The Steppe #6
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.
In this edition, we look at these key developments:
Mongolia’s copper prospects
Armenia hosting the EBRD
The China-Kyrgyzstan-Uzbekistan (CKU) railway
Azerbaijan, Kazakhstan, and Uzbekistan’s Caspian cables
Uzbekistan’s wind farms
Please don’t hesitate to contact us for feedback and tips at eurasia@montfort.london
Mongolia's Copper Promise
Copper, one of Mongolia’s primary exports, is commanding attention as prices soar, propelled by China’s rapid expansion of electric vehicle production. With its vast and largely unexploited copper deposits, Mongolia is emerging as a key player in the global energy transition. However, the nation faces challenges in attracting foreign investment to ramp up production.
The ambitious Oyu Tolgoi copper mine project, a joint project between the Mongolian government and Rio Tinto which has been operational for about 15 years, is anticipated to become the world’s fourth-largest copper producer by 2030, with an annual output capable of supplying components for approximately six million electric vehicles. Along with the Erdenet mine, a long-standing Russian-Mongolian joint venture, and Xanadu Mines, an Australian-listed developer that has secured $35 million from the Chinese Zijin Mining Group for a pre-feasibility study of the Kharmagtai copper-gold project, copper production seems set to grow.
This escalating demand for green technologies has revitalized mergers and acquisitions in copper mining. A 2023 S&P Global report warns of a possible copper concentrate deficit as early as next year due to a lack of new significant discoveries. This has sparked new interest in copper assets and investment in the sector, exemplified by Australian mining company BHP's ongoing acquisition attempts of UK listed Anglo American, known for its high-performing copper mines. As a result, Mongolia’s copper mining sector is attracting growing interest from international markets. Nonetheless, uncertainties loom over how Mongolia navigates the harnessing of these resources moving forward.
Charles Krusekopf, Professor of Business at Canada’s Royal Roads University and an expert on Mongolia’s economic development, highlights the complexities of the Mongolian government’s involvement in major resource projects. He told us:
“The Mongolian government holds either a majority or minority stake in all major resource projects and has recently passed legislation expanding its ownership rights. These risks have complicated the progress of foreign-invested projects, including Oyu Tolgoi, which faced tax disputes and renegotiations.”
Krusekopf also points out that Mongolia currently lacks substantial production capacity or the capability to produce rare earths and other emerging minerals like lithium. He concludes:
“While there is considerable discussion about development in these areas, progress remains in its nascent stages, with most activities focused on early exploration. The necessary steps for actual production have yet to be fully realized.”
Armenia Hosts the 2024 EBRD Annual Meeting and Business Forum
Yerevan was the host city for this year’s Annual Meeting and Business Forum of the European Bank for Reconstruction and Development (EBRD). The event, held from May 14-16, brought together policymakers, business leaders, financial institutions, and experts to discuss regional economic prospects and establish new agreements to strengthen economies in the region.
The EBRD has been active in Armenia since 1993 and its investments, supporting private sector growth, infrastructure improvements, renewable energy production, and rural digitalization, have amounted to over €2 billion in 210 projects across the country.
Armenia and the EBRD used the event as an opportunity to sign a significant loan and grant agreement. This arrangement will finance the construction of a customs and logistics centre in Syunik, Armenia’s southern region that borders Iran. The project is expected to improve trade and logistics, particularly as India and other countries show interest in the Armenia-Iran border region as a potential future trade and energy route.
The forum also included an announcement of a $7 million loan to Armenia’s InecoBank, intended to boost private sector competitiveness and encourage green investments. This funding, provided under the EU4Business initiative, will help Armenian companies become more competitive both domestically and internationally. The EU is supplementing this aid with grant incentives of up to 15 percent and free local and international consultancy services.
Elsewhere, during the event, the EBRD released its latest Regional Economic Prospects report, providing the latest macroeconomic forecasts for its regions. The report underscored rapid growth in the Caucasus and Central Asia during 2022 and 2023, driven by a post-pandemic rebound, strong IT sector development, expansion of export-oriented manufacturing, and a boom in the financial sector.
While this financial sector growth was driven by an unprecedented surge in money transfers from Russia over the past two years, policy support has also played a significant part. Structural reforms in tax and tariffs within the region’s countries, efforts to combat organized crime and corruption, and targeted assistance for agriculture, digital and creative industries, and rural manufacturing all made substantial contributions.
CKU Railway Set to Break Ground: A New Silk Road or Pipe Dream?
Construction of the China-Kyrgyzstan-Uzbekistan (CKU) railway is set to commence in October, as announced by Kyrgyz President Sadyr Japarov. Under discussion for nearly three decades, this joint railway project has the potential to revolutionize the region's logistics landscape.
Crucially, the railway will shorten the route from China to Europe by 900 kilometres. This will reduce transit times by eight days and bypass Russian territory. This ambitious project aims to link China’s railway system with European networks, passing through Turkmenistan, Iran, and Turkey.
But, financial restraints in Kyrgyzstan and Uzbekistan have caused delays in implementation, leading sceptics to question whether the project will proceed as quickly as planned. The project also faces several logistical challenges, including the construction of over 50 tunnels and 90 bridges. Ongoing concerns about governance could add complexity to the project’s realization.
Another issue is the financial allocation for the project, which the three countries have not yet agreed upon. In October 2023, Gennady Bessonov, secretary-general of the International Coordinating Council for Trans-Eurasian Transport, acknowledged the issue. He stated, "Although China possesses the capability to undertake the construction unilaterally, the railway project does not currently occupy a position of top priority for them."
This corridor plays a crucial role in China's Belt and Road Initiative, aiming to recreate the ancient Silk Road trading routes. Following Russia's invasion of Ukraine in 2022, sanctions on the Trans-Siberian railway have highlighted the significance of southern routes for China. However, China's hesitation to prioritize the CKU project could be due to its desire to avoid upsetting Russia and Kazakhstan, which are not part of the initiative.
As the project moves forward, all eyes will be on how these challenges are managed and if the geopolitical shifts that have made this project so important will continue to do so.
The Caspian Connection: Bringing Green Energy to Europe
A recent memorandum of understanding signed by the economy and energy ministers of Azerbaijan, Kazakhstan, and Uzbekistan marks a significant step towards integrating the energy systems of these three countries. If done well, it could change their prospects for expanding their wind, solar, and hydropower capacities – and new sources of green energy for Europe.
The agreement, finalized at the Tashkent International Investment Forum in May, aims to explore the potential for connecting their energy networks through a high-voltage cable laid along the Caspian Sea bed, the world's largest inland body of water. All three countries have committed to assessing the feasibility of installing these high-voltage cables beneath the Caspian, which would establish a direct energy link among the three countries and facilitate the sale of this green energy to the European Union. This follows the completion of a feasibility study for an equivalent cable across the Black Sea from Azerbaijan to Bulgaria, according to President Aliyev’s press service.
Presently, these three nations heavily rely on fossil fuels for electricity production. Azerbaijan and Uzbekistan generate 90 percent and 85 percent of their electricity from natural gas, respectively, while fossil fuels contribute to 84 percent of Kazakhstan's electricity. This agreement stands to expedite their transitions to green energy, aligning with their ongoing initiatives for sustainable energy infrastructure.
A press release from the Kazakh government indicates that they have discussed and agreed upon the project's implementation, signalling that it has moved into concrete planning stages. Draft technical specifications for the deep-sea cable have already been drawn up and there are plans to address financing, revenue flow and ownership issues of the proposed transmission corridors.
If successful, the project could inspire other regional energy collaborations and contribute to the EU's green energy ambitions. While the EU is committed to phasing out fossil fuels, it currently lacks the capacity to achieve this goal independently. Sourcing green energy from external partners, such as this proposed collaboration proposed by these nations, is vital to bridging this gap.
Wind Farms in Uzbekistan Get a Boost
Uzbekistan recently approved an investment agreement with Chinese company Universal Energy to construct two 250 MW wind power plants. This authorization is a significant step towards increasing the country’s renewable energy capacity – and vital for one of the most energy-intensive nations in the world.
The two plants, costing $250 million each and totalling $500 million, will be located in Samarkand and Jizzakh regions. The electricity they generate will be sold to the National Electric Networks of Uzbekistan under a 25-year purchase agreement.
This development will significantly contribute to addressing Uzbekistan’s rapidly growing energy needs. The government anticipates that electricity demand will double by 2030.
Earlier this year, Riyadh-based green energy company ACWA Power also signed an agreement to build two wind power plants in Uzbekistan. This makes ACWA Power the second company from the Gulf region, following the Emirates' Masdar, to partner with Uzbekistan on renewable energy. In May 2023, Masdar signed a joint development agreement to develop over 2GW of solar and wind projects in the country.
However, modernizing its energy grid is a major challenge for Uzbekistan. The existing grid requires a significant overhaul to accommodate the increased use of renewable energy, without which curtailment and limited utilization would be necessary.
These renewable energy initiatives align with Uzbekistan’s goals to increase the share of renewables in its electricity production to 25 percent by 2030. This includes achieving 4 GW each for solar and wind power by 2026. In line with these targets, the Government of Uzbekistan has announced its ambition to become carbon neutral by 2050. The biggest challenge remains the modernization of the energy grid, which is crucial for accommodating the growing renewable energy capacity and ensuring the success of these projects.
Stat of the Month
2.4%: In Q1 2024, Georgia's railways transported 3.2 million tons of freight, a 2.5% increase from the previous year, according to the National Statistics Office of Georgia. Russia led incoming rail freight at 53.5%, followed by Azerbaijan at 22.9%, with other countries under 10%. Russia received 10.2% of outgoing freight, with the rest going to other countries. Transit freight mainly went to the Netherlands (16.2%), Turkey (8.1%), and China (7.9%), with smaller percentages to other countries including Brazil, Ukraine, Greece, and the USA.
What We’re Reading
A Guardian of Health in the Mountains of Kyrgyzstan by WHO Country Office in Kyrgyzstan
Uzbekistan Posthumously Exonerates 198 People Repressed During Soviet Era by RFE/RL’s Uzbek Service