China’s landlocked ‘port’ in Kazakhstan doesn’t need water to succeed

The New York Times published a critical article early this month about China Ocean Shipping Company’s (COSCO) travails in developing a “port” in landlocked Kazakhstan.

COSCO is a 49% owner of the Khorgos Gateway rail hub connecting Kazakhstan to China at a remote border area dividing the two countries. Its main purpose is to transfer containers from Chinese trains, which use a narrower railway gauge to those on the Kazakh side, which have a wider Soviet-era one, to keep cargo moving westwards. Backers hope Khorgos will serve as a freight node that speeds Chinese goods to Russia and Europe.

According to the Times, it makes scant sense for a sea-going shipper like COSCO to pour money into a loading facility for container trains when the nearest ocean is 1,600 miles away. The analysis illustrates continuing US skepticism about the viability of China’s Belt and Road Initiative (BRI) to create an integrated economic zone stretching from Central Asia to Europe.

Jeff Procak, a former regional cooperation specialist for the Asian Development Bank’s (ADB) East Asia Department, has a more upbeat and detailed assessment of Khorgos.

Procak oversaw the ADB’s technical assistance for trade in Central Asia before retiring in 2016. Prior to that, he served as the World Bank’s country officer for Russia. He visited Khorgos a few years ago and is familiar with the project’s strengths and weaknesses.

“Khorgos provides a potential model for reducing the artificial, administrative impediment to trade that crossing borders imposes,” Procak told Asia Times.

He says the Khorgos international free trade zone, where the rail hub is located, is a bit like the District of Columbia in the US. In this case, both countries (rather than adjoining states) contribute territory. The Chinese side benefits from proactive policies to develop an actual community to support the economic activity taking place. “The Kazakh side, like the Virginia side before the Civil War, is underdeveloped,” Procak observed.

The project suffers from a shortage of cranes to transfer containers to trains on the Kazakh side and still-limited return-rail shipments from points west to China. Procak further notes that prices at a local shopping mall designed to spur economic development are unattractive. But there are positive signs for the future: he was able to buy camel hair scarves at the mall that had been woven in Italy out of unprocessed Kazakh camel hair.

Other analysts say BRI could promote the development of intermodal freight transport in regions like Central Asia that rely on interchangeable containers for rail, ship and truck transportation. Although Khorgos currently has no direct rail links with the sea, it could eventually be connected to the Caspian Sea in the west by future transport projects.

Alternative routes

Procak says the Khorgos Gateway’s one problem is that there is some cross-border trade from China that doesn’t require processing or distribution at Khorgos. This means that traffic transiting the area crosses the China-Kazakh border at several locations nearby but not via the international zone at Khorgos itself.

A “landbridge” container train service that connects Dostyk in Kazakhstan to Brest in Belarus, for example, doesn’t transit Khorgos.

Procak recalls that the World Bank previously financed the building of a road from Almaty in southern Kazakhstan to Khorgos in the east. China then asked the bank to finance a continuation of the road on its side of the border.

He says completing the road had the effect of shifting much of the truck traffic from a border crossing point north of the international zone to an area south of the zone, adjacent to the rail crossing facilities developed there. “The other effect is that there are now several ways to get goods across the border, much like along the China-Vietnam border, so things are becoming more fluid, more informal,” Procak said.

“Khorgos provides a potential model for reducing the artificial, administrative impediment to trade that crossing borders imposes”

Corruption also isn’t helping the project. The analyst notes that in the space of 18 months during 2011-12, Kazakhstan dismissed three heads of its customs service for less-than-above-board activities. China is said to have conducted a similar crackdown on its side of the border.

A longer-term challenge is that transporting containers by rail is about 10 times more expensive than by sea. Procak notes that when the current throughput capacities of the various China-to-Europe landbridge rail routes are combined, the total doesn’t exceed that of four mega container ships that presently serve China’s trade with Europe.

This will be the economic reality, even though Khorgos plans to move 500,000 containers annually by 2020, up from 100,000 in 2017. “So such (rail) service will always be for niche markets in high-value goods,” Procak said.

Local governments in western China have responded to the rail-cost issue by offering generous subsidies that reduce the cost of moving a container by train through Central Asia by up to 40%.

Pluses outweigh minuses

In his final analysis, Procak says the geopolitical benefits of the project outweigh its economic shortfalls.

“China sees value in sharing the benefit of its economy with neighbors and key trading partners and the Belt and Road Initiative is a way to seek inputs and guidance from them regarding how best to allocate the benefits,” Procak said.

Procak noted that a nation like Kazakhstan desires, above all, amicable and prosperous relations with both of its superpower neighbors. He says this explains its interest in promoting its transit corridor potential with China.

Although Chinese subsidies to provide exporters with rail rates that are equivalent to sea shipping costs may not be sustainable in the long run, Procak argues that they are justified because they are offset by greater volumes of investments by Chinese manufacturers who want to export their output to foreign markets.