The signature infrastructure project of Kyrgyzstan’s new leadership is a 268 kilometer railroad line that would link China with Kyrgyzstan’s southern provinces and Uzbekistan. President Atambayev insists that Kyrgyzstan would profit greatly from inter-regional transit trade if the US$ 2 billion-plus line were built. Restrictions on Kyrgyzstan’s once lucrative practice of re-exporting Chinese goods to Russia and Kazakhstan have been increasingly curtailed by new Customs Union rules, leaving Bishkek searching for new sources of national income and employment. While the railroad would lower the costs for traders, its price tag in both monetary and political terms will not be insignificant.

BACKGROUND: The railroad would traverse and tunnel from China’s far western rail terminus at Kashi (Kashgar) to the Kyrgyz-Uzbek border town and trade hub at Kara-Suu, 20 kilometers north of Osh. The new line would then connect with Fergana Valley’s existing railroad network, which links the region’s major cities and the GM Uzbekistan plant in Asaka.

Kyrgyzstan’s railroad network remains the paltriest in the former Soviet Union. This reflects the country’s historic place at the edge of an insular empire, rather than the economic bridge between states that the country’s leaders have envisioned since independence. It consists of a single northern spur that links Bishkek and Balykchy to southern Kazakhstan’s main line, and a few short diversions to southern Kyrgyzstan’s major towns from Uzbekistan’s main Fergana Valley lines. At times, Kyrgyz authorities have suggested the project would also include a second costly phase linking the new line with the northern spur at Balykchy.

The proposal dates back to at least President Askar Akaev’s regime in 1996, and was revived several times under his successor, Kurmanbek Bakiev. Cost estimates ballooned with each successive reintroduction of the project, with the latest at US$ 2 billion. Cash-strapped Bishkek would have no hope of financing a project valued at over 40 percent of one year’s GDP. After visiting China in April 2011, Prime Minister Babanov (then Deputy Prime Minister) suggested that the deal would be signed in a matter of months, with only the site of the transfer station and the source of funding left to be resolved. Kyrgyzstan’s railroads are set at Russian wide gauge, while China’s are standard gauge. Thus, a wagon transfer station would be required at some point along the route.

Financing has been the more salient problem. In late 2011, Babanov floated the idea that mineral concessions would be offered in exchange for the railroad, as both previous regimes had suggested. Both of those regimes were discredited by public perceptions that the authorities were selling off the country to foreign interests, and this proposal has been denounced by rival politicians, nationalists, and activists. By early 2012, Atambayev appeared to back off; contradicting Babanov by claiming the government had no intention of dealing minerals for infrastructure. Instead he seemed to contradict himself by suggesting China, not Kyrgyzstan, would profit from operating the railroad to recoup its investment.

Nearly a year later, it is unclear what progress has been made. Opponents are decrying the lack of transparency in the negotiations and proposing alternatives. A nebulous German-Kyrgyz joint enterprise proposed in March 2012 to build both lines for 2 billion Euros (US$ 2.64 billion), without mineral concessions, if certain taxes and customs duties were waived and the group could operate the lines to recoup its investments. It is unclear whether this is a serious offer, or a political diversion.

IMPLICATIONS: Kyrgyzstan’s business community is largely behind the project, assuming decent terms are won. Traders currently face myriad costs and complications when importing goods on existing railroads that transit neighboring countries. The new connection would allow traders to deal with Uzbek and Chinese railroads directly, cutting out their Kazakh counterpart. As the customs regimes and state rail companies of all Kyrgyzstan’s neighbors are corrupt and bureaucratic, they would welcome the removal of extra players from the rail trade system.

Grandiose prognoses have been made by three successive presidents on the potential of this railroad, but no comprehensive public research has been undertaken to assess this rhetoric. International studies generally find rail freight costs to be 10 percent of road freight costs. But unreliable data within the region makes economic feasibility analysis nearly impossible. Due to the high proportion of black market trade between China and Kyrgyzstan, estimates of Chinese imports varied from US$ 2-10 billion in 2009. Without clearer cost or demand estimates, it remains difficult to evaluate the government’s publicly stated timeline of 12 years to recoup investment costs. It could be about right, or entirely inaccurate.

Nor have other options been seriously considered. Significant freight truck traffic already traverses all the routes in question, and modest improvements in multimodal container sorting terminals, roads, and vehicles may be a more competitive alternative. Such investments could be made without the political risks inherent in concessionary agreements. International donor projects have encouraged further exploration of the multimodal corridors option, though the host government has demonstrated little interest.

Advocates for the project tout that the new route would shorten the distance between China and Europe by 1000 kilometers, though adding two more corrupt and bureaucratic countries (Kyrgyzstan and Uzbekistan) to the list that freight trains must transit may prove more costly than a few extra days in transit. Uzbekistan also shuts its land borders unpredictably and often for extended intervals, including almost the entire period from April 2010 to October 2011.

Atambayev may also be wary of fueling public discontent and the nationalist opposition over corruption or opacity. Though Kyrgyzstan depends on China for cheap imports, anti-Chinese sentiments are common amongst the population. Such expensive projects often wildly enrich those involved in brokering a deal. Those elites whose personal interests are not reflected in the final deal are likely to be quite displeased. Kyrgyzstan’s Minister of Economy maintains the project would create 13,500 jobs, though it remains unclear how many of these would be citizens of Kyrgyzstan. Chinese companies are well-known for importing Chinese labor; a fact that will be repeated by Atambayev’s and Babanov’s political opponents if a deal with a Chinese firm is struck.

The transfer station’s location apparently remains a barrier as well. It would be to China’s economic and geopolitical advantage to operate its trains on its gauge all the way to the Fergana Valley. This may have prompted Kyrgyzstan to propose siting the transfer station just across the mountainous, largely uninhabited border. If Kyrgyzstan indeed wants to connect its internal rail lines through this project, situating the transfer station on the Chinese border would be vital. Babanov’s statement that its location remained an issue suggests that China is less interested in the north-south connection.

While they have made little public noise to this effect, Russia and Kazakhstan may be quietly stifling the entire project, as it would weaken their control over Central Asia’s trade with China. Kazakhstan is already improving its own rail connections with China to absorb excess demand, and Russia does not want Kyrgyzstan to become a transit country for Chinese goods yet again.

CONCLUSIONS: After fifteen years of talk, the Atambayev regime may yet succeed where its predecessors failed. Perhaps more significantly, his government clearly is seeking to developing links both with Russia and Kazakhstan, and with China. Whether or not the railroad is ever built, China will continue to play a crucial role in Kyrgyzstan’s economy. Kyrgyzstan needs low-cost imports from China to keep inflation down. Economists and businesses in Bishkek fear that joining the Customs Union as Atambayev intends will drive up prices. Improving the trade route to China may mitigate this risk somewhat. No less important is Kyrgyzstan’s access to Kazakhstan and Russia for its exports of textiles, food products, and migrant labor. While these countries could veto the project if they wished, their interest in a stable Kyrgyzstan may trump competing domestic interests in the end.

The fact that public discontent with corruption helped facilitate the collapse of two previous regimes may also weigh on the minds of Atambayev’s team. Any demonstrably corrupt deal could quickly delegitimize the new President. How this issue gets settled could signal the government’s success or failure in breaking from the country’s legacy of corrupt governance. The project may indeed prove to be worth its price in mining concessions, particularly considering Kyrgyzstan’s struggles to attract foreign direct investment to the industry. After all, there is little value to anyone in an unexploited mineral deposit.

AUTHOR’S BIO: Myles G. Smith is an analyst and consultant based in Central Asia.