Dragoman Digest
22 March 2024
Moscow, Tehran and New Delhi firm up north-south trade corridor
Countries adapt trade routes to address geopolitics shifts
A trade corridor connecting Russia, Iran and India is taking shape, as Moscow and Tehran look to evade the geopolitical constraints of established trade routes. The International North-South Transport Corridor (INSTC) stretches over 7,200km across both land and sea, linking St Petersburg to Mumbai. The route splits off into three paths between Russia and Iran. The main western route passes through Azerbaijan, the central route through the Caspian Sea and the eastern path on the Caspian Sea’s eastern shore.
The western route has seen a notable increase in development and utilisation over the past couple of years. Rail cargo experienced a 30 percent surge last year, while road freight saw a 35 percent increase. In October, Azerbaijan inaugurated a four-lane road from its capital to the Russian border and announced plans for further infrastructure enhancements along its border with Iran. Critically, Russia and Iran reached an agreement last year to construct a railway in northern Iran – a key section of the corridor.
The construction of the corridor, initially proposed in 2000, has been expedited by escalating geopolitical pressures. Western sanctions imposed on Russia following the invasion of Ukraine have hindered its ability to transport cargo through its traditional northern European trade route. Additionally, military escalation in the Red Sea by Yemen’s Houthis, which in many cases has caused shipping times to double, has prompted a wide exploration of alternative routes. Recent increases in trade between the countries that are part of the corridor, including a surge of arms trade between Russia, Iran and Azerbaijan, have also contributed to making its construction a priority.
India will be careful in its involvement in the project. It hopes to simultaneously uphold its relations with Russia and Iran while maintaining its strong ties to the west. Sanctions are another issue. Its interest in the project is partially owed to the corridor’s integration with the Chabahar port in Iran – which allows it to bypass Pakistan and increase trade with Afghanistan and Central Asia. However, the port, first agreed to in 2003, has struggled to make headway due to US sanctions.
Cambodia seeking Chinese funding to build canal on Mekong River
Project would aim to subvert Vietnam’s dominance of Cambodian shipping
Cambodia is seeking Chinese investment to construct a US$1.7 billion canal branching from the Mekong River to reduce reliance on Vietnam’s ports. The proposed Funan Techo canal will be 100 metres wide and aims to link the Mekong River with Cambodia’s ports in the Gulf of Thailand. The canal will reduce Cambodia’s reliance on Vietnam, which controls the downstream of the river. China, having control over the upstream portions of the Mekong, is expected to fully finance the project. While plans for the canal are still in preliminary stages, Cambodia is hopeful for construction to commence this year, with operations commencing by 2028. Phnom Penh anticipates that the canal can lower shipping costs by up to 30 percent.
The underlying motive behind Cambodia’s canal initiative is to diminish dependence on Vietnam’s ports, particularly the port of Cai Mep, which handles a significant portion of Cambodia’s exports. Additionally, tensions between Cambodia and Vietnam play a role, with Cambodian Prime Minister Manet recently emphasising historical claims to territories in southern Vietnam that encompass the southern Mekong River which were once part of Cambodia’s Funan kingdom. However, it is unlikely that the canal would entirely break Vietnam’s current monopoly over shipping Cambodian products. The canal’s capacity to accommodate ships carrying only 1,000 tons limits its impact. Economic ties between Vietnam and Cambodia also remain strong. Vietnam is Cambodia’s second-largest trading partner. Whether China will end up financing the project is also uncertain. China has scaled back on investing in global infrastructure projects in recent years, including airport projects in Cambodia. This retreat aligns with broader concerns surrounding the financial viability of Belt and Road initiatives, as many projects have incurred losses, contributing to a substantial debt burden on China’s partners exceeding US$1 trillion – much of which has had to be renegotiated.
The proposed Funan Techo canal
Source: Cambodia submission to the Mekong River Commission, Nikkei
Investments in coal-fired power plants in India surge
New Delhi’s red tape and regulations has stifled renewables rollout
Investments in new coal-fired power plants in India are on the rise, contributing to a surge in the country’s emissions. Essar Power aims to establish 1.6GW of new coal generation in the state of Gujarat by 2029, while Vedanta plans to create 1.9GW of new coal capacity. Additionally, companies like Adani Power and JSW Group have earmarked investment in coal generation. New Delhi anticipates a 50 percent increase in coal demand by the end of the decade, reaching approximately 1.5 billion tons. The recent investments contrast with the significant downturn in coal generation investments seen around 2017, when spending on new plants dropped by around a third. The decline was propelled by a sharp decrease in the cost of renewable generation at the time. Despite Prime Minister Modi’s target for solar capacity to reach 175GW by 2022, the actual installed capacity fell short by 40 percent.
Several factors contributed to the uptick in coal investments. In 2022, the Modi government imposed a 40 percent import tax on solar panels to stimulate domestic manufacturing. However, this failed to create an industry that could satisfy the demand for a large-scale solar rollout and simultaneously prevented companies from importing cheap panels from China. Additionally, state-owned electricity retailers are tied to numerous long-term contracts with coal generators at fixed costs, despite the declining costs of renewables. The government has essentially bailed out coal generators by maintaining retail power prices below profitable levels and taking on large amounts of debt. The investments in coal generation in India, along with similar trends in China, are offsetting the progress made by G7 countries in decarbonisation. China commissioned a massive 114GW of new coal-fired power plants in 2023, marking a 10 percent increase from the previous year.
European automakers announce massive investments in Brazil
President Lula looking to attract EU investment in green industries
EU companies are making significant investments in Brazil’s auto industry, as the country prioritises green industrialisation. Stellantis recently unveiled plans for a R$30 billion (US$6 billion) upgrade to its Brazilian facilities from 2025 to 2030, aimed at enabling the production of EVs and flex-fuel vehicles equipped with electric components. Flex-fuel vehicles, capable of running on either petrol or ethanol, constitute over 80 percent of vehicle sales in Brazil. Stellantis’ investment marks the largest ever by an automaker in South America. The company had a 23.5 percent market share in South America in 2023, and a 31.4 percent share in Brazil. Similarly, Volkswagen announced a R$9 billion (US$1.8 billion) investment last month to upgrade its Brazilian plants between 2026 and 2028. EVs in Brazil are potentially a large growth market for European automakers. EVs represent just 0.4 percent of vehicles sales in Brazil and hybrids 2.1 percent, despite the country ranking as the sixth-largest auto market.
The investments align with President Lula’s efforts to revitalise Brazil’s industrial sector through a buildout of green industries. Central to the agenda are new government mandates and incentive schemes like the Green Mobility and Innovation program, which sets minimum requirements for recyclable vehicle parts and offers tax credits for cleaner vehicles, totalling over R$19 billion (US$3.9 billion) by 2030. Chinese EV companies have also played a large part in Lula’s strategy, leveraging their dominance in the global market. Notably, last year BYD announced plans to establish its first manufacturing plant outside of Asia in Brazil, with a R$3 billion (US$600 million) investment, while Great Wall Motor aims to invest around US$2 billion in the country. Nevertheless, EU companies remain integral to Brasilia’s goals given their leading position in the local market.
Malaysia emerges as beneficiary of chip companies diversifying from China
Washington’s restrictions on Chinese chipmaking the driving force
Malaysia is experiencing a surge in semiconductor investments, driven by ‘China plus one’ diversification strategies adopted by foreign investors. The state of Penang, located north of Kuala Lumpur, has become a focal point for these investments. Germany’s Infineon has allocated US$5.4 billion for its Penang facilities over the next five years, including the development of the world’s largest fabrication plant for silicon carbide chips commonly used in EVs. Similarly, the US’ Intel plans to invest US$7 billion in new plants in Malaysia, including a facility for 3D chip packaging. Other major players such as Micron and AMS Osram are also expecting to expand their presence in the area. Largely due to investments in chip plants, Penang gained US$12.8 billion in FDI in 2023, more than the total it received between 2013 and 2020 combined. Malaysia has an established presence in the packaging, assembly and testing part of the chip supply chain, commanding 13 percent of the global market. The country now aims to venture into higher-end segments like fabrication and integrated circuit design.
The investments reflect a shift from previous preferences for manufacturing in China, driven in part by US restrictions on Chinese semiconductor technology. The Biden administration’s 2022 restrictions on US companies exporting advanced semiconductor fabrication equipment to China, subsequently adopted by European and East Asian allies, have prompted companies to seek alternative manufacturing locations. Even Chinese chip supplies like Fengshi Metal Technology are relocating to Penang to align with the trend set by Western companies and to pre-empt potential US sanctions. However, Malaysia’s chip manufacturing sector still faces challenges. Despite nurturing local companies like NationGate and Greatech Technology, Malaysia has yet to establish a national champion for semiconductor fabrication.