China’s planners have studied the art of using economic pacts to pursue strategic objectives. The “One Belt, One Road” initiative (OBOR) and the Asian Infrastructure Investment Bank (AIIB) are prime examples. China has pinned its hopes of gaining strategic preeminence in the South and Central Asian regions thanks to its deep pockets. Infrastructure investment confers power to influence regional affairs. But South and Central Asia are not lacking of powers seeking influence — Russia and Iran have their own regional investments, plans and partners.
The China-Pakistan Economic Corridor (CPEC) is particularly important for China. With access to Pakistani ports, China will be able to expand its market reach and bring in foreign direct investment to ease the devaluation of the renminbi. The renminbi’s drop signals China’s hope to increase the amount of low wage jobs abroad and play it safe on future risks while implementing financial reform. Though China has become the world’s largest banking system, debt has played a pivotal role in its growth in recent years.
OBOR serves as a buffer: debt finances infrastructure projects abroad to provide short-term employment, create some growth abroad, unload industrial overcapacity, and cement influence and ownership of assets in other countries. Though CPEC is ostensibly profitable, it better represents China’s attempts to buy influence and access to the Indian Ocean with debt while providing Chinese industries a stimulus. Pakistan has proven a willing partner due to its political interests in the region and need for investment.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Gwadar as the Crown Jewel of CPEC
Pakistan’s Gwadar port is a trade hub for CPEC on the Indian Ocean rim. China announced what has become a $57 billion investment plan into CPEC, capped off by Gwadar. In a recent interview, the chairman of the Gwadar Port Authority, Dostain Khan Jamaldini, stated that “Gwadar can become a Shenzhen-level city in ten years,” indicating that the port will be open to numerous trading actors besides China. But the rhetoric about expanding trade likely does not reflect reality. There’s mounting evidence that the potential for high returns on the Chinese investment in Gwadar and CPEC will not match government claims.
Gwadar is not yet commercially operational due, in part, to a lack in connectivity via the East Bay Expressway, Balochistan. Other large sections of the proposed CPEC run through volatile areas that pose risks. Security concerns in Pakistan have prompted the government to create a new 13,700 personnel Special Security Division, whose sole purpose is to secure CPEC projects, while growing threats in western China have led to a severe security state in Xinjiang. China has also sought to deploy security assets to Gwadar. Finally, acute water shortage issues in Balochistan hinder large-scale construction projects. These hurdles are slowing the completion of China’s hoped-for energy import route circumventing the Malacca Strait.
A Tale of Two Ports
The nearby Iranian port Chabahar, where India is investing, exists as a geopolitical mirror to Gwadar. The two projects reflect the successes and limits of China’s efforts to extend its influence on the Indian Ocean rim. Though Indian officials stress that Chabahar is not a competitor port, its strategic rationale suggests otherwise.
India needs land access to Afghanistan to realize its ambitions to play a larger role in Central Asian trade and security. However, Pakistan has installed a transit blockade for Indian goods bound to Iran and beyond. In response, Afghanistan has banned Pakistani transit for trucking goods through its territory, a bad sign for growing hopes for regional rail connectivity between Tajikistan and Pakistan through Afghanistan. But the Chabahar port will help India’s push to play a deciding role in the future of Afghanistan and the region.
Iran has opened Chabahar to Indian and Japanese investment, though delays and doubts about the project linger. India recently approved a $150 million development plan to begin building up the investment zone stipulated by the initial agreement last May. Though India seems sluggish, both Japan and India have profit-driven interests for the port’s development. Satellite imagery does show progress at Chabahar, despite delays, and oil port Bandar Abbas is in serious need of capacity relief to handle oil flows.
Chinese investment in Iran, on the other hand, has not appreciably changed since the nuclear deal took effect. China’s approach to Iran does not seem to portend an increase of investment to curry political influence as has been the case in Pakistan, particularly as Iran has other suitors. Tehran has not particularly privileged Chinese oil and gas companies as it has sought investment and partnerships to develop its reserves.
Chabahar is a critical project for regional energy security that, even with hiccups, India and Japan are committed enough to complete. China’s studied use of infrastructure investment, while helpful for Pakistan’s equity markets, may not produce the desired results in time due to limitations in China’s strategy and a complicated political environment in the region that hinders interconnectivity. The arc of these two ports’ development offers an interesting window into Russia’s balancing act with China over Iran and India.
Russia’s Iran Approach
Russian-Iranian relations are often discussed regarding mutual interests in the Middle East as Russia and Iran seek to push out U.S. influence and assert a stronger role on their shared periphery. Their partnership is most solidly founded in the Caspian: Russia has sold majority stakes of two strategic ports in Dagestani capital Makhachkala and Astrakhan to Iranian firms, Iran is pushing against Azerbaijan’s position as leading shipper in the Caspian, and Lukoil’s projected $8.5 billion in spending on Caspian oil and gas will ideally transit Iran to Asian markets as it comes onstream.
The Russian-Iranian political relationship has outstripped the economic relationship for some time. Even with as much as a 70-80 percent increase in trade turnover in 2016, it only totaled $2.2 billion. Russian Energy Minister Alexander Novak has stated that he expects a free trade agreement to be signed between Iran and the Eurasian Economic Union at the end of March. For now, it remains political chatter but as Russia tries to lure Iranian investment into its Muslim regions, there will likely be an increase in business contacts that may allow Russia to try to leverage existing ties between different ethnic and religious communities in the Caspian region and Tatarstan.
Though China has a vastly superior set of financial and economic tools to invest in Iran and deepen ties, Lukoil was the first oil and gas company to sign a contract after the unveiling of the New Petroleum Contract. Even with attempts by Iran to locally source production for arms by using joint ventures or licensing products, Russia’s arms industry is looking to lock up market share in Iran before Chinese exports can compete, creating pathway dependencies like those found in the Indian military. Further, the symbolic significance of a free trade agreement, should it happen, will likely aid ongoing negotiations with India for a similar deal.
With these facts in mind, Chabahar is an economic and political bellwether for future trade between Russia, Iran, and India that figures into the regional balance of power. China is unlikely to worry given the tiny trade volumes involved. But symbols beget the appearance of regional cooperation and the possibility of introducing new supply chains that will, by and large, circumvent the desired routes in which China is investing.
The Limits of Russian Interests in Pakistan
Despite smaller moves on arms sales and exercises to strengthen military ties with Pakistan, Russia’s economic interests in Pakistan remain ambivalent at best due to its regional goals and challenges in Afghanistan. An agreement was inked in 2015 for a $2 billion gas pipeline between Karachi and Lahore, but Russian business interests are constrained in their ability to move into the market due to lack of knowledge, limited areas of competitive advantage, and lack of financing. Even with the pipeline project, there are ongoing negotiations to drive Russia’s tolling fees down as Pakistan dangles the threat of competition with Qatar as a bargaining chip. There have been small attempts at encouraging investment and trade between Punjab and Tatarstan, but any successes would be a pittance for both parties.
Pakistan has publicly stated Russia can use Gwadar for exports. Regardless, Gwadar is not a logical transit point for Russian imports or exports. Rosneft now owns the Gujarati port of Vadinar after its acquisition of Essar Oil and oil transit for Russian crude will never travel through Central Asia to Pakistan. The nature of Russia’s access is also unclear, given denials from the Kremlin as it attempts to manage its newfound interest in Pakistan with its more important relationship with India. Aside from energy — dominated by Chinese investment — Russia has little reason to economically engage Pakistan. Pakistan already eats up 35 percent of China’s arms exports and while Russia will seek market share, China has firmly established itself. Instead, improving access and influence with the Taliban is a key goal as Russia seeks to undermine Kabul. But until Tajikistan joins the Eurasian Economic Union and transit through Afghanistan and Pakistan toward India is guaranteed, there will be little reason for Russia to pursue a deeper commitment aside from bettering political ties on security issues.
Given the unclear efficacy of infrastructure investments, China’s OBOR initiative does little to guarantee growth without reform in transit states and easing political tensions. Pakistan has seen positive signs. The World Bank authorized a $450 million for a program to improve financial access, the government is adamant that reforms improving the business climate for entrepreneurship are taking root, and Pakistan’s equity markets have performed remarkably well of late.
Still, political tensions and security issues will prevent transit through Afghanistan and cut off Tajikistan from trade with Pakistan for a long time to come. Russia has a noticeably better relationship with Tehran than Beijing and its policies in Pakistan must be viewed through the lens of its broader engagement with the Indian Ocean region. China’s expansion into Pakistan has ossified animosities between the Indian and Pakistani governments, creating a situation for Russia to play multiple sides. Though China may pretend that its investments are “win-win” and carry no political agenda, there still are regional winners and losers.
Softening attempts to publicly resist OBOR in Moscow mask a shifting calculus that the Caspian region can form a stop to China’s expansion. Iran and Russia prefer to split the Caspian between themselves and have acted accordingly. Barring a major shift in Pakistani-Indian relations that would improve overland trade routes through Pakistan and Afghanistan, Russia is poised to use its bread and butter — energy and weapons — as policy instruments to maximize regional influence without committing tremendous financial reserves to projects of dubious economic value. Russia’s approach to CPEC is asymmetrical, using target sectors to compete with China where possible. Chabahar will provide an important conduit for this double-game as work progresses, no matter the news out of Gwadar.
Nicholas Trickett currently works at a think tank in Washington D.C. He is finishing an M.A. in Eurasian studies through the European University at St. Petersburg with a focus on energy security and Russian foreign policy.
Oliver Thomas is a recent alumnus of a research Fulbright grant to study in Taiwan on the island of Kinmen. He currently writes for the Taiwan Brief and works at a think tank in Washington D.C. He will pursue further study in politics and international relations at the University of Cambridge in the fall.