The Silk Road Initiative: Leading China Towards Energy Charter Treaty Membership?

by Lina Nagell

In an effort to diversify trade routes and sustain growth rates, the Chinese government presented the One Belt, One Road (OBOR) initiative in 2013. One of the major challenges facing the ambitious project, stretching from China to Europe, Africa and Latin America, is long-term cooperation with countries bordering the route and security of investments in the energy sector, specifically. China has bilateral agreements with some of the countries along the route, but some of these are limited and they vary to an extent, whereas others are non-existent. Stability and security for investments along the route is needed. In this context I examine the potential for Chinese accession to the Energy Charter Treaty (ECT).

A short introduction to the ECT

For readers unfamiliar with the ECT, a short introduction and historical overview is necessary. Signed in 1994 and entering into force in 1998, the ECT builds on the 1991 Energy Charter (EC). The EC, also known as the European Energy Charter is an expression of the foundations which should underlie international energy cooperation. In the period following the Cold War, efforts to overcome previous economic division were initiated. The energy sector was indeed deemed one sector with great potential for mutually beneficial cross-border cooperation. The creation of the EC and the subsequent signing of the ECT may in this context be viewed as an effort to establish common accepted foundations for energy cooperation amongst states – the alternative being individual bilateral agreements. China gained observer status in 2001, and signed the International Energy Charter (IEC) in May 2015. The IEC differs from the ECT in that it is a declaration of political intention, aiming at strengthening energy cooperation between the signatory states, but does not bear any legally binding, obligation or financial commitment. The IEC can be seen in the large-scale context of expanding the ECT internationally. The main goal of the ECT is to strengthen the rule of law on energy issues, by creating a level playing field of rules and mitigating risks associated with energy related investment and trade.

One Road, One Belt

OBOR consists of two main ideas, building on the traditional Silk Road that reached its height during the Tang Dynasty (618 – 906). The construction of a 21st century Maritime Silk Road and a Silk Road Economic Belt from western and inland China, crossing Central Asia on its way towards Europe. China is hoping to diversify its trade routes, sustaining its appetite for growth and reaching new areas where trade volumes could be expanded. OBOR could have great potential for increasing, or at least sustaining, Chinese economic growth. The country is currently struggling with a glut in industrial materials. Something that could be alleviated by the help of new trade routes and easily accessible markets. Chinese dependence on oil shipped through ports in the pacific could also decline as a result of OBOR. The initiative also has the potential to translate Chinese economic dominance into geopolitical power.

Although increased Chinese influence on the global stage is desired from a Chinese point of view, some of the countries along the route have not been so inclined in the past. Some observers point out that the free-fall in oil prices could help quicken the development pace of OBOR. Many of the countries along the route are highly dependent on the trading of natural resources and are now struggling amidst falling revenue. The current situation might make these countries more inclined to accept Chinese investment pitches, as well as to taking a share in China’s $40 billion Silk Road Infrastructure Fund. Last year alone, China signed more than 20 country-to-country energy cooperation deals to further facilitate OBOR according to Chinese Foreign Minister Wang Yi.

Russian discontent: An obstacle for the future development of OBOR?

A potential obstacle in the development of OBOR has been Russian discontent towards China’s focus on Central Asia, traditionally an area of Russian dominance. Falling oil prices, as well as the potential increase in independence from Russia that OBOR could provide, are seen as incentives for further cooperation between Central Asia and China. In a report prepared by Mr. Zhuwei Wang in 2015, Chinese accession to the ECT is presented as a facilitator for “profitable, lasting relations between China and the hydrocarbon-producing states of Central-Asia”, which are all members of the ECT. There are currently signs that the leadership in both Moscow and Beijing have opted for strategic cooperation amidst a strenuous relationship with the West, something that could bode well for OBOR. However, the longevity and future of such cooperation remains to be seen.

Another potential obstacle for OBOR has been the lack of security for Chinese investments in regards to political and commercial risks when building infrastructure in countries along the route. This issue is specifically dominant in the region from Pakistan through Central-Asia and the former Soviet member states. Although increased Chinese foreign investments over the last few decades have shown lower levels of risk-aversion than more established global players, it is discussed by observers whether this could be a result of necessity and not desire. Security and stability in a project of the magnitude of OBOR is not only desirable for China, but necessary.

The New Silk Road, leading China to the ECT?

Among the over 65 countries bordering OBOR, so far 38 have signed bilateral investment treaties, some of which are limited to determine the amount of compensation in case of expropriation. This leaves at least 27 countries where Chinese investments could be exposed to a vast range of political and legal risks. As discussed during the Meeting of the EC Industry Advisory Panel (IAP), investments in the energy sector have a tendency to span long time periods, making them particularly vulnerable for changes in the legal frameworks and other political situations. Alongside offering a broad legal basis for the protection of these investments in the 54 Contracting parties to the ECT, the ECT also offers China collaborative opportunities with other regions and adopters of the IEC, including Africa, the Middle East and Latin America – markets with potential for further Chinese exports. When China signed the IEC last year, some observers viewed this as a first step towards ECT accession. This also taking into account increased cooperation between China and the ECT in recent years. Common ground between China and the ECT is to be found on issues regarding security of supply and demand, energy transportation and energy transit security, as well as the alleviation of energy poverty. So, what are potential obstacles facing Chinese accession?

Can China have its cake and eat it too?

If something sounds too good to be true, it usually is. It is true that the ECT does not seek to determine the structure of national energy markets in member states, dictate national energy policies, obliging member states to open up their energy sector to foreign investors, and could be said to leave the member state in question free to determine the system of property ownership of its national energy resources. However, accession to the ECT could mean the Chinese government will have to face suits by foreign investors. With a new National Congress of the Communist Party set for 2017, a lead up to which President XI Jinping is expected to further consolidate power, changes opening up China further might not be viewed as the best solution. While some observers point out that the benefits of ECT accession outweighs the costs, there is a great deal of uncertainty as to how willing the Chinese are to accede to the ECT. Like an overexcited family member on the sidelines of a soccer match, China might opt to be a loud advisory to ECT. The interesting issue for the future will be if China takes the plunge and joins in.

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