A $75.3 million dollar Asian Development Bank (ADB) loan to Uzbekistan, approved in December 2007, to upgrade an important Central Asian highway, is recent step in the recreation of the Silk Road.¹  Just one month earlier, eight Central Asian area countries and the ADB committed $18 billion dollars to improve regional transportation services and infrastructure that will connect the Central Asia to Europe. Active 2000 years ago, the original Silk Road connected China and Central Asia through the trade of silk, spices, and other commodities. Today’s Silk Road covers many of the same regions and still involves commodities, but energy and geopolitics pervade its mission. Despite the time difference, both Silk Roads aim to improve the lives of its citizens and help this region develop economically. Many parties are trying to adapt this romantic concept to today’s realities.

China is one of the few developing countries to successfully lift millions of its citizens from poverty by attracting foreign investment and providing cheap labor that fuels economic growth internally and worldwide. Its appetite for energy knows no bounds as it scours the earth for fuel, as well as minerals and basic commodities needed to industrialize its economy.  Yet its neighbors in Central Asia, whom happen to have many needed natural resources, including oil and natural gas, as well as an educated workforce remaining from the Soviet era investment in Space and Nuclear research facilities in the region, have to yet to truly benefit from China’s rise.

There are many barriers preventing Central Asia from attracting foreign investment and taking advantage of its resources, including

• Inadequate infrastructure, such as old and outdated rail tracks preventing long-term growth in the rail system and  only one major, paved regional highway that links Uzbekistan and Kazakhstan and other roads that were not build to handle a large volume of trucks;
• Inward-looking trade policies, such as export taxes on goods shipped to other countries, import quotas, export licensing, and transportation restrictions;
• No modern banking mechanisms;²  
• Weak governance with corrupt bureaucracies (for example some say that 80 percent of Khazakstan’s economy is controlled by an extended clan of President Nazarbaev );³  and 
• Culture of bribe-seeking amongst the military, police, and border officials.

Addressing these barriers will help intraregional trade as well as attract foreign investors. The ADB is beginning to fund infrastructure projects, human development project to improve education, health and nutrition; water use management; and trade and investment facilitation to improve the policy environment, political institutions, information flow, and capacity building.⁴

Additionally, the ADB recommends that Central Asia strengthen inter-regional trade in products such as natural gas, electricity, fruits and vegetables, wheat, wool, clothing, and minerals. The proximity to China and the region’s position at the crossroads of Europe makes their energy resources extremely attractive. Tajikistan has the potential to provide hydro-electric power; Uzbekistan has natural gas; and, Kazakhstan and Xinjiang (China) have large supplies of oil and coal.⁵ In the coming years, Kazakhstan’s oil supply might even yield the same amount of oil as Iran.⁶ Kazakhstan’s oil is attracting interest from China, the U.S., and Europe.

Xinjiang (the “New Frontier”), an autonomous region of China, may play a crucial role in the new Silk Road as well. While, it has the same weaknesses as the rest of the region, i.e. vast deserts and security issues, it has a real potential for growth. Xinjiang has 11 international airports with connections to Central Asian countries and Russia. The region contains 30 percent of China’s land-based oil resources, 35 percent of its land-based natural gas, as well as gold. Agricultural products are also abundant in Xinjiang. There is a Sino-Kazakh oil pipeline, carrying nearly10 million gallons of crude oil per year, which begins in Shanghai, crosses Xinjiang and travels thru the region.⁷  

One of the other ways to actualize the potential of the region is to attract foreign investment. Middle Eastern governments and investors have expressed a lot of interest in the region. The Gulf Cooperation Council (GCC) has invested money in real estate, banking, and infrastructure projects throughout Asia.  Sovereign Wealth Funds, such as the Kuwait Investment Authority has doubled its investments in Asia from 2005 to 2007.⁸  Saudi investors, lead by Prince Alwaleed bin Talal, bought a $2 million stake in China’s 2nd largest state-owned bank.  Gulf investors, with a collective $300 billion in assets, are shifting their portfolio asset allocation to Asia by 10 to 30 percent. ⁹

Another institution, the Shanghai Cooperation Organization (SCO), is also playing a key role in the revival of the Silk Road.  The SCO consists of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan; Iran, Pakistan, and India belong as observers.  The SCO was originally was originally formed to deal with security issues in Xinjiang and Central Asia, such as combating Ughur fighters seeking an independent Xinjiang. Now the SCO is dealing with regional economic growth and increasing political power. (In 2005, the SCO was responsible for the withdrawal of U.S. military bases from Uzbekistan.) Seeing itself as an alternative to the U.S. and the EU, the SCO has started training programs, and economic and humanitarian assistance programs.¹⁰ 

A third player in the region that is exerting much influence is Russia. Russian energy companies, Lukoil and Gasprom, have developed and gotten the rights for 35 years to Uzbekistan’s Khauzak natural gas field, which is estimated to hold 400 billion cubic meters of natural gas. Since the deal was made in 2005, Uzbekistan has become pro-Russian in its politics and has shut out Western oil producers from its country.¹¹

Russia’s Lukoil though has joined the China National Petroleum Corporation, Petronas of Malaysia and the Korea National Oil Company to explore other natural gas deposits in the region, such as in the Aral Sea, located on the borders of Uzbekistan and Kazakhstan. The U.S. and Europe still have stakes in the region and hold the rights to other natural gas and oil fields; nonetheless, Russia not only offers financial support, but also political support in case of domestic uprising that would lead to regime change (the U.S. cannot offer similar guarantees).¹² 

The stakes are high in this region. Increasing energy prices are drawing the interest of many players. Central Asia must keep in mind that it also needs to develop its human capital, if it hopes to create a sustainable, diverse economy. The ADB and the SCO can provide key financing and vision for improving the human capital as well as the physical infrastructure, which will unlock the region’s potential. Globalization will hopefully bring a new and improved Silk Road for the 21st century.