The pandemic, the war in Ukraine and the desire for more green energy development are motivating factors for a strategic shift in Belt and Road Initiative project financing.
China is again stepping up its investments as it seeks to reinvigorate and revitalize the Belt and Road Initiative (BRI) project launched by president Xi Jinping in 2013, which took a breather during the global pandemic.
The uncertainty over energy supplies caused by Russia’s invasion of Ukraine – unleashing inflation and undermining global economic growth prospects – is expected to make China more circumspect and strategically driven, not least as it is also facing slower growth and spiralling debts at home, worsened by the pandemic.
Belarus, Russia and Ukraine have all crashed in the Euromoney Belt & Road Index (EBRI), along with Taliban-controlled Afghanistan, forcing China to concentrate on its other partnerships.
Constantin Gurdgiev, associate professor of finance at Monfort College of Business, believes China will consolidate more of its BRI-related investments in the Central Asia and Indian Ocean regions, in line with the trend that has emerged in recent years.
“This consolidation is being accelerated by the war in Ukraine, but it also predates this conflict and reflects China’s response to the geopolitical and economic trend toward regionalization that is displacing the globalization dynamics of the 1990s and 2000s,” he says.
China, he believes, will have an interest in expanding the longer-term diversification of its key supply chains, to cover not only its strategic partnership with Russia but also other Central Asian and Asia-Pacific markets.
“This involves increasing the flow of Chinese foreign direct investment over time to countries that provide an alternative access to resources (than Russia), eg Kazakhstan, Turkmenistan, Azerbaijan and Mongolia, as well as Pakistan and Iraq.
“A number of these countries are also offering China alternative shipping routes for land-based goods transit to Europe, routes that by-pass now-sanctioned Russian and Belarusian territories.”
Data released by its ministry of commerce indicates that China made direct investments in BRI projects worth some $20 billion in 2021, a rise of 1.7% year-on-year. There was an increasing focus on Africa and the Middle East, notably with regards to alternative energy and rail-led transport sector developments.
According to Nada Awad Rizkallah, head of risk management and strategy at Credit Libanais, 142 countries had signed a cooperation agreement with China by the end of 2021, with total investments exceeding $160 billion.
“These investments primarily comprise Chinese engagements related to the energy (oil, solar, wind and gas), construction, health and utilities sectors, with the aim of improving regional integration, increasing trade and stimulating economic growth.”
The EBRI indicates that not only is there enormous potential in Asia but also in Africa, and especially the Middle East, where China has become much more engaged.
Since it was launched, China has brought 21 Arab countries into the BRI, notes Richard Abdallah, a risk manager at Arabia Insurance. He cites GIS Reports, which mentions that Chinese investments in ports and other infrastructure in the Gulf amounted to more than $177 billion in 2019 alone.
“Egypt is an important recipient of BRI financing,” he says. “In 2018, the two countries signed several contracts amounting to $18 billion.”
Egypt is an improving tier-two country, along with Israel and Jordan, all of which have index values comfortably above 100, showing rising GDP and/or improving investor climates since the BRI was inaugurated.
Iraq’s score is still below 100, but the country is on the rise and it has finally moved back out of tier five to tier four.
Credit Libanais’ Rizkallah notes that the largest recipient of Chinese investment under the BRI framework during 2021 was Iraq.
“The two countries cooperated primarily in the energy sector, across oil, with the construction of the Al Khairat heavy oil power plant for a total value of about $5 billion, gas in terms of developing the Mansuriya field by Sinopec [the state-owned petroleum and chemical corporation] together with Iraq’s Midland Oil Company, and also solar, with a 2GW power PV [photovoltaic] project, currently in the permission stage, developed and owned by the Power Construction Corporation of China valued at $3.7 billion.”
Owais Arshad, global economic sanctions expert at RBC, says that, cumulatively, Iraq is now thought to be the third-largest recipient of BRI funding after Pakistan and Russia.
“Energy lies at the heart of this relationship and Chinese firms, such as Sinopec, have won a number of important contracts, including a project to build a $5 billion power plant in Karbala and a deal to develop a gas field near the Iranian border,” he says.
Additionally, China has been willing to provide much-needed infrastructure investments, ranging from schools to airports, all of which will be paid for via Iraqi oil.
“This use of collateralized resources to pay for projects has been a mechanism that has often been used by China, particularly in Africa,” says Arshad. “Iraq, for its part, is desperate for such investment as it slowly recovers from the ravages of the US occupation and, more recently, the widespread violence engineered by Daesh’s self-styled caliphate.”
He goes on to discuss the growing closeness between Beijing and Baghdad as reflecting the broader shifting power dynamics of the Middle East, where Arab states, particularly in the Gulf, view the US as disengaging from its traditional role of security guarantor.
China is seemingly expanding its footprint in this emerging vacuum, says Arshad, adding: “Purportedly, Saudi Arabia, another major source of oil for China, is even mulling accepting payments in yuan, underscoring the success Beijing has had in deepening ties with traditional American allies, including Israel.”
Iraq is the third-largest supplier of oil to China, and Beijing’s BRI investments are likely to be attempts to cultivate and secure critical energy sources that are independent of Western control.
This has become critical, given the way sanctions have recently been used to forcibly decouple the Russian economy from Western markets.
“Investments in Iraq could therefore serve as an insurance policy as China attempts to sanction-proof its economy,” says Arshad.
He notes that from a broader geopolitical perspective, by integrating Iraq into the BRI, Beijing is also attempting to knit together nearby states into its orbit by connecting them to its landmark China-Pakistan Economic Corridor (CPEC).
Iran and Afghanistan are potential areas of expansion with regards to CPEC, says Arshad, adding that the inclusion of Iraq would “result in an uninterrupted crescent of Chinese-dominated infrastructure, energy and logistical assets that will further bind these states to Chinese hegemony and bolster Chinese freedom to pursue its strategic interests, be it with regards to Taiwan or, more broadly, its ever-expanding dispute with Washington.”