Project and Zone Analysis

The Dry Port of Khorgos: Zone Overview

The border between Kazakhstan and China is one the most inhospitable places on Earth. Summer temperatures in the Saryesik-Atrau desert barely pass 10 degrees centigrade, while temperatures in January can be expected to plummet below -20. In this post we explore how such a barren landscape became one of the key focal points of China’s westward economic push, via Khorgos.
 On
April 18, 2019

Introduction

The border between Kazakhstan and China is one the most inhospitable places on Earth. Summer temperatures in the Saryesik-Atrau desert barely pass 10 degrees centigrade, while temperatures in January can be expected to plummet below -20. In this post we explore how such a barren landscape became one of the key focal points of China’s westward economic push, via Khorgos.

Changing Tracks

The difficulty of importing and exporting goods between China and Kazakhstan dates back to the Soviet Union. Kazakh railroads are 8.9 centimeters wider than the standard European gauge (or width). It is believed that the Russian Empire wanted to hamper foreign invaders from using their tracks, even if they gained control of the territory. The wider Russian standard was then inherited and maintained by the Soviets for similar reasons.

The Dry Port of Khorgos is China’s way of overcoming this problem. Chinese railroads follow standard gauge, so the purpose of the dry port is to lift containers filled with goods from one freight wagon to an adjacent train compatible with the Russian standard. Situated near the Eurasian Pole of Inaccessibility- the furthest point from any ocean in the world - it would seem unlikely that a city could be built here, at the crossroads of China, India, Russia, and the West. Yet a minor railroad incompatibility is now leading to what could become the “Dubai of Kazakhstan”, driven in large part by China’s “One Belt, One Road” (OBOR) initiative.

It’s worth mentioning in brief that Siemianówka in Poland constitutes the flip-side of Khorgos: transferring cargo from Russian tracks back onto the standard European width.

Khorgos Eastern Gate Special Economic Zone

On November 2011, the President of Kazakhstan, Nursultan Nazarbayev signed a decree to establish the Khorgos Eastern Gate Special Economic Zone. The Khorgos Gateway and Dry Port occupies 129.8 hectares of land, including logistics and industrial zones, with a capacity to hold 18,000 containers. 7 gantry cranes allow for horizontal transfer of containers between the different tracks. The zone has many other facilities; including storage, production, textile manufacturing, chemical and metal treatment. It also hosts the International Center for Boundary Cooperation (ICBC), a kind of commercial sub-zone which includes facilities for shopping, restaurants, and entertainment.

Businesses operating in the Eastern Gate SEZ are exempt from import tariffs, land tax, property tax and value-added tax, which also makes it an attractive commerce hub for Kazakh and Chinese shoppers living near the border.

International Center For Boundary Cooperation (ICBC)

ICBC Khorgos is a public company created under the agreements between the governments of Kazakhstan and China, with territory on both sides of the border. The goal of the Center is to act as a place of cultural exchange and business cooperation, providing infrastructure for educational, scientific and recreational activities. According to a paper by the Macrothink Institute, the Center has 3 and 5 star hotels, a congress hall, a shopping complex, a sports center, and a theme park. An International Chinese-Kazakh University will also be built within the zone.

ICBC Khorgos has several advantages, including a 30 day Visa-free presence for visitors, easy road and rail access, and independent rule of law within the zone. Both countries’ currencies are accepted, and Kazakh and Chinese citizens can enter with only an ID card.

Performance

Transporting wholesale goods (clothing, machinery, household goods) from Yiwu in Zhejiang Province to London by sea takes 40 days. But since the Khorgos Dry Port became operational it the same journey by rail takes anywhere from 18 to 20 days. This is a huge increase in efficiency.

During its first year of operation, the port handled over 70,000 containers, and that number is expected to increase to 500,000 by 2020. According to Karl Gheysen, the first CEO of the Gateway, 99% of the port’s employees are Kazakhs citizens, 80% of whom are locals.

The Silk Road Economic Belt (SREB)

The Khorgos Gateway is part of the “Silk Road Economic Belt” (SREB) branch of OBOR, which focuses primarily on connecting China to Europe.

Since the Soviet Union broke up in 1991, the Republic of Kazakhstan has experienced economic struggles from the withdrawal of subsidies and skilled labor from Russia. It stands to benefit greatly from SREB. The Republic of Kazakhstan is Central Asia’s largest economy, and is projected to join the world’s 30 most developed countries by 2050.

Apart from the obvious connectivity benefits for China, Kazakhstan has a very large mining industry, with oil comprising 25% of the country’s GDP. In addition, there are large stocks of minerals and metals, including copper, zinc, iron, chrome, ferro alloys, steel, and aluminum- many of which are components of consumer tech. Uranium is another key export, for nuclear fission plants around the world, including China.

Closer cooperation between China and Kazakhstan allows both countries to take advantage of their relative strengths. China can benefit from Kazakhstan as a transport corridor to the Baltic, and a source of energy, minerals, and metals; while Kazakhstan can benefit from Chinese manufacturing and technology imports.

Below is a table of the top 10 exports and imports between China and Kazakhstan in 2016.

Source: Macrothink Institute (The Case of Khorgos City)

Financing Arrangements

Surprisingly, most of the funding is provided by Kazakhstan, through the Nurly Zhol (Path to the Future) plan, a package of $9 billion USD in public funds. According to Reconnecting Asia, $101 million USD is provided by the Kazakh Sovereign Wealth Fund Samruk-Kazyna JSC. Another $107 million USD is provided by Kazakhstan Temir Zholy JSC, specifically focussing on the development of the Dry Port. However up to date figures for funding not readily available to date.

Possible Risks

There are several concrete and perceived risks associated with the Dry Port and ICBC project.

  • There is widespread perception that ICBC is just a large duty-free zone for shoppers, and has created a lot of media criticism.
  • Kazakhstan is a member of the Eurasian Economic Union (EEC) and is still largely dependent on Russia. The Silk Road Economic Belt will allow some diversification of the Kazakh economy in the direction of China, but may come at a cost.
  • Much of the funding comes from Kazakhstan, with unknown or questionable sustainability.
  • Possible imbalances in the relative advantage of the free trade zone to Chinese and Kazakh citizens.

Conclusion

Kazakhstan is a vital link between China and Europe. It remains to be seen whether it will develop beyond the port zone into a successful and dynamic city, similar to Dubai. Even so, the Dry Port of Khorgos is a fascinating example of how cities tend to develop at economic crossroads. It also shows how to accelerate economic growth and cultural exchange in developing economies around the world.

Sources:

  1. Wade Shepherd, Forbes: https://www.forbes.com/sites/wadeshepard/2017/02/20/khorgos-the-new-silk-roads-central-station-comes-to-life/#5ce09243c22e
  2. South China Morning Post: https://multimedia.scmp.com/news/china/article/One-Belt-One-Road/khorgos.html
  3. Astana Times: https://astanatimes.com/2016/11/khorgos-dry-port-to-process-more-than-500000-containers-by-2020/
  4. Macrothink Institute- The Case of Khorgos City (paper): www.macrothink.org/journal/index.php/jsss/article/download/11014/8969
  5. Forbes, Criticism of ICBC: https://www.forbes.com/sites/wadeshepard/2016/07/26/an-inside-look-at-icbc-khorgos-china-and-kazakhstans-cross-border-free-trade-zone/#7a1729b5c8f1
  6. Khorgos Dry Port: https://reconnectingasia.csis.org/database/projects/construction-khorgos-dry-port/0bb539d4-ea54-48c7-b1d7-bd45cc7af476/