Russian Trade Routes Crucial for China’s Expansion

As new trade routes create new openings for trade set to compete with slower shipping routes, the growth of China-Europe rail transit has sparked intense. China is predicting 15% annual growth in container volumes exported by rail to Europe every year for the next 10 years. Thus far, growth has largely been driven by generous subsidies for rail routes in China.

As European firms find niche export markets in China via rail, volumes are running up against logistical constraints in Russia and Trans-Caspian routes are growing more attractive, a new analysis by Global Risk Insights shows.

China has three primary rail routes linking it to Europe: Russia’s Trans-Siberian Railway from China’s northeast, the Trans-Siberian via Mongolia, and Kazakhstan’s rail system as well as Turkmenistan’s carrying goods to Caspian ports. At that point, goods are shipped across the Caspian to Azerbaijan where they’re then loaded onto the rail network crossing the South Caucasus and into Turkey.

Profitable rates for the Trans-Siberian route stand at $8,000-$9,000 per 20-foot container. It costs $1,000-$2,000 to deliver the same via container ship. China is now mulling pulling its subsidy support covering 40-50% of the cost of shipping via the Trans-Siberian due to a shortage of capacity on the Russian rail network and incredibly slow train speeds.

Russia has failed to convince China to commit financing for its modernization plan for the Trans-Siberian and Baikal-Amur Mainline rail routes, and Russia’s Ministry of Transport is leaning towards ceasing Belt and Road cooperation with China unless financing needs are met by Beijing. Russia’s transport ministries and infrastructure sector will likely struggle to win state resources during a time of increasingly strict budget controls from Moscow.

Rail transit volumes through Russia, therefore, have limited room to grow. Domestic demand for grain, coal, and other essentials strains from a systemic shortage of rolling stock due to the poorly conceived regulatory schema. It’s estimated that higher rental costs for rail wagons have taken 200-250 billion rubles ($3.4 billion to $4.3 billion) out of the economy.

Depending on market prices for grain and coal, in particular, Russian firms see exports as more profitable. The domestic industries and consumers that pay for infrastructure improvements will likely suffer next year due to China’s import needs. China appears to be giving up or else trying to drive an unacceptably hard bargain on large-scale projects and financing.