Central Asia Rates 2nd and 3rd Looks From Investors
When Russia occupied the Crimean peninsula and supported the separatists in Ukraine’s eastern Donbas region, some Western experts advocated a common policy approach to Ukraine, along with its neighbors Moldova, Belarus Georgia, Armenia, and Azerbaijan. In Moscow, policymakers still refer to these nations as to Russia’s “near-abroad,” and from Brussels they are seen as“Eastern Partners.”
But there is another “in-between” space that demands focus from the West: Central Asia. The geostrategic region is being squeezed by America’s two greatest adversaries of the day – China and Russia. The tensions between the U.S. and both Eurasian nations are now on the rise. Tit-for-tat consulate closings, U.S sanctions over the riots in Hong Kong, and technological espionage cases are just the symptoms of a planetary confrontation between the two superpowers.
With accusations against Moscow of U.S. election interference accusations and sanctions against the massive Nord Stream II natural pipeline project from Russia to Germany, diplomatic relations with the Kremlin are at a nadir. But while support of countries between the Baltic and the Black Seas elicited dozens of initiatives from Western policy makers in recent years, the Central Asian region seems to be less of a priority. This is a mistake.
There is little doubt that post-Soviet Central Asia is a place where the economic interests of Russia, China, and Western powers overlap. The largest country in the region, Kazakhstan, has made remarkable economic progress during the last 30 years: its oil and natural gas production grew by 3.5 and 3.8 times since 1990, while in Russia it advanced by only 10 and 13 percent in that period.
Kazakhstan’s leadership encouraged both Western and Chinese companies to invest into the country while it teamed with Moscow in constructing a vast economic integration bloc known as the Eurasian Economic Union. More than 4,700 miles of highways and 2,000 miles of rail were built in recent years in an effort to be a part of the critical China-Europe transport corridor.
Hundreds of millions of dollars were invested in educational projects aimed at grooming the managers who will run the country in decades to come. A sophisticated transition of power to the new generation of leaders is underway in Nur-Sultan with the new President Kassym-Jomart Tokayev, formerly the nation’s Prime Minister and Foreign Minister taking office in March 2019 and winning the elections in June 2019.
This success story needs a strong financial component. Back in 2019, Kazakhstan produced 1.6 million barrels of crude a day, just 15 percent less than Chevron did, and was the world’s leading uranium producer with 21.7 thousand tons, or 40.5 percent of global deliveries last year.
However, the combined market capitalization of all Kazakhstani listed companies stood at $38.4 billion by the end of the year whereas Chevron alone was valued at $225.5b. The ratio of market cap of listed companies to the country’s GDP is as high as 69 percent in China and 42 percent in Russia, while Kazakhstan stands at 22.6 percent. A long way to go…
Should private investors discover the true potential of the regional markets, the modernization of the entire Central Asian region would accelerate dramatically. The Russians seem unwilling to invest in their “near-abroad”: in the case of Germany, for example, 91.5 percent of outgoing FDI is placed within the EU, while in the case of Russia only 1 percent ends up in Eurasian Economic Union countries.
Kazakhstan’s leadership is doing its best to develop state-of-the-art financial institutions that may help to achieve this goal. Back in 2015 the Astana International Financial Center (AIFC) was founded. In addition to a stock exchange created and managed in partnership with NASDAQ, the Shanghai Stock Exchange, Goldman Sachs, and the Silk Road Fund, AIFC also offers a kind of a free economic zone where both Kazakhstani and foreign companies may register, enjoying the local residency and an international legal regime. The zone operates under the laws of England and has a court comprised of respected international lawyers, including the former Deputy President of the Supreme Court of the United Kingdom, Lord Mance.
As of mid-2020, 500 companies from 42 countries cooperate with the AIFC, including the incubation of over 100 startups. AIFC also boasts the first Islamic bonds to be found in the post-Soviet space, which were placed in March 2020. Of course, some plans appear to be delayed as Kazakhstan fights the second wave of the coronavirus pandemic–but we should be looking further into the future.
Central Asia is the key to the Eurasia’s economy, both as a “bridge” between China and Europe, and also a gateway for Western investment. Kazakhstan affords access to the still large Russian market, boasts a huge pool of natural resources, and provides links to neighboring emerging economies such as Uzbekistan, which is opening up at break-neck speeds under President Shavkat Mirziyoyev. Uzbekistan (like other regional economies) has virtually no stock markets to speak of – a unique trait for a country of 34 million.
The geopolitical and geo-economic game playing out in Central Asia is complex, but financial cooperation with the countries of the region is promising, with AIFC rising to the role of regional hub. In our dynamic world, it is a crucial task for both American and European investors to establish a strong presence in Russia and China’s “in-between” spaces, thus securing a chance for contributing to, and for profiting from, the region’s progress.
