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OPINION

War in Ukraine threatens BRI, disrupts China-Europe rail freight

In just a few years, the New Eurasian Land Bridge, which conveys rail freight between China and Europe, became a key part of Beijing’s fading Belt and Road Initiative. Thanks to sanctions levied against state operator Russian Railways, that vital trade link threatens to be disrupted – and possibly severed.

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It was one of the few Belt and Road Initiative (BRI) projects China could point to in the Covid era and honestly say: “Yes, that works.”

For a while, the New Eurasian Land Bridge (NELB) could be described as a crowning achievement of Chinese president Xi Jinping’s grandiose BRI. Less a bridge than a vast overland trade super-connector, it ran – sorry, runs – 10,900km from Rotterdam to Lianyungang, a city 500km to the north of Shanghai.

An engineering marvel, it passed – sorry, passes – en route from Holland to China, via Poland, Belarus and Russia.

Right now, it’s easy to fall into the trap of describing the land bridge in the past tense. For two of those countries are now at war with a third nation not on that list.

The blood-soaked events in Ukraine now threaten to disrupt and possibly even sever this vital link in the global supply chain

Russia, under the thumb of its warmongering president Vladimir Putin, is intent on crushing and probably occupying Ukraine. Belarus, a client state and one of Moscow’s few allies, meanwhile acts as a launch pad for cross-border raids, including on Kyiv.

Poland, a Nato member state, has become a logistics hub for the shipment of aid and weapons to Kyiv, even as it prepares to be overwhelmed by up to a million Ukrainian war refugees.

None of which bodes well for the NELB.

In 2017, 40 freight routes connected Europe with China. Today, according to the official Belt and Road Portal, the number is 78, reaching 180 cities in 23 European countries. The total value of two-way overland trade in 2021 was $74.9 billion, according to data from the China State Railway Group, against $50 billion in 2020 and just $8 billion in 2017.

China’s railway operator reckons 15,000 China-Europe freight train trips were made in 2021, up 22% year on year.

It has been one of the more positive and lesser-noticed trade stories of the last two years. In March 2021, the German logistics company DHL hailed the “explosive growth” of two-way overland trade, as global firms turned to rail to keep supply chains open.

Vital link

Yet the blood-soaked events in Ukraine now threaten to disrupt and possibly even sever this vital link in the global supply chain.

At a time when the US, the UK, Europe and others are heaping sanctions on Russian banks, corporates and individuals, as well as dozens of Belarusian officials and organizations, it’s hard to imagine European firms continuing to use this transit route.

This is bad news for China. The BRI has been faltering for years, undone by poor-quality projects and aggressive over-lending by Chinese policy banks to much poorer developing nations, many of which cannot afford to repay their debts.

Russia’s invasion of Ukraine is not helping the BRI, except in a scenario where Putin succeeds in annexing Ukraine and we enter a new world order where China becomes the clear hegemon. We are not there yet.

For now, freight continues to flow along the NELB, a route that also continues to convey Russian oil, wheat and metals to Europe.

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Russian Railways freight trains. Photo: iStock

But the situation is fluid and subject to rapid change. Little noticed in the slew of sanctions set out by the US on Monday, which prohibit US persons from providing new debt or equity to specific organizations, was the name Russian Railways.

This, the international law firm Holland & Knight said in a note published the same day, would “impede the ability” of the state-run firm to efficiently operate and invest.

Also on Monday, news service RailFreight.com wrote: “If European companies cannot work with Russian Railways, this means that New Silk Road transit through Russia is impossible.”

That would mean, for now at least, saying farewell to the NELB, and to its role as one of the few genuinely effective and widely embraced facets of the BRI.

For now, Chinese goods are likely to continue to flow along the NELB – but for how long?

To be clear: for now at least, there is no ban on transporting goods via Russia’s rail network.

But plenty of firms are taking their own initiative. On February 25, San Francisco-based freight forwarding and customs broker Flexport said it had “ceased accepting bookings” on its China-Europe Trans-Siberian railroad services, with immediate effect.

For now, freight will continue to roll along the rails, from China to Europe and back again. But exporters on both ends, and the banks that finance them, will face a fraught operating environment, as the invasion of Ukraine gets bloodier – as it surely will – and the noose tightens around more Russian banks, firms, people and institutions.

The big European firms that transport goods – furniture, medical equipment, car parts – east to China by freight will need to keep abreast of fast-changing rules. To break them would be to court reputational and financial disaster.

Unappetising prospect

China faces a similar quandary. It is cheaper to export overland than by sea; the process is also less prone to delays. Plus, the threat, for a still highly export-dependent economy, of being forced – if only temporarily – to abandon not just an important cog in what remains of the BRI but also a large and profitable trade conduit, is an unappetising prospect.

That’s doubly true when Beijing is already struggling to inject fresh momentum into a torpid economy undermined by poor retail sales figures and a troubled property sector. In a research note published Monday, BNP Paribas tipped its economy to grow by 5% to 5.5% in 2022, down from 6% last year.

For now, Chinese goods are likely to continue to flow along the NELB – but for how long?

“There are secondary sanctions to take into consideration here,” warns Charles Robertson, global chief economist at Moscow-based investment bank Renaissance Capital. “If [a Chinese company or bank] gets penalized for using a sanctioned service like Russian Railways – that’s when you have your Chinese battery maker deciding to ship his goods. Even if shipping costs 5% more, it’s not worth being fined.”

On January 5, Chinese foreign ministry spokesperson Wang Wenbin described China-Europe rail freight services as a powerful “anchor of stability” in the global supply chain. When he made those comments, they were manifestly and undeniably true. The moment Putin ordered Russian troops to invade Ukraine, that ceased to be the case.

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