August 30, 2012
TSG IntelBrief: The New Silk Road: Prospects, Opportunities and Risks
As of late August 2012, the international community is accelerating its military drawdown from Afghanistan. Its new vision for the region rests on a resurgent Silk Road that would share ideas, trade and transport across South and Central Asia, with Afghanistan once again as the apex. The Silk Road offers hopeful prospects for foreign investors, but its success materially rests on building internal security in Afghanistan along with a shared vision among neighboring countries. Within that vision, two issues remain deeply uncertain.
The logic behind the Silk Road is clear: NATO plans to improve Afghanistan's security and prospects through a regional network of economic interdependence. The hope is that a vested interest in trade and sharing of resources will override geopolitical and national tensions. The flagship project for this major undertaking is the construction of a Turkmenistan-Afghanistan-Pakistan-India pipeline (TAPI) that would transport gas across the region. For an Afghan economy reliant on foreign aid, the project also offers opportunities to generate money through taxes and foreign investment.
Afghanistan clearly offers bold investors the potential for lucrative rewards. In July 2010, the United States announced that it had discovered nearly US $1 trillion in untapped mineral deposits across the country, and the United Kingdom's Foreign Office subsequently estimated the value of all of Afghanistan's mineral resources in 2011 at approximately US $3 trillion. These deposits include large veins of iron, copper, cobalt, gold and lithium, which are certain to become the backbone of the country's economy going forward. In addition, according to figures from the U.S. Geological Survey, Afghanistan has approximately 1.9 billion barrels of undiscovered crude reserves, and a similar amount of natural liquid gas. Over recent years, investment in Afghanistan has come predominantly from state-owned Chinese, Indian and Brazilian companies. As one example of this, an Indian-led consortium won a tender in January 2012 to explore the Hajigak iron ore mine in Bamiyan, northwest of Kabul. Chinese firms have also invested heavily in Afghanistan's mining industry. Several multinational companies have also operated within Afghanistan, including two large international hotels, the Hyatt and Serena, along with Coca Cola, DHL and Standard Chartered Bank (although it plans to pass its business over to an Afghan bank). In a positive indicator that Western companies are seeking to invest in future opportunities, Exxon Mobil, a global energy company, submitted a bid in July for an oil concession in the north of Afghanistan.
Geopolitics, Terrorism and Afghanistan's Political Future
The main risk to the Silk Road issues from instability in Afghanistan. The U.S. and its allies remain intent on pursuing an aggressive drawdown strategy, with the withdrawal of American troops from Afghanistan scheduled to be completed by late 2013 despite long-term security problems. Foremost among these security challenges is the Taliban. Although weakened from 2001, it remains operational…and lethal. Its key leaders are still alive and its religious and sociopolitical narrative resonates across the Pashtun-speaking south. According to sources, the group remains intent on retaking Kabul after NATO troops have departed. Giving substance to these forecasts, recent terrorist attacks in Kabul have targeted parliament, hotels and embassies in the most secure locations of country, indicating significant gaps in intelligence and security. Some analysts speculate that the security vacuum following NATO's withdrawal will lead to another civil war. But given continued international commitments to train and provide financial support to the military, this scenario is unlikely. Based on the current political and security realities, a more realistic outcome is that the Taliban retains de facto control in the south, while terrorist attacks and political feuds persist in Kabul and the elsewhere in the country.
Meanwhile, competing geopolitical interests among neighboring countries also threaten the Silk Road's progress. India is focused on strengthening its own regional position vis a vis China. Its diplomatic objective towards Afghanistan is primarily based on building regional strength. Following the overthrow of the Taliban-led government, New Delhi has developed a partnership with Kabul through the equivalent of hundreds of millions in U.S. dollars in aid and reconstruction. In return, Afghanistan provides India access to minerals and resources.
India also has substantial security interests in Afghanistan: in the past, terrorist groups that have trained in Afghanistan — including Lashkar-e-Taiba — have conducted attacks into Indian territory. As the exit of military troops nears, India will increasingly focus on these security concerns. In October 2011, India signed a strategic partnership with Afghanistan, which included an Indian guarantee to provide "training, equipping and capacity building programs for Afghan National Security Forces." The agreement appeared to underline New Delhi's determination to ensure that Afghanistan does not slip into a security vacuum. For Pakistan, India's increasing influence in Afghanistan is a major driver for its national security policy. This is especially true given the reality that Pakistan's military elite has typically guided foreign and national security policy. Among senior commanders, there is a continued view that India is the country's main security threat, and that New Delhi will use its influence in Afghanistan to stoke unrest in Balochistan. The military pursues a doctrine of strategic depth with Afghanistan; a policy that aims to limit India's influence in Afghanistan, in part through the use of non-state proxies. These militant groups include the Taliban, Lashkar-e-Taiba and the Haqqani Network. In the past, each of these groups has targeted Afghan government and security targets, along with Western government interests. Over recent months, Pakistan's PPP-led coalition government has presided over a thawing of relations with India, particularly with respect to trade. However, longstanding issues of mistrust continue to stall progress in security relations. Indeed, Pakistan's security relations with India are increasingly tied with Afghanistan. According to sources, such is the importance of Afghanistan that it is one issue never to have been discussed during negotiations between the two countries. A worst-case scenario for Pakistan's military elite is the formation of a pro-Indian government in Kabul that would leave it strategically encircled. A realistic objective for Pakistan appears to be to support a power sharing-agreement in Afghanistan, which would include the Taliban. Across the wider region, countries are also prone to pursuing their own self-interests at the expense of the Silk Road. For example, the border between Uzbekistan and Kyrgyzstan is regularly closed due to ethnic disturbances and internal security problems. There is also evidence that Central Asian terrorists are increasingly active across the north of Afghanistan, particularly the Islamic Movement of Uzbekistan, a trend that might threaten recently discovered oil interests. Other potential spoilers to the Silk Road include Iran, which is historically opposed to the Taliban, but according to some sources has recently switched its allegiances as it seeks to undermine U.S. interests. China, although publicly stating that its interests are primary economic, has generally pursued a stronger relationship with Pakistan.
A High Risk Tolerance
As the international community pursues a military exit in Afghanistan, the Silk Road offers a plausible strategy to help build regional security and advance economic prospects. Investors — both from state-run and multinational companies — will likely increase their investment in Afghanistan as the country opens up following the end of the war. However, those wishing to secure potentially lucrative rewards must embrace a high tolerance for significant physical and operational risk. To be sure, the barriers to entry will be considerable. Foreign investors seeking to benefit from what are certain to be considerable returns from natural resources will have to very carefully assess the torrent of geopolitical factors, meticulously prepare for an array of challenging eventualities, and strategically mitigate an expansive set of risks to their staff and assets. .
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