Value Chains Transformation and Transport Reconnection in Eurasia

Geo-economic and Geopolitical Implications

Jacopo Maria Pepe

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000393866
• Edition: 1
• Topic: Economia
• Subtopic: Condizioni economiche

This book focuses on the geo-economic and geopolitical impact of value chains transformation on the transport-logistic reintegration of continental Eurasian countries, with a specific focus on the members of the Eurasian Economic Union.

The author assesses the potential impact of current trends (global value chains fragmentation and decoupling) on Eurasian transport integration. The book combines in-depth analysis of the evolution of value chains and transport-logistics corridors across Eurasia with a geopolitical assessment of its implications for the EAEU's members' foreign and economic policy orientation. The author explores three key arguments: (1) the key to a successful and sustainable integration of the transport space of continental Eurasia is less the ongoing expansion of transcontinental transit, and more the participation in intraregional and transregional cross-border value chains, even though this process is increasingly tied to the question of the geopolitical and geo-economic orientation of continental Eurasia; (2) even in a more regionalised world economy, the economic complementarities between continental Eurasia and the two manufacturing blocks at the edges of the supercontinent, Europe and Asia, represent the greatest chance for continental Eurasia for larger participation in high value-added value chains; and (3) without diversifying trade and financial ties across Asia and normalising relations with the EU, the combined effect of shifting value chains location across the continent and China's ambiguous and flexible transport politics might turn an unprecedented chance into risk, augmenting competition among and within countries which are members of the EAEU over traffic volume, FDI, value chain participation, and ultimately geopolitical and geo-economic dividends.

This book will be of interest to scholars and students of IR Theory, IPE, Geopolitics and Regional Studies, as well as the related subfields of transport geography, economic geography, and logistics.

1
Transport integration and value chains in continental Eurasia

Limits and potential

For the countries of continental Eurasia and their economies, transportation plays a pivotal role in the domestic development and for the integration into global markets. Generally, the roles of railways and roads vary by distance from a seaport or inland terminal, with roads generally preferred for distances up to 900 km and rail intermodal services limited to long distances from ports (more than 900 km). In the case of continental Eurasia, long distances from open seas, geographic extension, and scarce demographic distribution with a population largely concentrated in mid-sized cities scattered across a vast space have made rail transport essential. For instance, rail is the dominant mode of transport in Russia and the backbone of the country’s economy: the rail sector generates 2.5% of the country’s GDP and dominates freight transportation; its modal share, excluding pipelines, increased from 71% in 1992 to 85% in 2012 (European Bank for Reconstruction and Development, 2016). The same is true for many Central Asian landlocked countries.

After the dissolution of the Soviet Union, however, the Soviet unified rail network, which accounted for nearly 148,000 km of rails by 1991 (Westwood, 2002), was split into different national networks. The creation of independent republics in Central Asia and the Baltics created new border barriers to regional and global markets. With the end of the Soviet Union, the fragmentation of the integrated rail network proved critical: the Trans-Siberian rail line, the backbone of the Russian and Soviet internal transport network, lost direct overland access to southern, eastern, and southeastern markets as well as access to ports to reach Western European markets. Similar problems were faced by the new independent republics of Central Asia as well as of Eastern Europe: when landlocked or only having access to ‘closed seas’, dependence on the Russian rail and transport network created new asymmetric dependencies and coordination problems.

In fact, immediately after the end of the Soviet Union and the opening up of the former Soviet space, none of continental Eurasia’s domestic rail networks were able to become a single functioning platform for transcontinental connectivity. The Russian rail (and road) network – as originally projected before the October Revolution – was extended greatly during the Soviet era and administrated as a unique entity by the Soviet Ministry of Railways. This huge infrastructure system, which encompassed 32 railways at the end of the Soviet Union, was jointly managed by the Gosplan, the Ministry of Railways, and local railways in cooperation with industrial clients. In this case, the railways of Central Asian countries were mainly used to ship bulk goods and raw materials to industrialized western regions and the European (Baltic) ports of the Soviet Union. After the dissolution of the integrated Soviet transport space, national companies in former Soviet states in Central Asia and the Caucasus assumed responsibility for newly created ‘national’ networks in the form of state-owned, integrated companies (mainly joint stock companies). The length of the transportation network they inherited varied between countries, resulting in diverse levels of complexity, maintenance requirements, and interlinked interdependencies. For example, Russia retained 3/5 of the system but lost the southern and western parts to Ukraine and the Baltic Railway Branch to the Baltic States. For Azerbaijan, the former Soviet portion became the national railway, while Georgia and Armenia had much more difficulty in dividing the rest of the Trans-Caucasian Railway among themselves. Uzbekistan inherited a large part of the Central Asian Railway minus a portion that became the Turkmen Railway. Kazakhstan inherited the longest railway network among the Central Asian and Caucasus states, including three branches: Alma-Ata, West Kazakhstan, and Virgin Land. A common element of all these new ‘independent’ networks, directly derived from the enduring orientation toward Moscow, has been (a) the dependence on Russian territory to link with global markets and (b) a lack of alternative routes. In the first years after independence, the network retained its north–south orientation and lacked direct east–west connections both domestically (e.g., in Kazakhstan, between Astana and Aktau) and in connecting with external countries. This problem lies at the core of present constraints, and new rail construction plans and lines developed before and after the launch of China’s BRI have sought to address this issue. For example, the Kazakh rail network is mostly developed along the north–south axis in the eastern and western parts of the country and is particularly dense along the Russian–Kazakh border; until recently, however, it lacked a direct east–west line, passing through the central part of the country (Zhesgazan–Beineu). For a long time, the network also lacked border-crossing points to other countries. Often, there were no convenient routes to move from one place in a country to another, leading to several cases where rail lines linking two regions of a country must cross borders that had become international (e.g., between the Fergana Valley and other parts of Uzbekistan through Tajikistan; between the northern and southern Kyrgyz Republic through Uzbekistan, Tajikistan, and Kazakhstan; between northern and southern Tajikistan through Uzbekistan and even between two neighbouring regions of southwestern Tajikistan; and between several regions of northern Kazakhstan through Russia).

Accordingly, new dependencies emerged for Central Asian countries such as Tajikistan and Kirgizstan (until recently, tense relations with Uzbekistan had led to a transit blockade that essentially cut off Tajikistan from regional and global transport). In the case of Armenia or Kyrgyzstan, the inherited network was incomplete or even insufficient for connecting various regions within the country.

In comparison to Soviet times, the transport infrastructure network has lost its unitarity and functional interoperability while diminishing relatively quickly alongside an increase in economic activity since the early 2000s. Even when considering the transport network of the EAEU as a unified transport space (which it is not, thus far), with 1.6 million km of roads and 108,000 km of railways (Eurasian Economic Commission, 2014), the total length of the rail network is still less than in Soviet times. In general, the quality of infrastructure has been and remains a pertinent issue: while Russia’s Trans-Siberian mainline is entirely electrified and double-tracked, the line requires modernization in its central and eastern sections to cope with the increase in cargo traffic and turnover. In other continental Eurasian countries, rail networks are only partially electrified and even fewer are double-tracked.

The development of a unified and functioning transport and logistics system has been traditionally linked to industrial policies, urbanization, industrial developments, and trade policy but also increasingly to participation in cross-border production networks. For example, in Soviet times, this unified transport and rail network proved instrumental to fostering industrialization and the creation of industrial and urban districts across the Union according to planners’ internal but autarchic division of labour. However, efforts to industrialize continental regions like Siberia, the Far East, and Central Asia via greater transport connectivity failed in the long run. Central Asia and Siberia were integrated into the Soviet supply chains, mainly as producers and exporters of raw materials, to the more industrialized regions of western/southwestern Russia. A few countries, like Uzbekistan, were integrated as producers of manufactured products. Consequently, the transport and rail network of these regions better served the western Russian industrial complex than did the industrial diversification of these regions.

Following the end of the Soviet Union and more than 20 years of failed attempts at post-Soviet integration, the 2014–2015 creation of the EAEU between Russia, Kazakhstan, Belarus, and, later, Armenia and Kirgizstan represents a more serious attempt to institutionalize regional integration in continental Eurasia. This development also denotes an effort to take advantage of scale economies in terms of market size and production capacity in an era of increased regionalization and fragmentation of the world economic system.

In fact, the creation of the EAEU has paved the way to gradual, functional reintegration of the former Soviet transport network, which is nowhere near complete (Vinokurov, 2018). As opposed to the case of the Soviet unified transport network, this new integration attempt has not sought to centralize the control of infrastructure and assets but instead to synchronize cooperation among independent states and their national transport and network operators, in the context of market liberalization and development of modern services, as envisaged in the EAEU transport strategy (Eurasian Economic Commission, 2016). This attempt coincides with the idea of fostering a coordinated industrial policy to develop new cross-regional value chains while modernizing and diversifying the economies of country members. Within this scope, Article 92 of the treaty establishing the EAEU and Annex 27 to the treaty define industrial policy within the Union as being formed by member states with a focus on industrial cooperation and implemented with consultative support and coordination from the Eurasian Economic Commission (Eurasian Economic Union, 2014). In 2016, for example, Russia emended the rules on industrial assembly, particularly in the car industry, by decreasing the required percentages of local production in order to facilitate the establishment of cross-border assembly processes (Noerr, 2016).

To date, the EAEU-member transport network is the most extended of the post-Soviet space and the best functioning in terms of interoperability across continental Eurasia. This status is attributable to several factors: a similar gauge width (1520 mm), a common railway law, gradual tariff harmonization, and reforms to promote greater interoperability on the cross-border market for rail wagons and containers carried out since the establishment of the Union. If the rail networks of key non-EAEU members (e.g., Uzbekistan and Azerbaijan) will operatively be included in this emerging common transport market, then continental Eurasia’s rail network can indeed become the backbone of greater economic development and cross-regional value chain integration.

However, the effects of increased transcontinental rail services on the economies of EAEU members and non-EAEU countries have fallen short of expectations thus far. Problems related to infrastructure (e.g., congested border-crossing points), rolling stock (lack of containers and rail cars, as in the case of Kazakhstan), traction (no privately owned or foreign locomotives have thus far been allowed to cross borders), and services (e.g., delays and corruption at border-crossing points and a lack of electrified freight briefs along some routes) have not been fully resolved. These issues continue to constrain functional integration in intraregional, high-value-added production networks. This pattern, along with a lack of free trade agreements with major manufacturing powerhouses, generates few incentives for foreign investors.

At first glance, mutual trade inside the Union and external trade have each increased since 2010, with the exception of the crisis years (2014–2016). Since 2016, external trade has even grown more rapidly than mutual trade, while mutual trade presents a more diversified structure (Eurasian Development Bank, 2019).

In this respect, stronger coordination of transport and logistics, both in terms of infrastructure modernization and in the elimination of non-trade barriers, appears fruitful and seems to support the economic integration process – even more so when considering that “cooperation in transport and logistics is regarded as one of the main depoliticized areas of integration that can really lead to economic goals set” (Pak, 2016, para. 6). For instance, the Eurasian Economic Commission has launched a massive institutional package to refine the Union’s transport policy with a major focus on the harmonization of regulations and safety standards around all transport modes. At present, the highest level of harmonization has been reached in the rail sector with the creation of a single logistics company, the United Transport and Logistics Company–Eurasian Rail Alliance, by merging the assets of three national container operators: Belarus, Russia, and Kazakhstan. The company, launched in 2014, was reorganized in 2018 and 2019 (Belarus News, 2019a) to provide customers with better transport services across the single market, including harmonization of external rail tariffs and introduction of a single consignment note.

However, a closer look at the sectoral structure of mutual and external exports, both of which are critical when assessing the impact of transport network synchronization on participation in broader Eurasian value chains, presents a different picture. As the Eurasian Development Bank (2019) reported, mineral products topped the structure of mutual (23%) and external (55%) trade exports in 2018, reflecting the driving roles of materials and energy products in the Union’s industrial production and trade relations. Conversely, manufacturing products play a somewhat more relevant role in mutual trade than they do in external trade. Machines, equipment, vehicles, and parts thereof constituted only 3% of total Union exports compared to more than 19% in the case of mutual trade (Eurasian Development Bank, 2019). The import share of machines, equipment, and their parts from third countries accounted for up to 45% of all imports, confirming the Union’s dependence on capital-intensive, technological goods (Eurasian Development Bank, 2019).

The predominance of manufactured and manufacturing goods, including crucial intra-industrial goods, in mutual trade between EAEU members testifies that cross-border production networks among Union members are promising and emerging: already by the end of 2013, a year after the creation of the single economic space, there were more than 10,000 joint ventures in the EAEU with partners from EAEU member states (Ustyuzhanina, 2016). According to calculations, the three biggest manufacturing economies inside the Union – Belarus, Kazakhstan, and Russia, have a rather high potential for joint cooperation and for the creation of cross-border value chains inside the Union in a wide range of high-value-added manufacturing sectors with high diversification potential. These range from the transport sector (motor vehicles and parts, trucks, trailers, and railroad equipment) to the information and telecommunication sector (hardware manufacturing: computers, smartphones, and tablets, energy storage devices (batteries), integrated circuits), as well as to a wide range of strategic metal products (steel, aluminum, and copper, but also silicon, cobalt, zinc, manganese, tungsten, and niobium alloys) (Kofner, 2020a).

However, at the moment, such ventures are still limited to a few sectors (i.e., the nuclear power industry, automotive industry, space activities, and machine building for the military industry) and largely dominated by Russian FDI (Ustyuzhanina, 2016). Moreover, the scarce roles of manufacturing exports and high-value-added exports in total external exports and in the total export of finished goods (according to the Eurasian Development Bank [2019], only 29% of all exported finished goods in 2018 were high-value-added) suggests several trends: first, manufactured and manufacturing goods for intra-industrial trade are largely non-competitive on the global market; second, cross-regional value chains are scarce or relevant only at the intra-Union level; and third, integration in global or continental value chains beyond Union borders is still in its infancy, albeit with certain potential. Notably, a low level of exports of high-value-added finished goods, manufactured goods, and manufacturing intermediate goods (e.g., parts and components) in highly globalized sectors such as electronics, vehicles, and machinery equipment implies a low level of ‘domestic content’ in exports, which is critical to evaluate emerging economies’ participation in global value chains.

Given the structure of mutual and external trade and the few economic complementarities among EAEU members, decreased transportation costs via better coordination and harmonization as well as upgraded infrastructure and logistics make particular sense if such efforts are considered functional to foster integration with the value chains of external manufacturing powerhouses in Europe and, increasingly, in Asia.

In this respect, current trends at the two edges of Eurasia offer an unprecedented opportunity for continental Eurasia: in Europe and especially in China, geographical shifts in value chains toward inland regions have paved the way for a pioneering and major transformation that could prove crucial to the sustainable transport and industrial integration of continental Eurasia in value-added production networks.

2
The ‘continentalization’ of value chains

An opportunity for Eurasia transport integration

2.1 Europe’s value chains ‘go east’: a new manufacturing core

In Europe, following the EU’s eastward expansion in 2004, a new manufacturing core in Central-Eastern Europe has emerged in sharp contrast to the historical, industrial ‘Blue Banana’ stretching from south England to the Italian northwest. This fact became even more apparent after the outbreak of the 2008 crisis, when different paths of economic growth emerged between Germany and some Central-Eastern European member states on one side and Western and Southern European member states on the other. There is a consensus on the fact that the distinct impacts of the economic crisis on different European economies – as well as the German resilience to the crisis – can be explained by, among other factors, the different levels of integration of single countries in the regional production cluster centred on German-export-oriented and globalized companies (Stehrer and Stöllinger, 2015).

According to the Vienna Institute for International Economics, there is increasing evidence for the emergence of a ‘German–Central-Eastern European Manufacturing Core’ (GCEMC), a joint geo-economic production platform with Germany (and part of Austria) at its centre, as a new production and export core of the EU. It has been argued that in the GCEMC, integration into the regional value chains of German companies and the trade openness that followed the EU’s expansion in 2004 has helped the V4 maintain high manufacturing shares of GDP while giving Germany an unprecedented strategic advantage (Stehrer and Stöllinger, 2015). In fact, when examining bilateral aggregated data for imports and exports between Germany and the V4, as well as for the role ...