A $50 Billion Dead End: Why the Silk Road From Europe to China Bypassed Ukraine

Translated by Ollie Richardson & Angelina Siard



Ukraine risks losing one more piece of the transit pie worth billions of dollars per year. The other day the International Union of Railways and the freight association FERRMED signed a memorandum on the development of Eurasian logistics for the transportation of goods between China and the EU.

“The main international freight railway route between China and Europe passes along the border of Ukraine, but not through Ukraine”

wrote the former deputy Minister of Infrastructure Aleksandr Kava on his Facebook page.

He explained to “Strana” that when planning the route of the European-Chinese corridor, transport workers intended to bypass Ukraine. The main flow of freight will go through Belarus. Ukraine was left with only a “spare branch” – on the map it is a thin thread of a section in the direction of Hungary, Serbia, and Slovakia.

“Over the last five years ‘Ukrzaliznitsya’ has not invested anything in the development of transit traffic, whereas Belarus bought new locomotives, accelerated the passage of cargo trains, and invested in transshipment complexes. As a result, cargo trains travel across Belarus at a speed of 120 km/h, while we don’t even have electric drive trains from Kovel to the border. We have to reform trains in Kovel and reduce the number of railcars on the train, and this is all a loss of time”

said the expert

However, this isn’t even the most important thing. Freight will pass from the Kazakh-Chinese to the Belarusian-Polish border through the territory of Kazakhstan, Russia, and Belarus with only two customs inspections — in Brest and Dostyk. “Creating a flow through Ukraine entails, at minimum, one more border, since freight from our country undergoes careful examinations in Russia,” explained Kava.

Belarus gradually takes away automobile transit from us too. According to the estimates of the economist Aleksey Kushch, over the past few years Ukraine’s neighbours have intercepted a third of automobile freight that previously passed through Ukraine. And after the reconstruction of the Belarusian road M10, which goes exactly in parallel to our border, this figure will grow even more.

“Strana” tried to understand why world freight carriers bypass Ukraine and whether or not Ukraine stands a chance of returning this billion-dollar transit.

Belarusian silk road

The memorandum between the International Union of Railways and the freight transportation association FERRMED includes several bullet points. This is, in particular, the elimination of network bottlenecks, increasing the efficiency and speed of transportation, monitoring train movement, increasing the length of cargo trains, increasing axial loading, and so forth. In fact, the proposed route of European freight to China that bypasses Ukraine is a final judgment for the domestic transport system. The project of railway workers and cargo carriers will be formally implemented without Chinese investments. But it is nevertheless a part of the large-scale “One Belt, One Road” program, which the authorities of the Celestial Empire have been pushing forward for five years now.

And Ukraine, which initially declared its participation in the project, risks to definitively be left out of it.

In 2013, when China started talking about a global transport corridor for the first time, Ukraine was immediately included in the list of countries that were potential participants of this project (in total there were 60 states in the list). In particular, the Chinese were ready to invest in routes in the direction of Slovakia and Austria. And the Ukrainian authorities went even further and declared the creation of the Trans-Caspian route – from the Black Sea ports through Georgia, Azerbaijan, and Kazakhstan to the Eastern border of China. This route was approved at the time by the Celestial Empire. According to the evaluations of experts, Ukraine’s participation in the “One Belt, One Road” project promised Kiev investments worth $7 billion.

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But the “Silk Road” railway in our interpretation completely failed. Trains were sent to China from Ukraine with pomp several times, but it wasn’t succeeded to fully load them. Businesses complained about the journey being too long and expensive and preferred to send freight in a different way.

“This route turned out to be inexpedient. The reason? The war. Russia doesn’t allow the transit of freight of Ukrainian origin through its territory, and the alternative route through Georgia and Kazakhstan hasn’t been optimised. It passes through two seas, and respectively includes 4 transition stops. Because of this, firstly, it is difficult to calculate exact delivery timeframes for freight, and secondly, there are additional expenses”

explained the owner of the “Ukr-China Communication” company Vyacheslav Lysenko

“This train sank in bureaucratic formalities and corruption. Schematically speaking, sending a container by sea takes 30-35 days and $1,500-2,000. By rail through Ukraine it is quicker, but at least $3,000. Who needs such a business?”

said the analyst of the “Europatrol” company (involved in studying transport markets) Vyacheslav Konovalov.

As a result freight now goes to China mainly through Belarus.

“Our neighbours took away from us at least 70% of the flow. Although initially Chinese investors called the western border of Belarus a ‘bottle neck’, since there is narrowing and capacity decreases,” said Aleksey Kushch. According to him, Chinese freight worth $50 billion passes from central Europe through Belarus every year.

“Logistics commission is about 10%, i.e., our neighbours earn $5 billion a year. And we could earn several times more because the capacity of our western border is potentially more than in Belarus, and our geographical position is more favourable. In addition to central Europe, Ukraine could handle freight from the Eastern and Southern part of the EU. Plus, we have an agreement on a free trade zone with the EU, which Belarus doesn’t have. This means that the same China could create assembly productions in Ukraine in order to then deliver these goods without duties to Europe. I.e., at the expense of the Chinese alone we could generate 10-15% of GDP with ease,” considers Kushch.

“In the future this route (from Europe to China) will be even more attractive because the need for the transfer of freights grows quicker than by sea, but it is cheaper than air transport. But so far we completely lose a railway segment. There is also other nuance: 90% of all trains come back from Europe to China empty. That’s why the Chinese government makes big discounts for these routes. The Celestial Empire needs raw materials. Ukraine can provide them, for example, sunflower oil, oilseed meal, or grain. We could fully load these containers and, respectively, increase export. But since Russia doesn’t allow Ukrainian production to pass, we lose also this opportunity,” explained the owner of the “Ukr-China Communication” company Vyacheslav Lysenko.

The head of the secretariat of the Council of Businessmen under the Cabinet of Ministers Andrey Zablovsky says that the news that freight from Europe will now definitively bypass Ukraine is not a surprise, it is more likely a statement of fact.

“We can’t even cope with domestic transportation and export. Due to the lack of trains and grain-carriers, traders aren’t able to increase the grain supply, corn in particular, on foreign markets, although the received crop allows this. Since the beginning of this year many companies were forced to reorientate themselves to automobile delivery because of a lack of trains. That’s why soon we need to solve at least this problem, and only then can we think about transit freight”

considers Zablovsky

Scanning tunnels and passage without bribes

“Ukrzalizhntsya” loses, at minimum, 5% of goods turnover annually, also because of the worn-out rolling stock.

“The transport fleet has been in operation for 30-40 years. This year alone “Ukrzalizhntsya” will write off about 100 locomotives. In order to keep the rolling stock in working order, tens of billions of dollars are needed”

said Zablovsky.

Belarus, on the contrary, only increases the shipment of freight, including to China.

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During the first 9 months of 2018 the number of container trains going from China to Europe through Belarus grew by 25% (to 213,400 units). 12 container trains pass through the neighbouring country from Asia to Europe every day. They travel from the “Krasnoye” station (bordering Russia) to Brest in less than 12 hours. This year it is planned to open traffic on a new (fourth) check point between Belarus and Poland: Vysoko-Litovsk – Czeremcha.

“Ukrzalizhntsya” also talks about the expansion of transit. In the autumn of this year a new “daughter” of “Ukrzalizhntsya” named “UZ Cargo Wagon LLC” was created. Such a condition was laid down by the European Bank for Reconstruction and Development, which allocated for “Ukrzalizhntsya” $150 million in credit for the purchase of 6,500 new gondolas.

“We receive $150 million at a good interest rate. This is lower than in the banking market of Ukraine and the international capital markets. With this money we will build the most demanded rolling stock – cargo gondolas”

wrote the head of the company Evgeny Kravtsov on his Facebook page.

However, it isn’t yet clear what the tariffs for transportation via the new railcars will be. Plus, our businesses are rather afraid that the new subsidiary will pick up the old traditions of “Ukrzalizhntsya”, where, in addition to the official payment, an unofficial payment is also taken for the allocation of railcars and the necessary trains.

As the Director of the Strategic Development and Investment Policy of “Ukrzalizhntsya” Anton Sabolevsky told “Strana”, in 2018 “Ukrzalizhntsya” invested 16.9 billion hryvnia in fixed assets, which is a record figure for the last five years.

“In particular, more than 300km of tracks, from which 80% are on the so-called TEN-T network, were reconstructed (they pass through the territory of Ukraine and are approved by EU countries). Concerning the China-Europe route, the key to this question is on the table of the aggressor country, which explains the trajectory of laying the route past the territory of Ukraine. In 2018 more than 7,000 China-Europe containers went across Ukraine’s territory, which satisfied all participants of transportation. But freight traffic in this direction is controlled by the Russian side, therefore the problem lies more likely in the political than in the commercial sphere,” said Sabolevsky.

“Also important for transit cargo carriers is the existence of infrastructure. For example, in Belarus in the Grodno free economic zone a scanning tunnel was built, which checks freight without stopping the trains, an electronic document management system flow was established, and carriers in general don’t personally contact the customs inspector. As a result, there are almost no additional idle times for freight, and there are no payments in envelopes for the fast admission, unlike in Ukraine”

said Aleksey Kushch

Automobile trap

Belarusians also took notice of our automobile transit. Recently, a network of autobahns (including tolls) of almost European quality were constructed in the neighbouring country. And if to also take into account the fast admission at customs, it isn’t surprising that many European cargo carriers sending goods to Asia prefer Belarusian routes, even if they are longer than Ukrainian ones in terms of mileage.

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“The situation will worsen even more upon the completion of the reconstruction of the M10 road, which runs in parallel with the Ukrainian border. The Bryansk region and Kobryn (the Brest region of Belarus) will be connected by a road of the first technical category (4 lanes of high-speed movement) with a length of more than 520km. It is possible to predict that it is exactly along this route that transit through Russia to Kazakhstan will go. For Ukraine this is hundreds of millions of dollars of lost money,” said Aleksandr Kava. According to him, the strategic objective of Minsk is to connect the capital and 6 regional centers via roads of the first technical category. Part of the roads have already been built (to Brest, Gomel, Mogilev), and also with Vilnius.

The new M10 will make it possible to connect the Bryansk region to the M1 highway to Warsaw and Berlin.

But in Ukraine, despite the statements of the authorities about record financing (this year more than 50 billion hryvnia has been allocated), special progress in road construction hasn’t yet been observed.

“We so far are only restoring the road network, but this money clearly isn’t enough to expand it,” said Kava. According to his estimates, in order to create a network of highways of international standard it is necessary to invest tens of billions of dollars. As priorities – we need to construct a Uman-Dnepropetrovsk road, providing a corridor between the Eastern and Western direction, Lvov-Mukachevo (a path to Hungary and Slovakia), Odessa-Nikolaev-Kherson, and also Nikolaev-Dnepropetrovsk.

But even this list will need several billions of dollars, while current financing isn’t enough to even repair the listed routes.

“Targeted investments are needed. For example, the European Union invested €60 billion in the roads of Poland over 15 years. But whether or not such investments will come to us and whether or not automobile transit in many respects will be established depends on relations between Ukraine and Russia”

said Kava

Aleksey Kushch says that even with the present difficult relations with the Russian Federation, providing a flow of freight to China would be quite possible.

“It’s unlikely that Russia would throw a monkey-wrench into the works and make things difficult for Chinese freights. It itself is interested in cooperation with the Celestial Empire. But Chinese investors look at us cautiously. They are frightened by the slogans of our ministers about ‘riding bears’ [the Minister of Infrastructure of Ukraine Vladimir Omelyan said that trains to Russia would be cancelled, and the only way to thus get to Russia will be by riding a bear – ed]. And the state won’t be able to master investments in the creation of a transport network and infrastructure independently. A vicious circle is created. Ukraine risks becoming a grey zone, some kind of transit dead end, and in several years it will lose even the volumes of cargo transportation that it has now,” summarised the expert.

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