Chabahar and Gwadar: Opportunities and Challenges

Spearhead Analysis – 17.04.2017

By Shirin Naseer
Research Analyst, Spearhead Research

China has relentlessly used economic pacts to serve its strategic objectives. While benefitting from the economic advantages of Chinese pacts, states have also been fearful of China’s potential demographic and cultural clout. These economic pacts have brought foreign investment on the one hand and on the other, have also allowed China to expand its regional power.

With the “One Belt, One Road” initiative (OBOR) and the Asian Infrastructure Investment Bank (AIIB) China has successfully increased its influence in South and Central Asia’s regional affairs. It is said that Gwadar will only be used for commercial purposes, but there is a high likelihood of the port developing into a military naval base, expanding China’s geostrategic sway.

Infrastructural investment is a tried and tested policy method for states to increase control and influence in other regions.

The China-Pakistan Economic Corridor, a massive $46 billion bilateral development project between Pakistan and China, is particularly significant to China’s regional interests. Granting itself access to Pakistani ports, the resulting foreign direct investment can ease the devaluation of the renminbi. With the drop in the renminbi China hopes to increase low wage jobs abroad and lower the risks associated with financial reforms in the future. CPEC also promises access to the Indian Ocean and provides Chinese industries a way to relieve industrial overcapacity, create industrial growth abroad and reinforce influence and ownership of assets in other countries.

Of course, China is not the only power seeking strategic preeminence in the South and Central Asian regions; there’s Russia and also Iran, with the Chabahar port bearing an uncanny resemblance to Gwadar.

Officials in Iran and Pakistan have stressed that Gwadar and Chabahar are going to be “sister ports”, yet the strategic rationale behind Chabahar fails to convince.

Pakistan has put a transit blockade on Indian goods passing through its territory. As a response, Afghanistan banned the Pakistani transit for trucking goods passing through Afghan territory. This only makes it more difficult to imagine any positive development in the Pakistan-Tajikistan regional rail connectivity plan which will also have to pass through Afghanistan.

So, the Chabahar port is an alternative means for India to exercise its ambitions in the region and further its role in the Afghan conflict.

As the two ports develop, Chabahar and Gwadar also allow insight into Russia’s place in present-day geopolitics. There is Russia’s relationship with China: a difficult partnership, due to conflicting regional interests, that has of late gained major grounds in political and economic cooperation; Russia is balancing this bilateral relationship with its relationship with Iran and long-term ally India, which is no easy task.

In Iran-Russia relations the political relationship has taken precedence over the economic relationship.

Both countries seek to limit US influence in the Middle East. Rhetorically as well as practically, Russia and Iran have laid the foundation for more trade, signing energy and banking agreements as well as pursuing work on the North-South Transport Corridor. Largely, the Caspian has brought the two closer together. Russia has sold the majority stakes of two ports in Dagestani capital Makhachkala and Astrakhan to Iranian firms. Iran has been working to seize a greater share of the Caspian trade and prevent Azerbaijan from dominating East-West transit of goods in the Caspian. Lukoil — Russia’s leading firm in Iran and the Caspian — also plans to invest around $8.5 billion into Caspian fields, which is expected to transit Iran to Asian markets.

Earlier in March, the Russian Energy Minister Alexander Novak announced that Iran and the Eurasian Economic Union (EEU) will sign a free trade agreement (FTA) by the end of the month. However, no significant progress has been made in this regard. Any such FTA, if signed, will also, to the advantage of Russia, build pressure in the ongoing FTA talks between EEU representatives and India.

Despite China’s obvious regional edge over Russia, in terms of both its financial and economic capabilities, Lukoil was the first oil and gas company to invest in Iran. Iran is trying to locally source production for arms by pursuing joint ventures and licensing products. However, Russia’s arms industry is working even more diligently to secure a market share in Iran before China can have its exports compete in the market, thereby producing pathway dependencies in Iran, similar to those found in the Indian military.

Between Russia, Iran and India the Chabahar port will play a crucial role in deciding the tone of future trade and will hold both political and economic implications for Central and South Asia.

Now, where does Pakistan figure in all of this?

Russia has made some efforts to increase arms sales and hold military exercises to improve ties with Pakistan. Smaller attempts have also been made to encourage investment and trade between Punjab and Tatarstan. However, Russia’s economic interests in Pakistan remain vacillating, at best, between the need to increase Russia’s influence in Asia, and the need to step back due to the challenges involved in resolving the Afghan conflict.

Russia in 2015 agreed to build and possibly run a $2 billion gas pipeline in Pakistan, however, Russian businessmen feel restricted due to unfamiliarity with the local market, a lack of financing and limited areas of competitive advantage. Pakistan has asked Russia to further reduce the price of liquefied natural gas (LNG) that will be pumped through the North-South pipeline. While negotiations are currently ongoing Pakistan has also used the threat of competition with Qatar as a bargaining chip to strike a favorable deal on the tolling fees with Russia.

Even though Pakistan has offered its Gwadar port as a transit point for Russian exports and imports, Russia is unlikely to take it up on the offer.

Rosneft, a leading Russian oil company, now owns the Gujarati port of Vadinar which means Russian crude oil will not have to travel to Pakistan. The way in which Russia was granted access to the Gujarati port remains unclear as the Kremlin continues to evade the question; perhaps because a clear answer could risk Russia’s balancing act between its fairly new relationship with Pakistan and its long-standing and much more significant relationship with India.

China has firmly established itself in Pakistan, both in terms of energy investment and arms export. So, Russia’s economic interest in Pakistan is, to say the least, limited.

The need to improve outreach to the Taliban has provided reason for Russia to actively hype engagement with Pakistan and better political ties with the country. But until Tajikistan joins the EEU and transit through Pakistan and Afghanistan to India is allowed, a deeper commitment to improving ties is unlikely to materialize.

At this point Russia is playing multiple sides; China’s investment in Pakistan has added to the animosity between India and Pakistan. Russia has adopted a strategy of using ‘energy and weapons’ as policy instruments to extend its regional influence. Russia’s approach to CPEC is inconsistent as it competes with China where the opportunity presents itself and supports it otherwise as a Russia-Pakistan-China alliance emerges.

Despite the assertion that the two ports have no political agendas, it is clear that whether it is Gwadar or Chabahar, there will be regional winners and losers as a consequence of their development.