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The collapse of the Soviet Union allowed China to envision a land-based trade and energy network that would be free from dependence on Russia or the United States. Now, amid conflicts in the South China Sea and Taiwan Strait, unpredictable escalation has put sea trade at risk, further feeding into China’s urgency to shift trade and energy dependence away from sea.
The groundwork for this long-term strategy began in Central Asia. After the region’s countries gained independence from the Soviet Union, Chinese leaders were quick to sweep Central Asian leaders off their feet, introducing group after group of Chinese entrepreneurs offering to invest, with Beijing ready to sign off on billions in cheap loans. Before any Chinese energy projects became operational, bilateral trade between 2002 and 2005 almost quadrupled from $2.3 billion to $8.8 billion. By 2019, that figure had grown to $46 billion. Political and social influence followed, and in less than thirty years, China has built a foundational presence in Central Asia across all sectors.
Now China needs to replicate that success in the Caucasus in order to take another step westward toward implementing its trade and energy dream, away from the control of Russia and the United States. Xi Jinping’s administration has taken the first steps to kickstart cooperation between China and the Caucasus.
Once logistics and trade barriers are resolved—mainly through higher connectivity with Central Asia—economies in the Caucasus region are expected to quickly integrate with the Chinese economy over the next couple of decades. In August 2015, the first China-Baku train was launched via Kazakhstan, with ferries covering the Caspian Sea section. From 2016 to 2020, bilateral trade between China and the Caucasus region almost doubled, from $1.9 billion to $3.6 billion.
Chinese companies are also working with governments in the region to step up industrialization. Azerbaijan’s economic diversification policy and China’s willingness to transfer industrial capacity are facilitating greater economic cooperation between the two countries. Since 2018, several large-scale Chinese projects have been launched in Azerbaijan: a $1.5 billion industrial park at Alyat Port, a $1.17 billion integrated steel plant, a $300 million tire factory, and a lead recycling plant.
In Georgia, recent Chinese projects include a $160 million gas-to-electricity plant; the country’s longest tunnel, expected to be part of China’s Eurasian rail network; the Mindeli coal mine in Tkibuli; and the country’s largest glass bottle production line, which is currently under negotiation.
China’s presence is also on the rise in Armenia, where the number of Chinese companies operating grew from five in 2016 to thirteen in 2020. A number of Chinese companies have purchased stakes in Armenian companies in preparation to modernize production, particularly in copper and textiles: the two largest Armenian exports to China.
Beyond trade, leaders in the Caucasus region have embraced China’s Belt and Road Initiative. Dozens of youth-oriented exchanges have been introduced; Confucius institutes and university partnerships have been set up; and in 2016, Huawei inaugurated its flagship “seed for the future” program in Azerbaijan, taking a group of university students to China to study computer science there.
When China took its first steps toward building a strong foothold in Central Asia some thirty years ago, it did so as a stranger to the region. Despite that, Chinese foreign policy in Central Asia was successful, not least due to the Soviet-educated background of most Chinese politicians under the Jiang Zemin administration.
In the Caucasus, China finds itself an outsider once again. But this time, the Xi administration lacks the kind of room for maneuver that Jiang and his diplomats enjoyed. Progress toward integrating the economies of China and the Caucasus has been slow. Complex regional politics and hostility between Armenia and Azerbaijan have cast doubt on the viability of Baku as a Eurasia connectivity hub.
Azerbaijan has not yet fully committed to being a key part of China’s land-based trade and energy network. At the governmental level, China has failed to close several key financial agreements that will boost economic ties with Azerbaijan. There are currently no agreements on currency swaps, industrial transfer, or free trade between the two countries, though China has concluded such agreements with Georgia and Armenia. On top of that, Azerbaijan has not shown any great enthusiasm for upgrading its old and slow railway infrastructure, which is needed to accommodate Chinese cargo arriving from Kazakhstan via the Caspian Sea.
Azerbaijan’s hesitation to commit to China reflects economic activity on the ground. Chinese commercial banks do not issue loans to private Chinese companies seeking to start or support their current operations in Azerbaijan. There is no settlement cooperation between Azerbaijani and Chinese banks. The Chinese business community has complained that Azerbaijan’s close ties with Turkey has made Chinese products less competitive, even if they are cheaper. Currently, machinery, electrical appliances, and clothing account for 60 percent of Azerbaijani imports from China, all of which are in direct competition with Turkey.
In addition, China’s absence in the Nagorno-Karabakh conflicts has sent a clear message to the region that Beijing is neither willing nor able to intervene in a conflict in which Russia is involved. This dynamic between Russia and China is a bottleneck to China’s relationship-building with Azerbaijan: the latter finds Turkey a much more appealing partner, both in terms of economics and security.
As a result, only a small population of 110 Chinese nationals live and work in Azerbaijan, according to 2020 statistics from the Chinese Embassy in Baku. There is no Chinese presence at all in Azerbaijan’s industrial parks. In comparison, 1,768 Chinese nationals live and work in Georgia. The number of Chinese nationals living and working in Armenia decreased during the recent renewal of the Karabakh conflict from 252 in 2019 to 96 in 2020.
The few Chinese nationals in the region are mostly employed by state-owned Chinese companies, and therefore lack the initiative and proactiveness that drove Chinese investments in Central Asia. Nor are there any official or private Chinese chambers of commerce in the Caucasian capitals: intermediary bodies key to driving investment from China elsewhere in the world.
Going forward, greater connectivity between the Caucasus and Central Asia is certain, but it may not end in China. Years of strong dependency on China and a clear escalation of Chinese assertiveness have prompted Central Asian states to look for an alternative. This is most evident in Turkmenistan, whose leadership feared that potential U.S. economic sanctions against China would complicate gas transportation. After the Turkmen leadership renewed gas export talks with Russia, China put Turkmenistan on a military blacklist in January 2019, freezing all future military exports to the country. By the summer, Turkmenistan had begun selling gas to Russia again and started negotiating to sell gas to the European Union during the Caspian Sea Economic Forum.
The Turkmenistan-Azerbaijan joint development of the Dostluk oil and gas field thus came as no surprise, since Central Asian states have been on the lookout for an alternative partner in the past couple of years. Uzbekistan, too, having witnessed Kazakhstan repeatedly moving to close its border with Kyrgyzstan over a dispute, fears a Kazakh monopoly of trade routes to Russia and China. In late 2020, Uzbekistan, Iran, and India held a virtual meeting to discuss the joint use of the Indian-built Chabahar port in Iran to enhance regional connectivity, as opposed to the Chinese-built Gwadar port in Pakistan. During a state visit to India in February 2021, Uzbek Foreign Minister Abdulaziz Kamilov once again stressed the importance of connectivity, inviting high-level Indian participation in the upcoming Central and South Asia regional connectivity conference to be held in Tashkent later this year.
In failing to win over Azerbaijan, and by extension Turkey, China is making no progress in realizing its dream of trade and energy networks free from the control of Russia and the United States, while risking losing its dominance in Central Asia to India. Going forward, stronger Chinese diplomacy will be needed to accompany post-pandemic investments in Eurasia.
This publication is part of the Sino-Russian Entente project carried out with the support of the UK Foreign and Commonwealth Office.
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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