Silk Road from Ukraine to China – No Tickee No Shirtee (Part II)

In which I continue summarizing this piece in VZGLIAD, written by reporter Olga Samofalova.

We last left off at the interview with Alexander Zavgorodniy, the head of Ukraine’s public railway network, called Укрзализныця (UkrZaliznytsya).  Ukraine is hoping to attract capital investments to renovate their aging railway infrastructure.  One of the things that would make them attractive to investors, is to become a transit hub on China’s new “Silk Road” project.

According to Zavgorodniy, the Ukrainians already did one test run, and are scheduling the actual start of the project for March.

Kiev is convinced that this route will be of strategic significance, not just for Ukraine, but also for Europe as a whole.  “Our colleagues from Poland and Germany have stated numerous times, that they are interested in the creation of this transport corridor.  And we are working with them currently, over the formation of a single policy, in order to create a single tariff.”

НА СУШЕ И НА МОРЕ

Again according to Zavgorodniy, Ukraine is willing to offer the services of its very own two ferry-boats.  This will also help to lower the cost of the project and make Ukraine attractive to Silk Road investors.

Ths Ukrainian ferryboat runs from Istanbul to Odessa.

During the test run,  one Ukrainian train left Kiev on 15 January.  The train consisted of 10 wagons (train cars) and 20 standard 40-pound containers.  In the course of two weeks, the train crossed both Black and Caspian seas, travelled through the Caucasus and Central Asia, and on the morning of 31 January arrived at the border between Kazakhstan and China.

Ukrainian government officials celebrated this achievement as a glorious victory, as a way of joining Europe and Asia while bypassing Russia.  The route proved to be two or three times faster than the legacy Odessa to China route, and cost was calculated as no more than $5000 per 40-pound container.  When the Ukrainian test train arrived in China, the Minister of Infrastructure of Ukraine, Andrei Pivovarsky, declared that only two weeks were needed to transition from the test run to the real deal.  However, very shortly, the project milestones were moved back two months.

But this is not the main reason why the VZGLIAD reporter poo-poos the project.  For starters, this particular route is not exactly a new invention, as the officials in Kiev declare.  Secondly, Zavgorodniy is not right to claim all the laurels of victory for himself.

In reality, this project was heralded by an earlier project called TRASEKA, which was created in 1993, with the participation of Kazakhstan, Kirgizia, Tajikistan, Turkmenistan, Uzbekistan, Armenia, Azerbaijan and Gruzia.  The agreement to create TRASEKA was signed in 1998 by 12 nations of the Commonwealth of Independent States (CIS) and Eastern Europe.  Among the signatories was President Leonid Kuchma of Ukraine.

First leg of 10th International Corridor: Odessa (Ukraine) to Varna (Bulgaria)

Furthermore, the legacy of this project can be traced back even further, to Soviet times.  In fact, the “new Silk Road” route corresponds with the “10th International Corridor” of the “Organization of Collaboration of Railway Lines” (ОСЖД), which unites the railway lines of the CIS countries, Eastern Europe, Mongolia, and China.  This route begins in Odessa and follows this route:  Varna, Batumi, Tbilisi, Baku, Türkmenbaşy, Tashkent, and ends in Aktogay, Kazakhstan, right on the border with China.

The terminus is Aktogay, Kazakhstan.

The only difference between the TRASEKA route and the older “10th Corridor” is that in TRASEKA the freight does not pass through Türkmenbaşy.  Intead it uses Aktau,  which is in the Western part of Kazakhstan, and thence just directly through Kazakhstan to the China border.  According to experts Sergei Kondratiev and Sergei Agibalov from the Russian Institute of Finances, this transit corridor is indeed a legacy from the Soviet Union and the СЭВ (Council of Economic Mutual Aid):  “The ferry-boats, the crossings, the railway lines, and indeed the entire schema of this transport project — all of this was worked out and built several decades ago.”  In other words, Zavgorodniy and the Ukrainian government are not allowed to take credit for this scheme.  And the “test train” was not even necessary, it was just a P.R. action, since everybody knows that the route works.  In fact, everybody has been using this route for a long time.  Just in 2014, Ukraine’s freight load along the TRASEKA corridor comprised 1800 kilometer tons per kilometer.  Along the Azerbaijan and Kazakhstan territories this route is already fully loaded, the freight load here is on the orders of  11-17 thousand kilometer tons per kilometer.

In Kazakhstan, this particular route just happens to coincide with the single railway line connecting the western and eastern portions of the country – hence its popularity.  Same thing goes for Azerbaijan, according to Kondratiev/Agibalov.

On the whole, the volume of freight along the TRASEKA corridor is rather low.  It did perk up a bit recently, when the conflict between Russia and Turkey caused a greater demand for TransCaspian routes between Turkey and Kazakhstan.  Aside from that, there is very little demand for this particular trade corridor between the E.U. and China.  Why?  Because it is not profitable.

The Main Quibble

And here is the main quibble.  Regardless who should take credit for dreaming up this route, the VZGLIAD piece claims that it is not economically effective, and that the Ukrainians are just dreaming on with their pipe dreams, as they often do.  Points made:

• The Ukrainians hope that the TRASEKA corridor can carry freight from Europe to China in only 10-12 days, with a cost of no more than $5000 for one 40-pound container.  However, the Russian experts in the Institute of Finances calculate that the actual cost will be $8000 for one 40-pound container.  This to the border of China.  If one calculates the route from Odessa to the actual Chinese city of Shanghai, then the estimated cost is $12,600.  This is 5-7 times more costly than the current sea route from Odessa to Shanghai.
• In calculating the cost of $5000, Ukrainians are making a lot of assumptions.  Namely, that the railway systems of Gruzia, Azerbaijan and Kazakhstan will grant them a significant discount.  Once the TRASEKA agreements are signed with these countries, Ukraine can indeed count on some kind of discount.  But probably more along the lines of 10%.  Whereas, to achieve the $5000 figure, they need a discount of at least 40%.  Which may not be realistic.
• As far as the promised terms of 10-12 days for the entire trip, these figures are also unrealistic, according to the Russian experts.  It does not factor in routine delays or unforeseen events.  Which happen especially with the ferry-boats.  For example,  the round-trip ferry between Odessa and Poti  runs once a week.  The two ferries promised by Kiev for the Silk Road, will turn “once a week” into “twice every 7 days”.  Which is not good enough.  Ukraine does not possess enough capital to build its own fleet of ferryboats.
• The ferry route from Baku to Aktau has become overloaded in recent weeks.  This is due to Russian sanctions against Turkish companies.  As a result, the Azerbaijanis are using 11 out of the 13 available ferries.  It is getting too crowded there for Ukrainian ferries to squeeze in.  Besides, in the port of Aktau there are only 2 docks which can receive container freight.

Maybe this is faster and cheaper?

In summary, these and other infrastructure limitations, plus tariff issues (with Ukraine an Associate Member of the E.U. and Kazakhstan a member of the Eurasian Economic Society) will add days to the Ukrainian proposed time of 10-12 days.  A more realistic estimate, according to these experts, is 22-24 days.  Thus, Ukraine’s new “Silk Road” will end up being 1-3 days faster than the current one, but will cost on average $3000 more per container.  Is the prognostication of these experts.

And the piece ends by pointing out that Ukraine has a habit of hyping geopolitical “mega-projects” such as oil and gas pipe networks.  All of these projects are designed to “liberate” Ukraine from dependencies on the Russian economy, and draw it closer to Western Europe.  And most of these projects never transition from paper to reality.

Will the same fate befall the new “Silk Road” project?  Only time will tell.