China’s Bet on Sending Its Exports Through Russia Hits Setback

Date: Tuesday, April 5, 2022
Source: The Wall Street Journal

Sanctions imposed on Russia are disrupting China’s ambitions to move more exports to Europe, a setback for the $4 trillion effort championed by Chinese leader Xi Jinping to cement his country as the world’s pre-eminent trading partner.

Although the European Union has yet to officially ban imports passing through Russia, inbound rail-cargo shipments have all but frozen, according to freight forwarders. Moving shipping containers from China along a 7,500-mile corridor that runs through Russia and extends to the United Kingdom is a vital part of Belt and Road, a yearslong undertaking that includes investments to connect China to Europe by land and sea.

After Russia’s invasion of Ukraine, some freight forwarders that move Chinese goods are looking to Kazakhstan and Georgia for rail-cargo shipments.

“Many customers from Europe and China have reoriented their shipments from rail to ships,” said Andreea Brinza, vice president of the Romanian Institute for the Study of the Asia-Pacific, a think tank. “The situation is very fluid, so there are risks regarding rail shipping, and things can change quickly for the worse.”

The principal rail links along what is known as the Silk Road rail corridor to Europe from Russia pass through Belarus and Poland. The port of St. Petersburg in western Russia is another link, with trains moving Chinese cargo through Siberia before the goods are placed on container vessels destined for Europe.

China’s Belt and Road initiative was announced by Mr. Xi in 2013, and Beijing has since signed deals to move its exports with 140 countries. The investments mainly involve long-term port leases, along with developing rail and road networks and power stations.

China’s trade with those countries reached $1.83 trillion last year, a 24% increase from the year earlier, according to the Chinese Commerce Ministry.

Big shipping and logistics players like A.P. Moeller-Maersk A/S, Hapag-Lloyd AG and freight forwarder DB Schenker have suspended operations to and from Russia. The inland port of Duisburg in Germany, a Silk Road hub, warned in March that marine insurers would likely stop covering shipments from Belarus and Russia.

The rail network gained favor with cargo owners and freight forwarders during the Covid-19 pandemic as an alternative to ocean transport because ports around the world closed or curtailed operations to stop the spread of the virus. Scores of laden ships got stuck for weeks outside Chinese, European and American ports causing delivery delays that stretched for months.

Overall, logistics players moved around $82 billion worth of Chinese exports into the EU by rail in 2021, a 10-fold increase since 2016, according to EU and Chinese customs data. That is about 10% of the total $828 billion annual trade between China and Europe, where most of the cargo is moved by ships.

“It’s faster and costs less to send Chinese exports to Europe on trains, but now very little is moving,” said George Xiradakis, managing director of Athens-based XRTC Business Consultants and an adviser to China Development Bank. “It’s a painful setback for the Belt and Road initiative.”

At the port of Duisburg, often a first stop in Europe for locomotives with Chinese exports, dozens of trains arrive weekly stuffed with clothes, sports equipment and electronics from manufacturing centers in Wuhan and Chongqing. On their way back East, the trains move German cars, French wine, Scotch whisky, as well as high-end clothing and accessories from Milan.

“Trains are still coming with cargo that left before or during the Russian attack. But over the next few weeks, we expect less,” a spokesman at the port said this week “There will be a negative impact.”

The Ukraine war could also shift some sentiment on projects in Europe aimed at helping Chinese cargo move about the continent. Germany’s port of Duisburg said it would stop all business activity in Belarus and plans to sell its 39% stake in the Eurasian Rail Gateway Co., which planned to build a container terminal at a logistics complex outside Minsk. China has invested around $2 billion since 2015 in the complex called the Great Stone Industrial Park, near Minsk.

The invasion put Chinese companies with a global reach in an awkward position, as they have to abide by sanctions by cutting off or scaling back business ties with Russia even though Beijing said it won’t take part in the U.S.-led sanctions.

Export volume shipped on trains from China’s Dalian port to Europe has sharply reduced since March as shipping demand and willingness decreased, according to an official with Dalian Port Company Ltd. cited by the state-run Securities Times. Before the Ukraine war, the shipments delivered on China-Europe freight trains from Dalian rose 69% on year in the January-February period, according to data released earlier by Dalian Port, the port operator.

Shandong Yuma Sun-Shading Technology Corp. Ltd. said at the end of March that the company’s exports to Ukraine, Russia and other neighboring countries were reduced last month because of the fighting in Ukraine and logistics bottlenecks. The listed firm, which manufactures and sells roller blinds, drapes and curtains, said product deliveries to those countries slowed significantly in March, but it expects business to be back to normal after the war ends.

To boost Russia’s reach in global trade, President Vladimir Putin in 2018 ordered state monopoly Russian Railways to substantially grow container traffic. Moscow expects container flows to increase to 3.6 million boxes by 2035, which if achieved, would boost Russia’s capacity share in overall Asia-to-Europe cargo movement to 15% from around 5% currently.

If Russia is completely taken out of the train routes that move cargo from China, then containers would have to travel longer distances through the Caspian Sea and the Caucasus region and enter Europe through Romania or Bulgaria. The rerouting would likely result in higher costs and more complicated logistics that could substantially cut train volumes, industry participants say.

FourKites, a Chicago-based maritime data provider that tracks container shipments, said that if the volume transported by rail was transferred to ships, it would mean an increase in sea freight volume by up to 8%.

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