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"New Silk Road" Part 3: Challenges, Rivalries, & Prospects For Success

Tyler Durden's picture




 

Submitted by Robert Berke via OilPrice.com,

Part 3: Challenges, Rivalries, Prospects for Success, and Investment Implications.

In Part 1 of “The New Silk Road,” we examined the China’s plan for rebuilding the silk road, stretching from Europe to Asia.

In Part 2, we looked at currently proposed projects, and what could stall and hamper progress.

In Part 3, we examine the geopolitical rivalries, prospects for success, and investment implications.

Progress on the Silk Road

If the rush by nations to join the Chinese sponsored Asian International Infrastructure Bank (AIIB) is any indication, the world is becoming ever more engaged with China’s New Silk Road.

To westerners used to lengthy, multi-decade delays in giant government projects, progress on the Silk Road project is taking place at an astonishing pace. Hardly a day goes by without an announcement of some new project that is set to soon break ground.

On May 7th, President Xi met with his counterpart in Kazakhstan, to sign major agreements to develop high speed rail lines between Kazakhstan, Russia, and ultimately China. The China side of the rail line to Kazakhstan is already completed.

Following hot upon that deal, the next day, on Moscow’s Victory Day Celebration, the Chinese President Xi met with President Putin in closed door meetings, where hundred billion dollar deals were sealed in just a few hours, including the high-speed train from Moscow to Beijing.

On May 13th, China Railway Group won a $390 million contract to build the railroad, along with two Russian railway companies, with regional development plans set to take place in 2015.

On May 10th, Xi’s three day visit to Belarus culminated in another major agreement, with Belarus becoming a new partner in the high speed rail extension. It almost seems as if the Chinese President Xi has multi-billion deals falling out of his pocket everywhere he goes, and he goes everywhere.

AsianInfrastructureDevelopment

Geopolitics

There are many who say that the New Silk Road is the first shot in a competition for dominance in Eurasia. Others claim the start of a new cold war. George Soros is among those who go even further with alarming claims of an imminent nuclear war between the US and China. Why the sudden alarms for an obscure area of the world? Here's an indication of the global significance some experts have traditionally claimed for the region.

"If China succeeds in linking its rising industries to the vast natural resources of the Eurasian heartland, then quite possibly, as Sir Halford Mackinder predicted... in1904, ‘the empire of the world would be in sight,” wrote Alfred W. McCoy, a history professor at University of Wisconsin-Madison, on June 8.

Although no one has a crystal ball in matters of war and peace, history clearly shows that since the onset of the cold war, the great powers have become adept at avoiding direct conflict with each other.

US Secretary of State John Kerry met Putin in May, and the message was not about the end of strife between their two countries, but the need to avoid mistakes that could lead to direct conflict. The only agreement announced at the meeting, was the establishment of early warning systems and a hot line, as the first steps in avoiding accident that could lead to further conflict. In that sense, better and earlier communications, keeps people from getting jumpy and pushing the wrong buttons.

As to the Asian pivot, it’s expected that the US will also push for early warning and improved communication systems with China, for the same reason, to avoid accidental conflicts emerging into something more serious.

No doubt, the bellicose rhetoric from both sides will continue, partly as the regular saber rattling we’ve all become accustomed to and partly for home consumption (see recent example below).

“There should be no mistake: The United States will fly, sail, and operate wherever international law allows, as we do all around the world,” US Secretary of Defense Ash Carter said in response to China’s recent arms buildup in the South China Sea. He also added that the United States intended to remain “the principal security power in the Asia-Pacific for decades to come.”

Without mentioning China, Carter also makes his view clear that the US takes a dim view of Beijing's strategy in the region, and his statement was intended to make clear that the US has no intention of backing down.

"We already see countries in the region trying to carve up these markets…forging many separate trade agreements in recent years, some based on pressure and special arrangements…. Agreements that…..leave us on the sidelines. That risks America’s access to these growing markets. We must all decide if we are going to let that happen. If we’re going to help boost our exports and our economy…and cement our influence and leadership in the fastest-growing region in the world; or if, instead, we’re going to take ourselves out of the game,” Carter said in a speech to the McCain Institute at Arizona State University in April.

It is not impossible but far from likely that the US and EU would level war or sanctions against one of their largest trading partners, upon whom, much of their economies depend.

Iran is good indicator of the response to new Eurasian opportunities, where global business is lining up, eagerly awaiting the easing of sanctions in order to jump in. A similar response is likely to take place on a much larger scale with the launching of the Silk Road, where the global business community is eager to join.

It’s important to note that it won’t just be Europe and America competing in the race, but so too will emerging new and very wealthy competitors from Asia and the Middle East. It’s hardly a coincidence that the Kuwaiti Sovereign Funds, one of the biggest in the world, has opened offices in Beijing a few years ago, with an eye on financing energy deals. Others from the global oil clan will not be far behind.

Reportedly, China has held open an invitation to the US to join its sponsored Asian Bank, as a founding and governing board member. China also hold open an invitation to Japan to become a founding member. But the US has not been so welcoming. The US sponsored Trans Pacific Partnership pointedly leaves out China and Russia. In response to questions about future membership, an unnamed US State Dept. representative reportedly responded: “Anyone but China.”

“The United States …has mixed feelings toward China's rising international status. It remains ambivalent concerning China-proposed initiatives such as the land and maritime Silk Road Initiatives and the Asian Infrastructure Investment Bank. …however, … there is a wide belief among the American think tanks that no convincing reasons exist for the United States not to support or participate in these initiatives,” wrote Fu Ying, China’s Vice Minister for Foreign Affairs, on June 9.

There is no legal barrier to America becoming a major governing partner with China in Eurasian trade, while also continuing to oppose China's recent aggressiveness. Despite the rising tensions, the US remains one of China's largest trading partners. As a governing partner in the Asian Infrastructure Investment Bank, the US would enhance its leadership in the region, enable western business to take advantage of newly offered opportunities, while helping to underwrite Eurasia's much needed development. It would also avoid the embarrassment of western business rushing to join the project, as seems likely, despite their government's disapproval. The sticking point, as Secretary Carter made clear, is who will lead.

Yet, as we learned from the Godfather, it might be wise to: "Keep your friends close; keep your enemies even closer."

Project Feasibility

Any large, complex economic development project like the ‘Road’ comes with a high degree of risk and delays associated with projects that cross multiple international boundaries, face a myriad of conflicting laws and regulations, and are based upon long term payoffs in a highly uncertain future.

Like many economic development projects, the underlying assumption is that the project will result in increasing demand. But China’s new empty cities are a testament to the idea that “if you build it, they might not come.”

No doubt, development financing is needed in Eurasia. A new high speed rail system across the region will likely help boost European trade with Eurasia and the Far East. It’s also likely that a number of cities and regions along the route will see growing economic activities. But what will succeed is far from certain.

Investment Implications

The backbone of the system will be an interconnected network of high speed railways set to open up the territories to transport, migration, agriculture, commerce, and industries.

As the American west was opened to development by new railway systems built through sparsely populated regions, one of the first industries to benefit was mining that spawned the famous gold rush fever. This time around the rush will likely be led by global mining giants in search of much more than gold and precious metals.

In terms of energy, Eurasia is home to many large oil and gas producers, including Russia, Iran, Azerbaijan, Kazakhstan, and Turkmenistan. Our top prospect here would be global engineering giant, Schlumberger (NYSE: SLB), which recently acquired the largest drilling and exploration company in the region.

The area is also home to huge mineral reserves, including precious and industrial metals, uranium, and coal. An example is Mongolia with its recent discoveries of some of the world's largest copper and coal mines. Global mining giants are likely to be big winners, like BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO).

For a number of reasons, I strongly favor the builders and suppliers, the pick and shovel approach to investments, as far less risky than the long term and more speculative bets on economic growth prospects. From that perspective, that Russian/Chinese agreement offers evidence of some of the best investment prospects, for both short and long term returns.

The agreement for the Russian/Chinese high speed railway between the two countries calls for China to supply the project with: 20 percent of financing, and 60 percent of engineers, labor, technical assistance, and equipment. The first contract agreed to involved China's government-controlled China National Railway Ltd, a $360 million contract to develop the railway between Moscow and Kazan, with plans to extend to Beijing.

China, the world's leading developer of high speed train networks, recently announced the merger of its two largest train builders, China CNR Corp. and CSR Corp., intended to boost exports of rail technology. Following the announcement of the merger, the companies’ stock rose by twenty percent before trading was halted. The newly formed company (CRRC Corporation Ltd), with a market cap of $26 billion, will be listed on the Shanghai exchange in place of CNR and CSR, that will both be delisted.

CSR recently announced a bid for Canada's Bombardier Co. (TSE: BBD.B), one of the world's leading manufacturer of high speed locomotives, trains, and airplanes. At around $5+ per, share, the newly listed company, CRRC, with a market cap of $25 billion, is a top prospect.

For years, the Kremlin has been lobbying Europe about a planned economic corridor that would extend from Vladivostok to Berlin, and with that plan now incorporated as part of the Silk Road project, Russian Railways becomes another hot prospect.

Other top prospects include Siemens (FRA:SIE), Germany' giant manufacturer of automated switching systems, an essential component in high speed rail systems, and already a partner with Russian railways.

Conclusion

As to the importance of Asian trade to the US, we'll leave the last words to Secretary Carter. In his speech at the McCain Institute, he laid out the administration’s official policy.

…(The) ” Asia-Pacific…is the defining region for our nation’s future”… “Half of humanity will live there by 2050″ and that “more than half of the global middle class and its accompanying consumption will come from that region.”….”There are already more than 525 million middle class consumers in Asia, and we expect there to be 3.2 billion in the region by 2030…President Obama and I want to ensure that… businesses can successfully compete for all these potential customers. ….Over the next century, no region will matter more… for American prosperity."

 

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Fri, 06/12/2015 - 19:02 | 6191776 TeamDepends
TeamDepends's picture

Don't book your tickets to Silk Road until after Nibiru passes.

Fri, 06/12/2015 - 19:16 | 6191797 THE 4th Quadrant
THE 4th Quadrant's picture

Spending Gold or Silver along the way will make your trip sublime.

Fri, 06/12/2015 - 19:54 | 6191891 lakecity55
lakecity55's picture

But where is "Niburo?" You can't hide a friggin planet.

Fri, 06/12/2015 - 19:04 | 6191779 kowalli
kowalli's picture

or we will have www www www in 3...2..1..

Fri, 06/12/2015 - 19:04 | 6191781 fascismlover
fascismlover's picture

Let them fly I say...nothing in the west is other than trillions in debt and multi multi trillions in debt in unfunded future liabilities.  

Please do get big enough to do an anti Hitler job on what we have going on in the west though.  

Fri, 06/12/2015 - 19:49 | 6191880 Dindu Nuffins
Dindu Nuffins's picture

China is also an afficionado of massive debts. It simply uses them to build infrastructure of dubious value rather than keep fed people of dubious value.

Fri, 06/12/2015 - 20:55 | 6192051 Volkodav
Volkodav's picture

Is not Chine debt internal?

Fri, 06/12/2015 - 19:11 | 6191790 The Delicate Genius
The Delicate Genius's picture

"There are many who say that the New Silk Road is the first shot in a competition for dominance in Eurasia"

Who?

People who have been living in caves?

The senile?

Very small rocks?

You can, as an initial matter, go back to the Iraq War - the *first one* - a few years before Zbig's "The Grand Chessboard"

China and Russia are *in* "eurasia" - it's the US and UK {yes, technically, but, not really in "Eurasia"} that have fought, lied, and murdered their way in.

One can go back further - how about the US overthrow of Iranian government, and support of a dictator and his secret police so the US and UK oil concerns could, in essence, steal Iran's oil?

https://en.wikipedia.org/wiki/1953_Iranian_coup_d%27%C3%A9tat

Why not go back to the opium wars?

The dutch east india company?

I defer to historians, but I've read enough to know that only an ignorant twat would dare assert "...the New Silk Road is the first shot in a competition for dominance in Eurasia"

It is an assertion of breath-taking stupidity.

Everyone here is now dumber, for having read it.

Fri, 06/12/2015 - 19:57 | 6191897 swmnguy
swmnguy's picture

Actually, I don't even think Alexander the Great was the first to take a shot at it.

Fri, 06/12/2015 - 19:28 | 6191820 mt paul
mt paul's picture

Beijing -Brussels

 

would be a nice ride

on an old BMW motorcycle ..

Fri, 06/12/2015 - 19:53 | 6191888 Dindu Nuffins
Dindu Nuffins's picture

I think most people would prefer an airplane ticket for just a little more money. That's the story surrounding the wet fart that high-speed rail in China itself has become.

Fri, 06/12/2015 - 20:13 | 6191938 besnook
besnook's picture

the only place in the first world high speed rail is a wet fart is the usa and the shart called acela.

Sat, 06/13/2015 - 01:12 | 6192545 Dindu Nuffins
Dindu Nuffins's picture

Chinese HSR lines lose money and are chronically under capacity. Planes are more convenient, slow trains are cheaper. Truth hurts for the ching-chong brigade here on ZH, but you get your paychecks regardless.

Sat, 06/13/2015 - 09:37 | 6192934 besnook
besnook's picture

china builds for future infrastructure demand not present demand as is done in the present quarter mindset of the west.

Sat, 06/13/2015 - 11:36 | 6193170 Dindu Nuffins
Dindu Nuffins's picture

The famed "Long-term Thinker" fallacy.

Building something before you need it is a waste. If you get a new TV every five years and you decide to "think ahead" and buy four TVs today because you can store three of them and unpack them as you need them over the next 20 years...

Then you have a bunch of worthless shit in five years. Outmoded, perhaps suffering from damage during storage.

If everyone prefers airplanes--and why wouldn't you want to shave dozens of hours off a trip?

... then HSR is a load of rubbish until something actually changes the dynamics.

Sat, 06/13/2015 - 10:01 | 6192982 Max Steel
Max Steel's picture

In this era of conveinence via planes there are interconnected pan-western european railway system also working quite fine . So why chinese rail network with bullet trains can't work ? Actually truth hurts more to ignorants . 

Sat, 06/13/2015 - 11:39 | 6193239 Dindu Nuffins
Dindu Nuffins's picture

Bullet trains are not regular railway systems. They're gimmicks that aren't as capable of hauling freight as traditional rail, and yet also too slow for passenger service on a practical scale. This is borne out in the operating losses. You want to argue against the bottom line, go ahead.

The guy above you played the "Long-term Thinker" card and made me laugh. Apparently,China will have more demand for HSR in the future somehow, when it has already peaked in population and already is the site of the largest human annual migrations, Chunyun season.

Pocketbooks voted. Poor use traditional rail, and rich use airplanes. HSR lost. The dynamics in China will be repeated elsewhere wherever HSR is built.  Go cry somewhere.

Fri, 06/12/2015 - 19:31 | 6191836 q99x2
q99x2's picture

They should make George Soros support the Silk Road. Or a part of it. Mix him in with it. One part at a time. I'd like to go and document the project.

Fri, 06/12/2015 - 19:39 | 6191852 kchrisc
kchrisc's picture

Zion's Plunder Road: "Printing" plunder, bombing schools and wedding parties, overthrowing countries, enslaving peoples, and building and arming an insurgent army (again) in the Middle East.

Liberty is a demand. Tyranny is submission..

Fri, 06/12/2015 - 19:43 | 6191866 besnook
besnook's picture

like the usa can contain china.....in its own backyard. lol. that would take more cannon fodder than the usa has even with 90 million millenials itching to give their lives to save the fortunes of the zionutz.

Fri, 06/12/2015 - 19:51 | 6191885 kchrisc
kchrisc's picture

Another contrast between Zion and non-Zion dominated parts of the world.

Zion utilizes "printed" plunder by their banksters, protected by their bought off and controlled governments, to plunder the west. Zion then goes on to only build luxuries for themselves and war machines by which to protect themselves as well.

China, and the rest of the east, have utilized their share of this plunder to build manufacturing plants, rail lines, ships, education centers, etc.

Zion is nothing but plunder and murder writ large.

Liberty is a demand. Tyranny is submission..

 

Zion is easy to see, as it's sitting on you.

Fri, 06/12/2015 - 20:05 | 6191910 Omen IV
Omen IV's picture

In ten years it will be clear that the US intervention in Ukraine accelerated  the match that lit a fire under these people that burned for 100 years and made China, Russia & Iran and the BRICS recognize there is no solution or appeasement of the USA - just construct a fortress that cant be breached by the Empire of Chaos in every way

huge mistake - Germany to follow east

Sat, 06/13/2015 - 02:01 | 6192608 Urtica ferox
Urtica ferox's picture

…(The) ” Asia-Pacific…is the defining region for our nation’s future”… “Half of humanity will live there by 2050? and that “more than half of the global middle class and its accompanying consumption will come from that region.”….”There are already more than 525 million middle class consumers in Asia, and we expect there to be 3.2 billion in the region by 2030…President Obama and I want to ensure that… businesses can successfully compete for all these potential customers. ….Over the next century, no region will matter more… for American prosperity."

In a little-reported conclusion to this speech, Ash Carter went on to say "We intend to gain entry to this vast market using our tried and true negotiating techniques - overbearing boorishness and military intimidation of the main players. We WILL insert ourselves into this market, and are certain that in the near future both China and Russia will come to see that all resistance is futile, and will gladly allow American corporations to rape and pillage these vast new markets to the utmost." 

When a reporter asked whether the new Eurasian trading bloc might choose to exclude the United States instead, Carter replied "Everybody knows that we are the one exceptional and indispensible nation, and so by definition such exclusion is simply impossible."

Sat, 06/13/2015 - 06:20 | 6192730 Firewood
Firewood's picture

Like its revered NAZI Germany inspiration before it, USSA and its Anglozionazi Empire of Chao$ will have to deal with its alpha mutt sect sooner or later. The future of this Third World Fourth Reich is grim indeed and all the posturing vis a vis the China Russia alignment is merely the last pathetic whimpering of a decadent "society" dying from the head down.

 

Onward with our Jaded Helmets and the fast approaching culling we all know is inevitable.

Sat, 06/13/2015 - 18:06 | 6194095 Herdee
Herdee's picture

China starts freight service into Russia:http://rt.com/business/266521-china-russia-cargo-service/

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