Georgia: The Key to China’s ‘Belt and Road’

Better later than never? For Georgia, the answer is a resounding yes.

Back in 2013 when Chinese President Xi Jinping announced his ambitious Silk Road Economic Belt and Maritime Silk Road projects (also called One Belt, One Road or OBOR), Georgia was not even mentioned. That wasn’t surprising; Georgia was not a part of main route on the ancient Silk Road, so neither was it included in Xi’s new route. But things have changed rapidly.

Right now Sino-Georgian relations are at their peak. The two countries are negotiating a free trade agreement and both sides admit Georgia has a key role to play in the New Silk Road project as a hub between Asia and Europe. “There is no country in the region that is more open to Chinese business and investment, Chinese people and culture or Chinese innovation and ideas than Georgia,” then prime minister Irakli Garibashvili said in a speech at Peking University in September 2015. In an op-ed for China Daily, he added that “Georgia is Europe’s natural gateway to Asia, as it is Europe’s eastern most point both by land and sea.” Right now, Georgia is attracting China and plans to transform itself into a logistics and transportation hub to connect Asia and Europe.

But there are still many questions to be asked. How, when, and why did the Georgian government attract Chinese interest? What interest do both parties have in the project? And how realistic is it? China always had some interest in the Caucasus region — there are some major Chinese investors in Georgia — but the Middle Kingdom never considered Georgia as a strategic partner. Even Georgian media was quiet about OBOR at the beginning.

I first heard about Georgia’s potential involvement in this project last September, when Garibashvili visited China, but it was not from Georgian media. By that time I was studying in Lanzhou (one of the key cities of OBOR) and while riding the bus I happened to hear on the radio that the Georgian prime minister was visiting China to discuss an FTA and OBOR.

“We are definitely ready to become the part of the New Silk Road route. Our aim is to use Georgia’s strategic location as best we can,” said Garibashvili while visiting China.

In addition to talking with his counterpart, China’s Li Keqiang, Garibashvili also met with the president of the Asian Infrastructure Investment Bank, Jin Liqun. At the meeting, it was noted that Georgia will be one of the first countries where the bank will start implementing projects. One month later, Georgia hosted the Tbilisi Silk Road Forum, the first forum about the OBOR project organized outside of China. Clearly, Georgia is getting more involved in OBOR, but how did it all start?

China and Georgia established relations in 1992. China was one of the first countries to recognize Georgia’s independence, but Beijing didn’t have many interests in region at that time. Trade between two countries was only $3.7 million at the end of the 20th century. But in recent years, it’s become clear that China sees Georgia’s potential. Driven by Georgia’s privileged access to the European Union, investment-friendly tax policy, and strategic location on the Black Sea, Chinese investment interests in Georgia now run the gamut, and look set to expand. Trade between countries was worth over $700 million in 2015, FDI from China was more than $200 million by 2014, and exports from Georgia to China have increased by around 2000 percent compared to 2009.

Before Garibashvili’s visit to China in September 2015, China and Georgia held numerous exchanges. The Georgian delegations tried their best to get China’s attention and China tried to understand whether Georgia could be the gateway between Asia and Europe it needed so much to realize OBOR. After numerous visits by Georgian officials, several memorandums were signed and China began to pay more attention to Georgia. On December 13, the first transit train from China arrived to a station in Georgia, thus marking the opening of the “Silk Railroad.”

Why Georgia? Why now? As I noted earlier, Georgia was not even mentioned when the OBOR plan was  first announced. China never considered Georgia as a key player in Europe, but things have changed. It’s believed in Georgia that the country has a unique geostrategic location, but it apparently wasn’t so attractive for China before. Geography alone can’t explain why Georgia gained so much importance for OBOR in the past year. Some assume that China was interested because of the Georgia-EU Deep and Comprehensive Free Trade Area (DCFTA) and the country’s investment-friendly tax policy. Georgia does have a welcoming investment policy (it’s 24th in the World Bank’s Doing Business 2016 rankings) but the DCFTA argument falls apart on closer examination. Before Georgia, Hungary and Belarus were believed to be China’s strategic European partners in OBOR. Hungary is officially a member state of the EU; in comparison, it’s unlikely that Georgia’s Free Trade Agreement with the EU attracted China.

Then why? The answer is simple, and it’s hidden in China’s economic downturn. China’s economy has slowed to its lowest level of growth in 25 years. Quarterly growth it at its lowest rate since the depths of the financial crisis six years ago. Depreciation of China’s currency, less domestic spending and less FDI mean nothing good for the future of country’s economy. China is in need of money to finance the many OBOR projects in different countries, but the overwhelming majority of those investments are long-term projects; China would not gain any material profits for some years at least. So, China has to cut on spending but Xi can’t simply abandon OBOR — it’s an important plan for domestic propaganda while China’s economy is going down, and on the international level it marks China’s global ambitions. Saying no to OBOR at this point would be political suicide.

To connect with Europe, China would have to spend a lot of money on infrastructure in Belarus and Hungary. Taking into consideration the economic situation, they began to look for some less expensive alternatives. Here comes Georgia and the nearly completed Kars-Tbilisi-Baku railway, which is intended to complete a transport corridor linking Azerbaijan to Turkey, which could be used to connect Central Asia and China to Europe by rail. High returns on a light financial burden provide the main reason for China’s interest in Georgia at this point.

What does this mean for Georgia? To be clear, it does not mean that Georgia is changing its Euro-Atlantic path. Georgia is still struggling toward membership in the EU and NATO. Instead, OBOR is seen as a potential solution to some domestic issues: creating more jobs, building infrastructure, getting more FDI, and providing a much-needed economic boost.

Besides the economic gains, there is even bigger reason why Georgia wants to be part of this project: Russia. The neighbor from the north is believed to be Georgia’s number one threat and enemy, and Moscow is strongly opposed to Georgia’s western choice. But if Georgia were to be a main hub between Europe and Asia in the OBOR project, China would be the guarantor of Georgia’s stability. Given the sanctions imposed on Russia and its isolation, Beijing is the only strong partner Russia has for now; in this situation Putin wouldn’t dare to mess with China’s new protege. It’s a “win-win game” as the Chinese like to say: China gets its OBOR plan realized with less expenses, while Georgia gets economic prosperity and a guarantee of stability, which makes it easier for the country to rush toward NATO and EU.

However, there are plenty of obstacles for China while realizing the OBOR plan: skeptical attitudes toward China of people living in OBOR countries; the potential for the partnership with Russia to sour; international terrorism on the OBOR route; and the downturn of the Chinese economy. Despite all of this, OBOR is already being realized; the first steps have been made.

Meanwhile, though Georgia is not ruled by Garibashvili anymore, new Prime Minister Giorgi Kvirikashvilihas also acknowledged the importance of OBOR. “The ‘One Belt, One Road’ initiative is a very important initiative for us. It offers a lot of new opportunities to countries along the Silk Road,” Kvirikashvili said in his interview with China Central Television.

The Georgian government announced in February that the Anaklia Development Consortium (“ADC”), a joint venture between Georgian Group TBC Holding and U.S.-based Conti International, has been awarded the contract to build a new deep-water Black Sea port at Anaklia, on the western coast of Georgia. The new port will have the capacity to accommodate the Black Sea’s largest vessels and will provide a new maritime corridor connecting China with Europe. The Georgian government will contribute $100 million towards the $2.5 billion project; ADC will fund the remainder of the cost through a mixture of equity and debt from private and institutional investors. Upon completion, the port will have the capacity to process 100 million tonnes of cargo per year, which could boost Georgia’s GDP by 0.5 percent.

Located on the eastern edge of the Black Sea, Anaklia strategically sits on the shortest route from China to Europe. Though a joint Chinese bid to build the port was unsuccessful, Georgia still envisions a linkage between the Anaklia port and OBOR. Mamuka Khazaradze, founder and president of TBC Holding, said: “The Anaklia project represents a one-of-a-kind investment in the restoration of the Silk Road that will pay dividends for generations of workers in Asia and Europe.” The Anaklia Development Consortium was also awarded the right to develop a free industrial zone on about 600 hectares of land adjacent to the port.

On December 13, the first transit train from China arrived to a station in Georgia, marking the opening of the “Silk Railroad.” The train’s arrival was met with a celebratory ceremony attended by then-Georgian Prime Minister Garibashvili, the director of Georgian Railways, and the acting Chinese ambassador to Georgia. Garibashvili once again emphasized that the Silk Road project is an historical commitment that will significantly increase the amount of foreign investment and jobs in Georgia.

The cargo sent from China reached Georgia in 15 days. It is noteworthy that on its way to Georgia, the train went through Kazakhstan and Azerbaijan and would then pass by sea from Georgia to Turkey. In the future, this railway transit route is expected to provide a fast, accessible connection between Europe and Asia. Cargo sent from Lianyungang, China’s easternmost port city, will take a little over two weeks to reach Istanbul, 25 days short than if shipped by the sea route. The Kars-Tbilisi-Baku railway is expected to be finished this year and cargo from China will likely increase significantly. This trans-Caspian route satisfies several checkboxes: it avoids Russia and it can potentially capitalize on the opening of Iran.

Meanwhile, on January 15, a shipment was sent from Ukraine, reaching China on February 2. The shipment launched via ferry from the Ukrainian port in Chornomorsk and crossed the Black Sea to Batumi, Georgia (future cargo will likely head to Anaklia after construction on the new port is finished). From there, it continued on rail through Georgia and into Azerbaijan. At the new Azeri port at Alyat, the cargo was loaded onto a second ferry and sailed for the Kazakh port at Aktau, where it once again took to the rails headed for the Chinese border. Taken together, these two routes help us draw a new map of OBOR, where Georgia plays one of the main roles as a hub in two directions — from China to Turkey and Ukraine to China, and vice-versa. Most importantly, it provides a way to avoid Russia for Turkey and Ukraine, both of whom have tense relations with Moscow at the moment.

Besides railways and ports, the FTA negotiations are also a major boon for Georgia. Georgia will potentially be the first country in the South Caucasus to strike up free-trade relations with the world’s second largest economy, while already having a free-trade deal concluded with the EU. Genadi Arveladze, Georgia’s deputy minister of economy , said that parties have already held several rounds of negotiations on the FTA, with the next round scheduled for May 9. He added that by the end of this year negotiations should be over and Georgia and China would have their FTA.

In early April, Liu Xianzong, chairman of  the Silk Road International Chamber of Commerce, visited Georgia, where he met with the president, prime minster, and minister of foreign affairs. At every meeting, both parties highlighted Georgia’s future role in OBOR. At the same time, the executive director of the Partnership Fund (an organization created by the Georgian government to attract investment), David Saganelidze, visited China, met with Chinese officials and even made a speech about Georgia’s involvement in OBOR at the Boao Forum for Asia.

How things have changed. Georgia is now a main solution for China to realize its ambitious OBOR project. Let’s see how things develop from here.

Revaz Topuria is president of the Europe-Georgia Institute and Executive Director of the Future Diplomats’ Club of Georgia.

By REVAZ TOPURIA Apr. 28, 2016 on The Diplomat

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