asia would be the main hot-bed of contest. And, anyway, I doubt many Georgians would lose sleep over annoying the Russians.

However one looks at it, Chinese interest in the Silk Road has helped to stimulate a 'pivot to Asia' in Georgia's developmental thinking. In a terrain that tends to be polarized by options to the West and options to the North this is, at least, refreshing.

(This article contains a correction from the print version).