This entry is part 34 of 34 in the series Asian Development Bank

The Ukrainian state-owned railways have recently presented a project of a possible branch of the New Silk Road railway.

It would connect Ukraine and Europe with Iran, thereby facilitating commercial contacts with various states of the Persian Gulf and even India. Now they need Poland.

For the time being, the launch of the railway and ferry route bypassing Russia and linking the Ukrainian Chornomorsk with China is only a partial success. There was no problem obtaining cargo shipped to China, but there are no goods to carry on the way back – Ukrainians are too poor for such purchases. The only solution is to extend the New Silk Road railway into Poland.

The management of the Ukrainian state-owned railways Ukrzaliznytsia is presenting ambitious plans for the expansion of the New Silk Road railway launched in mid-January. It seems that the project has a chance of succeeding, but requires quick and major adjustments.

An appetite for Iran

“Everyone knows that international sanctions against Iran have been lifted, and now we can trade with them. We’ve already conducted talks concerning cargo deliveries both at the level of embassies, and at the level of carriers. We already have concrete arrangements. If we combine forces to find new markets and build logistics chains, such a partnership will be profitable to all the participants,” argued Ivan Khoriakov, the deputy head of the commercial department of Ukrzaliznytsia, in the railway magazine “Magistral”, where he presented the project of a rail-sea-road connection running from the Izow station on the Polish-Ukrainian border to the Azerbaijani-Iranian border point.

The new route would have a length of 2,500 kilometres, and the goods would travel this distance in several days. After the construction of a section of railway tracks connecting the railway lines of Iran and Azerbaijan, planned by the authorities of the two countries for 2017, the transportation time would be even shorter. The Ukrainians are hoping that this will enable them to increase exports of their agricultural products to the markets of Iran and India.

In search of consumers

The “Iranian” plans of the Ukrainian railways seem ambitious, but for now quite a different problem has to be solved – it is necessary to fill the already existing main corridor of the New Silk Road rail link with goods. While finding cargo for export to China is not difficult, it is a lot harder to find goods to be carried on the way back.

The first train with goods from the Ukrainian Chornomorsk, which after two weeks arrived on January 31st at the Dostyk station on the Kazakh-Chinese border, got stuck there because there was nothing to take back on the return journey.

According to the data of the Ukrainian Embassy in China, Ukrainian-Chinese trade decreased in 2015, mainly due to the decrease in the imports of Chinese goods by Ukraine. At the same time, there has been a slight increase in exports from Ukraine to China.

According to the data of China’s customs administration cited by the Ukrainian embassy, in 2015 the trade turnover between the two countries amounted to USD7.07bn and was 17.6 per cent lower than the year before. The value of imports from China reached USD3.517bn, i.e. over 31 per cent less than in 2014. The export of Ukrainian goods reached USD3.557bn, which means a slight increase (of 2.1 per cent).

According to the comments of the Ukrainian diplomats, the analysis of the structure of trade between the two countries indicates a reduction in the size of imports of all major commodity groups to Ukraine, which is associated with the strengthening of the dollar exchange rate to the hryvnia. This “creates certain difficulties for medium and small-sized importers” and results in the reduction of the purchasing power of the population.

Today Ukrainians are so poor that they will not buy in mass quantities even products as cheap as some goods coming from China. According to data of the State Statistics Service of Ukraine, in February 2016 real wages in Ukraine were 8.3 per cent lower than the year before.

The scale of poverty is shown by the latest government draft of “The Ukrainian consumer basket” which includes: a wardrobe – once every 25 years, a chair – once every 15 years, a bed – once every 25 years, a desk – once every 25 years, kitchen furniture – once every 25 years, a bathroom mirror – once every 20 years, a phone – once every 25 years, two plates – once every 3 years, a knife, two forks and two spoons – once every 10 years, a refrigerator – once every 15 years, a washing machine – once every 14 years, a chandelier – once every 25 years, a radio – once every 20 years. When it comes to clothing (which has traditionally constituted a large part of the imports from China), the government assumes the following annual norms – for men: a suit, a tie, a sweater, a sweatshirt, a pair of trousers, six pieces of underwear, two t-shirts, one pair of swimming trunks, and 10 pairs of socks; for women: six pieces of underwear, two bras, two t-shirts, two pairs of tights and one pair of trousers.

With such levels of consumption there isn’t the slightest chance of an increase in the imports of consumer goods from the Silk Road. The only way is to find consumers for cargo from China outside Ukraine.

A place for Poland

The original plans of the Ukrainian railways assumed that the New Silk Road railway line would bypass Poland – the possible extension of the transport corridor was supposed to go through Belarus and Lithuania to the port in Klaipeda. It seems that the cold shower associated with the lack of cargo traffic on the way back from China has corrected these plans and that Poland is presented with an opportunity or even several opportunities at the same time. On the one hand, cooperation on the New Silk Road means an acceleration of trade with China, bypassing the Russian transit route, but also the utilization of the Iranian market, which is opening up after years of sanctions, and the construction of a European railway hub connecting the eastern broad gauge network with Western Europe.

According to Mariya Hryhorak, the President of the Ukrainian Logistics Association, the effective implementation of the New Silk Road railway project is impossible without attracting other countries, and in particular Poland, on the principles of mutual benefit.

In mid-March the Lower House of Polish Parliament (Sejm) agreed to ratify the agreement on Poland’s accession to the Asian Infrastructure Investment Bank, which Poland joined as the only country of Central and Eastern Europe. The justification for the consent included references to the New Silk Road. In the context of the growing importance of the ‘One Belt One Road’ project, Poland could play an important role in this venture as the first EU country on the route of the revived silk road. The development of direct connections – maritime, railway, and in the future also road connections between Asia and the European Union is one of the areas of activity of the new bank.

“Projects in this area could provide Polish entrepreneurs with a chance to start new businesses or to expand the existing activities. The previous experience of Polish companies in cooperation with Chinese partners provides a good starting position to expand its scope and to engage more Polish companies in this cooperation,” argued the authors of the document.

In February, during a meeting with the representatives of the Ukrainian government, Deputy Minister of Infrastructure and Construction Jerzy Szmit declared Poland’s active participation in the construction of the international transport corridor running from Poland and Ukraine through the Black Sea, Georgia and Azerbaijan to Central Asia.

According to the Ministry, at the end of February a meeting was held at the request of the Ukrainians. The discussed topics included bilateral cooperation in the field of transportation of goods on the East – West route, participation in the implementation of China’s “One Belt One Road” initiative and the organization of the transport of goods from Asia by transit through the territory of Ukraine to Europe.

“In this context, the Ukrainian side is supporting the initiative to launch a container train connecting Odessa (Ukraine) with Sławków (Poland), in order to expand the functions of the ‘Sławków’ logistics terminal. The possible use of the Broad Gauge Metallurgy Line was also discussed. (…) Within the framework of accession to the Chinese Silk Road project, a series of talks with our partners in Georgia, Azerbaijan and Kazakhstan was conducted with the aim of introducing a single policy for tariffs and the delivery of goods on the Europe-China-Europe route,”- informed the Ministry of Infrastructure. After the plan has been prepared, the cargo will be delivered from the Polish border to China in 11 days.

By Michal Kozak

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