Steppe #10: Cotton's Clean Break
Montfort Eurasia's newsletter covering Central Asia and the Caucasus
Hello, and welcome back to The Steppe, your newsletter bringing you the latest business- and investor-relevant happenings in the South Caucasus and Central Asia, brought to you by Montfort Eurasia.
Uzbekistan’s Cotton Redemption
Kazakhstan: Uranium to the Rescue?
Kara-Suu Comeback
Turkmenistan’s Green Leap
Caspian Winds Meet Black Sea Cables
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COP29 in Baku is fast approaching, and the team at Montfort Eurasia have been following developments closely. Make sure to catch our dedicated newsletter that gives an inside track on what’s going on with the climate summit.
Uzbekistan’s Cotton Industry Turns a Corner
The rows of bushes, flecked with fluffy white fibers, stretch into the horizon. For decades since the fall of the Soviet Union until 2017, picking cotton in these fields was a mandatory annual task for millions of Uzbeks In order to bring in the harvest. In recent years though, the industry, which accounts for 13.6% of GDP, has been cleaning up its supply chains as a result of reforms enacted by President Mirziyoyev — and is poised to become one of Eurasia’s most dramatic growth stories.
Ostracized for years by the global market as a result of human rights concerns, major Western brands and manufacturers like Levi’s, H&M, and Adidas for many years joined a sweeping boycott of Uzbekistan’s cotton that was lifted in March 2022 after the International Labour Organization assessed the sector as being free from forced labour. But, in the space of just a few years, the country has put itself in prime position as a textiles powerhouse: the ban has been lifted and this past month Uzbekistan hosted the world’s largest annual textile event––the International Textiles Manufacturers Federation (ITMF) convention.
That’s only possible because, since 2015, Uzbekistan has made remarkable strides in eliminating forced labour. The ILO estimates that two million children and 500,000 adults were removed from forced labour, a major victory for the country’s human rights efforts. These reforms, including stricter labour inspections and the abolition of cotton quotas, have paved the way for modernizing the textile sector and boosting its export potential.
Uzbekistan's shift towards producing value-added goods, rather than just unprocessed resources, marks a major departure from its past reliance on raw cotton exports. Recent modernization initiatives have enhanced wages and working conditions, with the sectoral minimum wage increasing sixfold between 2015 and 2020. These reforms have opened up new opportunities for businesses to enter a more liberalized and regulation-compliant market.
One of the key dynamics making the country’s industry attractive to foreign investors is the introduction of cotton clusters. These clusters vertically integrate farming and production processes and today, nearly all of Uzbekistan’s cotton is produced through 142 clusters.
Abu Yousuf, head of the Better Work Programme in Uzbekistan, which is a joint initiative between the ILO and the International Finance Corporation (IFC), describes a clear shift in mindset within the industry.
“Based on my discussions with industry leaders and our colleagues in the government, there has been a clear shift in mindset, along with efforts to diversify export potential. They are committed to compliance and have demonstrated that commitment in their collaborations.”
Despite the progress, challenges remain. Labour rights violations, such as contract abuse and intimidation of rights defenders, remain of concern. Ensuring that these issues are addressed will be crucial for maintaining investor confidence and securing Uzbekistan's place in global supply chains. The government must demonstrate a commitment to transparency by allowing independent monitoring and swiftly investigating any reports of abuse.
As Uzbekistan continues its reforms, the country’s textile sector is poised to become a key player in the global market. For investors seeking opportunities in a rapidly growing and improving industry, Uzbekistan's cotton sector offers a promising future. However, maintaining progress on labour rights will be critical to preserving these gains and ensuring long-term success.
Kazakhstan’s Nuclear Gamble
Kazakh President Kassym-Jomart Tokayev has announced that Kazakhstan will hold a referendum on October 6 to decide whether to build a nuclear power plant, a move that could mark a significant shift in the country's energy strategy. The push for nuclear energy is being promoted by Kazakhstan's leadership as essential for ensuring long-term energy security.
For years, the country has debated the potential of nuclear power as part of a broader strategy to diversify its energy mix and reduce greenhouse gas emissions. This discussion has gained momentum as Kazakhstan grapples with increasingly hotter summers, power outages, and the looming threat of energy shortages. According to government projections, the country could face a severe electricity shortfall within the next decade. By 2035, Kazakhstan’s electricity consumption is expected to surge to 152.4 billion kWh, putting pressure on its aging infrastructure and requiring new power sources to meet growing demand.
Currently, Kazakhstan relies heavily on coal, which accounts for approximately 80 percent of its energy generation. Another 15 percent is generated by hydropower, while the rest comes from renewable energy sources. The government has recognized the environmental risks posed by this reliance on coal, oil, and natural gas. As part of its commitment to reducing carbon emissions, Kazakhstan is eyeing nuclear energy as a viable alternative.
Kazakhstan’s position as the world’s leading producer of uranium makes the prospect of nuclear energy particularly expedient. The country holds 12% of the world’s known uranium resources and produces a staggering 43% of the global uranium supply. Leveraging this domestic resource to fuel a national nuclear power program could enhance energy independence and strengthen Kazakhstan’s role in the global energy market.
But, the proposal has sparked significant concerns, particularly regarding the environmental impact. One of the most debated issues is the plan to use water from Lake Balkhash to cool the reactors. Environmentalists argue that the lake, already suffering from declining water levels and increased salinity, is under ecological stress. Further strain from a nuclear power plant could accelerate the degradation of its ecosystem, posing risks to biodiversity and local communities that depend on the lake for water and livelihoods.
Public opinion on the nuclear power plant is divided. While some see it as a necessary step toward energy security and climate goals, others remain wary of potential environmental damage and safety risks. There’s also the legacy of Soviet-era nuclear weapons testing in the country, which were conducted with lax safety controls and exposed an estimated 1.5 million Kazakhs to nuclear fallout.
As the referendum approaches, the Kazakh government will need to carefully balance its energy needs with environmental protection. Should the vote pass in favour of building the nuclear plant, it would have far-reaching consequences not only for Kazakhstan’s energy policy but also for the region and beyond.
Bridging the Divide: Kara-Suu Reopens After 14 Years
On September 12, the Kara-Suu checkpoint at the Kyrgyz-Uzbek border reopened after 14 years of closure, marking a significant step in the two nations’ improving political and economic ties.
This crossing, near the town of Kara-Suu in Kyrgyzstan's Osh region and Uzbekistan’s Andijan region, was closed following violent unrest in 2010 that left over 400 dead. The fallout severely impacted the Kara-Suu market, an important regional trading hub for goods from China and Turkey, but its reopening is set to revive economic activity in the region.
Before the unrest, the market employed up to 15,000 people, serving as a vital economic stabilizer in the area. The reopening of the checkpoint follows renewed talks between Kyrgyzstan and Uzbekistan, breathing new life into a once-thriving trading zone.
The reopened checkpoint is expected to significantly speed up transportation from Uzbekistan into Kyrgyzstan's Osh region, with about 12,000 people projected to cross daily. It will also improve the transport links between Osh and Jalal-Abad.
During the opening ceremony, Kyrgyz official Bakyt Torobayev emphasized that reopening these international checkpoints is crucial for boosting cooperation, stating they "are an important step towards strengthening economic, social, and cultural ties between our countries, as well as increasing tourist flows."
The same day saw the reopening of the Ken-Sai and Uch-Kurgan checkpoints between Kyrgyzstan's Jalal-Abad region and Uzbekistan's Namangan region. In total, 13 out of 16 border checkpoints between the countries are now operational, with three more—Seydikum, Sumsar, and Yntymak—slated to reopen in 2025. Railway stations in Jalal-Abad, Shamaldy-Sai, Kara-Suu, and Kyzyl-Kiya will also be activated.
Trade between Kyrgyzstan and Uzbekistan reached $693.6 million in 2023, and in the first seven months of 2024, it increased by 6.7%, hitting $428 million.
On September 1, 2023, a protocol came into effect allowing citizens of Uzbekistan and Kyrgyzstan to travel to each other’s countries for up to 60 days using only an ID card.
Railways and Renewables: Turkmenistan's Next Chapter
Turkmenistan will be in line for a wave of new support from international investors under a new strategy launched by the Asian Development Bank (ADB). The plan spans from 2024-2028 and is designed to support the nation’s aims to pursue a more sustainable, diversified economy.
A key component of the strategy is supporting Turkmenistan’s green transformation. ADB will invest in energy efficiency, renewable energy projects, and policy reforms to help the country reduce carbon emissions and achieve its climate goals. The bank will also assist in developing long-term decarbonization plans, with a focus on reducing methane emissions, positioning Turkmenistan to meet its climate change commitments.
A reduction of Turkmenistan's dependence on hydrocarbons could create investment opportunities in non-energy sectors such as agriculture, technology, infrastructure, and manufacturing. Investors could tap into emerging industries as the country develops new sectors.
In addition to green initiatives, ADB will also focus on improving Turkmenistan’s transport infrastructure, particularly through developing integrated railway networks along key trade routes, such as the Central Asia Regional Economic Cooperation (CAREC) corridors. CAREC has been involved in the country since 2010, helping support efforts towards regional transport, trade, and energy security.
The development of significant transport infrastructure projects could create investment opportunities in construction, logistics, and energy infrastructure.
This could enhance the efficiency and reliability of supply chains, facilitating both domestic and international trade. The strategy also emphasizes the importance of the private sector in driving economic growth, with ADB offering support to boost export-oriented industries and improve access to capital for small and medium-sized enterprises
Black Sea Energy Bridge: Linking the Caucasus to Europe’s Green Grid
Azerbaijan and Georgia have joined forces with Romania and Hungary to develop a significant renewable energy project aimed at linking the South Caucasus with the European Union. The initiative will involve installing a high-voltage direct current (HVDC) submarine cable under the Black Sea, which will facilitate the transmission of green energy from the Caspian Sea region to the EU. Already approved in December 2022, this ambitious venture gained renewed urgency following the EU’s efforts to reduce its dependence on Russian energy supplies in the wake of Russia's invasion of Ukraine.
The cable will primarily tap into Azerbaijan’s potential for wind energy generation in the Caspian Sea, delivering power to Romania and Hungary through Georgia. The four countries have signed a shareholders agreement establishing a joint venture for the Black Sea Energy project, with leadership responsibilities rotating among partners. The European Commission has pledged 2.3 billion euros in financial support.
Romania’s transmission system operator Transelectrica, Georgia’s Georgian State Electrosystem, Azerbaijan’s AzerEnerji, and Hungary’s MVM have come together to form the firm overseeing the cable installation. Based in Romania, the firm will be responsible for executing the project over the next three to four years. This interconnection will link the transmission networks of all four countries, providing a critical corridor for renewable electricity, strengthening regional energy security, and contributing to the EU's long-term climate goals.
Stat of the Month
69.8%: Coal remains the dominant energy source in Mongolia, supplying 69.8 percent of the country’s energy. As the coldest capital in the world, Ulaanbaatar’s growing population - now 45 percent of the country - is driving increasing energy demand. Between 2006 and 2016, heat demand grew by 35%, with projections rising from 5,059 kilo giga calories in 2016 to 8,096 by 2030. To meet these needs, Mongolia will require 3,093 kilo giga calories of heat capacity by 2030.
What We’re Reading
Kazakhstan: Turkic unity and Kazakh culture on display at Nomad Games, Joanna Lillis, Eurasianet