Khorgos: Where East Meets West

A new epicenter of transportation and trade is growing up from the barren dunes in the far east of Kazakhstan on the Chinese border. It is called Khorgos Eastern Gate, and it is a massive special economic zone that, in the words of its builders, is set to change the map of logistics. Located on the site of what was once a major junction on the ancient Silk Road, Khorgos is being revived again as part of the new Silk Road Economic Belt, the overland portion of China’s Belt and Road initiative, an immense trillion dollar endeavor that aims to increase infrastructural, economic, and political connectivity between more than 60 countries across Eurasia.

“Where you are standing right now is where the East meets the West,” a smiling man in an orange safety vest called out to me as he approached with an outstretched hand. “Really, this is the place,” he added, as though I didn’t believe him. He introduced himself as Karl Gheysen, the CEO of Khorgos Gateway, the company managing the dry port that I was visiting.

We were standing before a set of four railway tracks lying side by side, the place where trans-continental China-Europe trains stop to relay their cargo. China’s rail gauge is 85 mm narrower than those in the former Soviet sphere, so containers need to be transferred onto local gauge trains at the border before continuing onward. Gheysen’s white safety helmet rocked from side to side as he theatrically pointed out the directions of trade routes emanating from China, India, Iran, Turkey, and Europe which converged together right where we stood – the point at which the economies of the East meet those of the West, as Gheysen liked to put it.

Khorgos Eastern Gate is colossal. Ultimately envisioned to encompass 5,740 hectares, the special economic zone is currently divided into the KTZE - Khorgos Gateway dry port, an industrial zone, a logistics area, and a supporting new city for 50,000 workers and their families.

The special economic zone (SEZ) is currently being managed by DP World, which has a ten-year contract to start up operations here before handing the reins back over to Kazakhstan. This is the same company that developed the port and special economic zone that Dubai grew up around, and, according to Gheysen, the goal in Khorgos is similar.

“I know it doesn’t look like much now,” Gheysen admitted as we looked off across a gargantuan barren expanse that extended from the tracks out to the snow-capped mountains beyond, “but we’re building a new Dubai.”

Originally from Belgium, Gheysen is a career shipping guy who has worked in sea ports all over the world. Oddly, he now finds himself running a container terminal in a place that couldn’t be farther from the sea – literally. Khorgos Gateway lies just a few ticks away from the Eurasian Pole of Inaccessibility, the farthest point on earth from an ocean. But this remote position is precisely the reason why the place has risen to the apex of international interest: The point that is farthest from the sea is also the geographic center of the continent. This makes Khorgos Gateway the ideal locale for a great junction between east and west, north and south – precisely what it aims to become.

“Kazakhstan is coming from a landlocked country and is becoming the most linked-in country on the whole continent.” Gheysen proclaimed. “If you take Russia, the largest country; China, the largest economy; India, one of the largest populations, and you put these three together, right in the middle is Kazakhstan. It’s this place.”

Khorgos Gateway is poised to become a major hub on a rapidly developing new network of rail and road trade routes that span Eurasia, connecting China, Russia, South Asia, the Middle East, and Europe. The dry port is directly linked to the Western Europe-Western China Highway, which will stretch from the coast of China to St. Petersburg when it is completed next year. Kazakhstan also has a joint venture terminal at the seaport at Lianyungang in China, and is working on developing others at seaports in Klaipeda in Lithuania, Bandar Abbas in Iran, and Mundra in India, which would directly connect the country with four seas if successfully implemented, further mitigating its landlocked position.

‘Dynamic Crossroads’

Kazakhstan is aiming to transition from a Central Asian backwater into the most dynamic crossroads of the most dynamic continent on the planet. Khorgos sits right between China and Europe; economic giants which engage in more than $600 billion worth of trade each year. Khorgos is also right on the cusps of the fast-growing Chinese and Commonwealth of Independent States (CIS) markets. Situated on the border of the Eurasian Customs Union, goods that cross into or that are manufactured at Khorgos are intended to be able to move freely through Kazakhstan, Russia, Belarus, and Kyrgyzstan without additional customs procedures or duties – an obvious advantage for companies looking to reach these markets.

“Eurasia is no longer a mere synonym for Central Asia,” Gheysen explained, “but rather a new economic macro-region where Eurasia is considered as one continent with huge economic potential.”

Meanwhile, China is rapidly developing the cities on its western borderlands, such as Horgos, which sits directly across the frontier from Khorgos. While Horgos is still a mostly rural expanse that’s twice the size of New York City but only has 85,000 people, it is being rapidly urbanized on the strength of $3.25 billion in investment from the Chinese government. Ultimately, it is hoped that Horgos will grow into a city of 200,000 people that be able to sustain its new large-scale development projects, which include a giant cross-border duty free mall that it shares with Khorgos. In all, China is currently investing $16.3 billion into developing the cities of its far west as part of the Belt and Road initiative, and as these places become more economically kinetic the importance of Khorgos, the gateway to the CIS and Europe beyond, will likewise grow.

“As we know, in western China provinces like Xinjiang and Gansu will grow nearly eight to ten percent during the next ten years. That’s why they need our roads for export and to connect with the big markets,” explained Murat Bekmagambetov, the director of the department of strategic planning at KTZ, Kazakhstan’s national railway. “We can make our opportunity [by making] our infrastructure and their goals have synergy.”

“You don’t need an ocean when you have China in your backyard,” Hicham Belmaachi, the commercial director of Khorgos Management Company, observed.

The idea for Khorgos Eastern Gate came directly from the president of Kazakhstan, Nursultan Nazarbayev, who for years has been aiming to reestablish the Silk Road and reassert his country’s role on it. 

“Here at the border with China we have what we call in logistics an event. The event is the change of rail gauge. So whatever you do the train will stop here. So Nazarbayev said, ‘Okay, fine, we have something here, we have an event, so we will create something around that event,’ and this is the result and it’s magic,” Gheysen said.

When Karl Gheysen first arrived in Khorgos two years ago the place was little more than sand dunes and snow-capped mountains. The nearest Kazakh city is the diminutive 30,000-person Zharkent, a 30-minute drive away. Almaty, Kazakhstan’s cultural and commercial capital, is 300 kilometers distant. Two hundred and thirty diggers soon set to work clearing away the dunes and flattening the earth, preparing the ground for the new city that would soon be built there.

On July 29, 2015, a little over a year after Gheysen arrived, a pilot area of the Khorgos Gateway dry port was formally commissioned and the first China-Europe trains began rolling in.

“In 47 minutes in and out we handle a full train,” Gheysen claimed. “That’s faster than in Europe. That’s faster than anywhere else.”

In a very real sense, Khorgos Gateway is a port for trains and trucks rather than ships, and is run more like a sea terminal than a rail depot. As we walked over to an area where a block train was being broken down by four-wheeled mobile cranes, Gheysen explained how rail companies around the world are used to functioning in a government-owned monopoly that is virtually immune from the pressures of competition and thus lack the thirst for profit that is typical of the private sector.

“We come from the shipping world where there is competition, big competition, so we have to go fast,” Gheysen said. “These rail people are not used to thinking like that, so it is a change of culture in the rail environment. For us, this is like a sea terminal. The procedure is the same as in a seaport.”

Since being partially commissioned at the end of July, Khorgos Gateway has handled over 20,000 TEU from more than 400 trains, with a 53 percent growth rate this year over last. (Note: TEU stands for twenty-foot equivalent unit, which is a unit of cargo capacity based on that of a standard shipping container.) Once the dry port is fully commissioned in May, when all of its RTG and RMG cranes have arrived and are functioning, it will have capacity for 540,000 TEU annually. Within five years Gheysen predicts that this number could top one million, which would put it on par with many of the world’s seaports.

Much of the train traffic entering Khorgos Gateway comes from emerging transcontinental rail lines that are connecting China with Europe and the Middle East. Cities from all over China are starting up their own international block trains as they vie to become hubs on the Silk Road Economic Belt. At present, at least 19 direct rail routes connect cities in China, like Suzhou, Lianyungang, Chengdu, Zhengzhou, and Yiwu, with cities on the other side of Eurasia, such as Warsaw, Rotterdam, Hamburg, Duisburg, Lodz, Poti, and Tehran. Most of these trains make the 10,000+ kilometer journey in roughly two weeks.

While transcontinental rail shipping will more than likely always be a niche option between cheap but slow ocean transport and fast but expensive air transport, demand is growing rapidly. According to Erkin Zhusanbayev, the managing director of corporate development at KTZ, Kazakhstan’s national railway, 42,000 China-Europe containers flowed through Kazakhstan last year, up from just 2,000 in 2011.

The Khorgos Eastern Gate SEZ is being developed in three stages, Zhusanbayev explained. First comes the dry port, then the logistics zone, then the industrial zone. Operations at the SEZ will gradually transition from just being a place for through-trains to a complete one-stop shop where products can be manufactured, warehoused, imported, exported, transshipped, and sold. There are to be e-commerce warehouses, freight forwarding stations, regional distribution centers, factories, and showrooms where customers can purchase products that can be put directly onto trains.

“The concept is really not just a Silk Road going through, they really want to make this a real logistics economy,” Gheysen said.

At this juncture, the master plan for Khorgos Eastern Gate is showing signs of gaining momentum. Last October, Jiangsu province showed up with a check from China’s central government for $600 million to launch a manufacturing operation in the industrial zone; the agreement was formally ratified in March. According to an administrator at KTZ, big companies like Hewlett-Packard and Toyota are taking steps to open distribution hubs here, and interest has been shown by DHL and Alibaba in setting up freight forwarding and warehousing operations, respectively.

Khorgos Eastern Gate will be officially commissioned in May 2016. Investors should then be permitted to access their land and begin constructing their warehouses, distribution hubs, and factories; the dry port will be fully operational, and customs will be moved on-site, making the SEZ the “one-stop shop” it’s designed to be. In the words of Karl Gheysen, this is only the beginning.

Economic Concerns

Nonetheless, Kazakhstan’s current economic situation is having a major impact on how projects like those at Khorgos Eastern Gate develop.

“The financial crisis is really hitting Kazakhstan very hard, and there’s quite a lot of emergency measures and cuts in all sorts of budgets,” Gheysen explained. 

While Kazakhstan is in the process of developing an array of large and expensive infrastructure projects, the country is also weathering a perfect storm of economic calamities. Since independence, Kazakhstan’s economy has been firmly rooted in commodities exports, with oil and gas the country’s largest sources of financial sustenance. While this has enabled Kazakhstan to become the wealthiest and most developed country in Central Asia, it has also put the country at the mercy of the global oil market as well as the economic condition of its major trading partners – namely, China and Russia. The 70 percent drop in the price of oil since June 2014 by itself caused a 40 percent decrease in national revenue. Couple that with the economic crisis in Russia, the slowdown in China, and the nearly 50 percent depreciation of Kazakhstan’s currency, the tenge, and Kazakhstan now finds itself in a very precarious fiscal position. Nazarbayev recently declared that a crisis worse than the recession of 2007-2009 could be looming.

In spite of this, development at Khorgos Eastern Gate continues.

“With any economic slowdown investors tend to calm down their enthusiasm and take their time with making investment decisions. We have clearly seen this the past months but we are not worried as our project is focused on a long-term development,” said Hicham Belmaachi.

“I guess in the long run we’ll all be fine and just manage,” Gheysen explained. “There’s not really an option. This project of the Silk Road will not be stopped. At most it will be slowed down a little, but nothing more than that. The pressure to deliver is on.”

Rather than Kazakhstan putting its Silk Road projects on hold until better economic times come around, they are instead being positioned as the handholds to help the country pull itself out of economic turmoil and make it more resilient in the future. As part of its “Nurly Zhol - Path to the Future” program, Kazakhstan has been arduously trying to diversify its economy from being so fundamentally dependent on export commodities for well over a decade, but it hasn’t yet lead to many significant results. Through the early 2000s times were good; Kazakhstan had high oil and gas prices to lean on, and the economic transition never approached a point of urgency. That has now changed. Kazakhstan’s perhaps inevitable day of economic reckoning has arrived, and the country is left with little choice but to make good on its long-promised diversification efforts. The development of logistics and manufacturing industries are key planks in this strategy, and now, more than ever, projects like Khorgos Eastern Gate are needed.

“In the end, this only creates more opportunities for the Chinese, who are more than willing to help Kazakhstan out,” Gheysen said. “[In contrast to] what one might suspect, the economic situation actually has brought us new opportunities. With the current economically challenging times it is crucial to find solid partners to link-into this evolution. In the long term, a Kazakhstan-China partnership will be the ultimate guarantee for the long term viability of this new Silk Road.”

On March 17, a memorandum of understanding was officially signed in Nanjing, making China a 49 percent partner in the Khorgos Gateway dry port.