The competitive threat to the Belt & Road project will focus minds amid the war in Ukraine and the constant urge to reprioritise project financing.
China's Belt & Road Initiative has a serious competitor following the inauguration of the Partnership for Global Infrastructure and Investment that was announced in June during the G7 leaders’ summit at Schloss Elmau, Germany.
As a first step, it plans to mobilise $600 billion worth of investments by 2027, a third of which is to be funded by the US through grants, federal financing and private-sector capital.
This will be allocated to various physical, digital and social infrastructure projects around the world with the aim of supporting economic growth, supply chains and, of course, security interests.
It is clearly intended as a bulwark against China’s dominance, a rival to its New Silk Road, as the US and its closest allies reach out to developing countries.
The question, however, is whether or not it can compete with an established project that has been almost a decade in the making and is continually refocusing and reprioritising in light of a changing global landscape.
China has signed more than 170 cooperation agreements totalling more than $800 billion worth of investments since the BRI was launched by president Xi Jinping in 2013.
Although it did not have the overarching holistic approach the new G7 plan would appear to offer, China has adapted its strategy over time. The pandemic, global warming and its own targeted strategic interests are clearly catalysts, with Russia’s invasion of Ukraine an added factor to incorporate.
This is now making China focus on new Eurasian trade routes, which, in turn, are opening-up opportunities for countries in central Asia and the Caucasus.
Several are high-flying countries in Euromoney’s Belt & Road Index (EBRI), combining GDP figures with investment climate scores sourced from economists and political experts who ranked countries on the Euromoney Country Risk platform.
They include tier-1 Turkmenistan, and tier-2 Uzbekistan, Tajikistan, Kyrgyz Republic, Albania, Bulgaria, Armenia and Georgia, among others.
Nicolas Firzli, director of the EU Asean Centre at the Singapore Economic Forum believes the EBRI metrics reflect the fascinating geo-economic dynamics reshaping Eastern Europe and the world economy.
“Because of their unique geographic position at the crossroads of Beijing’s Eurasian ambitions (‘New Silk Road’) and America’s self-righteous fervour (‘New Wilsonism’), the former marches of the Soviet-Russian empire are the focus of all attentions,” says Firzli.
In the past five years, he says, countries such as Poland, Hungary, Ukraine, the Baltics, Romania and Bulgaria have attracted the consideration and finance of great powers and foreign direct investors alike, allowing them for a while to grow faster than the EU average.
“But things may be changing now that war has returned with a vengeance to that part of the world,” he says.
Estonia, Poland and Hungary’s EBRI values have fallen along with other countries in Euromoney’s latest quarterly index compilation, and for good reason too, Firzli states.
Unlike Lithuania, they are still dependent on Russian natural gas, raw materials and fertilisers. Estonia and Poland also share borders with Russia (including Kaliningrad) and its military ally Belarus, which could make them vulnerable to an extension of the theatre of operations.
“On a more political plane, [prime minister Victor] Orbán’s Hungary is perceived as a de facto ally of Russia, which has further isolated Budapest at both the EU and Nato level.”
Firzli says a new great game is unfolding on two overlapping planes.
“On the one hand, you have what is perceived by most observers as some kind of 19th century landgrab by Russia: a big, belligerent power seemingly trying to swallow its innocent neighbour, Ukraine, using big guns, bombers and foot soldiers deployed on a gigantic arch stretching over 1,500 miles from Kharkov to Odesa.
“On the other hand, you have the US-led G7 and Nato bloc accelerating its ‘pivot to Asia’: the perceived enemy being China, and the weapon of choice infrastructure finance, focusing on energy and transport assets, and massive private equity investments in semiconductors, [liquid natural gas] terminals and agribusiness, etc.”
While the EU and Russia are engaged in a lose-lose war of wills over Ukraine, which has weakened them both, Firzli notes that the US administration of president Joe Biden has successfully convinced its partners in Paris, Berlin, Rome and Tokyo to ‘develop a values-driven, high-impact and transparent infrastructure partnership’ to counter China’s BRI.
“But this plan comes rather late in the game,” he adds. “China has already established solid positions, lower costs and superior technical skills, notably in the fields of civil engineering, construction, high-speed rail and renewable energy.”
More worryingly, he believes, the G7 plan is predicated upon the rather naïve assumption that policymakers in Bucharest, Skopje, Rig and Belgrade will naturally choose Washington and Brussels over Beijing.
“Nothing could be further from the geo-economic truth," says Firzli. "As demonstrated recently by Greece, Israel and Saudi Arabia, most eastern European nations will probably choose to take both G7 and China monies to build state-of-the-art ports, energy grids, telecom towers and highways.”
But where the G7 might get ahead is in countries where China has promised much and delivered little.
Take Nepal, one of the leading countries in EBRI.
Nepal is a tier-1 country with one of the highest index values, second only to Mauritius, out of the 68 countries included in the index.
This makes it one of the countries showing the biggest increases in GDP and/or improving investor climates since China’s BRI was inaugurated – a sure-fire sign of its potential.
What is more, Nepal has shown the biggest improvement to its index value between the first and second quarters of this year, and the G7 is sensing an opportunity.
“Nepal is party to China’s Belt & Road Initiative, and has identified eight different infrastructure projects which are under preparatory stage,” says Pramod Rijal, senior economist at the Institute for Integrated Development Studies.
“These include hydropower projects, transmission lines and railway projects. Among the ongoing projects, the widening of a 27-kilometre ring road inside the Kathmandu valley is under construction with the support of Chinese aid.”
However, it is five years since China signed various infrastructure agreements with Nepal, and most of them are still waiting to be actioned.
Of course, the pandemic is partly to blame, but so too is the changing domestic political landscape; a good deal of quibbling over the funding choices, be they grants or loans; the payback terms; and the use of competitive tenders.
Nepal has historically received aid from both China and India for developing its infrastructure, but over the past few years the US has taken an interest in providing more support, notes Rijal.
“The Nepalese parliament recently ratified $500 million worth of Millennium Challenge Compact (MCC) aid signed with the US for constructing a transmission system and road network,” he adds.
Undoubtedly, China has noted that. Nor should Nepal's discovery of a huge supply of recoverable uranium be overlooked.
Yet the crucial take-away is probably what Firzli has already mentioned: Nepal will unlikely take sides. It will take whatever funding it can, for as long as it remains convinced it isn't falling into a Sri Lanka-style debt trap.
And that is a concern not just for Nepal, but also for other countries looking at the longer-term effects of funding programmes from abroad.