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Central Asia Update
Thursday, 16 February 2012 08:02

My former deputy at the Asian Development Bank Institute, Turdakun Tashbolotov, was recently interviewed on the current economic and geopolitical situation in Central Asia by our knowledge partner, Equilibri.  Here is the interview, which makes for very interesting reading.

 

How would you judge the current economic situation of Central Asia?

Central Asian states seemingly have an image of dynamically growing countries in Asia. According to the statistics, mainly taken from their national stat bureaus, the average GDP growth rate in last decade was around 6-10%. However it doesn’t necessarily mean that the quality of economic growth in those countries is solid and balanced.

Despite of industrial potential inherited from the Soviet Union and relatively high literacy rate of population economies of these countries still heavily dependent on revenues from exporting natural resources. As the recent financial crisis demonstrated, Central Asian states are still very vulnerable and fragile in the face of global problems.

They more had an image of so-called “banana republics” rather than “second wave of emerging tigers” with stable economic and political base for development. The overwhelming level of corruption in each country is one of the reasons of existing malfunction. The biggest economy in Central Asia, Kazakhstan is trying to build closer economic relations with it main regional trading partners, Russia and Belarus, forming a Custom Union. However the creation of the Union was a disaster for the economy of neighboring Kyrgyzstan. This small republic, the only WTO member country in Central Asia benefited a lot from being a gate to China, lost its advantageous position of re-exporter of cheaper Chinese products to neighboring countries.

This country had experienced series of unfortunate events since early 2010. A long lasting political battle between opposition parties and then-president K. Bakiev and Family ended with a violent coup that took about 95 people’s lives. The Kyrgyz economy came to the edge of collapse when, feared from importing of “Revolutions”, Kazakhstan and Uzbekistan decided to close their borders for couple of months. During the political instability followed by the coup another big problem rose in the southern Kyrgyzstan. Social tensions in predominantly agrarian and poor South resulted into ethnic conflict between Kyrgyz and Uzbeks.

In Central Asian countries, state measures of modernization the economy towards diversified and R&D oriented basis, in general, are very blur and shallow. Instead enormous amount of money were spent to build new shiny palaces and monuments. Uzbekistan has been trying to develop automobile and aircraft industries. However it is still very difficult to consider all these attempts as successful, because these industries are strongly protected by the government and heavily subsidized by other sectors, including even agriculture, while the quality of the products is not competitive in international market. Farmers in Uzbekistan are forced to sell their harvest to government for the price which is just a third of global prices. Agricultural productivity remains very low in all Central Asian states with acute problems in water management and pasture usage.

These problems reflected not only in regional ecological system, but causing a political tension between states. These tensions got accelerated when president of Tajikistan E. Rakhmon declared a launching of a grandiose project, $2-3 Billion cost 300 meters high Rogun Hydropower Station with a capacity of producing 13.3 TWh of electrical power per year. This fact brought equally grandiose panic and sentiments from Uzbekistan, demanding Tajik counterparts to stop this “stupid project”. However persistence of the Tajik government in pursuing this venture caused severe reaction from Uzbekistan by blocking all the transportation nodes leading to Tajikistan through Uzbekistan. It had very harsh impact on the Tajik economy as all the rail ways that connects this country with the rest of the world are laid through Uzbekistan.

Lack of cooperation among countries in solving common problems, political distrust among governments undermines the real potential of the region for prosperous development.

We know the dramatic economic improvements attained by East Asia in the last 3 decades. Central Asia did not succeed as much. Why? Are there globalization winners and losers?

It is very challenging task to make a comparative analysis between Central Asia and East Asia. These regions are very different in many aspects, including geography, history, culture, etc.  I would like to point out some acute factors.

First of all Central Asian states obtained their independence relatively recently, and process of integration, in the case of Central Asia, re-integration, is going very slowly. The regional political trends instead of moving towards integration have been moving toward economic individualism or autarky. Integration is the process when countries share the responsibility and make collective decisions. However for the political establishment in those countries even small hint of losing small part of their sovereignty is unacceptable standpoint. The race for imaginary regional leadership among Central Asian presidents, especially N. Nazarbaeyev of Kazakhstan and I. Karimov of Uzbekistan, whose unlimited political power in their countries could make jealous even some monarchs in the Gulf region, has also significantly shaped the regional politics making it more competitive rather than cooperative.

Secondly Central Asia is land lock region with relatively small population, for instance the whole population of all five Central Asian states altogether is smaller than population of the Philippines or Vietnam, or even Thailand. In ancient times Central Asia was a hub of Silk Road and it benefited a lot from its strategically important location. However in modern era it lost its central role of being a bridge between the East and West, as the East and West found it easier, cheaper and faster to trade and communicate through the sea routes. According to estimates done by the Eurasian Development Bank based in Almaty, in order to deliver a cargo from Shanghai to St. Petersburg by sea it takes about 30 days, but by rail road through Central Asia it supposedly takes 10 days, but actually because of low quality of infrastructure, border checks, bureaucratic formalities, difference between Soviet and international standards of rails size, it takes about 20-40 days, not mentioning the fact that it is twice more expensive than by sea.

Third factor that makes Central Asia less attractive compare to East Asia is Afghanistan, correctly speaking, an unstable situation in this country. Afghanistan is not only the biggest exporter of drugs, but also, despite of huge concentration of NATO troops, is still black hole for extremisms and terrorism, which keeps nervous not only governments of Central Asian states, but apparently some potential investors too.

The recent global financial crisis has somewhat demonstrated the level and type of integration of each Central Asian countries to the world economy. Kazakhstan whose financial system was closely integrated to the world economy experienced the external shocks the most, which reflected in slowing down external capital flows that led to decline of economic growth. As oil price fell sharply the Kazakh government did not have much choice except for external borrowing.

In Uzbekistan and Uzbekistan banking system is under the tight state control and it helped them to avoid direct negative impact of the crisis, but economic slow down in their main trading partners together with declining commodity prices eventually played negative role for their economies too. Kyrgyzstan and Tajikistan are heavily dependent on importing food and fuel, eventually food crisis rather than financial crisis caused more trouble for these countries. Another issue resulted by crisis was significant cut of remittances from Kyrgyz and Tajik workers abroad, moreover, many people who lost their jobs in hosting countries (mainly Russia and Kazakhstan) returned to homes increasing the social tensions in their countries. Despite of different levels of integration to the global economy and exposure to the globalization processes Central Asian states all got affected from the global financial crisis.

At this point may be it is a bit early to give clear economic or political assessment whether the Central Asian countries are losers or winners of Globalization. They are all relatively young and even politically immature states. However if they keep continuing current economic and political polices in the nearest future most likely they will be among losers, if they use their wealth from enormous natural resources to advance their domestic economic and political reforms towards socially oriented and more liberal economy, and build mutually beneficial regional cooperation it will allow them to use benefits of globalization and protects themselves from its imbalances.  
What is the most promising economy of the region in the years ahead?

Each country in the region has a great potential to build successful and sustainable economy. Kazakhstan, Uzbekistan and Turkmenistan are countries that own, along with huge amount of other kinds of natural resources, significant deposits of energy resources such as natural gas, oil, and uranium and needless to say about their (mainly Kazakhstan and Uzbekistan) enormous agricultural capacities to produce highly valued cotton, wheat, fruits and vegetables. These lucrative advantages of these countries could create a strong base for further development towards building a highly industrialized economy.

Kyrgyzstan and Tajikistan relatively poor and less awarded by the nature states are also becoming significantly important players in the region by speculating and, in some cases, manipulating with water resources. These two countries located in upper side of the stream of the two giant river basins in the region – Syr Darya and Amu Darya. They are persistently pushing the idea of constructing new hydropower stations along these rivers, which causes ardent protests from downstream countries mainly Kazakhstan and Uzbekistan (last being more vocal among two). However these projects indeed promises alluring benefits for Tajikistan and Kyrgyzstan in the future if they could accomplish their plans. It will allow them not only to solve the problems of chronic deficit of energy supply in domestic market but also enable them to export the electricity. The growing demand for energy in China and South Asian countries would give them an opportunity to find a strong niche in the energy market of the region and receive good dividends.

All these good potentials can be realized into productive development only by applying balanced and pragmatic strategies and through mutually beneficial cooperation among the countries. Economic integration and cooperation allow them to expand the market and become more attractive for investment, and political cooperation will help them to build a solid security system based on trust to adequately respond to regional and global threats and challenges.

However at this point, integration processes within the region is not very active, except for Kazakhstan, which became one of the founding-members of newly created Customs Union with Russia and Belarus. This Custom Union might, in fact, accelerate the integration processes in the region as governments of Kyrgyzstan and Tajikistan expressed their interest to join the Union after they conduct a careful analysis of all economic costs and benefits.

However there is a risk that this Custom Union will promote only geopolitical interests of Russia as the biggest economy and leading power in the region without providing equal economic opportunities for smaller member countries. Uzbekistan and Turkmenistan are not much interested in participating in regional integration processes not only because their governments are confident with their state-economy model, which was, according to some local experts, proved to be viable and resilient way of running economy during the recent global financial crisis, but also the self isolation is one of the ways of keeping save existing regimes. As result these countries according to the EBRD remain as the least favorable economies in the Commonwealth of Independent Sates (CIS) in terms of investment climate.

We know that the Central Asian countries have plenty of natural resources. Which country has managed best its resources without falling victim to the "resource-state" path?  Is this country following an economic model that resembles the Chinese state capitalism or is it applying a US style capitalism?

Oil rich Kazakhstan has relatively open and liberal economy and its legislation allows a full or shared ownership of its natural resources by foreign companies. The corruption scandals with their participation that occasionally appear in media is different topic for discussion, but anyway, the leading oil transnational companies are freely operating in Kazakhstan. The Kazakh government owns an oil company called “KazMunayGaz”, uranium company “KazAtomProm”, and Electric company “KEGOC”. In 2008 government created a special state fund called “Samruk-Kazyna” that manages state shares in all more or less profitable companies in the country, including those three energy companies. The Head of the Fund was president Nazarbayev’s son-in-law T. Kulibaev, who was fired recently after the incident in Zhanaozen, a small town in oil rich western part of Kazakhstan, where workers strike in one oil company led to clash with police and 10-15 people were killed. This case demonstrated that the situation in profitable energy sector in Kazakhstan is far from being well managed and regulated. There are still sensitive problems in worker’s rights, corruption, transparency issues, and lack of well established public and private relations.

Kazakhstan despite of obvious pro-Russian incline in its foreign policy, is actively trying to diversify exporting routes of its natural resources by avoiding strong Russian dominance in its energy sector and diminishing dependence from Russia’s transportation systems. Kazakhstan had joined a Baku-Tbilisi-Ceyhan pipeline, which was build to bring Caspian oil (and Central Asian natural gas in near perspectives) to Europe bypassing Russian pipeline system.

Recently Kazakhstan, Uzbekistan, and Turkmenistan made another very bold step to develop a new strong market alternative to Russia by jointly constructing (together with China) a new gas pipeline that brings natural gas from these countries to China with a capacity of 40 billion cu/m per year. This project seems satisfied all the partners, especially Turkmenistan and Uzbekistan, whose geographical location surrounded by the states with serious security problems always was a biggest challenge to find stable alternative routes of export.

The energy resources of Kyrgyzstan and Tajikistan are either in very negligible amount or very expensive to extract and transport, so at this point there is no much economic interest from leading energy market players to these countries.

The problem of delaying the economic reforms by relaying on wealth from abundant natural resources might become the main obstacle for development in resource rich countries in Central Asia. The lack of enthusiasm of the Turkmen government to reform its economy from state-owned command economy to the free market economy can be partially explained by this factor. However a reluctance to pursue active economic reforms in neighboring Uzbekistan is not dictated by the abundance of resources, but, along with other factors, president I. Karimov’s strong beliefs in state regulation economy. Another recourse rich country Kazakhstan is far from having “resource curse” phenomena, but the problem of “Dutch disease” is definitely flying around.

How are the big economies playing in the region? Is it China, Russia or the US to get the most powerful economic leverage?

Russia, China, and the United States are all have vital interests in Central Asia, and their interests are not limited only with economic aspects. Russia traditionally has more political influence on the whole regions; however the level of that influence varies from country to country.  Kazakhstan and Kyrgyzstan and less extend Tajikistan are openly build their foreign policy around Russia’s interests. Uzbekistan and Turkmenistan are trying to demonstrate their independence in every possible way, but Russia has still some leverage to influence on them. However in energy sector Russia pursues totally different interest than China and the US. If latter two are considered as pure energy consumers, Russia is one of the biggest exporters of natural gas and oil. Therefore Russia’s vital goal is to protect own market and secure its important role of transit country. It could not do much to oppose Baku-Tbilisi-Ceyhan pipeline, but very active and so far quite successful in opposing to Nabucco project, which is anticipated to bring Central Asian natural gas to Europe avoiding Russian territories. As an alternative variant to that project, Russia is actively promoting North and South Streams of pipelines to reach directly European Union through Baltic Sea and Black Sea eliminating its dependence from “unreliable” transiting countries like Ukraine and Belarus.

Having said that, no one can deny the growing influence of China in the region. The Chinese Government is trying to expand its role in Central Asia through the Shanghai Organization for Cooperation (SCO), an organization which includes all Central Asian republics, except Turkmenistan, plus China and Russia. In the SCO Summit in Russia’s Yekaterinburg in 2009 China announced its plans to provide $10 billion as loan for the member countries with the possibility to increase the amount if necessary. China with its dynamically expanding domestic demand might turn the whole Central Asia, together with Russia, into its raw material supplier. It has big appetites not only for natural resources but also ubiquitous Chinese investors (supported by the Government) are actively involving in Central Asia’s financial sector, communications, construction sector, infrastructure, agriculture etc. According to Kazakh media there was an official request from the Chinese Government to Kazakhstan to rent some 1 million hectares of arable land for 50 years.

The US’s actions in the war against global terrorism, especially a war against Taliban movement in Afghanistan, which is considered by Central Asian states, and eventually by Russia too, as positive phenomenon, somewhat increased, if not the popularity, but at least the necessity of American presence in the region. The US has a military air base in Kyrgyzstan, the only military base in Central Asia, after the Uzbek government kicked them out from its territory as result of strong criticism from Washington on how Uzbek police and army handled the people’s unrest in Andijan city in 2005, where 300-1500 people were killed. However interesting things happened when former president of Kyrgyzstan K. Bakiev tried to close the American Air Base. When Americans agreed to increase the annual rent for using the airport facilities other neighboring countries started offering their territories to them, including Turkmenistan, a country which announced it’s neutrality from everything and everybody (and built a huge monument called “Arc of Neutrality” to magnify the fact). Although the US’s involvement in energy sector in Central Asia is relatively limited, obviously, it also wants to get some share from the cake made of oil and gas. However two other players, Russia and China, in given historical and geographical advantages, are more vigorous than the US. The significant achievement of the US and its friends in this regard was accomplishment of 1780 km long oil pipeline Baku-Tbilisi-Ceyhan with a capacity of 1 million b/day. Although there many international oil and mining companies headquartered in the US are operating in Central Asian countries, the supporting role of the US Government to them is ambiguous. We can only assume that occasional trips of some prominent American senators to Central Asia are organized by certain interest groups to have a say on their behalf.

The European Union is trying to strengthen economic relations with the region, particularly on the energy sector. Do you think Central Asian governments consider the EU a reliable economic partner, given the current economic troubles?

The Europeans are also actively involved in international competition to get some piece of the energy cake. Growing dependence from expensive Russian oil and gas, unstable situation in Northern Africa pushes Europeans to develop common goals and be more persisted in pursuing their interests to secure alternative source of energy. Despite of all these factors some European governments still consider Central Asia, namely Kazakhstan and Turkmenistan as middle size producers, and do not see them as equally important alternative to what they have, Russia and Libya. These concerns were increased when new geological estimation released the fact that potential deposits of natural gas in Turkmenistan was smaller than what official Ashgabat had announced earlier. Also, chilly relations between Azerbaijan and Turkmenistan over disputed territories in Caspian shelf do not add any good credit to Central Asian side.

However as general line in the energy policy of the European Union the Nabucco project still looks important despite of all ups and downs in negotiation process and furious opposition from Russia.  The construction of this $8 billion cost project starts in 2013 and will be finished in 2017 with the capacity of transporting more than 30 billion cm3/ year. In order to increase the attractiveness of the project its promoters included Iraqi and Egyptian gas to connect to Nabucco, which makes it more surreal in the light of last developments in those countries. However this project is endorsed by the EU and intergovernmental agreement was signed in 2009 between concerned countries. How well they accomplish the plans depends on coordination between partner states and political situation in supplying countries.

In other sector of cooperation, let say in good and services trade, Europeans are not as active as Russian, Chinese, Turkish or Iranian companies. High technical standards set up by the EU make it difficult for Central Asian final products easily reach European market, except for raw materials like cotton, wool, silk, honey etc.

However European presence in such areas as economic assistance and aid is very much appealing. The EBRD projects, the EU programmes, Nordic Development Fund, and other national development agencies such as DFID, GIZ, Swiss Agency for Development and Cooperation, DANIDA have been providing valuable economic aid and technical assistance in various sectors of economy in each Central Asian countries.

The views expressed in this interview are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute, the Asian Development Bank, and its Board of Directors.


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