The Steppe #3
Montfort Eurasia's newsletter covering Central Asia and the Caucasus
Hello, and welcome back to The Steppe, the newsletter bringing you the latest business- and investor-relevant insights from the South Caucasus and Central Asia, published by Montfort Eurasia.
In this edition, we take a look at:
A developing trans-continental trade route cutting across Eurasia
The race for rare earth elements comes to Central Asia
Big green plans for one of the continent’s most polluted cities
A new business bloc seeking closer ties with Washington
The environmental challenge facing COP29 hosts Azerbaijan
A major airline boom across Central Asia
Please don’t hesitate to contact us to share feedback and tips at eurasia@montfort.london.
Eurasia’s new Silk Road
European and international investors have pledged an unprecedented 10 billion euros to bolster transport connectivity with Central Asia as part of the hotly-anticipated Middle Corridor, a network of road, rail and energy links that advocates say will help close the gap between East and West.
This funding, a strategic reaction to geopolitical shifts following Russia's war in Ukraine, is set to expedite the expansion and development of the Corridor at a time when pressures on international shipping, such as the Red Sea crisis, make overland transport more and more attractive to global firms. The EU has identified 33 infrastructure projects to be potentially funded, many of which are rail projects.
Given the challenges and sanctions associated with the Northern Corridor (Russian) and southern (Iranian) routes, the Middle Corridor, extending through Turkey, the South Caucasus, and Central Asia, is an alternative transport route that minimizes exposure to sanctions, while getting goods to market. This is important for Europe’s trade and connectivity, especially amid political and economic constraints. Moreover, it bolsters Europe's resilience to changes in trade patterns and disruptions.
But, there are major hurdles to consider when evaluating the feasibility of developing the Middle Corridor. Ilayda Nijhar, Geopolitical Risks Advisor at the Overseas Development Institute (ODI), a global affairs think tank, says alternative corridors like the International North-South Transport Corridor (INSTC), backed by Iran and Russia, still present a challenge to the Middle Corridor’s development.
This is despite the potential sanctions that using them may risk, as these routes offer shorter trade paths for Iran, India, and Russia. Consequently, the INSTC
“has the potential for a more competitive offer aligned with the strategic interests of the countries and businesses involved.”
This is especially so given that some of the countries involved are still deliberating the extent of their commitment to developing the Middle Corridor.
Another problem is that, given numerous logistical challenges like current capacity constraints and lengthy cargo transport times, its capacity would only be about 10 percent of the Northern Corridor’s 100 million tonne capacity. Developing the Middle Corridor will require major upgrades to road and rail systems and port improvements.
The EU’s endorsement of the Middle Corridor will certainly boost its competitiveness, especially in light of its inherent strategic appeal for several other countries on the way. As Nijhar notes,
“Turkey has been a vocal supporter in promoting the Corridor as a stable and dependable route, viewing it as a means to consolidate its regional position and become a central hub for Eurasian trade.”
Azerbaijan, Georgia, and Kazakhstan, hosting key transit points along the route, are also set to benefit from the Middle Corridor.
Kazakhstan in particular has emerged as a crucial contributor to the realization of this project. With its strategic location on the route and strong economic and infrastructure capabilities, Kazakhstan has entered into roadmaps with Azerbaijan, Georgia, and Turkey, committing to resolving bottlenecks and developing the route by 2027. These upgrades address some of the infrastructure challenges and they align seamlessly with the broader objectives of the EU in advancing the route.
Addressing the technical challenges beyond the Middle Corridor and its inability to completely supplant the Northern Corridor, it still stands as a crucial alternative, fostering increased connectivity. As trade volumes grow between the East and West and European investments pour into regional connectivity initiatives, the Middle Corridor plays a pivotal role in reshaping the trade landscape. Its appeal lies not only in its potential to overcome geopolitical challenges, but also in the prospect of creating more diverse and resilient trade routes.
More valuable than gold: How Central Asia could challenge China’s rare earth monopoly
China’s monopoly on Rare Earth Elements (REEs) has Western nations worried about their dependency on the East Asian nation, due to their wide range of uses from computing to clean tech and modern weapons systems. And the key to breaking free from this dependency might just be held by Central Asian countries like Kazakhstan, Kyrgyzstan, Uzbekistan, and Tajikistan.
Analysts, recognizing the potential in these nations' substantial reserves, are urging Western governments to dive into investment ventures with their Central Asian counterparts. This could challenge China's dominance in the sector and bring major new mining operations online that could see a dramatic expansion in the number of market players.
REEs, indispensable components in now-ubiquitous technologies like smartphones, computers, medical devices, satellites, and electric cars, are essential to modern life. China's early capture of the REE production market has them firmly in the lead, commanding 70% of global rare earth ore extraction and a whopping 90% of rare earth ore processing.
The impetus behind the push to diversify away from China's control is particularly urgent for Western actors given Beijing's use of Western dependencies on its REEs to advance its political goals. Notably, incidents such as the 2010 dispute between the Japanese coast guard and a Chinese fishing vessel led Beijing to suspend all REE shipments to Japan for over two months.
Despite possessing abundant REEs, Central Asian states face challenges, which include insufficient geological survey data and underdeveloped mining laws. To address these issues and optimize resource utilization, a recent report from the International Tax and Investment Center, a D.C.-based nonprofit research and education organization, recommends collaborative efforts with entities like the U.S. Geological Survey. This collaborative approach can diversify the global REE market and mitigate the geopolitical risks associated with concentrated control.
The ongoing global shift towards clean energy and emerging technologies is expected to increase further the demand for REEs. Central Asia will be critical in shaping the world of the future, with the transformation counterbalancing to the declining demand for the region's fossil fuels. This shift contributes to the heightened geopolitical interest in the area, catalyzed by increased overland connectivity and investment in the region.
Spotlight on Dushanbe: Tajikistan's clean city revolution gains momentum
For years, the Tajik capital has struggled with smog, vehicle exhaust, and industrial pollution. But the government and international organizations are now determined to turn the city into a hub for clean energy and cleaner air.
Dushanbe, home to around 900,000 people, has witnessed a considerable decline in air quality in recent years, exacerbated by various polluting industries. Vehicle emissions alone have doubled in the past decade, contributing to an annual output of 340,000-540,000 tonnes of CO2 equivalent. With air particle levels surpassing WHO guidelines by 7 to 10 times, Dushanbe ranks among the most polluted capitals globally.
Two years ago, Tajikistan’s Rakhsh Taxi secured a $4.5 million investment to acquire 100 electric vehicles and set up 30 charging stations in Dushanbe, as part of the EBRD Green City program. The initiative aims to cut annual CO2 emissions by 1,240 tonnes and significantly improve air quality. But that’s just the start.
Annually, the Government in Dushanbe government launches various programmes to help mitigate the issue of air pollution. A multi-Ministry "Air Purity" initiative, is aimed at reducing significant amounts of vehicle emissions into the atmosphere by conducting car ecology checks. As part of this programme, 455 drivers have been fined in the past 9 months for not adhering to the city emission standards.
In 2023, those efforts got a boost with the Green City Action Plan (GCAP) for Dushanbe, supported by the EBRD Green City program. Through the plan, Dushanbe is tackling public transport emissions head-on. This comprehensive strategy focuses on electrification, particularly in the taxi sector, responsible for over 50% of total emissions. Beyond addressing environmental concerns, this initiative opens doors for collaboration in renewable energy, attracting foreign direct investment, and ushering in cutting-edge technologies.
Looking ahead, the next phase could involve targeting emissions from stationary sources, putting Tajikistan on an even faster track to a green future.
Central Asia’s big business bloc
Photo: @State_SCA on X
In the first move of its kind, in 2023 the United States and the five Central Asian states of Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan, initiated the Business 5+1 (B5+1) platform. The first ever B5+1 meeting is now scheduled to take place in Almaty in 2024.
This public-private dialogue, the first of its kind in Central Asia, marks a significant step towards fostering economic integration and business collaboration. It comes out of the US’s flagship diplomatic initiative with the bloc, C5+1, collaborative efforts to enhance economic security and integration in the region.
The private sector spin-off, B5+1 centres business and trade ties between the Bloc and the USA and others as a diplomatic tool, as well as a determination to support a more resilient business environment. Increased bilateral trade and economic value of partnership, has long been seen as motivation between stronger relations.
The US, similar to Turkey and the Middle East and the EU, has been increasingly prioritising relations with Central Asia, seeing Russia’s invasion of Ukraine as an opportunity to fill a diplomatic vacuum for leadership in the bloc. The C5 + 1 has grown in importance in recent years; a summit last year was the first time this forum was elevated to Presidential level, with Biden’s chairmanship. These efforts, however, run behind the other key players; both Russian President Putin and Chinese leader Xi Jinping have already held summits with all five Central Asian leaders.
Yet the B5+1 has an opportunity to promote bilateral trade relations and investment opportunities, as well as encouraging modernised work practices in line with international norms and best practices for the region’s companies. If it is a success, it could be contribute to the development of a stronger, more globalised private sector.
Azerbaijan prepares for COP29
Azerbaijan secured the rights to host COP29 in December of last year following months of wrangling, in which Russian consistently vetoed EU host countries, and which eventually saw the 23 country Eastern European group fall in behind Azerbaijan.
Mukhtar Babayev, Azerbaijan's Ecology Minister and former veteran of the state oil company SOCAR for 26 years, has been appointed as the President for COP29 in Azerbaijan.
The choice of host country is not uncontroversial. Traditionally reliant on fossil fuels such as oil and gas, Azerbaijan has faced growing domestic and international pressure to diversify its economy away from flagship exports. This comes particularly from nearby partners such as the EU, who have ambitions to reduce greenhouse gas emissions by 55% by 2030, compared to 1990 levels.
In response, Azerbaijan has begun focusing on a slew of environmentally conscious projects, signing agreements for the development of an offshore wind farm, a green hydrogen production facility, and beginning construction on its first major solar power plant last year. However, skepticism surrounds the country's pace and commitment to this transformation, especially as it plans to expand its gas production over the next decade.
While Azerbaijan possesses undeniable potential for renewable power generation, it needs foreign investors to fully realize its capacity, particularly to establish the necessary infrastructure for export to Europe. Attracting international investments and fostering strategic partnerships with this objective in mind, Azerbaijan will not only accelerate the development of renewable energy projects but also contribute to its economic growth and energy security.
Skyward: A new chapter unfolding for Central Asian aviation
A plethora of airlines have recently unveiled new routes connecting to Central Asia and extending from the region to new locations, ushering in a new era for both globetrotters and the region itself.
Most recently, in February 2024, Qatar joined the list by launching four weekly flights from Doha to Tashkent, Uzbekistan, scheduled to start in June 2024 and already open for booking.
This surge in airline activity presents exciting opportunities for travelers seeking fresh destinations and cultural experiences. Central Asia, with its rich history, diverse landscapes, and hospitable communities, has long remained a hidden gem awaiting discovery by the world.
Historically, connectivity to and from the region has been limited, as national carriers like Air Kyrgyzstan, Somon Air of Tajikistan, and Turkmenistan Airlines have operated with modest fleets and route networks. However, this is changing with the emergence of new private airlines in the region and the decision of foreign airlines to begin servicing this area.
In 2023, Uzbekistan approved two new airlines, bringing the country's total number of carriers to eight. Until 2021, state carrier Uzbekistan airways and its low cost carrier Humo Air were the exclusive provider of commercial flights. Kazakhstan’s low-cost airline, FlyArystan, expanded its international network to include Indian destinations. At the same time, two low-cost Malaysian airlines, AirAsia X and Batik Air Malaysia, are entering the market with flights to Almaty, Kazakhstan and Tashkent, Uzbekistan, respectively.
The trend promises to be transformational. The new routes connect Central Asia to the world, promoting economic growth by creating jobs in the aviation sector and raising the region's international profile with new opportunities for investors and businesses. Most importantly, they can foster a newfound appreciation for these often-underrated countries, inviting adventurers to follow the ancient Silk Road, explore vibrant bazaars, and marvel at the breathtaking Pamir Mountains.
Stats of the month
7-12% of GDP: Central Asia is being encouraged to bring in measures to tackle a water shortage, with analysts suggesting potential economic impact of failing to adequately address water issues of up to 7-12% of regional GDP. Urbanisation, climate change and mismanagement are exacerbating the strain on current water sources, with only 50% of agricultural water resources currently being used effectively, according to bne IntelliNews.
6.6 million: The number of tourists that visited Uzbekistan in 2023 increased 26.6% year on year to 6.6 million people, reports Uzbekistan’s statistical agency. Although the majority of visitors still hail from the CIS region, there has been a noticeable rise in the number of tourists from Europe and the USA with 16,200 visits from the UK and 23,000 from the USA.
What we’re reading
Navalny death provokes shock but also indifference in Central Asia by Almaz Kumenov, Ayzirek Imanaliyeva in EurasiaNet
A deep dive into the musical repertoire of Turkmenistan’s national leader by Nurbek Bekmurzaev in Global Voices
Return Of The Jadids: Central Asia's Soviet-Repressed Groups Getting Fresh Attention From Kazakhs, Uzbeks by Chris Rickleton