Economic cooperation within SCO

02.05.06

MOSCOW. (RIA Novosti economic commentator Nina Kulikova)

The Shanghai Cooperation Organization (SCO), an international club that
unites Kazakhstan, Kyrgyzstan, China, Russia, Tajikistan and Uzbekistan, was
first set up to resolve border problems and to improve security in Central
Asia. In recent years, however, it has been increasingly focussing on
economic issues.

The trend toward expanding economic interaction in the region is logical,
because the SCO member states have a huge potential for joint activities in
trade, primary industries and investment. Yet this potential is far from
being fully exploited.

In recent years, all SCO countries have sustained economic growth at 6-8%,
which is significantly higher than in Europe. According to forecasts, the
pace can be sustained for another five years, first of all due to China's
steady growth, which in the last three years has stayed above 9%.

Positive developments in the Russian economy are also important for
cooperation in Central Asia to progress. Last year, Russia's GDP grew by
6.4%, which was better than in many developed countries, but lower than in
China and most CIS member states. Kazakhstan, for example, has seen its
economy grow by 9% annually over the last three years, while Tajikistan has
posted a rise of 8% and Uzbekistan of 7%.

Trade turnover between the SCO members has also been growing steadily.
According to the Chinese authorities, SCO turnover in 2003 was $19.7
billion. In the first five months of 2004, it reached $8.2 billion,
according to the Kazakh government, up 68.7% against the same period the
year before. Yet despite the active growth of SCO economies, the
organization's trade in absolute figures leaves much to be desired.

According to the Russian Institute for Strategic Studies ("The Shanghai
Cooperation Organization: Shaping a New Reality" study, edited by Yevgeny
Kozhokin, the Institute's head), China has been the country one to steadily
increase trade with regional partners in recent years. Indeed, the
statistics of the Chinese Ministry of Commerce shows that Russian-Chinese
trade has reached $29.1 billion in 2005, up 37.1% from the previous year. At
the same time, last year's Russian-Kazakh turnover equaled $10 billion, and
the Russian-Kyrgyz trade was just $543 million.

Further expansion of trade links between the SCO member states depends to a
certain degree on when they join the World Trade Organization. China and
Kyrgyzstan are already WTO members, while Russia, Kazakhstan, Tajikistan and
Uzbekistan are in the process of accession.

The Institute's experts say that China, which has the most powerful economy
in the region, is increasingly claiming the role of the SCO economic leader.
Its influence on the economic situation in neighboring countries grows every
year as it takes part in energy and transport projects in Kazakhstan,
Turkmenistan and other states.

This is easy to explain: China's mid-term goal is to develop its western and
central provinces. It has already launched investment projects to construct
roads, hydropower plants and primary industry facilities in the western and
central parts of the country. In case of its successful economic
development, Central Asia, which borders on China's northwest province of
Xinjiang, can contribute to the region's growth, first of all by its energy
resources. According to the province authorities, trade and economic
cooperation between the Xinjiang Uygur Autonomous Region and neighboring
countries have grown substantially in recent years. In 2005, SCO Central
Asian countries accounted for as much as two thirds of the province's
foreign trade. Its main trade partner is Kazakhstan.

SCO economic projects are in line with Central Asian states' national
interests. Dinara Kaliyeva of the Kazakh Institute of Strategic Studies
under the President, says that China's huge economic potential and
investment opportunities make economic cooperation within the SCO preferable
to other regional unions of the same states. Moreover, China's experience in
economic reform can be crucial for Central Asian transitional economies.
Shared experience and active cooperation with one of the world's
fastest-growing economies will contribute to economic growth in Central
Asia.


Russia is also interested in developing economic cooperation within the SCO,
as this will raise the organization's influence and, consequently,
strengthen Russia's presence in Central Asia. According to Russian President
Vladimir Putin, the SCO has gone far beyond its original goals and economic
interaction within the organization is gaining importance.

Economic cooperation was first taken up at SCO meetings back in the 1990s.

In 2001, the SCO member states signed the memorandum on main goals and areas
of regional economic cooperation and on the launch of measures to ensure
favorable conditions in trade and investment.

In 2003, it adopted a program of multilateral trade and economic
cooperation. Its long-term goal for 2020 is to shape a new integrated
economic space, including favorable conditions for trade and investment in
order to gradually ensure free movement of goods, capital, services and
technologies within the SCO. In fact, it provides for the creation of an SCO
free trade zone in the future.

In 2004, it adopted the action plan for the program of 127 clauses, out of
which 19 are related to energy cooperation, 20 to transport cooperation and
about one third to education, science and technology.

Energy production, development of new hydrocarbon fields and construction of
oil and gas pipelines are a priority area of cooperation within the SCO.
Kazakh Prime Minister Danial Akhmetov says that the plan would help to
develop a new energy network in the Asian region.

Russia, Kazakhstan, Turkmenistan and Uzbekistan are the region's largest
commodities exporters and they need reliable markets. China is the world's
largest oil consumer and is projected to import about 200 million tons by
2010 and 250 million tons by 2020. Given the global growth of energy
consumption and oil prices, energy partnership is becoming the key area of
international cooperation. SCO members can become a stable source of energy
for China. According to the Russian Institute for Strategic Studies,
Kazakhstan alone will supply China with 15-20 million tons annually in a few
years, after a pipeline is constructed under the 2003 agreement.

SCO energy cooperation promises to be lucrative, says Russian Deputy Foreign
Minister Alexander Yakovenko. There is a prospect to organize joint geologic
exploration and this way start joint development of Central Asian resources.
There are also plans to carry out large pipeline projects, such as a
pipeline from Central Asia to Xinjiang Uygur Autonomous Region with a
complete overhaul of the Kyrgyz pipeline network. Another project of the
century can be the construction of a Russia-China pipeline, he says.

The Kazakh prime minister believes that the most promising of the SCO joint
projects are the construction of the oil pipeline from Atasu (Kazakhstan) to
Alashankou in China, the resumption of oil pumping along the Omsk - Pavlodar
- Shymkent - Chardzhou pipeline, cooperation on Central Asian and Russian
gas transit, gas supply to China, joint exploitation of the Kyrgyz section
of the pipeline from the Bukhara gas-bearing area to Tashkent and on to
Bishkek and Almaty.

Also, the first SCO investment and development forum held in 2002 showed
that Chinese companies were interested in developing Caspian fields, says
Gulnara Karimova, director of the Center for Policy Studies in Uzbekistan.
The most important Russian-Chinese project is the West - East pipeline that
will transport gas from the Tarimsky basin to Xinjiang and also to Shanghai,
she said.

Finally, Central Asian commodities exporters will be able to boost their
profits if they develop a single strategy toward consumers. This can be done
if the SCO energy club functions efficiently. At present, the consumer takes
advantage of exporters' disunity and manipulates prices, says Vitaly
Bushuyev, director of the Energy Strategy Institute.

The SCO holds a dialog on developing transport cooperation. Its goal is to
work out a coordinated policy on transit shipments and to set up
international transport corridors.

According to Yakovenko, the SCO plans to develop the concept of a single
transport space. It is already working to modernize motor transport
corridors, to study the possibility of new routes, including railways, from
China's western provinces to Europe. New transport corridors can create
absolutely new directions in the regional economic policies, he says. Their
favorable influence will be felt in the short term both in Central Asian
states and in their neighbors.

At present, the priority is given to developing such international transport
corridors as the Trans-Siberian Railway and the North-South Corridor, which
ensure cargo shipments from Europe to Asia, says Alexander Misharin, Russian
deputy transportation minister. However, for these corridors to function
properly, all SCO states need to have a unified legal framework.

According to the statements made by the Tajik Transportation Ministry, one
of the most topical corridors may run along Uzbekistan - Dushanbe - Pamir -
Kulma passage - Xinjiang Uygur Autonomous Region. Tajikistan hopes to ship
cargos from Russia and Europe by this corridor. However, to make the route
comply with international standards, the country will have to invest in
reconstructing some of its sections, especially in the Gorno-Badakhshan
Autonomous Region.

In 2003, the member states agreed on a set of measures to improve road
communications within the SCO. However, many opportunities in the sphere
remain unrealized, says Kyrgyz President Kurmanbek Bakiyev. He believes that
issues related to road communications require additional work.

The construction of railway, road, river and air communications connecting
the ASEAN countries with Europe via Central Asia would promote trade and
stable economic growth in the latter, says Kaliyeva. Development of the
trans-continental communications corridor following the ancient Great Silk
Road, is important even for China, which wants to get access to Caspian oil
resources and find new ways to European markets, she points out. China's
interest in developing communications across Central Asia will be increasing
as its economy grows and its western provinces develop.

Russia attaches special importance to promoting financial cooperation within
the SCO. President Putin says that Russia will welcome the organization's
plans on mounting cooperation between financial and banking institutions and
the planned Eurasian economic forum.

At present, the countries are working on draft agreements to encourage and
protect mutual investment. Notably, Kazakhstan presented its draft in April
2006.

In 2003, Chinese companies invested $1.6 billion in the SCO countries. At
that time, Chinese Deputy Minister of Commerce Zhang Zhigang said that the
amount was not big and that his country would work to develop cooperation
with its partners within the SCO.

In 2004, Chinese President Hu Jintao announced that his country would
provide other SCO member states with subsidized commodity loans worth $900
million in order to spur economic cooperation. In future, China intends to
expand its export credit program for the SCO. "The Chinese government will
be increasing the sums of loans as needs will grow," said Chinese Prime
Minister Wen Jiabao.

This will definitely promote broader economic cooperation within the
organization. However, experts of the Russian Institute of Strategic
Studies, say that China seeks to provide commodity loans to SCO members, as
it boosts its trade volume.

In 2005, the SCO countries signed the agreement on inter-bank cooperation,
which seeks to improve bank cooperation on financing and servicing
large-scale investment projects in the member states. The parties hope to
shape modern efficient infrastructure to support trade and economic links
between the SCO members. If the agreement works in practice, it will
simplify mutual settlements and guarantees on banking operations. This will
help to involve SCO business and financial circles in large investment
projects in the region.

Among other priority areas the program names interaction in high information
and telecommunication technologies, agriculture, education, science and
innovation, and healthcare. According to Yakovenko, this is in fact a
program of the region's joint development in the first half of the 21st
century.

The Shanghai Cooperation Organization plays an increasingly prominent role
among regional structures set up in the post-Soviet period to ensure
multipolar development. Moreover, as economic cooperation was launched,
interaction within the SCO acquired a new pace, its international prestige
has grown, and the interest on the part of the world community has
increased. However, economic talks within the SCO take a long time. Although
the member states have seen a trend of economic growth in recent years,
which offers favorable conditions to develop trade and boost investment, the
level of economic interaction in the region is rather low. It remains to be
seen whether the SCO will be able to achieve an economic recovery and boost
trade and economic links between the member states. -0-