China And Kazakhstan's "Absurd" Remote Cross-Border FTZ May Finally Be Set To Boom
The first time I visited the International Center for Boundary Cooperation “Khorgos” (ICBC) was in May of 2015. At that time, I found a bi-national free trade zone straddling the China / Kazakhstan border that was basically a Chinese “cheap stuff” market flung out on the Eurasian steppes that was mired in a stagnant position between conception and vitalization. On the Chinese side there were five three-story marketplaces where vendors rented out booths to sell run of the mill, no-brand apparel, car tires, and plastic toys tax-free. On the Kazakh side, the scene was much grimmer: there was nothing but a temporary "nomad" tent selling Kazakh chocolates and imported Georgian wine that was set up next to a burning pile of garbage, and not much else.
The opening ceremony for the first trade center on the Kazakhstan side of the ICBC free trade zone. Image: ICBC "Khorgos."
In the spring of 2015 it was easy to be critical of the ICBC. However, I ended my otherwise disparaging article about this visit on a guardedly positive note:
But what needs to be kept in perspective is that not only a new free trade zone is being created here but an entirely new economy. The ICBC is just one part of a mutli-faceted development initiative to build an entirely new conurbation of trade, manufacturing, and logistics in a place where it didn't exist before. The adjacent Khorgos Eastern Gate Special Economic Zone and Khorgos Gateway dry port is estimated to attract 30,000 workers and their families, while the new city of Horgos on the Chinese side is being built for 200,000 people. All of these projects have synergy with the ICBC, and such large-scale development everywhere takes not years but decades.
Nearly two years after this first visit, I returned to the ICBC, and I must report that even after a string of political, financial, and corruption mishaps, nobody has given up on the place. As the new Chinese city of Horgos blossoms into an urbanized area of 30-story high-rise towers and a new epicenter for robotics manufacturing, the Khorgos Gateway dry port -- the catalyst for a "new Dubai" -- on the Kazakh side of the border doubles its container volume each year, and the Western Europe-Western China Highway, which passes right through Khorgos on its way from the coast of China to the Baltic Sea at St. Petersburg, gets set to officially open, the ICBC seems to have worked out some of its kinks and kicked development into another gear.
The new trade center on the Kazakhstan side of the ICBC. Image: Wade Shepard.
I entered the free trade zone from Kazakstan this time, and it became immediately apparent that some major changes had occurred since my last visit. There was a large warehouse of Senko-Lancaster, a Japanese / Kazakh joint venture that’s focused on distributing goods from China to other Silk Road countries that just opened three months ago. Around the corner was a new hotel that started being built last year by a Kazakh developer and a Chinese partner. A little ways away was a large trade center that was being developed via a Turkish / Kazakh JV that was at a mid-point of construction. In the center of it all was a massive new Kazakh / Chinese trade center called Samruk Central Square, which opened for business last summer — the first substantial commercial operation to open on the Kazakh side in the five year history of the ICBC. And, yes, that laughable tent and burning pile of garbage have long been removed.
If anybody knows the story of the ICBC, it’s Ravil Budukov. A Chinese-educated Kazakh, he has been with the project from around the time it first began in December of 2011. He showed up fresh out of college from Suzhou, and eventually rose up to become the chief officer of the International Department on the Kazakh side.
I asked Budukov what had happened, how did Kazakhstan transform their part of the ICBC from having next to nothing to showing glimmers of coming to life in such a short period of time?
“When they started, nobody in the world had any experience with this," he replied simply. "There were no laws and they didn't know how to administer it."
There is nowhere in the world like the ICBC. It is a bi-national, quasi-extra territorial free trade zone that has its own legal, tax, and immigration regimes. While China has the political nimbleness to quickly restructure its policies and laws to adhere to the ambitions of its national projects, in Kazakhstan this is a little more challenging. But now, Budukov said, the proper administrative procedures and laws have been worked out, and the results are apparent.
Construction on the Kazakh side of the ICBC. Image: Wade Shepard.
Funding the ICBC was also an issue for Kazakhstan. While the China side had an almost unlimited budget backed by Beijing — with $4 billion already being pumped in with reserves on the way — Kazakhstan was wallowing in the middle of a dire economic crisis. The combination of plunging oil and gas prices, which caused a 40% drop in national revenue, along with the devastated Russian economy and the economic slow-down in China -- two of the country's main trading partners -- left Kazakhstan adrift in a perfect storm of economic calamities. While developing its transportation infrastructure and diversifying its economy with projects such as the ICBC are part of the country’s "path to the future," finding the money for it in the meantime proved challenging. Partially to these ends, every project that is currently in development on the Kazakh side of the ICBC are international joint ventures.
The Chinese side has also grown at a rapid clip since my last visit. In addition to the five large shopping centers, branches of all five of China’s big banks, a large hotel, and a Jiangsu province-sponsored business center that were previously in operation, I saw three more trade centers, a massive exhibition hall, another hotel, and what will soon become the Silk Road Tower — an iconic 300-meter-high observation tower — that were all at various stages of construction.
The new museum on the Chinese side of the ICBC that is reputedly set to open soon. Image: Wade Shepard.
But what I found most interesting was the museum that was recently built next to the construction site for the tower, which I was told would open after the Chinese New Year holiday.
When the ICBC was announced it was not only marketed as a cross-border, tax-free commercial zone, but as a hub for entertainment and inter-cultural exchange. It was to be a place where merchants and travelers from across China, Central Asia, Russia, Turkey, and Europe could meet in the middle and stay for 30 days visa-free to dine on each other’s cuisine and share each other’s entertainment, along with buying each other's products. The master plan called for hotels, restaurants, museums, amusement parks, an anthropological center, casinos, spas, and a university for foreign languages. It was to become a modern caravanserai, a vibrant international hub where all of the countries of the revived Silk Road could join together. Such “people to people” exchanges have become a central theme of China’s Belt and Road initiative, and at every station along the way where China has a major presence there are not only plans for logistics hubs, manufacturing zones, and warehouses, but cultural, shopping, and entertainment facilities as well.
“We hope that this center will be the biggest tourist center in the world. Not only Chinese or Kazakh but other countries, cultures, to all come and meet in the middle,” said Kaharman Jazin, the new president of the ICBC.
There is also more of an international presence here in the ICBC than I witnessed before. This place isn’t just meant to be for trade between China and Kazakhstan, but is intended to be a great market that connects China with the entire CIS and potentially even Europe beyond, and this is particular true for the Eurasian Economic Union — the customs area that includes Russia, Kazakhstan, Kyrgyzstan, Belarus, and Armenia — that the ICBC is on the border of. The next phase of development for this emerging free trade zone consists of expanding its reach out through this region, and Budukov is currently running a traveling road show, going from country to country trying to entice investors to come and set up operations on the doorstep of China.
According to Budukov, 10,000 visitors from China and 3,000 visitors from Kazakhstan are currently coming into the ICBC each day — which is up from the 1,500 daily visitors that were coming at the time of my previous visit.
A duty free shopping center on the Chinese side of the ICBC. Image: Wade Shepard.
Another long-term aim of the ICBC is to become a place where visitors don’t only come to buy more or less utilitarian items at a cheaper price but also the luxury items that are trending throughout Asia. While there are signs advertising the presence of Chanel, Calvin Klein, Clinique, Prada, and Gucci in the ICBC, a visitor would be hard-pressed to find any of these luxury products actually being sold there. I walked through one trade center on the Chinese side that boasted the presence of luxury brands only to find the displays empty. The workers told me that they would be restocked after the Chinese New Year holiday. Maybe.
But even if these luxury products were actually sold here, the import restrictions of both the Eurasian Economic Union and China would hamper their sales volumes. Visitors can only take 50 kilos or 1,500 euros worth of merchandise tax-free per month out of the ICBC and into Kazakhstan. While China has an 8,000 yuan (US$1,250) daily limit. There are reports of a cottage industry that has developed in the nearby Kazakh town of Zharkent, where local high-school and college students carry merchandise out of the ICBC for shoppers who wish to buy more tax-free than the import restrictions allow.
“Do you feel as if this is a major problem limiting the potential success of the ICBC?” I asked both Kaharman and Budukov.
“Yes,” they both replied in unison.
“Is there anything that you can do about it?”
Kaharman just shook his head and smiled. This is an issue that’s even higher than Astana; it goes straight to the heart of the Eurasian Economic Union — straight to Moscow, who hasn't been the biggest fan of the whole ICBC concept, to put it mildly.
The entire stretch of the China / Kazakhstan border region where the ICBC is located is being cultivated as a massive bi-national conurbation of development, and all of the various projects have synergy with each other and are ultimately rising up in unison. This development zone is a national-level ambition of both China and Kazakhstan, and the political will and funding is there to take it to fruition — perhaps by any means necessary. To repeat an adage that has become popular during China’s decades-long development boom, the ICBC may in fact be "too big to fail," and may potentially become the central market of the entire New Silk Road.