WWW.OCAMAGAZINE.COM OCA#35 SUMMER 2020 text by Marc David Miller

For several years I have been out of the Central Asian market. Upon my return in 2019, I saw many changes in the region, changes that are not necessarily good or bad but that investors need to be aware of in order to understand the entire region and the individual countries.

There are three significant eras in the last 100 years for Central Asia (I chose 2019 as the divide between 2.0 and 3.0, as many issues that began in previous years have finally reached definitive stages of implementation):

Central Asia 1.0: 1920-1991.
The Soviet Years. Of some relevance (for instance, the effect of Korean ethnic population transfers to Uzbekistan and its impact on business today), but effectively Central Asia was tied to the Soviet economy.

Central Asia 2.0: 1992-2019.
Independence, the rise of China, conflict in Afghanistan, Kazakhstan’s encouragement of foreign investment, and European Economic Union. Five countries suddenly became independent in a matter of months, many institutions were carried over or became successors to their Soviet era counterparts. China became more important to each country’s economy, although countries were cautious because of questions of losing their sovereignty. The conflict in Afghanistan made the region a priority to the US government, as troops transited through the region to/from Afghanistan, planes were refueled out of Manas (Kyrgyzstan), and because Pakistan was considered an unreliable partner, transit routes (Northern Distribution Network) were developed. Most of these systems have been shut down and, unfortunately, not repurposed into civilian logistical routes. Rise of energy exports, led by Kazakhstan and its firm commitment to foreign investment. The Eurasian Economic Union, off to a slow start, tries to varying degrees to keep the region’s economies tied to Russia, and countries are just as concerned over issues of sovereignty regarding Russia as they are about China’s investment in the region. In addition, regional energy projects (especially hydroelectric from Kyrgyzstan to Afghanistan and Pakistan) are planned but stalled.

Central Asia 3.0: 2020 and Beyond.
China’s Belt and Road Initiative, a more open Uzbekistan, a more polarized US/Russia/China business and political climate, bigger push from US and EU for greater economic ties within the region, and Kazakhstan’s next generation of leadership.

As we look ahead, Central Asia 3.0: 2020 and Beyond, might be the start of the region’s greatest chapter. To some, China’s Belt and Road Initiative (BRI), announced by President Xi Jinping in Nazarbayev University, Nur-Sultan in 2013, is ‘found money.’ China seems to be pouring billions in infrastructure projects, especially in the transportation arena. The appeal of BRI to a poor or middle income country (and even developed countries like Italy and Greece) is that it is the only game in town for many states, and promises to develop infrastructure on a massive scale in coordination with China’s trade routes. Setting aside issues of corruption in such development, a country’s leadership can show new projects to its people, projects that would probably not have been built without China’s participation.

Many countries are concerned with transparency, ‘debt trap diplomacy,’ lack of knowledge transfer, and ultimately loss of sovereignty, either de facto or de jure. Unlike projects funded by EBRD, ADB, the World Bank and other institutions in the West, these projects are largely ‘black holes’ in terms of their financing, construction, and operation. A common criticism is that BRI projects are almost always constructed by Chinese crews and just as critically, subcontracts are awarded to Chinese companies, preventing local companies and people from learning modern accounting, financing and engineering techniques. To contrast, when Telefónica, the Spanish telephone company, went into Latin America starting in the late 1980s, they hired over 300 contractors in their first five years—everything from work crews to wire vendors, from food suppliers to truck manufacturers—which enabled the individual countries to build entire industries, not only to support Telefónica but to bid on contracts for other companies locally and internationally. EBRD, World Bank, Asian Development Bank and development agencies from Western countries like US Development Finance Corporation encourage such development; however, the funding is currently not nearly at the level of BRI and its associated financial institutions.

Uzbekistan at independence had arguably the most developed economy in Central Asia, as well as the largest population. Unfortunately, it continued its Soviet-style command economy, with the negativity associated with massive corruption, authoritarian rule, and little prioritisation of its own people’s education and prosperity. Islam Karimov considered himself a ‘Scientific Socialist’ and therefor the natural leader of Central Asia and consequently did little to develop a free market. Although blessed with good natural resources and universal literacy, benefits did not trickle down to the general population. In addition, there were disputes with neighbours, especially Kazakhstan and Kyrgyzstan, which prevented better regional economic integration. After Karimov’s death in 2016, Shavkat Mirziyoyev as president has led the country to better regional cooperation, a more open economy, and a vast improvement in human rights.

The geopolitical world is more clearly polarised today than it was 10 years ago. Russia is more aggressive and depending on its prosperity more likely to flex its muscles (Ukraine being the prime example). China is mastering the art of soft power, obviously lead by economic investment and trade with the Belt and Road Initiative but also other financing institutions like Asian Infrastructure Investment Bank. However, investment from the US, European Union, Japan and Australia is largely favored by both the leadership of Central Asian countries and as well as the middle classes, as it is perceived to ‘come with fewer strings’ attached, as well as allowing a country to prosper. It is important to understand that there is an economic competition in Central Asia, a 21st century Great Game, and countries can benefit by choosing how they want to participate without giving up control of their economies, without giving up work and knowledge opportunities for their own citizens, and still maintaining good relations with their larger neighbours rather than being absorbed into them.

Both the US and the EU want the countries of Central Asia to trade more among themselves, as well as incorporate Afghanistan, the Caucasus, and Mongolia (the “CAMCA” region) to promote peace and prosperity in the region as well as avoid over-dependence on either China and/or Russia. Projects such as CASA-1000 (hydroelectric power from Kyrgyzstan into Afghanistan and Pakistan) which have been largely sitting in a desk drawer for 15 years are finally being constructed; the benefits in terms of fundamental improvement to people’s lives is immeasurable. In addition, better co-operation means more direct trade routes for Central Asian exports and imports—all Central Asian countries are landlocked, and Uzbekistan is the largest of the two double-landlocked countries in the world.

Finally, Kazakhstan is in the process of transitioning to its second generation of post-independence leadership. Because of its forward thinking in the 1990s in terms of emphasis on higher education, on investment climate, on poverty alleviation and income growth, as well as being blessed by un-squandered oil and other natural resources, the country has by far the strongest economy in the region. The transition from Nursultan Nazarbayev to Kassym-Jomart Tokayev signals that the generation trained abroad, that came back to participate in the development of the country, are now likewise taking positions of leadership in politics and industry. Innovations continue, notably the Astana International Financial Centre (AIFC) as a financial and legal hub connecting the economies of the Central Asia, the Caucasus, China, Mongolia, Middle East and US/Europe.

Image by Guilherme Romano from Unsplash