Pavel Matsukevich: There are no more guarantees that Brest will remain China’s land gateway to the EU

Ex-diplomat, political analyst Pavel Matsukevich in the next issue of his blog “Pulse of Lenin-19” conducts an audit of options for the delivery of goods made in Belarus to foreign consumers, and also evaluates the transit attractiveness of Belarus.

Three troubles because of the regime

The confrontation of the regime with the West has different consequences, which have complicated the life of Belarus. One of them concerns restrictions in mutual trade that have affected key export positions and, for example, technology imports from the EU, the US and other advanced countries. These measures are not fatal for the economy, and even more so for the regime, but they are sponsors of the long-term technological backwardness of Belarus.

The second of the consequences is more sensitive, because it touches almost all foreign trade of Belarus and even with countries in which Lukashenka’s presidency does not cause allergies. It is no secret that Belarus has lost access to the ports of Poland, Lithuania and Ukraine, which is why it is experiencing serious difficulties with the delivery of its goods to the countries of the “far arc” – Latin America, Africa, South and Southeast Asia. For the foreign-oriented Belarusian economy, and over 60% of everything produced in Belarus is exported, this is a matter of critical importance.

The third of the tangible consequences leads to the loss of transit attractiveness, which was a Belarusian calling card in the international division of labor. At first, for well-known reasons, planes began flying around Belarus, and then individual Chinese container trains began to bypass Belarus. True, new routes for the delivery of goods from China to Europe, bypassing Russia and Belarus, began to appear far from yesterday – for example, the Trans-Caspian appeared back in 2017.

How does official Minsk get out of this emergency situation?

Problems in trade with the West are solved by reorienting exports to Russia and Asia, as well as other regions of the “far arc”. They are resolved quite successfully. At the end of 2022, as follows from Lukashenka’s statement at a recent meeting of the Council of Ministers, “about 80% were reoriented to the markets of friendly countries.” The main “reorientator” was the Russian market, something was successful in the Chinese. At least China has become the second foreign trade partner of Belarus after Russia.

The problem of delivering goods is somehow resolved also with the help of Russia, through whose territory Belarus exports to third countries. Although this is a problematic solution in itself, since it gives Moscow a remote control of the entire Belarusian foreign trade, the Kremlin can turn it off at any moment like a tap.

The delivery of Belarusian goods to China, including potash fertilizers, is carried out by container trains – in 2022, 988 BelZhD trains transported 120,000 containers in twenty-foot equivalent there, which is 6.5 times more than in 2021.

That is, a solution to the problem of exports to the Celestial Empire has been found, but China is not yet the whole of Asia. And then, whether it is competitive and long-term is a big question. The price situation in the maritime and rail freight market has changed radically in favor of maritime, but more on that later.

Belarusian trade flows in the “far arc” turned towards the transport corridor “North-South”. Western sanctions are pushing the development of trade routes, which were previously considered unpromising and costly, although not without interest, not without reason.

And we will go to the North-South

The history of the corridor goes back to the 1930s and is associated with the creation of the Trans-Iranian Railway. The section from the port on the Persian Gulf of Bandar Khomeini to the Caspian port of Bandar Torkemen and further to Turkmenistan became the route along which American and British aid came to the USSR under Lend-Lease during World War II.

In the post-war Soviet era, the corridor played a liaison role between the Baltic states and the states of the Persian Gulf and the Indian Ocean. After the collapse of the USSR, most of the links were broken, and only by the end of the last century, regular transportation along this route was resumed.

In 1999, companies from India, Iran and Russia signed an agreement on the transportation of containers, and a year later in St. Petersburg they signed intergovernmental agreement on the creation of the North-South corridor. The main North-South route, 7.2 thousand km long, runs from the Indian port of Nava Sheva to St. Petersburg through Iran. At the same time, transportation was carried out mainly between Russia and Iran.

In September 2003, Belarus joined the agreement. The entire list of participants also includes Azerbaijan, Armenia, Kazakhstan, Oman, and Syria. Ukraine also showed interest in the route, but it never took shape in joining the agreement.

In November last year, after a long-term lull, Belarusian-Iranian negotiations on the development of the North-South resumed, in particular, on a permit-free system for road transport. As a result, the relevant agreement was signed during Lukashenka’s visit to Iran earlier this week. I suppose that the topic of the development and use of the corridor in the interests of Belarus was one of the central ones at the talks in Tehran. For Belarus, we are talking about entering the markets of all regions of the “far arc” through Iran, from the Middle East, Africa, Southeast Asia and Oceania to Latin America.

In the development of the North-South corridor, BelZhD launched an accelerated freight train Belarus-Russia-Azerbaijan to Baku last summer. The volume of cargo transshipment through another Caspian port, Astrakhan, increased 8 times in 2022 to 100,000 tons. At the beginning of this year, for the first time, BelAZ mining dump trucks and spare parts were unloaded there, which then followed to Saudi Arabia. By 2024, the transit of Belarusian cargo through Astrakhan may increase to 850 thousand tons.

“North-South” allows you to transport goods to Iranian Caspian ports with subsequent delivery by road or rail transport to the ports of the Persian Gulf. At the same time, low fuel prices in Iran create an advantage for trucking.

The matter is not limited only to exports to the countries of the “far arc”, but also concerns imports from the EU – through Turkey and Georgia or Azerbaijan through the transport corridor TRACEKA. Then the “North-South” is switched on and the import gets to Russia. Turkish ports have turned into transit hubs, from where goods are re-exported by sea or land to Russia, but can also be delivered to Belarus. The basis of this traffic is vehicles.

The development of the North-South project is complicated by a variety of difficulties. A report by the Eurasian Development Bank, published last year, identified more than 40 different infrastructure, tariff, administrative and financial barriers.

Investments in excess of $38 billion are required for the electrification of railways, the construction of missing and new railway lines, roads, the deepening of water channels, the creation and modernization of terminals in ports, border crossing points, logistics centers and roadside services. If realized, the potential for deliveries along the North-South by 2030 is estimated at 15-25 million tons.

An increase in the volume of cargo transportation along the corridor is inevitable, because there are no other options, which means that the infrastructure will develop. The project is actively promoted by Russia, which is also the main investor. “North-South” fits well with most latitudinal transport corridors, creating opportunities for the development of logistics chains for the delivery of goods in Eurasia. So, in some other brighter future, it can play a favorable role in world trade.

Transit (in)attractiveness

With the outbreak of a big war in Ukraine, the main railway route for the delivery of goods from China to Europe, passing through Belarus, was threatened. Got it but didn’t get lost. And war is not the only challenge facing rail transport.

In the review of the Eurasian Rail Alliance Index (ERAI) “Container rail transportation in the Eurasian space in 2022” The second challenge was the end of the favorable market situation associated with the high cost of sea freight against the backdrop of stable rail transport rates. In November 2022, the index, which reflects the cost of sea transportation of goods in containers from the countries of Southeast Asia to Europe, fell below the indicator of the cost of transportation by rail through the territory of the EAEU.

Over the past year, the WCI ocean freight rate has dropped from $9,507 per forty-foot equivalent in January to $2,132 in December, returning to “docoid” levels in the summer of 2020. According to ERAI, this marks the end of the unique conditions in which Eurasian rail transport found itself, which had a price advantage over maritime transport during this period. In turn, the ERAI index fixed at around 2,902 dollars for a forty-foot equivalent.

In 2022, there was a 35% drop in cargo traffic in the China-Europe-China transit segment, following through Belarus. This is bad news.
The good news is that the drop in traffic volumes along this route turned out to be smaller than along other corridors in the EAEU space. In addition, as follows from the ERAI survey, the average travel time has decreased to 6.69 days, and the speed of trains has increased to 816 km/day. Average train occupancy remained at 2021 levels at 117 TEUs. The share of loaded containers reached 96%, including 89.4% towards China. Thus, according to ERAI, the route continues stable operation, gradually improving the quality component of transportation.

ERAI data show that the key transport points of the China-Europe route in the EU are Malaszewicze (on the Belarusian side of Brest), Hamburg, Mannheim, Duisburg, Tilburg, Lodz.

At the same time, it should be taken into account that China supplies its goods to the EU mainly by sea – land transportation accounts for only about 6% of its trade turnover. According to ERAI, in 2022, goods worth a total of $29.6 billion were transported through Belarus, which is 3.2% of the total annual turnover between China and Europe.

The popularity of the railway delivery route through Kazakhstan, Russia and Belarus, which has been growing in recent years, is due to the conjuncture of prices for cargo transportation – maritime ones shot up in cost against the backdrop of the pandemic, making rail attractive.

The main thing is that despite the atmosphere of toxicity around Belarus, the Belarusian route remains the key (of the overland) for Chinese and European suppliers working with China. Therefore, there is reason to believe that transit through Belarus will continue, unless the war comes to Belarusian territory.

True, in addition to the war, there are other risks for the transit potential of Belarus, not related to the situation in our country or the steps of Poland (if it blocks Chinese transit, it will blow a hole in its own wallet).

The first and main risk is associated with a return to sea transportation against the backdrop of their price attractiveness. The second is with the further development of alternative rail logistics routes, such as the Trans-Caspian Transport Corridor, which links China and the EU through Kazakhstan, the Caspian Sea, Azerbaijan, Georgia and the Black Sea (Romania).

Do these inevitable logistical transformations mean the withdrawal of China-Europe-China transit from Belarus?

Unlikely, but there are no more guarantees that Brest will still remain a Chinese land gate to the EU. Stability is basically a thing of the past. By and large, some certainty in this matter is possible only after the end of the war in Ukraine.