Economy, Business And Markets

What to Do to Get the Silk Road Back?

What to Do to Get the Silk Road Back?What to Do to Get the Silk Road Back?

Iran, occupying the body of land between the Caspian Sea and the Persian Gulf, connects the lands of the East and the West.

In ancient times, the intercontinental transport of luxury products happened via the Silk Road, which started in China, ran through the Persian Empire (Iran) and ended eventually in Constantinople (present day Istanbul), the start of Europe.

The fast growth of trans-Eurasia trade over the last decade has blown new wind into the old Silk Road, but both the content of trade and the route itself has radically changed.

First of all, some unstable regions between China and Iran have made the reconstruction of the old land trade route difficult at times. A group of small and often poor Central Asian states now lie between the city of Mashhad in Iran and the city of Urumqi in western China, with insurgencies in between – in Afghanistan, Pakistan and China’s own western non-Han Chinese region.

But the booming of intercontinental trade has been a large incentive for countries to actively invest and cooperate to create new routes. China contributed to a $40 billion fund to develop a new maritime route. Currently, two routes stand out.

One is a sea route, which has China as its largest financial backer. The sea route starts in the docks of Shanghai, moves on to Hong Kong and Singapore, then to Colombo in Sri Lanka and eventually reaches the Suez Canal. The port of Dubai is the major regional Middle-Eastern hub in this route and crucial for Iranian trade.

Another route is being constructed over northern lands and is based on train transportation. This route is still in its infancy with China and Russia also heavily supporting the project.

President Vladimir Putin of Russia recently proposed to spend $47 billion on renewing the trans-Siberia railway, according to Siberian Times. This new intercontinental connection has been important for Putin to pivot Russia away from Europe and towards Asia as the conflict in Ukraine continues to rage.

Over land between East and West,this route is effective as it runs through only three countries before reaching the European Union; Kazakhstan, Russia and Belarus.

It is also much faster than by sea, taking only 22 days, while the maritime route would take twice as much. Sea transport than again has its own advantages, notably its much larger cargo capacity.  

Iran’s geo-economic strategy has so far been to maximize all existing opportunities, while simultaneously laying down the long-term framework for a more viable Iranian silk route.

The Iran-Turkmenistan-Uzbekistan railroad is set to open in a few weeks, with President Hassan Rouhani preparing to inaugurate the giant project in the north eastern Golestan Province, with neighbor Turkmenistan.

This railway links Iran directly to the northern Silk Road and provides access to Kazakhstan’s valuable wheat and Uzbekistan’s cotton market. More cost-effective access to these markets could alleviate Iran’s domestic water crisis, which some experts have shown is caused to a large extent by wheat production, and reduce large government subsidy costs.

Iran has also put efforts in increasing the capacity of its ports. The country’s largest container port is Shahid Rajai Port close to the southern port of Bandar Abbas. The government has put efforts in promoting Shahid Rajai, most recently by attracting French and African investment delegations.

India has also invested large amounts of money in the development of Iran’s eastern Chabahar Port. The South Asian country has promised that this port would be finished in about 18 months, according to Business Standard.

Delhi would invest $85.21 million a year and aims to use Chabahar to connect its own market to those of Afghanistan and Central Asia by building a railway from the port towards the Zaranj border with Afghanistan.

However, this port could itself be of huge asset to Iran. It is located about 500 kilometers to the East of Bandar Abbas. As such, it could be the first step in bypassing the unsafe Baluchistan regions in Pakistan and Iran and re-attach the maritime Silk Road to Iran.

The fruits from redirecting maritime trade away from the Suez Canal and towards an Iran-EU based route could be huge. Bilateral trade between China and the EU reached about €428.1 billion in 2013, according to a report released by the European Commission.

Iran’s exports have also increased 8-fold over the past decade, to 80.82 billion in the Iranian year ending in March 2013.

The government realizes that if Iran’s ports were to function beyond serving domestic needs, it needs to improve domestic transport infrastructure and customs and tariff regulations.

The former administration under Mahmoud Ahmadinejad in August 2010 approved a plan to construct six dry ports, or inland storage and redistribution facilities to ease the limited container capacity of the Persian Gulf ports. Admadinejad’s successor, President Hassan Rouhani, looks to build nine more dry ports. Infrastructural development is pushed through despite large obstacles such as steel and train wagon shortages which severely hinder the expansion of the country’s railway system.

The government also needs to improve the efficiency of border connections, notably with Turkey and a lot of work still remains to be done. The recent spat between Ankara and Tehran over truck transit fees is likely to postpone any major agreement to liberalize bilateral trade. Simultaneously, the spat has made both Iran and Turkey less attractive to trans-continental trade.

However, the most pressing issue remains the US and EU sanctions, which aim to keep Iran’s financial system disconnected to a dollar-dominated global economy. Sanctions have inhibited Iran’s trade ambitions and have prevented the country from realigning the new emerging trade routes with its own geo-economic advantage.

The window is left open for Iran to rebuild the ancient Silk Road if the ongoing nuclear talks between Tehran and the six world powers known as the P5+1 reach a permanent agreement, leading to the lifting of western sanctions.