Railway Infrastructure

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RESEARCH & KNOWLEDGE MANAGEMENT

RAILWAY INFRASTRUCTURE

“Upside Transit Potential”

5 SEPTEMBER 2016

Railroad infrastructure Table of content

1. Key highlights 3

2. Railway Industry overview in Kazakhstan 5

3. Railroad Infrastructure 6

4. Key railroad infrastructure projects 7

4.1 Arkalyk-Shubarkol 8

4.2 Zhezkazgan-Beineu 8

4.3 Zhetygen-Khorgas 9

4.4 Uzen –the border with Turkmenistan 9

5. International railway corridors 10

6. Special Economic Zones 11

7. Role of Kazakhstan in the Silk Road Economic Belt 13

8. Transit potential of Kazakhstan 14

8.1 Review of cargo flow between China and Europe 14

5.3 Transit volumes in Kazakhstan 16

9. Conclusion 17

REFER TO DISCLAIMER & DISCLOSURES AT THE END OF THIS PUBLICATION

Railroad infrastructure 1. Key highlights  Kazakhstan is characterized by significant distances between population centres and suppliers of raw materials and their intermediate or end customers. The railway system is the key mode of transportation in Kazakhstan with an operational length of over 14,767 km, making it the third largest rail network among CIS countries after Russian and Ukraine in terms of track length. However the density of Kazakhstan’s track network is lower (5.5km per 1,000 km2) compared to Ukraine’s (35.9km) and roughly at the same level as Russia’s (5.5km).

Freight turnover structure by means of transport, bln ton-km (2011-2015)

600 500 400 300 200 100 0 2011 2012 2013 2014 2015

Rail Auto Pipleine Inland water and marine Air

Source: Agency of Statistics, Samruk-Kazyna

 Transportation sector plays an important role in country’s economy due to its commodity-based orientation, and immense territory. Rail transport is the basis of the national transport system, comprising about 46% of country’s overall freight turnover in 2015 (236bln ton-km), while automobile transport accounted for 31%, pipeline transport - 23%, air and water transport - 0.3%. The country’s freight turnover highly depends on the GDP level, which is explained by high dependence of economy on natural resources.

Annual GDP growth and KTZ’s freight turnover growth (2011-2015)

20% 16% 12% 8% 4% 0% 2011 2012 2013 2014 2015 -4% GDP growth Freight turnover Source: Agency of statistics, Samruk-Kazyna

 The development of infrastructure is one of the crucial task for the Kazakh government, as it significantly affects its trade, promotes economic growth and employment, and increases Eurasian transit freight transportation. The infrastructure development is the core of "Nurly Zhol" government program for 2015-2019, initiated by the president of Kazakhstan in 2014. The development of transit potential is identified as a key objective of the national transport policy in accordance with the Kazakhstan-2050 Strategy and the State Program for the Development and Integration of Transport Infrastructure until 2020. The policy also specifies transit traffic as

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the crucial indicator of the transport system’s development and its integration into the global system.

Railway projects under Nurly-Zhol program, KZT bln Railway projects 2015 2016 Construction of the 2nd line of Almaty-1 -Shu 8.3 19.4 Construction of railway line Borzhakty -Ersai 6.7 - Construction of ferry crossing at Kuryk port 4.8 7 Source: Nurly-Zhol program, Samruk Kazyna

 Implementation of transport plans and strategies have resulted in improved connectivity within the region and new links to other countries. Zhezkazgan-Beineu and Arkalyk-Shubarkol rail links in Kazakhstan completed at a cost of USD2.7bln. The section between Shalkar and Beineu alone reduces the transport distance between China and Europe by more than 1,000km. Kazakhstan has set up an international logistics centers for intermodal freight transport on the border with China, and invested heavily in the Aktau port complex on the Caspian Sea. It opened a second border crossing with China at Khorgas, complementing the Dostyk/Alashankou crossing.

 The geographic and geo-economic location of Kazakhstan gives a significant strategic potential for freight transit. The country’s total potential capacity is estimated about 32mln tons. Now, Kazakhstan is handling only half of their potential cargo flow. Rail transport accounts for the largest share of transit in Kazakhstan. Revenues from transit exceeded USD700mln. With China’s increased integration into the system of Eurasian surface transport and trade along the economic routes of the Great Silk Way, the volume of goods transited through Kazakhstan to Central Asia and Europe is expected to grow further. Trade between the EU and China will reach USD800bln or 170mln tons within the next few years. Trans-Kazakhstan railway roads should raise freight traffic between China and the European Union up to 10mln tons.

Transit traffic, mln tons (2007-2020f) 2008 2009 2010 2011 2012 2013 2014 2020f Kazakhstan 16 15 14 15 16 - 16 32 Source: OSJD, EDB, Samruk-Kazyna

 The huge potential presented by land routes from China through Central Asia to Europe is not being utilized. Kazakhstan is not making the most of its transit potential. In 2015, the total volume of transit cargoes carried through Kazakhstan along the Europe-Asia route was about 47,400 TEUs, while the Suez Canal marine cargo flow during the same period amounted to a staggering 14.6mln TEUs. Only 0.3% of the cargo transported between the EU and China utilizes Kazakhstan’s international transport corridors. Trans-Kazakhstan railway roads should raise freight traffic between China and the European Union up to 10mln tons.

Railroad infrastructure 2. Railroad industry overview in Kazakhstan Kazakhstan is characterized by significant distances both between population centres and between suppliers of raw materials and their intermediate or end customers. The railway system is the key mode of transportation in Kazakhstan with an operational length of over 14,767km, making it the third largest rail network among CIS countries after Russian and Ukraine in terms of track length. However the density of Kazakhstan’s track network is lower (5.5km per 1,000 km2) compared to Ukraine’s (35.9km) and roughly at the same level as Russia’s (5.5km).

Transportation sector plays an important role in country’s economy because of its commodity-based orientation, and immense territory. Water transport accounts for only negligible part of the total freight turnover due to the country’s continental location. Automobile transport is not favorable for long distances due to high cost. Therefore, rail transport is the basis of the national transport system, comprising about 46% of country’s overall freight turnover in 2015 (236bln ton-km), while automobile transport accounted for 31%, pipeline transport 23%, air and water transport 0.3%. However, by the volume of transportation (ton) automobile transport exceeds rail transport by nine times. This is due to the short average distance of the transportation by automobile transport, 50km, compared to a rail transport, about 724km. In addition, technological inferiority is the reason of deterioration of the competitiveness of rail transport in comparison with others in both freight and passenger transportation segments.

Freight turnover structure by means of transport, bln ton-km (2011-2015)

600 500 400 300 200 100 0 2011 2012 2013 2014 2015

Rail Auto Pipleine Inland water and marine Air

Source: Agency of Statistics, Samruk-Kazyna

Investments in fixed assets in transportation sector amounted to KZT639mln in 2014, which was 34% lower than in 2013. Investments in pipeline and railroad transport accounted for 92% of the total investments in 2014. The data for 2015 and 2016 is not available yet. However, according to Kazakhstan Temir Zholy’s (KTZ) audited annual report, capital investments of the company amounted to KZT354bln and KZT209bln in 2014-2015, respectively, which were financed by the funds from the government, external debt, and internal funds. This implies that transportation sector optimizes its capital expenditures in the period of economic downturn.

Fixed asset investments by transport type, KZT mln (2010-2014) 2010 2011 2012 2013 2014 Railroad 99,451 218,654 253,054 243,085 205,799 Automobile 7,481 24,257 27,687 29,875 27,778 Pipeline 186,539 148,017 193,177 635,956 385,459 Inland water 30 13 8 1 22 Sea 7,539 20,030 1,409 2,965 4,719 5

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Air 9,244 10,298 19,866 51,288 15,559 Total investments 390,649 568,425 660,891 963,170 639,336 Source: Agency of statistics, Samruk-Kazyna

During last five years the country’s freight turnover increased gradually, reaching 512bln ton-km in 2015. The largest contributor to the growth was an automobile transport, its share rose from 27% in 2011 to 31% in 2015. The country’s freight turnover highly depends on the GDP level, which is explained by high dependence of economy on natural resources.

Annual GDP growth and KTZ’s freight turnover growth (2011-2015)

20% 16% 12% 8% 4% 0% 2011 2012 2013 2014 2015 -4% GDP growth Freight turnover Source: Agency of statistics, Samruk-Kazyna

Tariffs in the railroad sector rose significantly during 2010-2012 due to intensive investments requirements. Tariffs for accessing mainline railway network (MRN) are set and approved by the Agency of the Republic of Kazakhstan on regulation of natural monopoly (AREM). The MRN tariff (domestic, import and export) methodology is cost-plus, reimbursing all economically justified expenses arising from the provision of services and corresponding investments. Transit tariff

Freight transportation tariff indices (2010-2014) 2010 2011 2012 2013 2014 Railroad 119.1 121.5 114.8 101.7 105.7 Automobile 102.1 103.4 105.0 101.4 103.2 Pipeline 100.1 108.8 118.5 103.3 124.2 Inland water 164.9 114.7 104.5 100.4 103.1 Air 100.0 100.0 104.3 100.0 100.0 Source: Agency of statistic, Samruk-Kazyna

3. Railroad infrastructure Under article 13 of the law of the RK dated January 6, 2012 «On the national security of the Republic of Kazakhstan» the mainline railway network is the country’s strategic asset and is not subject to privatization. Kazakhstan Temir Zholy (KTZ) provides an access to private railway operators to the mainline railway network in accordance with tariff set by the Agency for Regulation of Natural Monopolies (AREM). KTZ is responsible for building, maintaining and modernizing railway system in Kazakhstan. The company is the only entity authorized to operate and manage the mainline railway track.

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The track network stretches over 14,767km, of which 4,216km are electrified, and only 4,900km is double - track railway. High share of single-track railway limits the capacity of additional freight turnover and significantly decrease the train speed, especially during high traffic density. High-speed lines with more than 250kmh are not available yet. There is also a progressive depreciation of mainline railway network. The most problem areas are: Aktogay - Shymkent, Aktogay - Beskol - Dostyk, Aktogay - Mointy, Petropavlovsk- Astana, Ozinki - Saryagash, Kandyagash – Makat, Makat - Nikeltau, Aktogay - Lokot, the border of the Russian Federation - Atyrau - Beineu, Iletsk - Zhaisan, Kyzylorda- Shieli.

Kazakhstan’s railway system consists of nine mainline railway networks and has 16 connection points with rail networks of neighboring countries, of which 11 are connected with Russia’s railway network, two with China’s and one with Kyrgyzstan, Uzbekistan and Turkmenistan, respectively. The majority of transport corridors have a north-south direction because most of railway lines were constructed during the period of Soviet Union. This implies interdependence between railway systems of Kazakhstan and Russia.

Mainline railway networks in Kazakhstan Freight Mainline network Brief Description turnover, Length ton-km Connects Western Kazakhstan to Aktau - Beineu - Makat - Kandyagash - the Kazakhstan-China border Arys - Lugovaya - Almaty - Aktogay - 29.6 4,121 through the southern regions of Dostyk Kazakhstan Connects the Kazakhstan-Russia Presnogorskaya - Kokshetau - Astana - border to the Kazakhstan-China 22.6 2,043 Dostyk border Connects Northern Kazakhstan to Petropavlovsk - Astana - Dostyk 19.9 1,902 the Kazakhstan-China border Connects Northern Kazakhstan to Tobol - Astana 14.4 665 Astana Iletsk - Aktobe - Kandyagash - Arys - Connects Russia to Southern 11.3 1,754 Saryagash Kazakhstan Connects Western Kazakhstan- Ozinki - Kandyagash - Aurs - Lugovaya Russia border to the Kazakhstan- 22.9 3,708 - Almaty - Aktogay - Dostyk China border Connects Southern Kazakhstan- Saryagash - Arys - Lugovaya - Aktogay Russia border to the Kazakhstan- 13.7 1,824 - Dostyk China border Connects Western Kazakhstan- Aksarayskaya - Makat - Beineu - Oasis Russia border to the Kazakhstan- 7 826 Uzbekistan border Connects Western Kazakhstan- Russia border to the northwest Makat - Kandyagash - Nickeltau 4.7 527 portion of the Kazakhstan-Russia border Source: Prospectus of KTZ, Samruk-Kazyna

4. Key railroad infrastructure projects Kazakhstan recognizes the importance of developing its infrastructure in order to adapt the railway system to meet international rail standards and transportation demand. Thus, it continues to invest in infrastructure and logistics to support economic growth and improve its transit potential. These include internal projects to promote regional growth as well as projects aimed at improving logistics and transit between major trading partners, such as China, Russia, the EU and Central Asian countries. 7

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The infrastructure development is the core of "Nurly Zhol" government program for 2015-2019, initiated by the president of Kazakhstan in 2014, which largely involves China's initiative "the economic belt of the Silk Road”. The National Fund allocated KZT46.3bn through targeted transfers to the national budget to finance projects in the railway industry and transport logistics.

As a part of Nurly-Zhol program, the government plans to connect transit hubs in the west and to eliminate narrow lines in the south in order to increase freight traffic domestically and freight turnover to Iran, Russia, China and EU. Specifically, it is planned to construct railway line Borzhakty-Ersai, ferry crossing at Kuryk port and second line with electrification Almaty-1 – Shu. Railway line Borzhakty-Ersai is expected to connect Kuryk port with main railway line and provide the traffic volume of 3.6mln of cargo in 2019.

The construction of the second track with electrification in the area Almaty-1 – Shu is expected to be completed in 2016 and to increase the efficiency of transportation, by increasing travelling speed, reducing travel time by 1.5 times and increasing freight capacity from 25mln tons to 80mln tons.

Railway projects under Nurly-Zhol program, KZT bln Railway projects 2015 2016 Construction of the 2nd line of Almaty-1 -Shu 8.3 19.4 Construction of railway line Borzhakty -Ersai 6.7 Construction of ferry crossing at Kuryk port 4.8 7 Source: Nurly-Zhol program, Samruk Kazyna

In order to develop international transport additional railway line were constructed, such as Uzen - the state border with Turkmenistan, which provides a direct route from the west of Kazakhstan to the Persian Gulf via Turkmenistan and Iran, and Zhetygen – Khorgas, the second crossing checkpoint at the Kazakh-Chinese border. In 2014, KTZ completed the construction of railway line, Arkalyk- Shubarkol, and part of the line Zhezkazgan-Beineu. The effects from launching these lines are expected to be a reduction of transportation costs by 10-30%, and delivery time by 1-3 days, and as consequence an increase of the country’s transit potential.

4.1 Arkalyk - Shubarkol In 2012, the construction of railway line Arkalyk – Shubarkol was started with a length of 214km. This provides an access to the fields in the central part of Kazakhstan, especially to coal deposits in Shubarkol and ore deposits and shorten the route in a northerly direction by 700km. New railway lines Zhezkazgan-Beineu and Arkalyk-Shubarkol cost of KZT500bln. According to KTZ, in 2015 the transportation volume in the both lines amounted to 10mln tons, which comprises 70% of planned volume in 2017.

4.2 Zhezkazgan - Beineu In 2012, KTZ started the construction of new railway line - Zhezkazgan-Beineu, which is 988km long. The main objective of the project is the continuation of the shortest rail route from central Kazakhstan to the Persian Gulf countries, which will create new industries in the region, allow to reduce tariffs for rail transportation and to reduce the transportation component of transported goods. The new road will significantly improve the socio-economic development of districts UlytauIrgiz, Aral, Shalkar Bayganin

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and Beineu. Because of launching these lines, the route of cargo traffic from the east to the west of the country will become 1,000km shorter.

Combined with the 400km highway between Aktau and Beineu and the expansion of the port of Aktau to handle cargo flows up to 25mln tons per year, these lines allow Kazakhstan to connect with such countries as Azerbaijan and Iran. In addition, construction of the ferry complex in Kuryk port (60km away from Aktau) will allow cargo shipment without unloading them from wagons. Project cost is KZT32bln and handling capacity will be four million tons of ferry cargo per year.

4.3 Zhetygen - Khorgas Zhetygen-Khorgas line was constructed to reduce the route from China to the port of Aktau on the banks of the Caspian Sea to 500km. The project cost amounted to KZT153bln. The length of the railway line is 293km. The government allocated KZT18.9bln to the construction of the railway from the republican budget in 2010. The project envisages the opening of 14 new separate items. The construction of new railway Zhetygen- Khorgas is an important step in the formation of the shortest rail lines from the border of China to the southern regions of Kazakhstan, Central Asia and the port of Aktau. It also provides the solution of the following key strategic objectives: empowerment of the implementation of the export potential of the country; creation of a second (along with the border crossings Dostyk) transit by land towards Europe - Asia on the territory of the Republic of Kazakhstan; significant reduction in the distance transportation of export and import cargoes.

Khorgos is five times bigger than Bishkek’s Dordoi, previously the largest Central Asian market, and is expected to redraw regional trade routes in favor of Kazakhstan. Direct railway that crosses the entire territory of Kazakhstan and reaches Iran is expected to additionally boost the country’s infrastructure. Cargo trains have already begun running from China to Iran through Kazakhstan and Astana is hoping to modernize its own available locomotives and repair 800km of rails. The project’s total cost amounts to USD2.7bln.

4.4 Uzen - the border with Turkmenistan In 2014, the new rail line between Uzen and the Turkmenistan border was opened, which connects Kazakhstan – Turkmenistan – Iran and is the eastern part of international corridor North-South. The freight transportation capacity of the line is estimated at 10mln tons. This facilitates the direct transportation between these countries by reducing the distance by more than 600km. It is also expected to provide an access to the Persian Gulf. The length of the rail line is 146km in Kazakhstan, 470km in Turkmenistan and 70km in Iran. The cost of construction amounted to USD430mln for Kazakhstan, USD371mln for Turkmenistan and USD106mln for Iran. Kazakh government allocated KZT11.1bln to the construction of the railway from the republican budget in 2010. Samruk-Kazyna made an additional contribution to the equity of KTZ totaling KZT20.8bln to fund the construction of two railway lines (Uzen –the Turkmenistan border, Khorgas-Zhetygen).

However, three countries have quite similar economic structure and thus low freight turnover. The direction Iran –Central Russia –Russian Siberia has more potential than the direction Iran - Kazakhstan. In the long-term, this route will interact with the East-west corridor, which connects Asia-Pacific region with Europe. In addition, it will take time to the new transcontinental communication system to begin to work.

Railroad infrastructure 5. International railway corridors Kazakhstan’s railway network held a number of international transport routes, formally included in the system of Euro-Asian land corridors. Sino-Kazakh transport corridor in the East-West from the sea port of Lianyungang (the eastern coast of China) through the border crossing Dostyk - Alashankou and the territory of Kazakhstan, with access to the road network in Russia takes a special place. Improvement of railway infrastructure in the corridors - a real step in the gradual increase of competitiveness of Kazakhstan's transport system in the Euro-Asian international transport routes.

Kazakhstan’s railway system forms part of five international transport corridors, which facilitate the delivery of freight between Asia and Europe.

International railway corridors International railway Description Characteristics Comments corridors The second most developed corridor and The total distance is China and Kazakhstan referred to as the “second 11,516km, 89% of use different gauges. This Eurasian overland bridge”. Northern Trans- which is double poses a major problem It runs from Lianyungang Asian railway tracked, 29% - since containerized through central and electrified. cargoes have to be northwest China, reloaded by crane. Kazakhstan and Russia to Western Europe. The different gauges It starts from Lianyungang The total distance is require transshipment at and passes through 10,989km, 10% of two points. The Iranian Southern Trans- Dostyk, Almaty, Tashkent, which is double part is single track and not Asian Railway Iran and Turkey before tracked, 46% - electrified. In Turkey, reaching the Mediterranean electrified. trains have to cross Lake and Black Sea ports. Van by ferry. This project includes Connects Eastern Europe Dostyk – Tashkent – Cargoes are shipped with Central Asia via Black Ashgabad – mainly from west to east, Sea, and Caucasus and Turkmenbashi – with mostly empty wagons Caspian Sea (Dostyk– Baku – Tbilisi - Poti travelling in the opposite TRACECA Almaty– Aktau, including route with sea ferry direction. This has a Zhexkazgan – Beineu, connections to negative effect on the Akhalkali (Georgia) – Kars Odessa, Varna, efficiency of Caspian and (Turkey) Constanta and Black Sea ferry lines. Istanbul. Access of Central Asia and Russia to the Middle East and South Asia and the Indian Ocean. Kazakhstan, The total distance is North-South corridor Turkmenistan and Iran 6,191km. made investments to develop this route, called Uzen-Kyzylkaya-Bereket- Etrel Runs from the Sino-Kazakh The shortest route border via Dostyk to Almaty from Asia to Central Central Trans-Asian to Volgograd in Russia and Europe. It is double- This corridor is relatively railway to Ukraine. It provides track and electrified underdeveloped. access to Poland, Slovakia, within the former and Hungary. Soviet Union. Source: EU-Central Asia Monitoring, Samruk-Kazyna

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The Trans-Siberian and Trans-Asian railway corridor could potentially carry around 8% each of the total EU-China transport volume in 2020, provided that most physical and institutional barriers are removed and assuming constant trade volumes between the EU and China. The TRACECA corridor, by contrast, has the potential to carry only around 1% of total transport volume, owing to the many obstacles along this route. The Trans-Siberian the Trans-Asian railway corridors are the most attractive ones at present, with the Kazakh corridor being slightly more attractive than TSR.

By 2020, the Trans-Siberian route is forecasted to be most practical for railway transports from Northern Europe, followed by the Trans-Asian Route. This is partly due the fact that the TSR route involves the fewest number of border crossings and transshipments. Yet, the Trans-Asian Route potentially offers the shortest distance, shortest transit time, and lowest transport costs for cargo from China’s coastal or inland provinces. If the transshipment at the Dostyk –Alashankou border crossing could be improved, the Trans-Asian Route will be the most optimal option for railway transport from Northern Europe to western China.

Railway corridors going through Kazakhstan

Source: Kazakhstan Institute for Strategic Studies, Samruk Kazyna

6. Special Economic Zones To better complement the expected increase in cargo traffic passing through the new Eurasia land bridge, 10 special economic zones (SEZs), all with different sectorial focus and priority activities, are being founded and further developed across Kazakhstan, including the USD3.5bln Khorgas-East Gate SEZ near the Chinese-Kazakh border. SEZ are being established to encourage trade, and offers advantageous terms to businesses.

Khorgas-East Gate SEZ, located on the border between China and Kazakhstan, has fast become one of the anchor projects for transforming Kazakhstan into a major commercial and transportation hub of the Eurasian continent. The zone hosts several facilities: International Center for Boundary Cooperation (ICBC), a dry port, logistics and industrial zones, ready connection with the Zhetygen-Khorgas Railway and West Europe-West China Highway and a package of attractive fiscal benefits, including exemption from import tariffs, land tax, property tax and value-added tax. Khorgas’s capacity currently is 200,000

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containers per year and is expected to reach 500,000 by 2020. China was a major supplier of funds, whereby China’s Jiangsu province recently invested more than USD600mln for developing the surrounding infrastructure in Kazakhstan.

Special Economic Zones Year of Special Economic Zone Sectorial focus foundation Mixed (aviation, chemical, Astana new city 2001 light industry, automobile manufacturing) Mixed (chemical, light Sea port Aktau 2002 industry, metallurgy industry) Innovation and Innovation Technology Park 2003 instrumentation Ontustik 2005 Light and textile industries Natioanal Industrial 2007 Petrochemical industry Petrochemical Park Burabay 2008 Tourism Khogas-East Gate 2011 Logistics Saryarka 2011 Metallurgy and metal working Chemical and petrochemical Pavlodar 2011 industries Chemical Park Taraz 2012 Chemical industry

KTZ Express, a subsidiary of Kazakhstan Railways, opened an international development office in Hong Kong. It aims to build a platform to promote multimodal freight logistics between Europe and China, via Kazakhstan. KTZ Express has also invested in a 21-hectare intermodal freight and logistics center at the port of Lianyungang in China. It has intended to provide direct access to Central Asia for cargo coming from Japan, Korea and Southeast Asia.

Special Economic Zones in Kazakhstan

Source: Kaznex Invest, Ministry of Industry and New Technologies

Railroad infrastructure 7. Role of Kazakhstan in the Silk Road Economic Belt The main aim of the Chinese conceptual framework “Silk Road Economic Belt” (SREB) is the development of several transport corridors. China primarily wants to gain access to new markets, obtain optimal export terms and develop Western regions. The key problems of land routes are their limited throughput capacity and their weak infrastructure. Unlike SREB land routes, major Chinese seaports have all infrastructure facilities they need to engage successfully in foreign trade: logistical centers, transport capacity, banks, hotels, qualified staff, and numerous professional logistical companies. Economic belt of Silk Road is very important for Kazakhstan because many funds were invested in infrastructure projects. Its strategic goal is to become a transport hub in the region.

China is currently the largest trading partner of Kazakhstan (accounting for some 20% of Kazakh’s total trade), and Kazakhstan is China's second largest trading partner in the CIS region after Russia. There are several joint investment projects that have facilitated trade between the two countries. As an important strategic partner in the construction of China’s Silk Road Economic Belt and the 21st Century Maritime Silk Road (the Belt and Road Initiative), Kazakhstan has been the biggest recipient of Chinese FDI in the former Soviet Union, receiving a total of USD22bln in investment from 1991–2013. As of the end of 2014, China’s total stock of FDI to Kazakhstan exceeded USD7.5bln, up from USD245mln in 2005.

In 2015, the total volume of transit cargoes carried through Kazakhstan along the Europe-Asia route was about 47,400 TEUs, while the Suez Canal marine cargo flow during the same period amounted to a staggering 14.6mln TEUs.

SREB transport corridors boast high potential, but they need massive investments to realize that potential. There are six potential transit corridors running across Eurasian Economic Union countries that can be used to deliver cargoes along the China-Europe route.

SREB transport corridors and their potential Potential Estimated Railroad throughput route Utilization SREB routes transportation cost, capacity post- capacity, ratio USD/TEU modernization, '000 TEUs ‘000 TEU Urumqi (XUAR) - Kazakhstan - 1,300 300 20% Omsk - Moscow -EU 1,000 Shanghai - Trans-Siberian 2,200 250 90-100% railroad - Brest Urumqi - Aktau - Makhachkala - 4,000 100 n/a Novorossiysk - Constanta 1,000 Urumqi - Aktau - Makhachkala - 3,700 50 n/a Tbilisi - Constanta Urumqi - Aktau - Baku -Poti - 5,000 50 n/a n/a Constanta Urumqi - transit via Kazakhstan - 1,700 300 n/a 1,000 Teheran Source: KTZ, Transcontainer, TRACECA, Infranews Research Center data, Samruk-Kazyna

In the first route, the railroad transportation costs could be reduced to USD1,000 after an increase of cargo turnover due to the modernization program, which includes improvement railroads in Russia and

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Kazakhstan, construction of six major logistical centers (including those already in operation) is estimated at USD6bln.

The main problem of all Trans-Caspian routes (regarding third and fourth routes) is that none of the existing Caspian ports is ready to process massive cargo flows. However, Kazakhstan’s successes in this area are much more impressive, even now, the Aktau port can transship up to 11mln tons per year.

Target export groups include a broad range of products manufactured in China’s western provinces, and a limited selection of goods originating from its central and eastern provinces. Goods that may generate additional cargo flows along the China – Europe route: 1) Exports goods originating from China’s western provinces (mostly Urumqi, the Tibet Autonomous region and Qinghai province). 2) Limited selection of goods originating from China’s central and eastern provinces. High unit added value products - electronic devices, automotive parts, pharmaceuticals, standard and costume jewelry and goods with critical delivery times (some food products, premium textiles). 3) The rout is already used to carry computer components (Hewlett-Packard) and automotive parts (BMW) from Europe to China.

8. Transit potential of Kazakhstan 8.1 Review of cargo flow between China to Europe China is the main partner of Europe in the Far East. In 2015, China was the second largest exporter and first largest importer partner in monetary terms. According to European Commission, total export volume from Europe to China amounted to EUR170mln, while total import volume to Europe from China stood at EUR350mln in 2015.

European Union’s trade with China, mln EUR

400 000

300 000

200 000

100 000

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Imports Exports

Source: European Commission, Samruk-Kazyna

China’s main exports to Europe are finished goods – accounting for about 95% in monetary terms. These include machinery and appliances (48%), textiles (11%) and other items. These commodities are suitable for containerized shipment. China imports mainly finished goods from Europe. Machinery and appliances accounted for 30% of total imports, while transport equipment – for 22%.

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European Union’s trade with China by commodity type in 2015, EUR mln

Imports Exports Machinery and appliances 169,571 50,713 Textiles and textile articles 39,556 3,176 Miscellaneous manufactured articles 32,335 1,589 Base metals and articles thereof 23,428 10,519 Products of the chemical or allied industries 14,711 16,783 Plastics, rubber and articles thereof 12,368 6,919 Footwear, hats and other headgear 11,511 415 Optical and photographic instruments, etc. 10,865 10,311 Transport equipment 7,666 38,130 Other 28,425 31,821 Total 350,436 170,376 Source: European commission, Samruk-Kazyna

Practically most of the goods traded between the EU and China are being shipped by sea. EU-China trade reached EUR520bln in 2015, and some 60% transited by sea, according to Eurostat estimates, while rail and road accounted for some 10% of China’s exports to the EU, and 3.2% of the EU’s exports to China. Distances by land between Europe and Asia are generally shorter than distances by sea. Chinese ports are severely overloaded. Besides, there exist certain marine transportation risks (Strait of Malacca, Suez Canal). The lack of possibility to control marine routes prompts China to explore other geographic options such as land routes through Russia, Central Asia, the Caucasus and Iran.

One container shipping cost and time from Breakdown of EU-China Trade Chongqing to W. Europe

Price Time Rail and others 8% Sea USD1,500-3000 38-45 days Road 7% Train USD3,500-5,500 16-20 days Air USD20,000-25,000 1-2 days

Air 23% Sea 62%

Source: UNECE, Samruk-Kazyna

The main advantage of land transport corridors is their shorter cargo delivery deadlines. Railroad route travel from Asia to Europe is at least two times shorter than marine route travel time. The shortest cargo delivery time from eastern China and other Southeast Asian countries to Western Europe by rail or road is 2-2.5 times shorter than sea shipment via the Suez Canal. Shorter delivery time is also a critical factor for certain cargoes (perishable goods or urgent door-to-door shipments). Faster delivery means quicker receipt of cash from the bank and shortened transaction times. Therefore, the time factor is a valuable

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competitive advantage that overland routes can offer for certain commodities, customers and for land- locked regions such as Xinjiang Uigur Autonomous Region, which has no viable alternative to rail and road transit. For example, the large Chinese port of Lianyungang has a direct railroad link to the Dutch port of Rotterdam. It currently takes 14 days to carry cargo by railroad from Lianyungang to Berlin (11,000km) while sea carriage requires 30-35 days.

As European leaders consider the expansion of trade and transportation links, Kazakhstan has several competitive advantages. First, by virtue of geography, Kazakhstan forms a one-country link between China and the Caspian Sea, playing a dominant role in any land links between Europe and China. Second, Kazakhstan continues to deepen institutional cooperation with the EU, as evidenced by the signing of an enhanced EU-Kazakhstan Partnership and Cooperation Agreement in 2015. Third, Kazakhstan offers an improving business environment crucial to the establishment of a trading hub: In the World Bank’s Doing Business 2016 ranking, Kazakhstan jumped 12 positions from 53rd the previous year up to 41st. Thus, Kazakhstan can be initially considered if the EU were to take a strategic approach to continental transport and trade.

According to UN Conference on Trade and Development (UNCTAD), by 2020 the volume of trade between major markets in Eurasia will increase by 1.5 times from USD800bln in 2014 to USD1.2tln. It is also expected that trade between China and the EU will increase to more than USD800bln by 2020, while freight transportation is forecasted to increase from 117mln to 170mln tons (to about 17mln TEU). Transit traffic through Kazakhstan (Dostyk and Khorgas) is estimated at 8% or about 1.5mln TEU. So, the transition to the inland corridors creates great opportunities for Kazakhstan.

8.2 Transit volumes in Kazakhstan In 2015, in China-Europe-China direction the volume of transportation through the railway network of Kazakhstan amounted to 47,400 TEUs, which was two times higher than in 2014. However, total transit freight turnover of KTZ declined by 11.5% YoY due to decline of overall freight turnover. Transit volumes declined due to lower demand in Russian oil products from countries in Central Asia, in Chinese chemicals from Russia due to the growth of its own production, in Chinese ferrous metals from Uzbekistan and Ukraine due to a decline in purchasing power and completion of construction projects etc. In 2015, revenue from transit transportation amounted to USD706mln and its share reached 30% of total revenues. By 2020, KTZ plans to raise the share of transit in the structure of revenues from rail freight to more than 50%.

In 1H16, 704 container trains proceeded through the country’s territory, of which 679 trains were transit traffic, 13% higher than in 1H2015. At the same time, in 1H16, 429 container trains went between China and Europe through Kazakhstan, which was 2.4 times more than in 1H15. According to market estimates, more than 700,000 containers per year will be transported via the transcontinental railway "China-Kazakhstan-Turkmenistan-Iran". A Duisburg-Chongqing container train (known as the Youxinou railway in China) runs daily via Kazakhstan. Kaztransservice, in cooperation with a Belarusian transport company, is also operating a container train running from Brest to Dostyk/Alashankou. Since 2011, for instance, Hewlett-Packard has transported 4mln notebook computers from its factory in Chongqing through Kazakhstan, Russia, Belarus, and Poland to Duisburg.

Over the period 2007-2014, transit traffic in Kazakhstan as a proportion of total volume of international transport by rail stayed at 6%.

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Transit traffic, mln tons (2007-2014) 2008 2009 2010 2011 2012 2013 2014 Belarus 51 43 46 50 46 47 32 Kazakhstan 16 15 14 15 16 - 16 Russia 38 23 28 30 34 30 24 Source: OSJD, EDB, Samruk-Kazyna

After the full implementation of measures for the development of transport and logistics complex in Kazakhstan and taking into account the potential of inland corridors transit traffic (China-Europe, China- Central-Asia, South Caucasus, Turkey, Central Asia –Russia, Europe) is expected to increase by 2 times from 16mln tons to 32mln tons by 2020 and revenues from transit from around USD0.7mln to USD3mln. Accelerated development and growth of exports from central and western provinces of China will contribute to achieving goal.

International railway freight traffic of Kazakhstan in 2014 Freight handed over

Traffic per Total through frontier YoY railway, port Total volume, '000 tons volume, '000 crossings change, % tons

Chinese Dostyk 7,860 -31.8 7,906 Railways Altynkol (exp) 46 2.2 Kyrgyz Railways 5,361 Lugowaya 5,361 0.0 State railways of 1,091 Bolashak (exp) 1,091 225.9 Turkmenistan Oasis (exp) 1,841 -8.9 Uzbekistan 17,715 Pahtaaral (exp) 3 Railways Sary-Agach (exp) 15,871 10.3 Aksu 22,422 1.8 Diny Nurpieisowo 10,120 -43.6 Zernowaya 14,028 -11.1 Ilezk-1 2,047 28.7 Russian 65,681 Kirgilda 1,673 -8.5 Railways Kurkamys 7,391 -14.3 Lokot 851 -8.2 Petropavlovsk 4,486 -7.4 Semiglawy Mar 2,663 -4.0 Port 6,024 Aktau Port (Fähre) 6,024 11.0 Piping 127 Makhambet (exp) 127 -18.9 Total 103,905 -10.1 Source: OSJD 2014, Samruk-Kazyna

9. Conclusion The geographic and geo-economic location of Kazakhstan gives significant strategic potential for freight transit. The country’s total potential capacity is estimated about 32mln tons. Now, Kazakhstan is handling only half their potential cargo flow. It is expected transit volume will reach its potential capacity by 2020. This will be supported by a rise of trade between the EU and China to USD800bln or 170mln

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tons within the next few years. Trans-Kazakhstan railway roads should raise freight traffic between China and the European Union up to 10mln tons.

Transit traffic, mln tons (2007-2020f) 2008 2009 2010 2011 2012 2013 2014 2020f Kazakhstan 16 15 14 15 16 - 16 32 Source: OSJD, EDB, Samruk-Kazyna

Kazakhstan has railway corridors running east-west and north-south and a number of new lines were constructed to reduce the distance. However, still railroad infrastructure in some parts has high degree of depreciation. To handle such huge volumes of cargo, the country’s existing transport infrastructure must be modernized further.

The priority transit routes for Kazakhstan and other Eurasec countries are the Northern corridor of the Trans-Asian railway, as it is the shortest distance between main points of loading (China and Southeast Asia) and freight destinations (Western Europe cities), which maximizes the key competitive advantage of overland routes, the speed of delivery.

Kazakhstan has already the required basic infrastructure. There are number of barriers to the realization of Kazakhstan’s transit potential. Physical barriers are delays at the Dostyk railway terminal located at the Kazakhstan-Chinese border due to different rail gauges used by Kazakhstan and China. Due to rail gauge differences, transit goods must be transloaded or re-transferred by machine from China’s railcars to Kazakhstan’s railcars. Also high transportation and handling costs associated with the use of the railway transit in Kazakhstan. Transportation costs in Kazakhstan account for 8% of the final cost of goods transported via railway, compared to industrialized countries, where transportation costs typically account between 4% and 5% of the final cost of the transported goods. Lack of adequate storage capacities at cargo terminals and warehouses at certain key rail cities in Kazakhstan. In addition, qualified staff is in short supply.

International railway corridors

Source: Ministry of Investments and Development of Kazakhstan 18

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