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China Quietly Looms Over Zapad 2017 Exercises

 
 

As Russia prepares for the Zapad exercises in September with its partner Belarus – the largest military exercise since the Cold War – many regional and transatlantic observers are, understandably, worried. Putting aside the alarmist rhetoric of potential Russian aggression, much less attention is paid to the unintended consequences of Russian actions aimed at destabilizing Belarus, Ukraine, or other regional actors.

Most coverage of Zapad ignores the presence of a new player in Eastern Europe: China. Russia may be entertaining provocative action with the exercise, but anything Russia could do would undermine China’s economic interests in the region and, by extension, Russia’s relationship with its so-called strategic partner.

China and Crimea

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Ukraine was originally China’s gateway into Europe when the Belt and Road Initiative was first articulated in 2013. Then-president Viktor Yanukovych went to China hoping to procure state-to-state loans in the wake of his rejection of an EU association agreement, a move welcomed by Moscow that triggered a political chain reaction leading to his ouster. Whether the loans would have kept him in power is unclear but they never materialized. Those loans aside, Chinese telecoms entrepreneur Wang Jing also proposed to build a $3 billion deepwater port in Sevastopol – home to Russia’s Black Sea Fleet in Crimea – along with $7 billion in further infrastructure investments in early December as political crisis spread.

The potential investment into the port coincided with an agreement to lease 3 million hectares of Ukrainian farmland earlier that fall as well as talks to open China’s market to certain Ukrainian agricultural exports. Corn was of particular interest for China, since it has historically relied on imports from the United States. Ukraine quickly became an important food security partner, accounting for close to half of China’s corn import needs based on the United States Department of Agriculture’s 2017 estimates, roughly 1.4 million tons so far this year. Since then, China has slowly increased access for Ukrainian dairy producers and other food exporters. China’s acute food security concerns make Ukraine a logical partner given its agricultural potential.

Russia’s annexation of Crimea and military involvement in the Donbas put China’s foreign policy stance of non-interference in others’ domestic politics to the test. The EU is China’s largest trade partner. Their mutual trade was worth about 1.4 billion euros a day in 2016 and the two parties have been negotiating an agreement on investment since November 2013. There was no conceivable way that China could recognize the annexation at the time, opting to abstain from a vote in the United Nations (UN) discouraging the recognition of Crimea’s legal status. To date, China supports a peaceful resolution that takes into account the interests of all sides, knowing full well that such a resolution is not a possibility for the foreseeable future.

Ukraine as Transit Hub

Plans to invest into Crimea fell apart quickly. Doing so would have been a tacit recognition of the annexation, infuriating Western partners and guaranteeing sour relations with Kyiv. Talk of investing into a deepwater port in Ukraine dissipated, but local authorities kept it alive in the news to lie about the peninsula’s business prospects. China’s trade and investment interests pivoted towards the mainland, including the proposed port project.

Ukraine reached a Deep Comprehensive Free Trade Area (DCFTA) agreement with the EU in 2015, eliminating 98.1 percent of EU tariff duties on Ukrainian goods and services. In response, Russia began an escalating series of road and rail transit bans to other countries through Russia, which Ukraine has answered in kind.

The bans added new impetus to trade through the Trans-Caspian corridor, buoyed by the Baku-Tbilisi-Kars railway (BTK) in the South Caucasus. The first train is expected to travel the line next month, making transit of Chinese goods through the region that much more attractive. Cargo transshipments through Azerbaijan’s Alat Port – dependent on the BTK to sustain itself – have grown 43.5 percent this year and Black Sea ports such as Constanta in Romania are joining the Trans-Caspian route. All the member states of the corridor have begun work on harmonizing tariffs and border practices.

With better market access, it has become more attractive for China to source production in Ukraine in the future as well as invest in its ports and roads. The China Harbor Engineering Company (CHEC) won a contract to dredge and upgrade the Ukrainian port of Yuzhny north of Odessa. The China Export-Import Bank was recently approached to finance a bridge project in Kremenchuk, showing growing interest in infrastructure in the country. Ukraine expects to spend nearly $2 billion next year on road construction and is reportedly in talks with China Road and Bridge Corporation (CRBC) to construct the nation’s first concrete highway connecting Odessa and Kherson. China has effectively pivoted from Crimea to the mainland and though the Trans-Caspian route remains too expensive to be competitive for Ukrainian firms, China can afford to subsidize its own exports.

Ukraine has eased the visa regime for Chinese businessmen, trade turnover grew 5.3 percent in 2016 reaching $6.51 billion, and the two countries have signaled interest in low-level security cooperation. Turnover is small for China, but brick and mortar projects will cement Chinese interest and capital flows into the country. That the DCFTA has made Ukraine an attractive market has undercut Russia’s economic pull. China is unconcerned about reform unlike European partners, something Kyiv may find useful in the near future as Trans-Caspian trade grows and port concessions are awarded.

Belarus as Launch Pad

Belarus’ rising significance for China’s aims in Eastern Europe comes as a result of growing investment, targeted trade, and most importantly, transit of Chinese goods to Europe by rail. Increases in transit also concern the Baltic States looking to find new trade opportunities. Transit volumes on Belarus’ rail network were up 30.4 percent for the first 7 months of 2017 year-on-year in tariff ton-kilometers, 8.85 billion thus far or 89.1 percent of Belarus’ own exports by rail in that time. Belarus’ transit rail trade is now nearly as large as its own exports by rail.

Most of that growth is due to greater container volumes by rail from Russia and other Eurasian Economic Union states like Kazakhstan, driven by routes and exports subsidized by China. Some transit growth comes from Russian goods headed to Ukraine due to transit bans on their border. After significant drop-off in the wake of the Ukraine crisis, trade turnover between Belarus and Ukraine has grown 26 percent so far in 2017 year-on-year from the nearly $4 billion in trade last year. Turnover is complicated by the fact that Belarusian firms trade with the Donbas and all increase in oil exports to Ukraine originate in Russia. China can use both countries as stepping-stones to supply chains in the Baltics and Poland without the same level of oversight required in EU member states.

Belarus began looking to China for infrastructure investment back in 2013 to lessen dependence on Russia and avoid European complaints on human rights. The most visible projects kicked around have been the Great Stone industrial park near Minsk and the creation of a logistics hub in Bolbasovo. Bolbasovo is also intended to become a trade hub for China to relocate production, but remains early in development.

Great Stone existed largely on paper until this May when the first sub-park was commissioned ahead of the Belt and Road Summit. Great Stone is meant to capitalize on Belarus’ labor costs so that Chinese companies can cheaply manufacture cars and higher-tech products. Doing so allows them to piggyback onto Belarus’ customs union with Russia, avoid negotiating with obstinate Russian companies for market access in Russia proper, and also sell to Eastern European EU member states. China and Belarus are considering a $585 million joint investment fund designed to attract companies to Great Stone. Of the 15 companies now claiming residency in the park, 11 are Chinese. President Lukashenko also has gone as far as to suggest military-industrial firms from China could open shop, a signal aimed at Moscow.

Just as in Ukraine, China has sought agricultural imports from Belarus. Belarus was granted market access for beef and poultry exports this year and Chinese investors have expressed willingness to invest up to $1 billion into the sector at large. Doing so would help Belarus reach its own export targets for its Agribiz-2020 plan. Most importantly, the two countries have signed a protocol for border cooperation, forming a basis for greater trade opportunities down the road.

Unintended Consequences

To be clear, the odds Russia will meet the expectations of more fearful rhetoric around the Zapad exercises are quite low. Michael Kofman’s overview is instructive in showing that more paranoid fears reflect much more on the West’s insecurities than facts on the ground and in the Russian general staff dictate. But if some form of aggression — hybrid or conventional — were to occur, Russia would risk further strategic isolation given its dependence on China.

Take China’s financial role for Russian firms and the Russian economy. Billions in Sino-Russian financing deals are covering budget holes in Moscow, such as the recent $11 billion financing agreement for the Russia Direct Investment Fund and Vneshekonombank (VEB), both under sanctions. State oil giant Rosneft is now searching for Chinese capital to plug budget holes, and may sell off shares of the company to Chinese partners. Chinese financing has kept Novatek’s LNG project on Yamal afloat. The Russia-China Investment Fund (RCIF) is supposed to invest $500 million in Russian projects this year. Russia’s central bank has even opened a Beijing office and some proffered the idea of issuing Yuan-denominated bonds, though the idea hasn’t taken root due to disagreements between banks on the efficacy of the policy. China has been a lifeline, but a cautious one.

All rail transit through Russia now funnels through Belarus because of transit bans with Ukraine. Anything that would provoke Poland to squeeze rail transit through Russia or interrupt transit flows through Belarus would force China to focus yet more on Trans-Caspian trade. A serious destabilization of Ukraine would harm China’s Black Sea toehold into European markets and a chain of investments stretching from Xinjiang to Georgia. Russia can write off investments it desperately needs into its own rail system if transit routes are interrupted or seriously threatened.

The issue isn’t just economic. China will have to spend political capital to compartmentalize its deals with Russia from its interest in infrastructure projects in more illiberal or dissatisfied members of the EU or states in Europe. China has already bought EU silence on the South China Sea through investment into Greece and Hungary, but has to play a careful game as scrutiny ratchets up on strategic investment policies. Greater EU concern over Chinese influence may lead to more forceful policy responses to projects in Greece, the Balkans, and Central Europe. China is increasingly perceived as a threat to European unity like Russia, a threat that becomes more pressing with aggressive Russian action this September.

Russia would likely lose a considerate audience in Beijing on important issues were it to undermine China’s economic strategy in Eastern Europe and force China to save face with major European partners. While China can build all the fences it wants for its trade partners, it can’t sit on them forever when an avowed strategic partner threatens their sovereignty and security. Russian leaders best not forget as Putin switches to social spending in an election year with the considerable financial aid of his counterparts in Beijing.

Nicholas Trickett holds an M.A. in Eurasian studies through the European University at St. Petersburg with a focus on energy security and Russian foreign policy.

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