I’ve long stressed the importance of geopolitical issues and the role they play in shaping the investment environment. As the world becomes a more complex place, global political developments are becoming increasingly important in the investment decision process.

I've established a Geopolitics & Investing (G&I) report in relation to another product--my global advisory, The Silk Road Investor (SRI)--to assist investors in identifying investment trends that stem from developments in the geopolitical arena, as well as offer actionable advice. 

Of Bears And Dragons

China is geographically close to Central Asia, sharing common borders totaling more than 3,000 km with Kazakhstan, Kyrgyzstan and Tajikistan.

China has three long-term strategic interests in the region: Keep Central Asia stable; use the region as one more way to diversify its energy resources; and contain separatist movements in its oil-rich Xinjiang province.

The first, rooted in Chinese history (i.e., the centuries-old debate over Chinese strategic security between proponents of maritime power and land power), indicates the pivotal role of Central Asia given its proximity to China’s western borders.

The second interest has been discussed extensively and has to do with efforts by the Chinese to stop being totally dependent in Middle Eastern oil. Furthermore, roughly 80 percent of Chinese oil imports pass through the 600-mile long Strait of Malacca; the Chinese see that as a weakness, given that the route can be easily closed down during times of conflict. This is particularly true where “conflict” involves China and the US. Consequently, pipelines from Central Asia are viewed as more reliable and are therefore highly desirable.

It comes as no surprise, then, that the recently completed 1,000-km oil pipeline connecting Atasu in Kazakhstan to Alashankou in western China was viewed by China as a great first step, even though China provided the entire $800 million to fund the project. Nevertheless, the move is justified by the fact that “between 2010 and 2020 Chinese oil consumption is expected to rise from 355 million tons to 500 million tons annually, and China's oil deficit will increase by 240 million tons.” Construction started in September 2004 and finished in 10 months, record time for such a colossal project.

The third long-term strategic interest--keeping the region stable--has to do with what the Chinese view as an unstable situation in the Xinjiang Uighur Autonomous Region (XUAR). The more than 7 million Moslem, ethnic Turkic Uighurs living in the region identify more closely with their Central Asian neighbors than with ethnic Chinese. As many Uighurs seem to desire greater autonomy--and it’s believed that foreign-based, radical Islamic organizations are instigating a separatist movement--Chinese leaders often view them as a destabilizing force. China and the US, as well as Russia, generally see eye to eye when it comes to dealing with radical Islam.

Even the Japanese feel that a growing radical Islamic movement in Central Asia would potentially affect Xinjiang and, consequently, destabilize the rest of China. Such a development would have disastrous consequences for Chinese relationships with their East Asia neighbors. This was one of the reasons why the Japanese have contributed monetarily to stabilizing efforts in Central Asia.

It’s been noted by some political theorists--and I laid out the argument in my book The Silk Road to Riches--that due to its economic ascent and smooth diplomacy, China has been able to start winning the acceptance of the other states in East Asia as well as in Central Asia. In addition to increasing economic interdependence, China’s new diplomatic tack is to portray itself as a rising, responsible power that doesn’t seek to exert political influence on the respective, domestic situations.

Finally, and maybe most important, China seems to be willing to aid its friends with real money rather than worldly ideas for change and future development. Hard cash (along with guidance) has always been extremely effective when trying to influence political systems, abroad or at home.

Even the most casual observer can see that Russia has embarked--after the disastrous years of the Yeltsin era--on a coherent foreign policy plan for Central Asia.

Foreign observers often forget that Central Asia is quite close to Russia in terms of culture, history and language. Most regional elites were educated in Russia; majorities speak Russian, listen to Russian radio and watch Russian TV. Many also have relatives in Russia. In other words, “there are no obstacles in language and thinking habits between the elite of Central Asia and Russia.”

Considering the global geopolitical situation as well as the internal changes taking place within specific countries, my view is that Russia will remain a major global player in the near future. Its status is secure for two main reasons: abundant natural resources and military research and development.

It’s obvious that Russia can’t afford to be a bystander to the changing military and strategic balance of power in its backyard, especially since it has traditionally considered the region a strategic buffer against outside threats.

Russia’s main aim when dealing with Central Asia has been to safeguard its interests through political, economic and military means (the latter referring to military assistance for security purposes).

Russia has kept a close eye on the states it considers most critical, such as Kazakhstan. Kazakhstan is very important for Russia, both politically and economically. It’s the home of significant ex-Soviet defense/industrial facilities, including the Baikonur space launch complex (which recently renewed its lease for the next 50 years) and a nuclear weapons testing facility. Kazakhstan is also the biggest oil producer in Central Asia; being one of the providers that controls the means of transportation affords Russia tremendous strategic and economic leverage.

Another example of economic dependence is that Russia covers a lot of its needs for cotton with imports from Uzbekistan. It came as no surprise when it offered full support to President Islam Karimov of Uzbekistan when his old allies (the US and EU) decided that he was a long-term liability after his security forces brutally suppressed a rebellion in the city of Andijan on May 13, 2005.

Thus, Russia and Kazakhstan signed several economic and military agreements to “develop a wide-ranging security system that would tackle terrorism, weapons of mass destruction, narcotics trade and organized crime.”

Russia has also re-established its presence in Tajikistan in an effort to “guarantee Russian investments and overall stability in the region.” It must be noted that when Tajikistan won independence from the Soviet Union, it fell into civil war between ruling elites and Islamists; the war lasted from 1992 to 1997. As a result, Russia has been traditionally seen as a stabilizing force for the government. Currently, Russia garrisons the 201st Motorized Rifle Division in the country and helps patrol Tajikistan's border with Afghanistan. And the Russians are operating a new air base within Tajikistan’s borders.

Russia has also developed significant military and economic ties with Kyrgyzstan, expanding its military base near the city of Kant in October 2003 in order to provide “security for Kyrgyzstan.” The base is located 30 km from Manas, where the US--though it’s strictly prohibited from offering security services to the country--operates its own base.

© 2006 Yiannis G. Mostrous
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