Global Trade Multipliers: A revised economic paradigm to expand Westwards!

Much has been written on the competition between China and India in their ambition to expand their respective economic power bases, win larger market shares through operational efficiency; innovation; and rebalancing to take on currency wars as the EU waddles and the once mighty U.S. reassesses its position in a multi-polar world.

The excerpt that follows is a summation [from a more detailed strategy paper] of how the opening up of 2 seemingly competing 'silk roads' will fuel the economies of not just the key proponents but also create significant investment and trade opportunities within the SouthWest Asian and Eurasian countries.

All these countries have yet to experience the full throttle in growth which had not been on offer as they were primarily concerned with regional and internal security, since they lay in the main theatre of military and political conflict post the end of the Cold War.

I envisage significant opportunities for investors on the back of the 2 trade bloc 'projects' which seemed to be mired in geo-political rhetoric, when in fact they are not at odds with each other but instead should be viewed more constructively from a trade proponent's perspective.

Security and sovereignty are at the heart of the 'projects' - but a region with 3 billion inhabitants will always have some form of conflict and threat thereof.

Where there is risk and threat, there is opportunity!

We are well into the prologue in the new Great Game - the players are largely the same as in the Cold War but this time around the key proponents are the ones who were previously the 'client states'.

Alliances are purely economically incentivised, and hence have morphed in accordance with the requirements of the indigenous nation states that will be emboldened in the wake of the new world order that is rising from the East.

The key proponents here are China (GDP: 10.3 Trillion / YoY growth: 6.7%) and India (GDP: 2.1 Trillion / YoY growth: 7.3%).

After years of double digit growth at break neck speed as a controlled economy, China is slowing down and consolidating - resulting in gradual devaluation of the CNY to maintain market shares and strengthen it's economic clout after becoming part of the SDR; export of capital to secure real assets in hard currency abroad; redeployment of capacity and human capital in the international arena.

India is the world's largest democracy and with it comes turbulence and political instability that seems to be a drag on growth. It is now shifting gears and is dedicated to the preposition that she needs to expand it's economic might across the region by exporting more services and products while also opening up the capital and consumer markets within the country to international players who can help fuel multi-year growth at sustainable 7-8% level while building up it's infrastructure. If she were a controlled eco-political setup akin to China, the GDP would be a multiple of the current given it's strategic location, multilingual and young population, and changing dynamics with the EU and U.S. 

Corporates from both countries have been active in the international M&A arena through selective and timely purchases of real assets ranging from energy to hospitality to automotive to industrials.

The associated (read allied) players behind these two proponents have multi-layered connections at tactical levels with each other but are now going to firmly stand behind a selected proponent.

In this region, Pakistan has emerged as China's sole ally with GCC energy providers as the next regional latch. The $46 billion China Pakistan Economic Corridor (CPEC) is testament to this new realignment as the U.S. pulls back from it's historical position of using Pakistan as it's key regional instrument.

Given the historical animosity between the two regional nuclear powers (India and Pakistan) since they gained independence from Great Britain in 1947, energy starved India has spent decades to try and access energy rich Central Asia but with little success given Pakistan's strategic position that buffered India's expansion.

Diplomatically, India achieved what it could not through decades of attrition with Pakistan - she tied the knot with it's old ally Afghanistan and new found love Iran this week through the Trilateral Agreement reached over the $20 billion Chabahar Transit Trade Accords under which 12 MoUs have been penned.

Game on!

At prima facie it seems as if it is all (or only) about geo-politics to curtail Chinese expansion towards the Arabian Sea given the U.S. is exerting pressure on Pakistan through bullying and provocation (drone strikes deep inside Pakistani sovereign territory; purported discord over sale of military equipment; political intrigue, etc.).

Needless to say, the thawing of U.S.-India relations over the past 2 years with the backdrop to enhance cooperation on military as well as economic and energy related ties speaks volumes in itself as bilateral trade volumes exceeded $103 billion in 2015 and are being pushed to rise to the $500 billion target. PM Modi's trip in June 2016 to the U.S. and his address to the joint session of the U.S. Congress will add to the realignment of the world order as India's old ally (Russia) is becoming less significant as a military power and is reeling from the slump in it's export receipts from it's primary produce (i.e.  energy products and metals) as global growth has slowed down and Chinese off-take is depressed. 

The lifting of sanctions by the U.S. on Iran was brokered [in part] through India, for which Iran seems obligated towards it's new sweetheart that is willing to put it's money behind the phased reopening of the gateway to Central Asia.

Afghanistan has generally had strong ties with India as both countries have a determined common opinion to keep Pakistan at bay. For it's support in countering Pakistan, Afghanistan has and will continue to receive economic benefits from India in the form of redeveloping infrastructure which will be used by the trilateral partners (Iran-Afghanistan-India) as the transit routes.   

What's in it for the key proponents?

CPEC provides China a short cut to western markets - instead of circumnavigating 12,000 km from it's Eastern seaports all the way around south Asia to the GCC states or up the Suez Canal to Europe, she can transport goods along the 2,500 km land route from Western China (3,900 km from Eastern seaports) to the deep sea port of Gwadar [in Pakistan] at the mouth of the Arabian Sea including all the oil products that would be pumped by pipelines from terminals in Gwadar to China.  

Overall, China is expected to have an economic boon from this 'short cut' of over $250 billion due to 85% time saving while distance is reduced by 80% and cost of transportation declines by 75%!

In the process, bilateral trade volumes with Pakistan will increase to $20 billion by 2020 from current $12 billion, create 700,000 jobs in Pakistan and add upto 2.5% to nominal GDP.

The objective for India from the Chabahar Transit is to open up the North-South Transport Corridor (NSTC) to Eurasia and Europe and in the process maintain a geo-strategic role at the choke point of the Persian Gulf.

Economic benefit to India as the key proponent of the Chabahar Transit route is expected to exceed $500 billion from trade through Afghanistan to Central Asia/Eurasia.

One can see the numbers adding up for India from bilateral trade with counter parts such as Kazakhstan (currently under $ 1 billion compared to China's $ 22.5 billion) and Uzbekistan (currently $ 315 million compared to China's 4.7 billion) given direct benefit of accessing the land locked countries via the proposed route.

Japan has thrown it's weight behind India by offering to provide financing to several Iran based projects on the back of the Trilateral Agreement. Japan will also use the Chabahar transit hub when it transports goods to Central Asia and back via Indian ports (Kandla and Mumbai which are 550 and 790 nautical miles from Chabahar).    

As part of the Trilateral Agreement (and associated accords), Iran's bilateral trade with India will multiply from it's current $9 billion. Furthermore, India is prepared to invest $20 billion in energy, petrochemical and urea plants alongside the Chabahar port.

Chabahar has been on India's foreign policy agenda since 2003 when Manmohan Singh held back from circumventing U.S. sanctions on Iran at the height of the 'War on Terror' that was being waged in the Afghan & Iraq theatres.

India will invest $ 500 million on Chabahar related projects including direct investment of $ 85 million and credit facilities of $ 150 million from EXIM Bank of India to the Iran Ports & Maritime Organisation to develop 2 terminals and 5 multi-cargo berths at Chabahar Special Economic Zone (SEZ) and for India Ports Global Pvt Ltd. to operate the port facilities for a 10 year period with the right to extend the arrangement by mutual consent. Currently, Bandar Abbas handles 85% of Iran's sea borne trade and is heavily congested with capacity constraints. Chabahar's ability to handle larger ships [of over 100,000 MT] will have it's capacity increased from it's current 2.5 million MT p.a. to over 12.5 million MT p.a. 

The SEZ will be home to a LNG plant and gas cracker to be setup by India. Furthermore, an ammonia/urea fertiliser plant is to be setup jointly by India and Iran at the SEZ which is expected to be fueled by the offshore Farhad B gas field that was discovered by India's ONGC Videsh in 2012 and is estimated to have 21.68 TCF of gas reserves. The long-term off-take of the urea fertiliser will be under agreement with India which has a perpetual and growing requirement. 

Chabahar will primarily be a launchpad for India into Afghanistan and beyond into Central Asia. For this to materialise, India has penned an agreement with Iran under which India will lay a modern 500 km rail line between Chabahar and Zahedan near the Iran-Afghan border. Across the border in Afghanistan lies Zaranj; India's BRO funded and completed (as part of it's $750 million aid package to Afghanistan) the $100 million 217 km highway that link's the border town of Zaranj to the 2,100 km Afghan Ring Road at it's southern point in Delaram. This allows a direct highroad access to eastern Turkmenistan, Uzbekistan and Tajikistan on the northern links which will help India (and by association it's strategic partners Iran, Afghanistan and Japan) access the energy rich Central Asian Republics.

Furthermore, mineral rich Afghanistan will be able to work jointly with regional partners in extracting and monetising the untapped industrial and precious metals [as well as gems] which are estimated to be worth over $ 1 trillion but are trapped due to continual military conflict.

Besides offsetting the $6.5 billion oil debt to Iran, India is also set to arrange (with Japanese backing) a $ 4.4 billion credit line to Iran to import steel rails for the infrastructure projects.

Access to markets in Kazakhstan, Russia and ultimately Europe would be through the eastern route of the NSTC via western Turkmenistan. Iran has agreed for India's IRCON to build the $ 1.6 billion 90 km rail line from Chabahar to Mashad (the second largest city in Iran) which lies in the southern region of the Caspian Sea and is also the gateway to the Turkmen capital of Ashgabat just 285 km away. The western route of the NSTC will be developed separately by Iran between Chabahar and Tehran and onwards northwest along the western shore of the Caspian Sea to the Caucasus and into Russia. 

Where there is Risk therein lies Opportunity..

These are the Global Trade Multipliers - each link and milestone in the silk road corridors will generate exponential growth and the cumulative effect would be explosive for Global Trade volumes over the next 2 decades as regional centricity and cohesion arising from trade links propels local markets.  

There are opportunities all along the 2 silk roads for investors - ranging from vendor sectors that will service the industries and infrastructure to consumer markets opening up in the wake of the projects across South & Central Asia. Banking and insurance services will propel trade and consumer demand supported by the New Development Bank which seems to be keen to underwrite BRICS centric projects.  

Timeline for the 2 silk road corridors (CPEC and Chabahar Transit link) may be competing geo-politically but in themselves they are complementary to the growth of not just the main stake holders (China and India) but all the regional economies who will have efficient access to larger and varied trading partners.

These corridors are already creating positive sentiment within the regional investors and consumers who are keen to invest into their local economies as they will be experiencing exponential growth due to the transit opportunities.

International investors and business houses have a clear opportunity to explore frontier markets through the largely untapped sectors in the corridor countries rather than taking only the equity portfolio investment route offered by select Frontier Markets asset managers.

The best way to tap into these explosive opportunities that I know [and encourage my other principals] is to visit the corridors and meet the local counter parts. This allows you to access the multi-facetted risks and anomalies in each market (as they are all unique) and determine the risk/reward metrics that suits you - I can assure you that it will far outstrip any return you can generate from a similar business in a non-transit nation.

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{Gratitude for data and visuals to multiple sources}