Wednesday, May 22, 2024
 
 

Can Central Asia escape China’s debt trap?

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While Washington focuses on the war in Ukraine, Russia and China seek to expand their influence in regions where the US is not sufficiently engaged.

Moscow recently hosted a summit with African heads of state, while the Chinese Communist Party organized a China – Central Asia summit in the central Chinese city of Xi’ian in May.

Beijing hailed the summit as a success, which prompted President Xi Jinping to call for a “harmonious” and “interconnected” Central Asia, encouraged more oil and gas trade between China and Central Asia, and pledged $3.6 billion in new development aid. Trade between China and Central Asia reached $70 billion in 2022.

Many believe that Beijing has perfected the art of loans, credits, and donations so that governments become indebted to China. This infamous “debt trap” has been successfully applied in Kenya, Sri Lanka, Mongolia, and Zambia, among other countries. The situation is so problematic as China is an unforgiving lender, that Sri Lanka defaulted in 2022, prompting nationwide protests.

This strategy is also applied in energy-rich Central Asia.

While the “debt trap” has become a fact of life, some project finance experts with close knowledge of Chinese tactics maintain that China is a completely new player in the sector of global infrastructure projects and has made a number of major mistakes with key projects due to a lack of experience in the field as well as poor financial oversight.

This should be changing however as Beijing learns from failed investment projects.  It is also important to recall that the Beijing-based Asian Infrastructure Investment Bank, founded in 2016, is now the world’s second-largest multilateral financing institution.

According to several media reports, Kyrgyzstan reportedly has a total debt of around $5 billion, of which between 40-50 percent is owed to China, notably the Export-Import Bank. In mid-May, China’s State Council Information Office announced the construction of a 433 km highway “within the framework of the Belt and Road Initiative,” which will add to the country’s debt.

Tajikistan’s situation is similarly problematic: the country’s debt is $3.3 billion, with around 60% owed to Beijing. That amount does not include investments, which total around $500 million.

Tajikistan and Kyrgyzstan have few resources and limited trade partners; additionally, the two states lack assets that can be collateralized to secure loans from other sources. But Beijing is willing to continue providing money, as, in the long run, the Asian giant will get back much more than what it loaned.

Tajikistan’s leader Emomali Rahmon, who has been in power for 29 years, and Chinese Communist Party head Xi Jinping have been closely allied in their crackdown on the Uyghurs, a Turkic-speaking Muslim ethnic group who are spread across Central Asia.

In the event Dushanbe and Bishkek, the respective capitals of Tajikistan and Kyrgyzstan, cannot renegotiate their debts, which they have done already, nor obtain external aid, a last resort would be to give Beijing control of crucial infrastructure and strategically vital companies as collateral payment. But project finance experts note that infrastructure projects and local companies are close to impossible to extract from a debtor country if payment is required. The two countries in question have mineral deposits, like gold and iron, and vital water resources, including hydro-energy, as both are upstream countries.

China is increasingly, and aggressively, showing interest in the water-energy sector of Kyrgyzstan. This interest is not surprising because, in the modern world, access to water resources provides additional leverage. An August 1 report by Radio Free Europe/Radio Liberty summarizes the situation efficiently, “long-reliant on hydropower to keep its power grid up and running, Kyrgyzstan is grappling with nationwide electricity shortages while seeking to build its power-generating capacity, Kyrgyz authorities also want to push forward with long-held plans for a series of new hydropower plants along the Naryn River.” Chinese companies like PowerChina Northwest Engineering Corporation, Green Gold Energy, and China Railway 20 Bureau Group Corporation are reportedly part of the consortium that will invest $2.4 – $3 billion in the hydropower plants.

Moreover, Chinese companies are reportedly interested in the bypass Chui canal-2, also in Kyrgyzstan, which will “help solve the problem of lack of irrigation water in Chui region.” If these projects move forward, they will undoubtedly help Kyrgyzstan’s energy security and water challenges, but, at the same time, the country will become more indebted to China while Chinese companies will effectively control the landlocked country’s most precious commodity.

Being indebted to the Chinese Communist Party is not simply about money, but also support, a vital commodity in international relations.

Case in point, the Tajik government has been accused of supporting, via deportations, Beijing in the latter’s violent crackdown on the Uyghurs – the Turkic-speaking, Muslim majority population – in China’s western Xinjiang region.

In other cases, Beijing asks for and has received support on important UN votes.

The other three Central Asian countries – Kazakhstan, Uzbekistan, and Turkmenistan – also owe China, but their situation is not as problematic as Kyrgyzstan’s and Tajikistan’s debts. To decrease trade dependence on Moscow and Beijing, Astana is betting heavily on the Trans-Caspian International Route transportation system, commonly known as the Middle Corridor and approaching Europe, as exemplified by a recent Kazakh – German Business Forum.

The debt trap and a growing presence by Chinese companies via Beijing’s attempt to revive the ancient Silk Road through its Belt and Road Initiative, as well as other overbearing projects, have fomented anti-Chinese sentiments in Central Asia, including protests.

What can the US do?

Long before the withdrawal from Afghanistan, going back to the George W. Bush administration, Washington lost interest in Central Asia as American foreign policy no longer considered the post-Soviet space a priority as it was deeper into the unsuccessful, and ultimately doomed, quagmires that were the Iraq and Afghan wars.

The situation changed, however, after the Russian invasion of Ukraine. Nowadays, officials in Washington have radically shifted their focus to reflect the realities of being in a Second Cold War with Moscow, and regularly engage with their Central Asian peers to ensure compliance with sanctions, not always successfully, against the Russian Federation, as well as discuss ways to decrease Moscow’s influence in the region.

Secretary of State Antony Blinken visited Kazakhstan and Uzbekistan in late February-early March and participated in a C5+1 (the five Central Asian countries plus the United States) ministerial meeting. Moreover, the US Chamber of Commerce’s US – Kazakhstan Business Council carried out its first official delegation to Kazakhstan in June.

A border guard passes through a gate on the Kyrgyzstan – China border.

Compared to the high-profile presidential summits and constant face-to-face engagements that Moscow and Beijing are carrying out, Washington, however, has much catching up to do. The unfortunate lack of a grand American strategy towards Central Asia, with achievable, coherent, and concrete goals, has been a constant criticism of analysts and scholars that follow the region. 

The establishment of the US Development Finance Corporation at the end of the Trump administration was a step in the right direction, with a stated goal of giving poorer countries an alternative to Chinese-financed projects.  In addition, the World Bank, still controlled by the major Western economies, has recently ramped up its spending in infrastructure projects to provide some competition to Beijing, along with more expertise.

Given China’s very effective debt trap economic strategy, particularly towards Kyrgyzstan and Tajikistan, Washington should consider approaching agencies like the Paris Club, World Bank, Asian Development Bank, and International Monetary Fund to develop a joint grand financial strategy to assist Central Asian countries to avoid – or escape – Beijing’s debt trap.

Unlike Russia, China will not militarily attack a Central Asian state to expand its sphere of influence. There is no need. Thanks to friendly, seemingly risk-free financial initiatives, China is slowly securing neo-vassal states. 

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President of Second Floor Strategies, a consulting firm in Washington, D.C. He covers geopolitical, defense, and trade issues in Central Asia, Eastern Europe, and the Western Hemisphere.

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