As per the recent proclamation made by the Lithuanian government, the Belarusian potash will get banned across the country from February 1, 2022. How will this termination of potash transit affect the economies of Belarus and Lithuania?
Belaruskali’s potash fertilizers are very significant exports for the country as they are the vital source of foreign exchange earnings for the latter. According to the National Statistical Committee reports, in 2020, Belarus earned 2,410,311.5 thousand dollars by exporting potash fertilizers. This amounts to 8% of the total volume of Belarusian exports and about 4% of the country’s GDP (60.3 billion dollars). Lithuania plays a crucial role in Belarusian potash exports because the bulk of Belaruskali’s products are shipped through the port in Klaipeda, Lithuania. That’s why the Lithuanian government’s decision to refuse transit access to Belarusian potash from February 1, 2022, will hit the latter’s economy.
Losses will not affect Belaruskali:
Usually, Belarus receives 2-3 billion dollars from its potash exports, but Lithuania’s recent termination of the transit agreement will result in the loss of 80% in the expected receiving. This will eventually decrease the GDP growth by 1-2%. Moreover, Katerina Bornukova, academic director, BEROC(Kyiv), analyzed that the losses will be incurred by different domains simultaneously, ranging from the Chemical industry, wholesale trade, Belarusian railways etc.
Much depends on Russia’s position:
The vulnerable Belarusian position has made it turn their eyes towards Russia, Belarus’s last and ultimate saviour. Therefore, it has become quite crucial for the latter to search for other alternative routes for the transhipment of potash after the closing down of Klaipeda port of Lithuania. But contrary to it, Russia hasn’t made it stand clear on the matter and still refrains from taking anyone’s side openly. Moreover, Vladimir Putin stated that Russia would become an opportunist in international fertilizer trade and make money by taking advantage of the market conditions.
In addition, Putin also had a meeting with the CEO of Uralchem, Dmitry Mazepin, on January 13, but its conclusions are not revealed but it can be averred that if anything positive happens in their talk, it will add to the problem of Belarus. Uralchem holds 80% shares of Uralkali and is the biggest competitor of Belaruskali. Moreover, the current baffling of Russia between Lithuania and Belarus is a cause of concern for the latter because Russia has not made any announcement or an official statement of helping Minsk in getting out of the current crisis.
On the other hand, the market is getting flooded with several apprehensions by politically exposed people. Pavel Slyunkin, Analyst of the European Council on Foreign Relations, firmly believes that Belaruskali should now go for the northern Russian ports for potash exportation because all other ports are occupied in the region Uralkali. Depending on the future political scenario, it may get possible that an agreement is reached between Belarus and Russia, which will free some Russian ports specifically for Belarus only, costing millions of euros.
In Counter reaction, Igor Udovitsky, owner of the BKT terminal, Klaipeda, has advised Minsk to file a lawsuit to prove the illegality of the termination. The decision of the Minsk arbitration council will be binding on all competing parties and courts, so Lithuania will need to restore transit access.
Do Belarus and Russia redirect Potash?
In August 2021, the head of the Belarusian Ministry of Transport, Alexei Avramenko, stated the readiness of Belarus to use the ports of the Leningrad region and Murmansk for the exportation of potash in the Asiatic region if, shortly, Lithuania refuses to provide transit access. The ban imposed on Belarus from February 1, 2022, has led it to seek Russian help, but still, Russia has not come out clearly on this matter. It hasn’t stated whether it will help Belarus or not? And if it happens then, such a reorientation will need time to rectify the problems associated with the transhipment. Moreover, some additional time will also be required to get done with all the legal aspects about how the export and transhipment will take place, keeping confidential the identity of the companies involved in these operations. The secrecy will protect the companies from any European and American attack, analysed by Sergey Kondratyev, Deputy Head of the Economics Department of the Institute of Energy and Finance Foundation.
There are several hurdles too in this reorientation to take place. The distance increased from Klaipeda to Russian ports will also enhance the payment amount of the wagon’s operators for the transhipment, which will adversely affect the profit of Belarus from the sale of potash fertilizers. The distance to Ust-Luga is 55 times longer, to Murmansk – 3.3 times, said Vladimir Savchuk, Deputy Director-General of the Institute for Problems of Natural Monopolies (IPEM). Moreover, in Russia, there is a shortage of port facilities for the export of fertilizers, due to which Russian companies themselves use the ports of the Baltic countries. That’s why Belarus will need to purchase the slots booked by Russian companies in the Russian ports. Sergey Kondratyev added that this wouldn’t be a matter of expense for the Belaruskali because tens of millions of euros a year is not a very big figure for the company, keeping in my mind the scale of their business.
“Belaruskali and Uralkali may join hands again: Igor Udovitsky
However, the journey of Belaruskali from Belarus to Russian ports will not be an easy one; it will have to cross several odds like Uralkali and other counterparties. To attract buyers, Belaruskali will be expected to provide heavy discounts. That’s why there is a severe apprehension by Igor Udovitsky, a Lithuanian businessman, that Belaruskali will have to make “many compromises” with Uralkali, which may also result in the unification of the two shortly. Earlier, both have worked together but cut off the ties after the 2013’s scandal in which Uralkali reproached Belaruskali potash workers for dumping.
Time for experimentation
Moreover, Belarus can also go for different experimentations after the Lithuanian termination of potash transit, for ex: supplying potash fertilizers to China. The same thing also happened in 2020 when the Belarusian potash company supplied potash fertilizers to China via the Northern Sea Route, unlike the previous routes following Baltic ports and Suez Canal. Therefore, assumptions are hanging around that Belarus is again likely to supply potash to China through trains, which will increase transportation costs. But the hikes in potash fertilizer prices can easily bear the additional costs. Katerine Bornukova added that now everything rests on the availability of trains, which will not compensate the volumes supplied through Lithuanian Routes. Moreover, intelligent China is looking forward to take advantage of sanctions imposed and bargain heavily in signing a new contract with Belarus in the wake of the expiration of the previous one that ended last December.
Direct and indirect losses
Sergei Kondratyev has also drawn attention to the direct and indirect losses Belarus will face. Of course, direct losses are tens of millions of euros due to snatching of the transit access, but the leading cause of concern would be the indirect losses. The sanctions imposed by the EU and the termination of transit by Lithuania have worsened the condition significantly. The termination has left Belarus with Russia as the only option available for the transhipments of potash, due to which the latter missed the opportunity of demanding more attractive offers from Moscow.
Indirect losses per year can reach 80-100 million euros which will act as a financial suppressor to the economy of Belarus. Furthermore, European Union sanctions have made Belarus tranship its export cargoes only through the ports of Russia. This is facilitated by the poor relations with Ukraine and the Baltic nations staunch support to the EU sanctions. Sergei Kondratyev also emphasized that the value of Russian ports has increased because that’s the only route left for the Belarusian potash export. The companies responsible for the operation of this route may demand more attractive conditions from the latter, considering their risks.
Apart from Belarus, Lithuania will also suffer badly with this termination. It will lose the status of a great transit power after the departure of Belaruskali, which it maintained even after a significant part of Russian cargoes in the 2000s. Moreover, the country is itself not sure whether the Belarusian potash will cease to be transported in the country after February 1, 2022, as the Lithuanian Transport Minister, Marius Skouodis, himself expressed his dilemma on the same. As per him, the effective ceasing can only be done after the sanctions imposed by the EU. Finally, the country’s bad relations with China will result in transhipment losses and confine it only to the domestic needs of the Lithuanian economy, which is very small.
The Central Bank of Lithuania has calculated losses
Amidst the sanctions issue, The Central Bank of Lithuania came up with an estimation that a halt in the Belarusian commodity flow will result in a 0.9% decrease the country’s GDP in three years.
The same opinion was shared by Swedbank Chief Economist Nerijus Mačiulis and Ione Kaländene, Head of the Research and Analysis Department of the Entrepreneurship Development Agency Versli Lietuva. Former believed that due to the loss of transit, gross domestic product growth in 2022 will be slower. But the slowdown in growth will be slight and amount to 0.2-0.3%. Therefore, the planned growth of the economy easily compensates for the short-term fall. He stated that loss would be shared by different state-funded institutions like the Latvian railways’ company, the port of Klaipeda and several other companies. Of course, the state budget will lose some of the income, but there will be no significant macroeconomic effect.
And Lone Kalandene opined that although the volume of transportation of Belaruskali fertilizers in Lithuania is vast, the losses incurred will be easily compensated because the leading carrier companies are state-owned. This will result in a little more burden on the state budget but will shield the Lithuanian economy.
Klaipeda port will face difficulties.
Algis Latakas, the head of the port, held the view that the ceasing of the transit of Belarusian commodities would incur heavy damages for both the port companies and the port authority, which cannot be compensated quickly. That’s why he asks for an assistance to be provided to both port companies and port authorities.
Igor Udovitsky, a Lithuanian entrepreneur, also believed that the sudden termination of the transit access would result in billions of euros, direct loss to Lithuania as 1 million tons of potash transit passes through Lithuania and the port of Klaipeda every month. As per his calculations, the loss of the contract with Belaruskali will result in total damage of more than 1 billion euros. He also mentioned the calculated loss on his Facebook page. Until now, the port of Klaipeda has been the leader in cargo transhipment in the Baltic States and was among the top 5 most efficient ports in the Baltic basin.
The status which Klaipeda achieved in the backdrop of the industrial crisis in Latvia and the shortage of cargo in the Eastern Baltic will become challenging to achieve again.
The head of the Association of Lithuanian Marine Loading Companies, Vaidotas Šilejka, also supported Mr Igor Udovitsky and expressed the irreplaceable position of Belarusian fertilizers for Klaipeda. According to him, the port will lose about 10 million tons of cargo per year which will undoubtedly shake the entire port of Klaipeda and the enterprises operating on its territory. On losing such a significant amount of cargo, port companies will need more than a year to reorient their activities as there are no alternatives available at the moment. Furthermore, the termination will also have wide-ranging implications in different domains and pose geopolitical challenges and changes in the global macroeconomic trends.
The audit and consulting company Ernst & Young also estimated that in 2019, due to the transhipment of Belarusian cargo in the port of Klaipeda, the country’s budget was replenished by 155 million euros (this is 1.4% of all revenues). At the end of 2019, 14.1 million tons of Belarusian cargo (30.5% of the total cargo turnover) were transhipped at the port, in 2020 – 15.6 million tons (32% of the total cargo turnover). In addition, the processing of Fertilizers of Belaruskali amounted to 25.5% of the annual transhipment in Klaipeda. According to preliminary reports of the Port Directorate, in 2021, commodity flows from Belarus accounted for about 30% of all cargo.
Latvian Railways are waiting for fines and reduced profits
This political manoeuvring of the Baltic countries will cost Lithuania also dearly. Stopping the transit of Belaruskali will be a severe problem for Lithuanian Railways as well because it was a valuable customer of the latter. The company may lose more than 20% of the commodity flow.
At the end of 2021, Mantas Bartuška, who was the head of the Latvian Railways at that time, said that the company would lose 60 million euros of annual revenue and the entire logistics chain as a whole – more than 100 million euros.
Former Lithuanian Prime Minister and Chairman of the Democratic Party of the Seimas of Lithuania Saulius Skvernelis believes that the damage to the Lithuanian economy from the rupture of the contract for the transit of Belaruskali fertilizers through the territory of the republic may amount to “from one to several billion euros.” He also said that Lithuanian Railways would have to pay a fine of 600 million for breaking the contract with Belaruskali.
Commenting on Skvernelis’ statement, Sergey Kondratyev said: “600 million is a very, very large figure. There is a possibility that Lithuanian Railways will try to somehow protect itself from this fine by challenging it in court, for example, or by obtaining protection from the government.”
Suppose the problem persists longer for 2-4 years. In that case, Lithuanian Railways will have to make a severe reduction in the scale of its activities: lay off personnel, reduce investments, and perhaps even have to consider the conservation of certain sections of tracks that will not be in demand.
“We don’t know how far things can go. Therefore, for Lithuanian Railways, the effect of stopping transit may not be felt right here and now. Yes, there will be fewer cargoes, but the company has a margin of financial strength to hold out for a while. But on the horizon of 2-3 years, losses can be tens of millions of euros, if we are talking about profits, and hundreds of millions of euros if we are talking about revenue, taking into account not only Belaruskali, but in general all Belarusian transit, including imported cargo. This could be a very serious blow for Lithuanian Railways, after which it will probably be difficult for the company to recover or, at least, play in the same weight category,” Kondratyev said.
In general, the overwhelming majority of experts agree on one thing – the “transit war” will not bring victory to anyone, and ordinary people will become “victims” in the geopolitical confrontation of states.
The negative economic consequences of stopping transit are apparent both sides will suffer equally. It will equally affect both the economies, both private and public companies as well as both the business leaders and ordinary workers.
As a social scientist anybody can conclude that both will have to come on negotiating table to broom out the dust of distrust. Sooner they will do it, better would be for both. The popular former Prime Minster of India, Mr. Atal Bihari Vajpayee remarked, “You can change your friend but cannot change your neighbour, you can change your history but cannot change geography”
Women’s mobility must be a key focus in urban policy
Historically, cities across the world have been designed to fit the needs of able-bodied men, or a neutral, often male, user. Yet, cities are experienced differently by men and women. Women and girls find their access to employment, education, care services and even leisure is constrained when urban mobility systems and public spaces are not safe and inclusive.
Across Indian cities, studies show that concerns about commuting safely during the late evening hours or beyond a particular radius are among the biggest barriers to girls and women going to school, college and work. For instance, a 2020 study in Bengaluru showed that only 2% of women commuters surveyed made journeys after 9 pm. Barriers to mobility can thus thwart women’s long-term aspirations, eroding their financial independence and agency. The threat of sexual harassment deters women from stepping out. For instance, a 2017 study in Delhi showed that women were willing to travel for 27 minutes more each day to take a route that was perceived to be safer. It will thus be important to devise strategies to prevent and penalise sexual harassment in public spaces.
Typically, women travel shorter distances at off-peak hours, and make chained trips, frequently changing between transport modes to complete multiple tasks, balancing domestic errands and employment. Systems are, therefore, needed to collect and analyse gender-disaggregated data to understand women’s mobility patterns and design public transport services accordingly.
It was after the Mumbai Railway Vikas Corporation, working with the World Bank, conducted a detailed study of mobility patterns on suburban trains, that it identified women’s safety as a key priority and devised solutions to make platforms, stations, and trains safer for women. These activities sought to do more than just introduce women-only trains — the Ladies Specials — by addressing the fundamental design of the infrastructure to make it more women-friendly.
Hiring more female staff can make travel safer. In Kochi, for instance, 80% of the metro staff are women, working as station managers, train drivers, ticket vendors, and cleaning staff. Similar initiatives can be taken by other bus and rail agencies to enhance safety.
What’s more, since deep-rooted social norms restrict women’s movement outside their homes, local communities need to be brought on board as partners to help shift the norms around women’s mobility. A number of community-based organisations have been working across cities such as Delhi, Gurugram, and Pune to sensitise communities; they also provide gender sensitisation training for frontline public transport workers.
Under the Nirbhaya Fund, the Centre provides valuable resources to states and central ministries to implement solutions for enhancing women’s safety. Since 2015, eight cities (Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Ahmedabad and Lucknow) have used these funds to identify hotspots for crime, enhance police capacity for investigating crimes against women and establish one-stop centres for violence survivors.
Moving a step further, the Greater Chennai Corporation established a Gender and Policy Lab, which will support the government of Tamil Nadu in implementing projects under the Nirbhaya Fund to create safer public spaces in the city. An assessment to understand gender differences in mobility was carried out, alongside a safety audit, in Tondiarpet in north Chennai. Installation of CCTV cameras and panic buttons in city buses is also underway, with Chennai’s Metropolitan Transport Corporation establishing a command-and-control centre to monitor incidents of harassment.
Our experience in Chennai and Mumbai, and other cities globally, shows that addressing gender concerns in urban mobility and public spaces requires long-term commitment from multiple stakeholders, with solutions aimed at addressing deep-rooted issues.
Drawing lessons from international best practices and project experiences in India, the World Bank has developed a toolkit for the Indian context, which both government and private agencies can use to make cities safer and more inclusive of women.
The toolkit outlines a four-pillar approach: First, assess the ground situation to understand gender-disaggregated mobility patterns and undertake safety audits; second, strengthen policies with a focus on fare policies and grievance redressal for sexual harassment; third, build capacity and raise awareness both within government agencies and through partnerships with community-based organisations; and fourth, improve infrastructure and services with a special emphasis on women’s safety and inclusion.
Making cities safer can ensure that women and girls have choices — they can choose to stay longer in the office, go to better educational institutions, and even have a wider array of entrepreneurship opportunities — all of which will help increase female labour force participation and, in turn, boost economic performance in India.
This Opinion piece first appeared in Hindustan Times, via World Bank
The Persian Gulf-Black Sea Corridor: Why should India consider an alternative getaway?
Recently Armenian has suggested the creation of a corridor linking the Persian Gulf and the Black Sea to facilitate trade between India, Russia, and Europe. On March 3rd, 2023, a delegation of high-ranking officials and experts from Armenia proposed the idea of creating a corridor linking the Persian Gulf and the Black Sea while visiting India. This suggestion came from the visit of Armenia’s foreign minister Mr. Ararat Mizoyan to India; he has suggested the creation of an alternative trade Corridor that will operate alongside the International North-South Transport Corridor(INSTC) to establish a trade link between Mumbai and Bandarabas Seaport in Iran and then proceed to Armenia and further on to Europe or Russia. This alternative route’s main objective is to bypass Azerbaijan because Azerbaijan has closer ties with Turkey and Pakistan, so Armenia is asking for India’s support and financial assistance. India and Armenia both have a very cold relationship with Turkey and Pakistan. Historically, Turkey has been the closest ally of Azerbaijan and supports Azerbaijan in the Nagarno-Karabakh dispute. Azerbaijan also has close diplomatic relations with Pakistan, and Pakistan also supports Azerbaijan in the Karabakh dispute, and in return, Azerbaijan backed Pakistan’s narrative on the Kashmir Issue. Azerbaijan has entered into defense cooperation and shown interest in incorporating JF-17 Thunder fighter aircraft jointly developed by China and Pakistan. Periodically participated in joint military exercises bilaterally and multilaterally. Azerbaijan has repeatedly supported the Kashmir issue on Pakistan’s position and criticized the India-Armenia defense deal on PINAKA multi-barrel rocket launchers, anti-tank munitions, and a wide range of ammunitions and warlike stores worth US $250 million to the Armenian Forse. India has overtly positioned itself on Armenia’s side in the Nagorno-Karabakh conflict and has consequently opted to resist Azerbaijan and its supporter, including Pakistan and Turkey, over the Kashmir issue and Turkey’s imperial aim of establishing a pan-Turkic empire, governed from Ankara. These factors created a lack of warmth in India-Azerbaijan’s political relations. Thus, India and Armenia both the country have some sets of issues with Azerbaijan as well as Turkey. Armenia’s relationship with India has been growing steadily due to defense exports in recent times.
Historically Armenia shares strong political and business ties with Iran. Both countries share a 35-kilometer-long border that runs along the northern edge of Iran. Iran’s foreign policy towards South Caucasus is very pragmatist in the case of Armenia and Azerbaijan. The conflict between Muslim-majority Azerbaijan and Christian-majority Armenia is viewed differently by Iran, which supports Armenia rather than Shia-majority Azerbaijan. India also maintains a strong relationship with Iran. For India, Iran plays an important role in its connectivity projects to link Central Asia and Europe. India also invested in Iran’s Chabahar Port to develop a transit hub that will benefit Indian trade reaching Europe, bypassing Suez Canal. Chabahar Port holds strategic importance for India, mainly because it is the direct competition with Chinese operated Gwadar Port in Pakistan, situated in the Arabian Sea, which is an important part of China Pakistan Economic Corridor(CPEC).
Armenia is seeking Indian Investments for the corridor within Armenian territory in light of the ongoing Russia-Ukraine conflict. The Indian investment could also facilitate the development of other regional projects like the International North-South Transport Corridor (INSTC) and put India on the map of Central Asian transport with links to Europe and Russia. India’s trade with Russia has substantially increased through the INSTC, which provides a trade link between Mumbai and Russia via Iran and the Caspian Sea. Azerbaijan plays a vital role in the INSTC mainly because of its geographical location and connectivity links with Iran. However, Azerbaijan has been slow in developing infrastructure projects under INSTC.
With the ongoing cold war between Russia and the West, any large-scale cargo transit passing through the Russia Europe border looks too risky for international Logistics and Insurance companies. Armenia intends to initiate a discussion with India to explore the possibility of Indian companies’ involvement and funding of the Persian Gulf Black Sea Corridor project. Armenia doesn’t have direct access to the Black Sea, which means Goods have to be further transported to Georgia. Only then can reach Europe and Russia. Armenia recognizes the need for Indian traders to do business with Europe, so they have proposed this idea to the Indian government.
The proposed Persian Gulf Black Sea Corridor aligns with India’s objective of seeking new trade routes to Europe that avoid the Suez canal, significantly reducing transportation costs and time. This corridor which will link Iran and Georgia via Armenia also reduces the risk of sanctions for India moving to Europe from the West because of ongoing West and Russian hostility. It will boost the confidence of the Indian Treadres and will be beneficial for the Indian economy.
In this sense, the Persian Gulf-Black Sea project has a reasonable cause. However, the question is, why would Iran agree to launch a multimodal corridor through territories with proven issues when it can reach the Black Sea via Turkey? Iran and Turkey have a conflict of interest in this case. Their relations have been tense lately since Turkey informally blocks Iran from using its rail routes to reach Europe. The root of this problem is situated within between Armenia-Azerbaijan conflict. The cold relations between Iran and Turkey are one of the main reasons behind the stagnation of the INSTC. Iran is closer to cooperating with Armenia, while Turkey backs Azerbaijan. The conflict in Nagorno-Karabakh has the greatest impact on the issue. Turkey is a key stakeholder in the conflicts and empowers Azerbaijan to overcome Armenia and block the Iran-Armenia border. If Iran eliminates Turkey, then Iran only has two options to reach the Black Sea: pass through Armenia or Azerbaijan via Georgia. Georgia has existing railway and highway connections with both Armenian and Azerbaijan, and Azerbaijan has a railroad reaching the Iran-Azerbaijan border, but the problem is there is no direct Railway connection that connects Iran to the Black Sea via Armenia.
On the other hand, Iran and Azerbaijan also working on a 165-kilometer Railway section of the Rashtra-Astra line, which is missing a link to connect the Azerbaijani and Iranian Railways. The railway line will connect the city of Rasht, the capital of Gilan province, with the city of Astra, located on the border with Azerbaijan. This Railway link is part of the International North-South Transport Corridor, which aims to provide a more efficient trade route between India, Iran, the Caucasus, and Russia. Recently in January 2023, Russia and Iran agreed to fund the construction of this Missing Link. But the project completion is in question because of the ongoing cold war between Russia and the west.
For India, INSTC is more than enough to trade only with Russia, Iran, and the caucus region, but India also wants to trade with Europe to throw an alternative route and not via Suez Canal. Thus, the Armenian government is proposing to the Indian government. If India uses the Russian route to reach Europe via Iran through the Caspian Sea, then it has more chances of getting sanctioned from this Black Sea Corridor will reduce the chances of getting sanctioned by West. However, this alternative trade route involves two countries, Armenia and Georgia, which is calling for heavy infrastructure Investments. However, there can be several potential negative sites to investing in infrastructure projects in other countries, such as political and economic risks, cultural and Social Challenges, legal and Regulatory issues, Financial risks, and geopolitical risks, so it is going to be a tough call for India nevertheless opportunities are there, but nothing is risk-free. Currently, it is a proposal by the Armenian government, we have to see how the Indian government will respond.
The Role of Asian Infrastructure Investment Bank For Developing Countries
The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank that was established in 2016 with the aim of financing infrastructure projects in Asia and promoting regional economic integration.
The idea for the AIIB was first proposed by China in 2013, as a response to what it saw as a lack of representation in existing international financial institutions such as the World Bank and the International Monetary Fund (IMF). China believed that these institutions were dominated by developed countries and did not adequately address the needs of developing countries, particularly in Asia.
To address this perceived imbalance, China initiated the creation of the AIIB, which would be open to all countries in the region and would prioritize funding for infrastructure projects. The bank was formally launched in January 2016 with 57 founding members, including many Asian countries, as well as Australia, Germany, and the United Kingdom.
One of the main advantages of the AIIB’s creation is the increased availability of funding for infrastructure projects in Asia. The bank has a capital base of $100 billion, with over 90 percent of this contributed by Asian countries. This funding can be used for a variety of projects, including transport, energy, telecommunications, and water supply.
Another advantage of the AIIB is that it offers an alternative source of financing for developing countries in the region. In the past, many of these countries have relied on loans from Western-dominated institutions like the World Bank and IMF, which have been criticized for imposing strict conditions on borrowers and for promoting policies that prioritize the interests of developed countries. The AIIB, by contrast, has promised to be more flexible and to work closely with borrowers to ensure that projects are aligned with their development priorities.
AIIB creation is considered as a major power move. Its implications should be viewed through the prism of relationship between global finance and sovereign states. Moreover, power as a goal is prevalent and traditional in the strategic thinking in the policy of communities throughout East Asia.
China became powerful and this means it has the capacity to direct the decisions and actions of others and implement its policy [Freeman 1997]. Chinese government showed its ability to marshal necessary resources to establish China-led international organization, which was its goal because Beijing doesn’t have enough influence in the World Bank, ADB and IMF.
According to the Comprehensive National Power (综合国力) indicator, used by the Chinese government, now China is the second strongest state in the world. The creation of international financial organization has always been the hegemon’s prerogative. Thus, such China’s move reflects the tendency that global balance of power is changing not in favor of the USA.
Australian scientist and representative of the English School of International Relations Hedley Bull defined international order as ‘a pattern of activity that sustains the elementary of primary goals of the society of states, or international society’ [Bull 1987]. Institutions change the global balance of power and, in turn, influence the international order. AIIB’s appearance increases China’s impact in Asia. Therefore, growing Chinese financial power is accepted as a challenge by current status quo powers as the USA and Japan – both don’t want to change the rules of the game in Asia at the moment.
Even if, from the Chinese point of view, it is supposed to be natural. Asian international order existed long time ago and was led by China. It’s obvious that Beijing has a strong sense of entitlement to be a regional leader again. It considers the contemporary Chinese presence in the international order, established after World War Two, as not adequate to current China’s elevated position in the global economy. [门洪华 2016].
The main consequences of the AIIB’s establishment for China are its increased international influence and progress in its efforts to manage domestic economic challenges. The USA and its Asian allies are disinclined to accept AIIB as one more additional puzzle to the global financial system alongside with other MDBs, that’s why they perceive it as a threat to their current geopolitical position. However, if there had been some attempts from the Obama administration to stop or slow down the establishment of the AIIB, they didn’t succeed and this was precisely articulated by Evan Feigenbaum, a former State Department official in the George W. Bush Administration: “The U.S. attempt to halt or marginalize the AIIB failed miserably”.
Additionally, it should be noted that AIIB’s creation led to one more economic implication – preparing grounds for possible future internationalization of Yuan.
China still is in the “dollar trap”: on the one hand, it has to continue buying the US Treasury securities because USD huge reserves accumulated by China are devaluating due to the quantitative easing monetary policy conducted by the Fed (The Federal Reserve System). A violent despeciation of the USD can lead to huge losses to China. On the other hand, at the moment China can’t borrow in its own currency, therefore, it is vulnerable to the balance of payment crises [Lai 2015]. Chinese currency internationalization may be a way to deal with those hurdles.
Firstly, internationalized Yuan should improve the globalization process and this intention was stated in the 14th Five-Year Plan (2021-2025). It will hasten the trade between China and the world, reduce transactions costs and risks of cross-border exchanges, settle payments, denominate financial assets and become the reserve currency for foreign central banks. Secondly, it will give China a seigniorage – the ability to issue Yuan to other countries in exchange for real goods and to lend Chinese currency abroad at low rates. The increased international demand for Yuan for trade invoicing and settlement will keep the interest rates low. Thirdly, once Yuan is internationalized, Chinese companies will be able to borrow internationally in their own currency – this will reduce the risk of businesses’ bankruptcy amid the possible sharp depreciation of Yuan [Huang and Lynch 2013].
The economic troubles and widespread bankruptcies in Asian countries during 1997-1998 Financial Crisis were mainly caused by the currency mismatch, when the companies were unable to cover their debts issued in foreign, not domestic, currency.
China has been already giving loans in Yuan and using its currency for the international trade settlements, for example, partly with Russia. Beijing would like other countries to peg their currencies to Yuan. However, China sees the Yuan internationalization as a long process according to Hu Xiaolian (胡晓炼) – the Chairman of Export-Import Bank of China. She stressed that Chinese currency internationalization wouldn’t be a confrontation weapon.
Nowadays AIIB provides loans in the USD, but in the near future it may lend in Yuan as well – and this will come in accordance with the national economic development blueprint.
The creation of the AIIB reflects China’s growing economic and financial power, as well as its desire to increase its influence in Asia and on the global stage. This move challenges the current status quo powers, such as the USA and Japan, who are reluctant to accept the AIIB as a new addition to the global financial system. However, the establishment of the AIIB also has economic implications, as it may pave the way for the future internationalization of the Yuan. This could help China deal with its domestic economic challenges, such as the need to borrow in its own currency and reduce its vulnerability to balance of payment crises. The internationalization of the Yuan could also improve the globalization process, give China a seigniorage, and reduce the risk of businesses’ bankruptcy. Nevertheless, Chinese officials have emphasized that the Yuan internationalization is a long process and not intended as a confrontation weapon.
The AIIB represents an important development in the international financial landscape, providing much-needed funding for infrastructure projects in Asia and offering an alternative source of financing for developing countries in the region. While concerns about the bank’s governance and China’s influence remain, the AIIB has taken steps to address these issues and has the potential to play a positive role in promoting economic development and integration in Asia.
 Evelyn Goh, “Great Powers and Hierarchical Order in Southeast Asia: Analyzing Regional Security Strategies”, International Security, Vol. 32, No. 3, 2008, pp. 113-157
 大国兴衰与中国机遇：国家综合国力评估， 海外生活，available at: https://m.juwai.com/news/225747
 Evan Feigenbaum, “China and the World,” Foreign Affairs, January/February 2017
 Wang Da, “Chinese consideration and global significance of the AIIB”, Northeast Asia Forum, No. 03, 48–64, 2015
 Paul Krugman, “China’s Dollar Trap”, The New York Times, 2009, available at: https://www.nytimes.com/2009/04/03/opinion/03krugman.html
 Peterson Institute for International Economics, available at: https://www.piie.com/publications/chapters_preview/373/2iie3608.pdf
 进出口银行胡晓炼：不能把人民币国际化当成国际对抗的武器, available at: https://finance.sina.com.cn/roll/2021-06-11/doc-ikqcfnca0417359.shtml
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