Kyrgyzstan: All is Gold but what Glistens?

The tiny, mountainous republic of Kyrgyzstan rests in the shadow of more famous neighbors: Kazakhstan, China and Afghanistan. Total economic collapse after the break-up of the Soviet Union was followed by large-scale foreign investment and slow but steady growth, enabling GDP (PPP) to peak at $13.5 billion in 2003. For the past three years, the size of the official economy has remained fairly constant at a little over $10 billion. The outcome for 2010, however, is still anyone’s guess, as even while Kyrgyzstan is pulled down by recession abroad, feeling the pinch on exports and remittances, the black economy and foreign aid receipts continue to boom.

Russian influence was first felt in Kyrgyzstan in the 1820s and throughout the 20th century, the two economies were inextricably linked: prior to independence in 1991, some 98% of Kyrgyz exports were purchased by other countries within the USSR. The subsequent loss of this ready-made market devastated industries and, despite nearly two decades of investment from the likes of the World Bank and the IMF, Kyrgyzstan has been slow to recover. 52% of the population still lives on less than $2 a day, unemployment hovers around 18% and inflation is currently 20% per year. Investment is targeted at industry and ignores the 2/3 of the population living in rural areas; the absence of adequate banking facilities has stifled regional entrepreneurship, rural poverty is climbing, and any hope of employment in Kyrgyzstan lies the country’s capital, Bishkek.

Photo: Konnie W. AndrewsBishkek is not the only draw for unemployed Kyrgyz, however. An estimated 10% of the population (and 90% of graduates) are employed abroad at any one time, predominantly in Russia and Kazakhstan. The situation is a double-edged sword: the brain drain is damaging to economic development but, at the same time, the government is reliant on the remittances of migrant Kyrgyz for 50% of the state budget. Whilst GDP per capita is significantly higher overseas ($15,800 in Russia and $11,500 in Kazakhstan as opposed to $2,100 in Kyrgyzstan), this only lasts whilst the global economy is buoyant; when economies contract, it is migrant workers who are first to lose their jobs. 2009 saw a dramatic reduction in remittances to Kyrgyzstan and resultant deprivation among families left behind. A UNICEF report released last August expressed concern about the risk of childhood malnutrition, and the charity is lobbying the Kyrgyz government to fortify all flour with nutrients in a bid to stave off the problem.

Global recession has also significantly affected Kyrgyzstan’s ability to sell her goods abroad. Exports, which include minerals, wool, cotton and tobacco, fell 17% in the first half of 2009 and trade with Russia (Kyrgyzstan’s largest trading partner) declined 43.6% in the same period. Although trade in kind (in particular the exchange of Kyrgyz hydro-electricity for Kazakh and Uzbek fossil fuels) continues as normal, international analysts have already predicted that Kyrgyzstan will see a 1.6% drop in GDP this year, making it the worst recession the country has experienced since 1995.

All is not doom and gloom, however, as while Kyrgyzstan lacks the oil and, it does have one major natural asset: in the heart of the Tien Shah Mountains is one of the largest gold reserves in the world. The Kumtor gold mine single-handedly produces gold equating to 10% of Kyrgyzstan’s GDP and 20% of total exports and three more viable mine sites have already been identified. The Swiss are major purchaser of Kyrgyz gold and, whilst gold’s spot price remains high, this portion of Kyrgyzstan’s economy can only flourish.

The final major component of Kyrgyzstan’s GDP is money received in aid from foreign governments. Both Russia and the USA maintain sizeable air bases in Bishkek and pay the Kyrgyz government handsomely for the privilege: in 2009 the Russians committed $2 billion in development loans and $150 million in aid, whilst the Americans increased their contributions to $60 million a year in rent and $117 million for development projects. Recession has not reduced aid contributions but such assistance does come at a price. Russian loans are tied predominantly to infrastructure projects, and loan repayment rates have been set such that the Kyrgyz will almost certainly default, putting the finished structures back into Russian control. The Americans want to maintain a regional power balance whilst weighing in on behalf of the Nabucco gas pipeline, whose opening in 2014 will break Gazprom’s monopoly on Eastern European gas supplies.

Global recession or not, Kyrgyzstan’s black economy continues to go from strength to strength. Analysts estimate that black money accounts for between 50% and 60% of country’s total economy and even the Kyrgyz government recognizes that undeclared assets, tax evasion and smuggling are endemic at all levels of society. Two of the most lucrative black markets trades, drugs trafficking and the hunting of endangered species, are both driven by foreign demand. Afghan opium travels through Kyrgyzstan en-route to Russia and Europe and, over the course of its journey, its wholesale price increases from $2.50 per gram to $33 per gram. Drivers, middle-men, customs officials and police all receive a cut of the pie, either for active assistance of for turning a blind eye. Foreign hunters, mostly from America, come to Kyrgyzstan in the hope of shooting big game trophies and will pay as much as $23,000 for an endangered Marco Polo sheep or snow leopard. Inevitably, this money is never declared to the state but is lucrative for all participants.

Photo: Tunduk of a Yurt by Jean Luc Wenger

Photo: Tunduk of a Yurt by Jean Luc Wenger

Where Kyrgyzstan stands to gain economically is if it can turn its black money white. Tentative steps have been made by the Kyrgyz government, which has announced a three-month amnesty during which those declaring black assets or previous tax evasion will be immune from prosecution. A more sweeping solution comes from the private sector: to turn Kyrgyzstan into the financial services hub of Central Asia. The country is easily accessible from across Asia and Russia, is politically relatively stable and is already attracting interest from a variety of foreign banks. If they can convince Asia’s black asset holders that the country is a safe, convenient and discrete depository for funds, Kyrgyzstan can look to shape itself in the Swiss model, profiting semi-legitimately from black market money.

Kyrgyzstan’s recession results largely from the economic contraction of its major trading partners. Significant mineral deposits, foreign aid and the buoyant black economy have, however, certainly softened the blow, ensuring that recession in Kyrgyzstan is short-lived: recovery is expected at 3% next year and 5.2% per annum in 2011-13. Kyrgyzstan’s greatest hurdle, therefore, is not to stimulate the economy in the short-term, but to ensure future economic development reaches rural areas, offering people a viable alternative to exodus and low-level black market trading. Only once this is assured can Kyrgyzstan create a stable, integrated market economy that plays to the country’s strengths and enables it to exist without the pressures that reliance on foreign aid and black money bring.