Executive Summary

Two new regional initiatives potentially could transform Central Asia’s political landscape. China’s Silk Road Economic Belt (SREB), launched by President Xi Jinping in 2013, offers multi-billion dollar investments in transport and industry and a vision of free trade across the region. The Russian-led Eurasian Economic Union (EEU), established in 2015, creates a customs union among former Soviet states orienting their economies toward Moscow. They have divergent goals, but Russia and China have committed to cooperate politically and economically. Their initiatives offer investments and enhanced cooperation in a region beset by economic and political challenges. Poorly handled, however, these initiatives could encourage and entrench local behaviour that risks generating instability and conflict.

[Russia’s and China’s] initiatives offer investments and enhanced cooperation in a region beset by economic and political challenges.

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The SREB aims to open trade routes for China across its vast continental hinterland while creating a zone of security around its troubled western region of Xinjiang. It is an umbrella concept rather than a clear set of projects. The first stage involves multi-billion dollar investments building rail and road links to Central Asia and across it to Iran, Russia, the Caucasus, Turkey, and Europe. China aims to reduce physical, technical and political barriers to trade, in pursuit of its longer-term goal of a free-trade agreement across the region. Poorer countries, such as Tajikistan and Kyrgyzstan, hope for investments in agriculture and industry to boost their economies. The plan also has a strategic and ideological dimension, extending Chinese political clout and promoting a state-led development model. If successful, it could form the first step in a new kind of international order in which China plays a leading role.

Chinese plans face serious challenges. Political sensitivities are high. While Central Asian elites welcome an influx of funding, Chinese investors often encounter popular suspicion and xenophobia. Rumours of land being leased to Chinese investors sparked protests in Kazakhstan in May 2016. A suicide bomb attack on the Chinese embassy in Bishkek in August 2016 raised fears in Beijing about security vulnerabilities. Many investment deals do not benefit the wider population and are accompanied by accusations of high-level corruption. There also are environmental concerns as China exports polluting industries into the region. This combination of nationalism, anger over corruption and environmental impacts could fuel anti-Chinese – and anti-government – sentiment in Central Asia.

The SREB also challenges Russia, which separately has been bolstering its regional role by building its own institutions. In May 2014, Russia, Belarus and Kazakhstan, joined in 2015 by Kyrgyzstan and Armenia, set up the EEU, loosely modelled on the EU. The EEU aims to promote free movement of goods, labour, services and capital within its borders while imposing tariffs on external imports. However, the EEU is slow to deliver on its promise of greater economic integration. Trade among members has fallen since 2015 in terms of both volume and value, due to the devaluation of the rouble, though it has picked-up slightly in 2017. There are political limitations, too. Uzbekistan and Turkmenistan make clear they will not join and likewise reject membership in the Collective Security Treaty Organization (CSTO), a Russian-led security bloc. Russia, though, remains a key partner for the Central Asian countries. Its deep and multi-layered political, social and cultural influence in Central Asia currently surpasses that of China.

Russia and China have committed to cooperation between the EEU and the SREB. Moscow has promoted the notion of “Greater Eurasia”, a nebulous project that would link China, Russia and Central Asia in a new economic and political bloc, and sees cooperation with China as intrinsic to this. But fundamental contradictions loom between the EEU’s inward-looking customs union and China’s push for free trade across the region and into Europe. Moreover, Central Asian states each have agendas of their own and overcoming obstacles to regional trade will prove difficult. Thus, Kazakhstan is keen to maintain strong links with the West to balance Russian and Chinese involvement while Uzbekistan, despite showing signs of seeking better relations with its neighbours, still restricts free trade across its borders.

[These projects] are unlikely to foster necessary political and institutional reform, without which Central Asia’s governments will remain brittle, struggling to manage social change and external challenges.

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One of the more concerning aspects is that these duelling projects focus little on issues such as rule of law, welfare, health, education or environmental protection. They also are unlikely to foster necessary political and institutional reform, without which Central Asia’s governments will remain brittle, struggling to manage social change and external challenges. For Western countries, the initiatives are emblematic of their increasing marginalisation in the region. The European Union (EU), the U.S. and international financial institutions also may wish to explore ways to engage with both initiatives and use this to push for good governance, as well as environmental and labour standards.

Bishkek/Hong Kong/Brussels, 27 July 2017

I. Introduction

This report analyses the significance of the SREB and EEU in terms of their impact on economic development, political stability and security across the region, and their possible influence on Central Asia’s complex geopolitics. It is the second of three reports analysing Central Asia at the crossroads between powerful economic and political actors and the consequences for regional peace, security and development as well as the domestic trajectories of each independent republic. Research was conducted in Moscow, Bishkek, Astana, Uralsk, Atyrau, Beijing, Shanghai, Hong Kong and London.

II. China’s Belt and Road Initiative and Silk Road Economic Belt

The Silk Road Economic Belt (SREB) is the largest terrestrial component of China’s Belt and Road Initiative (BRI), a hugely ambitious program to invest as much as $1 trillion in new transport and trade infrastructure between China and the rest of the world. The late Wu Jianmin – then a member of the Foreign Policy Advisory Committee of the Foreign Ministry and Crisis Group board member – claimed that the Belt and Road Initiative was “the most significant and far-reaching initiative that China ever put forward”. The Belt and Road Initiative involves over 60 countries in two broad arcs: a Maritime Silk Road along China’s sea routes, and the SREB, which aims to improve connectivity on Eurasian land routes to Europe. Central Asia is vital for its successful development.

The Belt and Road Initiative was labelled an “initiative” as it has few concrete goals or strategies and lacks institutional structure. Chinese ministries, state-owned enterprises and regional and local authorities seemingly develop their own linked proposals in response to broad, overarching concepts. As a result, the Belt and Road Initiative, and the SREB as one of its components, essentially serves as a new umbrella for separate, existing projects and investments as well as new initiatives.

China wants to be the key trading and investment partner for states across the Eurasian continent and open up new routes for trade with Europe.

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In economic terms, the Belt and Road Initiative aims to boost China’s slowing economy by developing new markets and generating demand for the country’s overcapacity in aluminium, steel, construction and other industries. China wants to be the key trading and investment partner for states across the Eurasian continent and open up new routes for trade with Europe. Chinese policymakers hope this will ameliorate widening economic disparity between the country’s poorer, landlocked western and interior regions and its more prosperous east coast, thus helping to maintain social stability.

Geopolitically, as part of the Belt and Road Initiative, the SREB is key to Xi’s “neighbourhood diplomacy” geared at improving relations with countries on China’s periphery by creating public goods such as transport links and power infrastructure. In this respect, it is a framework for economic statecraft, leveraging China’s strengths – vast reserves of capital and cheap loans, engineering know-how and production and construction capacity – to generate political influence and set a new agenda for globalisation on Chinese terms. As the May 2017 Belt and Road Forum illustrated, it also is a means of promoting China, both at home and abroad, as a rejuvenated, agenda-setting power.

Central Asia is a testing ground for new ideas in China’s foreign policy.

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The Belt and Road Initiative also has an implicit ideological component. It represents a de facto challenge to the economic development model promoted by Western states which emphasises structural and policy reforms and technical assistance in sectors such as education and health, but largely avoids public infrastructure. The Chinese government hopes that a state-led, credit-fuelled program of major investments in infrastructure projects will stimulate regional economic growth. If the Belt and Road Initiative is successful, some analysts speculate that it could form the basis for a new kind of international order, in which China plays a leading role. In this sense, Central Asia is a testing ground for new ideas in China’s foreign policy.

For this to succeed, funding is essential. China’s National Reform and Development Commission said in March 2017 that China had invested over $50 billion in countries along the Belt and Road since 2013 and signed contracts for new construction projects worth $304.9 billion between 2014 and 2016. Specific figures are more difficult to calculate. In November 2014, President Xi announced a $40 billion Silk Road Fund to be used “to provide investment and financing support for infrastructure, resources, industrial cooperation, financial cooperation and other projects in countries along the Belt and Road”. At the May 2017 Belt and Road Forum he announced a further 540 billion yuan ($79.4 billion), including 100 billion yuan ($14.7 billion) more for the Fund. By late 2016, the Silk Road Fund had committed to deals amounting to at least $3.25 billion, although its initial investments were in Russia, Pakistan and Europe rather than Central Asia.

The Asian Infrastructure Investment Bank (AIIB), with $100 billion in capital, also is expected to be a source of finance for the BRI, albeit beginning loans up to $2 billion in its first year, mostly in conjunction with other multilateral lenders. The Export-Import Bank of China and the China Development Bank will continue to play the most important roles in funding BRI projects, particularly for the SREB in Central Asia, using their established practise of soft loans to governments conditioned on the use of Chinese contractors.

A. The Silk Road Economic Belt Plan

Official documents highlight the Silk Road Economic Belt’s major goals, including transport connectivity, unimpeded trade, financial integration and cultural, educational and touristic exchanges. Beyond its ancient origins, the idea has a long history in modern Chinese planning. When President Xi launched the SREB in September 2013 in Astana, he was following in the footsteps of the then Premier Li Peng, who had called for the construction of a new Silk Road on a 1994 visit to Kazakhstan. Chinese strategists more recently revived the concept in response to America’s “rebalance” to Asia, as a Eurasian pivot or “march west” for China, extending the domestic Western Development Program into a Central Asian sphere where there would be less competition with the U.S.

There are two major strategic goals for the SREB. First, to provide China with alternative import/export and energy supply routes and lessen its dependence on strategic shipping lanes in South East Asia. Second, to produce a zone of stability on both sides of China’s western border.

China’s primary security and stability focus in the region – and one which it hopes the SREB can help address – has been its Xinjiang Uighur Autonomous Region, which borders eight countries, has fifteen dry ports and is rich in natural resources, making it a strategically crucial gateway to other markets and cultures. About 46 per cent of Xinjiang’s 22 million people are Uighurs, a Muslim people with historical and cultural ties to Central Asia and Turkey. Long-running tensions between the Uighurs and Han Chinese have deep and complex roots. They draw on conflicting historical narratives and are exacerbated by relative remoteness, poverty, low levels of education, linguistic and cultural differences and ethnic and religious discrimination. Massive state-financed investment and migration from other provinces have fostered rapid GDP growth in Xinjiang, but also widened economic disparities along ethnic lines and stoked Uighur anxiety about cultural assimilation and calls for greater autonomy.

Many smaller-scale instances of violence and unrest in Xinjiang appear to be the result of criminality, corruption, prejudice and other local disputes. More serious ones, such as the 2009 riots in the regional capital Urumqi, in which at least 197 people died, draw on wider socio-political grievances. Some significant attacks involving Uighurs in Xinjiang, Beijing (2013) and Kunming (2014) have featured terrorist tactics and appear to have been organised by politically-motivated groups and individuals, at least some inspired by radical Islamic ideology or separatism. Chinese counter-terrorism experts worry about the inflow of terrorist tactics and fundamentalist Islam from the Middle East and Central Asia, and point to claims of responsibility from the Turkestan Islamic Party, calls to action from foreign terrorist groups and evidence of Uighurs fighting with the Islamic State in Iraq and Syria.

The response from the central and regional governments has included stepped-up investment in the local economy, social programs, affirmative action ethnic policies, restrictions on religious practices and attire as well as a sweeping “strike-hard” counter-terrorism program with pervasive surveillance and extensive police and paramilitary deployments. Results have been mixed and some analysts worry that short-term stability only masks festering tensions. China uses drones, barbed wire and surveillance cameras to protect Xinjiang’s borders and is calling for greater border security cooperation with the province’s neighbours.

The SREB’s main domestic impact on Xinjiang so far has been to pump GDP growth to high levels through state-driven fixed asset investment, most of which was already in the pipeline. To date, it has led neither to an increase in trade volumes between Xinjiang and Central Asia nor to an increase in Xinjiang’s share of trade. Over time, to the extent the transportation infrastructure, logistics hubs and special zones comprising this “Belt” prove to be economically viable, they may increase trade and investment and create opportunities, particularly for larger companies and state-run entities such as the Xinjiang Production and Construction Corps.

However, the initiative’s influence on some of the roots of discontent – eg inequality and political tensions – is likely to be limited unless its “hard” infrastructure projects are combined with greater “soft” efforts such as addressing grievances and ethno-religious differences with greater sensitivity, more nuanced security policies and more programs to foster local community participation in trade, for example through training in business skills and seed funding for small enterprises.

The Silk Road Economic Belt (SREB) offers an alternative framework for China to expand its economic influence.

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In support of Beijing’s objectives for Xinjiang, the SREB bolsters China’s role in the Shanghai Cooperation Organisation (SCO), which includes four of the five Central Asian republics along with Russia, China and, since June 2017, India and Pakistan, and focuses on security and counter-terrorism. With its headquarters in Beijing, the SCO also serves to burnish China’s image and extend its regional reach, but its utility has limits. While Beijing has hoped to develop the SCO into an economic actor with a free trade agreement, Russia has objected; the SREB offers an alternative framework for China to expand its economic influence.

In Central Asia, the main focus is to improve transport and energy infrastructure along two broad transport corridors that would drive economic cooperation through connectivity. The New Eurasia Land Bridge Economic Corridor, linking China with Europe via Kazakhstan and Russia, builds on existing rail and road infrastructure, but Russia has been slow to develop new transport capacity. New initiatives include a high-speed rail link in Russia that cuts journey times between Moscow and Kazan from twelve to three and a half hours. Funded and built by China, the plan is to expand it to form a high-speed route from Moscow to Beijing.

China places more emphasis on developing a second route, the China-Central Asia-West Asia Economic Corridor, which links Xinjiang with Kyrgyzstan, Tajikistan, Kazakhstan, Uzbekistan and Turkmenistan, bypassing Russia. Within this route, a northern spur is most developed, building railways from a new trade terminal at Khorgos on the Chinese-Kazakh frontier across to the Kazakh port of Aktau on the Caspian. From Aktau, shipping offers transport across the Caspian to Azerbaijan and Georgia, and a link to the new Baku-Tbilisi-Kars railway. Heading south from Aktau, a new railway has opened between Kazakhstan, Turkmenistan and Iran. The first trains between China and Iran began operations in February 2016. In September 2016 the first ever train from China to Afghanistan arrived in Hairaton, having travelled twelve days from Nantong.

Kazakhstan is seeking to link transit routes to new special economic zones to maximise local impact.

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Not all these new routes will be commercially viable. They save significant time over sea routes for high-value, low volume goods, but are much more expensive for trade with Europe. Kazakhstan is seeking to link transit routes to new special economic zones to maximise local impact. The Khorgos-East Gate Special Economic Zone and dry port, announced with much fanfare on 2 July 2014 by President Nursultan Nazarbayev, is supposed “to spur economic growth across the whole of Eurasia”.

Progress has been slow, with development hampered by limited consumer demand from Kazakhstan, but some observers said the dry port may be “turning a corner”: in May 2017, deep-pocketed China COSCO Shipping Corporation and Jiangsu Lianyungang Port Co purchased a combined 49 per cent stake in the dry port on the Kazakh side of the border from the national railway company, and during a June visit by President Xi to Astana, $8 billion in business deals were signed and the governments pledged to work on aligning the Belt with Kazakhstan’s “Bright Path” economic policy. As the number of train services and usage both rise, costs per container are falling, while customs procedures at the Kazakh border have become much faster, said one Kazakh Railways executive. The different rail gauges between countries still necessitate changes of bogies, but block trains avoid this delay by transferring cargo in standard containers, which is less time-consuming.

Other routes are transforming internal travel. In June 2016, President Xi Jinping and then Uzbek President Islam Karimov inaugurated a new $1.6 billion rail link between the Ferghana valley and Tashkent, including the 19.2km Qamchiq Tunnel, the longest in the region, constructed by the China Railway Tunnel Group. This route forms part of a planned rail route through southern Kyrgyzstan to western China, which remains in negotiation. The old railway involved travel through Tajikistan’s territory, which created constant problems for passengers at borders, owing to difficult relations between the two countries. The project is an example of collaboration between development banks with World Bank ($195 million) and Eximbank funding ($350 million).

These internal transport routes may eventually form the basis of a new cross-regional network. Tajikistan is also developing internal rail and road routes with Chinese support. However, cross-border routes, essential to the success of the SREB, are much more difficult to accomplish. A route from Kashgar through Osh in Kyrgyzstan and on to Uzbekistan ran into difficulties in Kyrgyzstan, which lobbied China to build a north-south route instead. The Kyrgyz-Uzbek and Tajik-Uzbek borders remain cumbersome for private trade and travel, though improvements on the Kyrgyz-Uzbek border have been made. China refurbished road links between western China and southern Kyrgyzstan, which are now used by trucks bound for Tajikistan and Afghanistan. Routes involving Afghanistan are the most challenging: a Tajikistan-Afghanistan-Turkmenistan (TAT) railway project faces numerous security and political challenges.

Alongside new railways, China is focused on pipeline construction to lessen its reliance on Middle Eastern energy. According to Kazakh expert Konstantin Syroezhkin, in 2012 China controlled some 25 per cent of Kazakhstan’s oil production. The Kazakh-China oil pipeline, completed in 2005, is designed to carry oil from Kazakhstan’s offshore Kashagan project. The China-Central Asia pipeline is the main export route for Turkmen gas, leaving it heavily dependent on its partners in Beijing. A further “D” branch of this pipeline is delayed.

Chinese economic activity is not only about connectivity and trade but also about investment in industry. In Kyrgyzstan a Chinese-run cement plant is operating in Aravan, with others announced for Issyk-Kul and Osh. In Tajikistan, Chinese investors established several new cement plants and production increased fivefold between 2013 and 2015. The power sector is another significant area of investment. A Chinese company, Tebian Electricity Apparatus (TBEA), completed the $350 million reconstruction of the Dushanbe power plant in December 2016 and is refurbishing the Bishkek power and heating plant. In 2015, TBEA also completed a $390 million electricity transmission line between north and south Kyrgyzstan, which avoids the need to transit Uzbek territory.

B. Challenges on the Silk Road

These infrastructure projects and business investments have the potential to transform Central Asia and revive links to Iran, the Middle East, the Caucasus and Eastern Europe. They offer improved regional ties and promise major economic boosts. However, they also face serious problems and risks.

1. Anti-Chinese sentiment

An official Chinese White Paper on the SREB emphasises its collaborative nature, designed to coordinate with existing “multilateral cooperation mechanisms”, arguing it should be “jointly built through consultation to meet the interests of all”. In so doing, China seeks to allay local suspicion of its increasing influence and hopes the SREB will improve attitudes toward China among Central Asian states; in particular, it proposes cooperation with existing national plans where possible. While the EEU involves a complex path to membership, an intrusive regulatory regime and a supranational body in Moscow, the SREB imposes no supranational governance structures nor rules on participants. Tellingly, a goal of the SREB and China’s new “periphery diplomacy” is to promote pro-Chinese attitudes in its immediate neighbourhood.

Anti-Chinese sentiment is widespread at all levels of society in each Central Asian state and racist stereotypes often are aired publicly.

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But this will be an uphill task. Anti-Chinese sentiment is widespread at all levels of society in each Central Asian state and racist stereotypes often are aired publicly. Privately, some local politicians frame it as part of broader xenophobic tendencies but posit increased cooperation with China as particularly fraught for historical reasons. While elites are more comfortable about forging closer relations with China, and while they find the prospect of major investment with few political conditions attached extremely attractive, nationalism and economic resentments create a combustible environment which neither Central Asia’s governments nor Beijing should ignore. “The rise of Sinophilia and Sinophobia will impact the political, geostrategic, and cultural situation in the region, working either to speed up or to slow down Chinese expansion in it”.

These negative attitudes are particularly pronounced in Kazakhstan and Kyrgyzstan. According to opinion polls, more Kyrgyz citizens see China as an economic threat than a partner; they also view Russia, Kazakhstan, Turkey and the EU as more important economic partners. Such perceptions are especially pronounced among Kazakh nationalist activists for whom preoccupation with China often merges with economic resentment. Initiatives such as relaxing the visa regime for Chinese visitors were sharply criticised by nationalist voices.

In Kyrgyzstan, anti-Chinese sentiment often fuels protests or is used by political leaders to mobilise support against Chinese companies. In August 2011, three Chinese miners were attacked at the Solton-Sary gold mine, in Naryn province. Locals claimed that the Chinese ignored environmental safeguards and treated Kyrgyz workers poorly. In September 2012, locals in Jalalabad attacked a camp for Chinese road builders near the Charaat gold mine, complaining about the impact of truck traffic on local roads .In October 2012, protestors shut down operations at the Chinese-run Taldy-Bulak Levoberezhny gold field after reports of a brawl between Chinese and Kyrgyz workers. In 2015, a fight broke out between local and Chinese workers at a Chinese-owned copper mine in Kazakhstan.

The tendency among Chinese companies to hire Chinese rather than local workers causes tensions.

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These conflicts also occur with other foreign companies, but Chinese businesses appear to be specially targeted. In particular, the tendency among Chinese companies to hire Chinese rather than local workers causes tensions. Chinese workers often are subject to harassment and many Chinese companies advise their employees to remain isolated from the communities in which they work. This deepens the sense of mistrust on both sides and reinforces the idea that China’s practises and motives in Central Asia are opaque and self-serving. As a result, there is a slow shift toward using more local labour. These positions are not always in skilled or highly paid roles, but as more Central Asian citizens train in China and learn Chinese, more managerial positions are also opening to non-Chinese staff.

Agricultural land is in short supply in much of Central Asia and so land distribution also can spark conflicts. Specifically, nationalists fear that land will be sold to Chinese investors. In 2010, opposition activists held a protest in Almaty over plans to lease land to Chinese investors. In April 2016, major protests broke out in the Kazakh cities of Atyrau, Aktobe and Semey after the law was amended to allow the lease of land for 25 years. Though ostensibly about land reform, the protests became a vehicle for airing other grievances including fears of an influx of Chinese migrants and distrust of Chinese companies, particularly their labour and environmental practices. They led to the resignation of the agriculture minister and President Nazarbayev delayed implementation of the new law. Nevertheless, Kazakh officials announced proposed agricultural deals with Chinese investors worth nearly $2 billion in May 2016.

Chinese policymakers are accustomed to dealing with small groups of ruling elites and tend to discount the importance of public opinion. As one scholar put it, “most of the people in Central Asia who have strong negative sentiments against China are not powerful, while those who have power want to work with China”. But as the experience of some Chinese enterprises in Sri Lanka and Myanmar has illustrated, such thinking can be a recipe for further discontent and cancelled or delayed projects.

2. Corruption and governance

Unsurprisingly, neither the SREB nor the EEU includes safeguards against corruption or emphasises improved rule of law or governance. Although China stresses its commitment to international governance standards in its lending through institutions such as the Asian Infrastructure Investment Bank (AIIB), historically there have been frequent reports of high-level corruption surrounding Chinese investments in Central Asia, including bribe payments to senior officials. Chinese investors often invest in corruption-prone sectors such as mining, where state licences are acquired illicitly only to be resold to other bidders. In September 2016, the head of Kazakhstan’s Khorgos International Centre of Cross-Border Cooperation with China was reportedly arrested on suspicion of taking a million-dollar bribe. The head of the Chinese Chamber of Commerce in Kyrgyzstan admitted that “some Chinese investors have also joined in these dirty dealings”. Chinese companies, like other investors, also face problems in navigating complex and corrupt bureaucratic systems.

Part of the problem is the lack of transparency surrounding many deals, in which companies are selected without competitive tenders. China Eximbank and China Development Bank often provide soft loans to governments which are used to pay Chinese companies to carry out infrastructure projects. For example, a $385 million loan to the Kyrgyz government in 2013 financed work by Tebian Electricity Apparatus (TBEA) to refurbish the Bishkek power plant. The process caused controversy among Kyrgyz parliamentarians who were told that China’s Eximbank dictated the choice. According to Electric Stations Director General Salaydin Avazov: “If we had money for reconstruction, we would have held a tender. And since there is no money, we have agreed to the terms of Eximbank”. While China and Central Asian governments defend no-tender procurement as more efficient and effective given unreliable information about different companies, it also provides scope for mismanagement and corruption.

Poor governance and corruption likewise encourage lack of respect for environmental concerns, which in turn can be seized upon by activists to organise protests. In 2012, protests occurred in Aravan, Kyrgyzstan, after local residents complained about potential environmental damage from the Chinese-run cement plant. A $300 million Chinese-run refinery in Kara-Balta was forced to suspend operations temporarily after local demonstrations against pollution. Activists in Kara-Balta said residents living close to the refinery were not able to open their windows due to a heavy thick industrial smell and pollution. In 2015, one resident told Crisis Group: “We all now have health problems because of the emissions and pollution that is produced by the refinery. Every month, I have to visit doctors and show them my children. The medical costs grow to thousands of soms every month, and no one helps us”. The plant resumed production in 2016, but there are similar problems across the region. The rapid increase in coal-fired cement production in Tajikistan also raised concerns about pollution.

III. Russia and the Eurasian Economic Union

The SREB is ambitious and has significant funding, but China’s regional political influence remains secondary to Russia’s. Moscow retains important political, economic, personal and institutional links in Central Asia and seeks to reverse its declining economic influence by developing regional institutions. Early post-Soviet attempts to develop regional organisations failed until a 2010 Customs Union among Russia, Belarus and Kazakhstan was formed. This evolved into the Eurasian Economic Union (EEU), whose Central Asian members include Kazakhstan and Kyrgyzstan.

A. The EEU and Cooperation in Central Asia

The EEU has not had a good start. “The Eurasian Union is good for Russia, but offers nothing for Kazakhstan”, said a businessman in north-western Kazakhstan. His view is backed by trade statistics. In the first nine months of 2016, Kazakhstan’s trade with EEU member-states was down by 26.4 per cent compared to the same period in 2015. Many problems were caused by the Russian economic crisis and currency volatility; in 2014, the value of the Russian rouble compared to the U.S. dollar more than halved, cheapening the price of Russian goods for Kazakh customers, damaging domestic producers and leading to tit-for-tat restrictions by both sides until the Kazakh tenge also was devalued.

Kyrgyzstan suffered even more as the rouble’s collapse undermined remittances from labour migrants and made its own exports too expensive. Kyrgyz farmers struggle to take advantage of major new markets: they have no capacity to sort produce for large Russian supermarket chains or to transport it to market. Most agricultural goods lack clear certification procedures and few laboratories can generate the required certification, leading to unilateral bans on Kyrgyz exports by other countries while cheaper imports from elsewhere in the EEU are unimpeded. A local business leader said: “Our agro-industrial system will die and we will be totally dependent on external suppliers”.

The EEU has no equivalent to the EU’s Structural Funds which helped ease disparities across EU member states. Indeed, the EEU never was designed as a development organisation for poorer countries and attempts to develop ad hoc instruments, such as a $500 million Russian-Kyrgyz Development Fund to support those affected by entry, have not made much difference. It initially struggled to find projects that met its lending criteria, although it subsequently funded some 700 small projects, primarily through local bank credits. Also, some important bilateral Russian commitments to infrastructure projects failed to materialise; in 2012, Russia promised to invest $2 billion to complete the Kambar-Ata and Upper Naryn hydroelectric plants in Kyrgyzstan but Russia’s economic crisis and negotiating difficulties ended its interest in these projects.

The most popular aspect of the EEU is improvement in some cross-border transit. A Kazakh businessman recalls when it took a week to import cargo across the border: “We would wait three days at the border, and then take another three days to get through the customs”. Another says that he used to regularly pay $200 in bribes to cross the border, but now pays nothing. A businesswoman in northern Kazakhstan argues that “the victory of this union [EEU] is that they removed the customs, they took away a whole barrier. All the bribes were there”.

Travel can still be difficult, however, particularly on the Kazakh-Kyrgyz border. At the main Kordai border crossing, 10km outside the capital Bishkek, delays and queues are still the norm. According to one regular traveller: “Nothing changed at the border, in fact maybe it got even worse”. Some suspect the delays are manufactured by border guards seeking bribes. According to one driver: “If you pay 1,000-2,000 tenge, ($3-$6) you’re allowed to cross without problem. If not, they’ll want to search the car, put your goods through the x-ray, etc. If you don’t pay, you can be delayed an hour or more”.

Russian anti-immigrant violence declined in recent years, but there are still frequent attacks and harassment of Central Asian workers.

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The most significant boost for Kyrgyzstan is in labour migration to Russia, although residual anti-immigrant feelings in Russia present a darker side. As citizens of an EEU member country, Kyrgyz migrants to Russia no longer need to pay for a monthly work permit (patent) or take onerous language tests – though the former rules were not always followed in the first place. Kyrgyz officials still point to the failure of Russian employers to provide proper work contracts and papers for migrants. Russian anti-immigrant violence declined in recent years, but there are still frequent attacks and harassment of Central Asian workers. There are concerns among Central Asians that anti-migrant sentiment could rise again following the involvement of an ethnic Uzbek from Kyrgyzstan in a suicide attack on the St. Petersburg metro 3 April 2017.

Although many officials and businesspeople in Kazakhstan and Kyrgyzstan are disillusioned about EEU membership, opponents do not represent a powerful political force in either country. There is no “Kazexit” in the cards. Political and business elites are resigned to membership, either hoping that the EEU concentrates primarily on its economic mandate, or that it turns into yet another “virtual” organisation that can safely be ignored. Opinion polls still suggest high support among both Kazakhs and Kyrgyz for membership, with more than 80 per cent in favour in both countries.

B. Expanding Eurasia?

The EEU is presented as a purely economic project but in practice Russia also views it as a geopolitical and ideological effort – a platform for Moscow’s own Great Power aspirations. Russian officials and analysts talk of “Greater Eurasia” in which Moscow serves as a key pivot in a region stretching from Eastern Europe to East Asia. Russian deputy foreign minister, Igor Morgulov, claims that “Greater Eurasia” could facilitate integration between the EEU and the SREB, and among the EEU, the Shanghai Cooperation Organisation and ASEAN. In May 2016, Russian first deputy Prime Minister Igor Shuvalov compared the initiative with the U.S.-led Trans-Pacific Partnership, and said: “The whole Eurasian space is set to see an all-encompassing trade and economic partnership emerging. This partnership, which is primarily emerging between the EAEU [Russia’s acronym for the EEU] and China, will be open for other countries to join”.

Russian officials and analysts talk of “Greater Eurasia” in which Moscow serves as a key pivot in a region stretching from Eastern Europe to East Asia.

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For Kazakhstan and Kyrgyzstan, this involves a complex balancing act. On the one hand, officials in both capitals do not wish to get caught up in Russia’s complex geopolitics. Both countries refused to join Russia in imposing sanctions on agricultural imports from North America and the EU or on imports from Turkey in 2015. They maintain relations with Ukraine despite Russia’s conflict with Kyiv. On the other hand, they see benefits in a project that can promote Eurasian integration.

In 1994, Kazakh President Nazarbayev called for Eurasian integration and published a plan to form a “Eurasian Union of States”, likely a way of cementing Russian-Kazakh relations without undermining Kazakh national identity. After land-related protests and terrorist attacks in north-west Kazakhstan in May-June 2016 which the Kazakh government blamed on Islamic extremists, Russian nationalists talked about a potential Russian military intervention in northern Kazakhstan, which is home to a sizeable ethnic-Russian minority. But the appeal of separatist tendencies is lessened by Kazakhstan’s membership in the EEU since it mitigates fears of ethnic Russian minorities. In other words, the concept of Eurasia is useful for Kazakhstan, both in managing relations with Russia and in bridging its own internal ethnic divides.

In reality, the concept of Greater Eurasia for now is mostly rhetorical. The EEU struggles to find potential members. Leaders in Uzbekistan and Turkmenistan are implacably opposed and seem to privilege ties with China. In 2015, China became Uzbekistan’s main trade partner taking the top spot from Russia. When Xi Jinping visited Uzbekistan in June 2016, he became the first foreign head of state to address the Uzbek parliament. That said, in some ways, Uzbekistan already is economically integrated with the EEU zone: at least two million Uzbeks work in Russia, although their numbers have declined as they face increased hurdles to migration and lower wages.

Turkmenistan takes an even stronger stance against regional integration, informed by its official ideology of “neutrality”, which in practice is a policy of self-isolation. Turkmenistan attended the initial meeting of the Shanghai Cooperation Organisation in 2007 but refused to join and has rejected any possibility of EEU membership. Unlike other Central Asian countries, Turkmenistan has few labour migrants working in Russia and limited trade with EEU states. Its main exports, oil and gas, flow primarily to China. Russia’s Gazprom was a major buyer of Turkmen gas but suspended purchases in early 2016. Turkmenistan also suspended exports to Iran in 2016. As a result, it now heavily relies on China.

Tajikistan is more likely to join the EEU but, among other factors, China’s allure may encourage it to resist. Remittances from Russia declined sharply in 2015-2016 but still remain the main source of income for a majority of the population. Membership has public support because it could improve the legal status of hundreds of thousands of Tajik labour migrants already in Russia. Pro-integration economists present an optimistic scenario, predicting up to 3.5 per cent additional economic growth per year in the medium term after accession. However, given Russia’s deep recession and the high costs associated with funding Tajikistan’s integration in the economic bloc, Tajikistan’s early accession is growing less attractive to Russian officials.

Waning Russian interest in early accession is matched by ambivalence in Dushanbe. There is unlikely to be significant investment in Tajikistan from other EEU members, whereas China, Iran and Gulf states are all involved in investment projects. Although these infrastructure investments do not always benefit ordinary people they often offer lucrative deals for local partners. Companies close to the government reportedly have developed close ties with China, suggesting a potentially stronger interest among some constituents in that relationship.

Still, Russian diplomats are confident of Russia’s privileged position in Central Asia. They are keenly aware of anti-Chinese sentiment in the region and trust that over the long term it could work to Moscow’s advantage. The scale of Chinese investment cannot be matched, but Russia views its linguistic, cultural and military links as insurance against Chinese overreach. Vital to Moscow’s connection with the region are the millions of Central Asian migrants working in Russia and the remittances they send home annually. Though the value of remittances may fluctuate they are a lifeline to Central Asia’s poorer economies such as Kyrgyzstan and Tajikistan.

IV. Cooperation and Competition

Chinese and Russian regional projects in Central Asia have different goals. The SREB aims to develop ease of transport and freer trade to facilitate Chinese exports and access to energy supplies. The EEU, a customs union that raised external tariffs on imports from non-EEU members, seeks to ensure and legitimise Russia’s influence, including by establishing relations with other blocs like the EU. Nevertheless, geopolitical realities have forced both sides to cooperate. Russia needs good relations with China to counterbalance its problems with the West. China recognises Russia’s historical and security role in the region. Both states are opposed to greater Western, particularly U.S., involvement in Eurasia. Their worldviews and ideologies overlap and they share similar goals in counter-terrorism and in maintaining stability. The two states appear close enough to manage tensions between their regional visions for Central Asia.

Russia needs good relations with China to counterbalance its problems with the West.

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For now, Russia remains the key security player in the region. It retains significant operational military capacity with bases in Kyrgyzstan and Tajikistan. Russia also leads the Collective Security Treaty Organization (CSTO), which includes Kazakhstan, Kyrgyzstan and Tajikistan, and has expanded its military ties to Uzbekistan and Turkmenistan, although both countries strongly oppose military basing agreements or membership in the CSTO. Russia aims to prevent regime collapse in any Central Asian state, particularly through a Western-friendly “colour revolution”; to stem any spillover of Islamist radicalism from Afghanistan into Central Asia and southern Russia; and to counter narcotics trafficking.

China shares these goals and along with Moscow believes strong regimes are best placed to control potential internal conflict. During government suppression of protests or uprisings, Beijing and Moscow backed hard-line government responses in Andijan (Uzbekistan) in 2005; Janaozen (Kazakhstan) in 2011; and Gorno-Badakhshan (Tajikistan) in 2012. China and Russia – together with all Central Asian states except Turkmenistan – are members of the Shanghai Cooperation Organisation (SCO), a security grouping designed to counter what China terms the “three evils”: terrorism, separatism and religious extremism. However, the SCO’s operational capacity is limited.

Chinese analysts recognise that the SREB could multiply the number of potential Chinese targets for terrorism and protests as trade, investment and transhipment increase the presence and visibility of their citizens and projects. Chinese companies are likely to make greater use of Chinese and foreign private security companies with unarmed personnel for day-to-day protection of their operations in Central Asia, while counting on local government and Russian security forces to respond to more serious threats. But as Beijing’s interests in Central Asia grow, greater involvement in security matters will tend to follow.

A. The SREB and the EEU

In May 2015, President Vladimir Putin and President Xi met in Moscow and signed a joint declaration to coordinate the SREB and EEU with the stated goal of forming a common space on the Eurasian continent. In December 2015, after talks in Beijing, Prime Minister Dmitry Medvedev announced an initial agreement that “sealed the intention of the sides to continue to search for points of common interest between the Eurasian Economic Union and China’s Silk Road Economic Belt project”.

The following February, a working group between Chinese officials and the EEU agreed to develop a “roadmap” for cooperation. Foreign Minister Wang Yi on a visit to Bishkek said he saw the “SCO as a platform to speed up the docking of the Silk Road Economic Belt with the construction of the Eurasian Economic Union”. On a July 2017 visit to Russia, President Xi said his government was discussing an agreement on economic cooperation and a list of joint projects with the EEU. During that visit, the first signs of concrete agreements emerged as the Russia Direct Investment Fund said it would partner with the China Development Bank to create a new $1o billion cooperation fund for cross-border projects, while China Development Bank reportedly gave Russian state development bank VEB an $850 million loan for an innovation fund.

This slow diplomatic pace reflects a process through which Russian strategists have eventually concluded it is more in Russia’s interest to shape China’s initiative than to resist it. However, Russia still has reservations. There has been little follow-up, and for now it seems more likely the two projects will work largely in parallel, with the SREB prioritising bilateral trade, investment and infrastructure while the EEU focuses on internal cooperation among its members. Occasional projects may be badged as joint initiatives.

The SREB provides the EEU with enhanced legitimacy through recognition by a major power. In the wake of the conflict over Ukraine and ensuing Western sanctions, China’s initiative also offers Russia an alternative economic and political pole that supports its own efforts to turn eastward, limit American and European influence in its backyard, and promote development, social stability and regime security in Central Asia. “Russia’s main goal is to make the SREB a tool for strengthening and improving the [EEU], to prevent the two from competing with each other, and in the future, to make the resources of the SREB the foundation for creating an economic and political Greater Eurasian Community”, according to Timofey Bordachev at the National Research University in Moscow.

Despite the official positive view on relations with China, Russian experts privately frequently warn of challenges faced by Central Asian states in relations with China.

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There are limits to cooperation. Despite the official positive view on relations with China, Russian experts privately frequently warn of challenges faced by Central Asian states in relations with China. China prefers to do bilateral deals rather than deal with the EEU. Efforts by Russian officials to encourage EEU members to coordinate their involvement in the SREB have led nowhere. More significantly, China is committed to reducing barriers to trade along the SREB, while the EEU is constructing a customs union with relatively high tariffs and has launched anti-dumping investigations against Chinese products.

In the long term, China would like to develop a Free Trade Area (FTA) between China and Central Asia whereas Russia has opposed moves by China to promote an FTA among SCO members, fearing that China would economically dominate the bloc while an influx of cheaper Chinese goods would erode hopes of fostering domestic industry through trade-restricting policies such as import-substitution. Uzbekistan is also strongly opposed to any China-led free trade area. Kyrgyz entrepreneurs, however, welcome the idea, arguing that an SCO free trade area would be the ideal complement to the EEU.

Chinese analysts see the EEU’s primary aim as helping Russia recover its great power status and institutionalise its regional sphere of influence. To the extent that it facilitates policy coordination and promotes peace and stability, they reckon it may benefit the SREB. But Chinese scholars also tend to be sceptical of the EEU’s long-term prospects, viewing it as a defensive, inward-focused construct that will exacerbate Russia’s geopolitical rivalry with the West. They also point to the union’s lack of economic rationale or common market, the potential for territorial disputes among members, and the tension between its binding mechanisms and the natural tendency of Central Asian states to balance between Beijing and Moscow. They assess that Russia will have to make further concessions to satisfy the divergent, centrifugal interests of the other members and, in the absence of reforms to its own economy, bear an increasingly heavy burden.

By contrast, the Belt is conceived as an open web of bilateral agreements in which the economic benefits are explicit, while political expectations (such as supporting the One-China Policy and other Chinese interests) are largely implicit. As one Chinese scholar put it, “the EEU can’t stop the power of the market. Everything will flow back to the biggest market”.

B. A Role for the West?

The EU and the U.S. are influential actors in Central Asia but increasingly marginalised by the rise of China and a reassertive Russia. The EU’s Central Asian Strategy, devised in 2007, tried to address multiple challenges with limited funds: just $750 million in 2007-2013, projected to rise to $1 billion in 2014-2020. Failure of the 1990s Transport Corridor Europe-Caucasus-Asia (TRACECA) program brought to an end EU support for major infrastructure or connectivity projects in the region. Most funding in the present cycle is earmarked for education and rural development. However, the Strategy is unfocused and lacks political support, leading to few visible results.

The EU and the U.S. are influential actors in Central Asia but increasingly marginalised by the rise of China and a reassertive Russia.

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The U.S. has its own version of a “New Silk Road” launched by then Secretary of State Hillary Clinton in Mumbai in 2011; its goal is to link Central Asia through trade and export routes to Afghanistan and South Asia. A new C5+1 format, launched in 2015, involves regular meetings among the five Central Asian states and the U.S. The U.S. continues to offer political support to two major infrastructure projects: the Turkmenistan-Afghanistan-Pakistan-India Pipeline (TAPI), a gas export route from Turkmenistan to South Asia, and CASA-1000, an electricity generation and export project involving Kyrgyzstan, Tajikistan, Afghanistan and Pakistan. Both projects face political, security and commercial challenges that may prevent implementation.

More significant influence is exerted by the three major international development banks, the World Bank, European Bank for Reconstruction and Development (EBRD) and Asian Development Bank (ADB), all of which are willing to cooperate with China’s SREB program. In January 2016, China became a shareholder in the EBRD. In June 2016, the Asian Infrastructure Investment Bank (AIIB) and EBRD agreed on their first joint project, a $55 million road construction project in Dushanbe, part of a bigger project to improve connections to Uzbekistan, long undermined by poor relations between the two countries. The ADB and AIIB also have committed to cooperation along the Silk Road, with an early joint project agreed in 2016 in Pakistan. The World Bank pursues joint projects with the AIIB, including in Central Asia .A road project in Almaty, Kazakhstan, is jointly funded by the World Bank, the EBRD and AIIB.

The AIIB concentrates on joint projects in the wider Belt and Road Initiative, working with established multilateral lenders to boost its experience of complex projects and to give it greater legitimacy. These joint projects, and cooperation in the region more generally, raise broader questions. Although the EBRD has committed to “engaging in dialogue on such issues as governance and social and environmental standards”, multilateral lenders and development agencies could be tempted to dilute environmental and governance commitments in order to ensure their participation in projects. One mechanism to boost oversight and attention to governance issues would be to encourage greater civil society and media involvement in project planning and implementation – something neither China nor Russia is likely to do.

V. Conclusion

China’s Silk Road Economic Belt and Russia’s Eurasian Economic Union will have a profound impact on Central Asia’s future. Both have significant economic potential but also political downsides. In particular, China and Russia should not mistake the political status quo for a stable investment environment. They ignore potential conflict triggers – ethnic tensions, nationalism or inept and corrupt governance – at their long-term peril.

The two initiatives offer the prospect of trade, investment and enhanced cooperation in a region that is in need of all three. The SREB in particular, although driven by China’s national interest, has the potential to alleviate Central Asia’s infrastructure deficits, improve connectivity and spur economic growth. Yet, much like the EEU, it has fostered a politically-driven rush to sign deals and memoranda, while the policy and planning bureaucracy has struggled to keep up. Some projects may never materialise, others could face long delays. Additionally, while officials and executives who implement the Belt may seek to keep their focus on trade and investment, they will find it hard to avoid thornier questions of local politics, security and environmental impact as their presence becomes more prominent.

Beijing’s and Moscow’s basic premise appears to be that economic development coupled with a robust security apparatus will be enough to manage social problems.

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Beijing’s and Moscow’s basic premise appears to be that economic development coupled with a robust security apparatus will be enough to manage social problems. But if prosperity is unequally shared, local communities are not consulted on projects that affect them, and reforms of institutions and systems of governance fail to keep pace with investment inflows, then both the SREB and EEU could produce economically unviable projects that perpetuate existing market-distorting practices and rent-seeking, while exacerbating ethnic, class and regional divides, with social tensions masked by state repression.

Central Asia’s states also risk becoming indebted conduits for Chinese products being shipped to Europe and energy supplies flowing eastward. Their challenge is to extract as much benefit from the EEU and SREB as possible without giving up too much of their sovereignty, and to leverage Chinese trade, investment and transhipments to foster local businesses. That will require an entrepreneurial cultural change for Central Asians long used to resource extraction and Soviet-style central planning.

The EU and the U.S. cannot compete with the scale of Russian and Chinese influence in the region. Rather than develop their own “Silk Road” or analogous plans, they could instead focus on realistic initiatives that fit within existing regional projects or help develop bilateral engagement with key Central Asian republics. They can play an important role as complementary partners for Central Asian states that seek a more varied foreign policy, although this should not be done at the cost of adopting an uncritical approach to authoritarian regimes.

As China and Russia expand their influence, competition in Central Asia optimally should go beyond the establishment of spheres of influence. Instead, it should be about who can do more to foster the economic growth, skills development and innovation that would benefit both Central Asian societies and the rest of Eurasia.

Bishkek/Hong Kong/Brussels, 27 July 2017

Appendix A: Map of Central Asia

Map of Central Asia International Crisis Group, July 2017. Based on UN map no.3763 Rev. 7 (December 2011)

Appendix B: Map of EEU Countries