The Steppe #7
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:
Georgian uncertainties
South Korea’s soft power push in Central Asia
Uzbekistan’s reform process
Gold market updates in the region
Tajikistan’s relations with China
Please don’t hesitate to contact us for feedback and tips at eurasia@montfort.london
Georgia on Investors’ Minds
The past few months have seen thousands of protesters take to the streets in Georgia to oppose the country's passing of the so-called foreign agent law. The situation has plunged the country into crisis, with warnings from Brussels that it could jeopardize the country's bid to join the European Union.
While the political crisis has subsided, the country's economy is still suffering its effects. Georgia was already seeing a significant decline in foreign direct investment last year. Since the start of the year, the national currency – the Lari – has lost over 6 percent of its value. Following the passage of the “foreign agent” law, the Bank of Georgia was forced to prop up the currency amid growing uncertainty over the future of FDI and development funds being made available through NGOs.
The bill mandates that media and NGOs register as "pursuing the interests of a foreign power" if they receive more than 20 percent of their funding from abroad. Many view this as influenced by similar Russian legislation, which has been used to suppress political opposition to the Kremlin.
Critics argue that the bill threatens democratic freedoms and undermines Georgia’s EU aspirations by steering the country away from European integration and back toward Moscow. The government defends the bill as necessary for promoting transparency and preserving Georgia’s sovereignty.
While the turmoil in the Georgian markets was a direct reaction to the law's passage, Dr. Claire Kaiser, Head of Strategy & Senior Managing Director at McLarty Associates, notes that other issues in the Georgian economy may cause foreign investors – primarily from the U.S. and Europe – to have more long-term concerns. These existing worries were only amplified by the law's passage. Dr. Kaiser told The Steppe:
This is unfortunate, as the EU-Georgian Deep and Comprehensive Free Trade Agreement (DCFTA) and more recent decision to grant Georgia EU Candidate status late last year were clear indications for foreign investors that they could have long-term confidence in the investment environment in Georgia.
Dr. Kaiser emphasizes that political stability is vital for foreign investors.
The concern lies with contradictory signals emanating from Georgian officials which have intensified markedly over the past 12-18 months: stating commitment to EU membership trajectory and associated Euroatlantic integration on the one hand and introducing legislation and rhetoric that suggests the opposite.
These mixed signals, especially those contradicting this commitment, create uncertainty for investors seeking stability and predictability when evaluating commercial opportunities. According to Dr. Kaiser, not all is lost. She notes,
At the moment, the concerns are not irreversible, and much hinges on the rest of this year, which will see critical elections in Georgia.
Korea Goes from East to Central
K-pop may have taken the world by storm, but now South Korea’s sharpest soft power tool is being followed by a wave of economic investment decisions – particularly in Central Asia. South Korean President Yoon Suk Yeol traveled to the region in June for talks on deeper diplomatic ties and cooperation in economy, and particularly energy, minerals, and chemicals.
Yoon is one of the latest in a series of world leaders and dignitaries jetting to the region, as attention turns to securing supplies of critical raw materials, including silver, titanium, lithium, and molybdenum increasingly used in industries like renewable power. Notably, Putin visited Uzbekistan in late May, and David Cameron was in the region in April.
During his trip to Turkmenistan, Kazakhstan, and Uzbekistan, Yoon's office announced plans for a six-way summit, a South Korean-style C5+1, set to launch in 2025 with an inaugural meeting in South Korea.
In recent years, South Korean businesses have been actively seeking investment opportunities spanning various sectors in the region. Central Asian states, in turn, are keen to leverage this interest to diversify their economies, focusing on sectors such as culture, tourism, cosmetics and the extraction of rare earth minerals.
There is a well-established Korean diaspora throughout Central Asia, particularly in Uzbekistan and Kazakhstan, that brings with it Korean supermarkets, restaurants and demand for goods. The community arrived in the region following mass deportations from ethnically North Korean land under Stalin.
Following the collapse of the Soviet Union, South Korea was the first Asian state to recognise Uzbekistan’s independence, and since then, the country has had an outsize cultural influence on the region. There has been large investment in universities with a large number of South Korean exchange programs for Uzbek students (anecdotally, over half Montfort Eurasia’s Tashkent staff have a family or educational connection to Korea). Korean clinics are a stalwart of Central Asian private healthcare, and in recent weeks the Korean government has reached out to Uzbekistan to try to fill labor shortages in its automotive sector.
The last Korean-Central Asian developments came with Mongolian Prime Minister Oyun-Erdene Luvsannamsrai's visit to South Korea on April 1, underscoring the growing economic and cultural collaboration between Ulaanbaatar and Seoul. The visit saw numerous economic initiatives unveiled, from corporate partnerships to boosting tourism and facilitating entry for the Korean creative industry into Mongolia.
Since then, on April 23, Turkmenistan’s Ambassador to Seoul, Begench Durdyyev and South Korea’s Deputy Minister of Foreign Affairs, Kim Taejin, discussed deepening their collaboration in energy, oil and gas, and information technology as well as future prospects for cooperation in trade, economics, and culture. Given South Korea's reliance on imported fossil fuels, its interest in Turkmenistan's energy resources is evident.
South Korea's economic cooperation with Uzbekistan, where it has a small Korean diasporan community, stands out, with substantial investments in Uzbekistan’s economy. Just in 2023, South Korean direct investments in Uzbekistan’s economy totalled over $7 billion. This partnership supports Uzbekistan in diversifying its economy, including in solar power, nuclear energy, alongside infrastructure development. These efforts align closely with Uzbekistan's ambitions to modernize its industrial facilities and enhance transportation networks through new roads and airports.
In Kazakhstan, South Korea's involvement is deeply entrenched – ranking among the top 10 investors in Kazakhstan's economy. With over 700 Korean companies, including industry giants KIA, Hyundai, Samsung, and LG operating in the country, the scale of South Korea’s involvement is undeniable. South Korea is also eyeing Kazakhstan’s extensive lithium deposits as it aims to broaden its critical mineral supply chains.
South Korea’s engagement in Central Asia appears to transcend economic interests; it signals a broader aspiration for an enhanced role in the region. Central Asia holds strategic importance for South Korea's plans to diversify and strengthen its ties in Eurasia. South Korea's economically advanced status and thriving international companies are poised to influence trade dynamics and industrial developments throughout the region for years to come.
Uzbekistan Ends State Monopolies in WTO Bid
In a major move towards joining the World Trade Organization (WTO), Uzbekistan announced the end of exclusive rights that had effectively given several large state-owned companies effective monopolies over key sectors. On June 4, President Shavkat Mirziyoyev signed a decree abolishing these economic privileges, part of ongoing reforms to create a free market and provide for equal and competitive market conditions.
The decree affects industries like metallurgy, chemical industries, telecommunications, and energy, impacting companies like UzGasTrade, Uzkimoimpeks, Uzmetkombinat, and Uzvtortsvetmet.
Ending preferential treatment for state-owned enterprises will promote competition, aligning with the WTO's incentives to eliminate discriminatory practices and trade barriers. Deputy Prime Minister Jamshid Khodjayev stated during Uzbekistan-WTO negotiations in Geneva on May 24 that Uzbekistan plans to become a WTO member by 2026.
Uzbekistan first applied for WTO membership in 1994. But, it has faced setbacks due to external economic crises, leading to reliance on protectionism with customs barriers and high state intervention. It revived its WTO membership ambition in September 2017 by introducing a free exchange rate procedure. The government also resumed meetings on WTO accession in July 2020, after a 15-year hiatus. On May 28, 2020, the Cabinet of Ministers established the Interdepartmental Commission for Working with the World Trade Organization.
Uzbekistan has adopted legal acts to align its trade regime with WTO rules in several areas. However, additional reforms are still needed for accession to the multilateral trading system and to reform foreign trade policies. These efforts are likely to be welcomed by foreign investors.
WTO membership could also provide consumers with cheaper and higher-quality goods and services by reducing customs tariffs. Lower raw material prices could decrease domestic product prices, enhancing international market competitiveness and significantly reducing logistics costs.
While cheaper imports of raw materials could initially negatively impact national production, it is expected to foster a competitive environment in the long run. It will also increase competition in sectors that had previously been dominated by domestic monopolies and create a freer competitive environment.
Gold Fever in Central Asia
Mongolia is rushing to shore up its economy with major purchases of gold bullion.
In the first five months of the year, Mongolia’s Central Bank has bought 6.1 tons of gold, figures show. These purchases are designed to increase the country’s foreign exchange reserves, build fiscal stability and stabilize the currency.
The bank reports that the country’s foreign exchange reserves have declined due to the COVID-19 pandemic and the Russia-Ukraine conflict. As of April 2024, Mongolia's foreign exchange reserves were around $5.25 billion.
In a March ratings commentary, the Fitch rating agency reaffirmed a B- “stable” outlook for Mongolia, underlining its mining revenue boom that has raised government revenue and foreign reserves, allowing for declines in debt. According to Fitch,
“If sustained and prudently managed, the commodity windfall could lead to improvements in its ‘B’ rating.”
Meanwhile, Uzbekistan became the world's top gold-selling country in March driven by the output of state-owned NMMC, which operates the world’s largest open gold mine. According to the World Gold Council, Uzbekistan sold 11 tons of gold in March. With global geopolitical instability, such as the war in Ukraine and tensions in the Middle East, gold prices are high and likely to remain so for the foreseeable future, making right now a good time to sell.
Gold has experienced a major rally this year, with spot prices rising by more than 13 percent since January 1.
Uzbekistan has a trade and budget deficit, making selling even more useful. Ahead of the curve, Uzbekistan had done rounds of gold buying in the past, and has already developed the practice of selling off gold, including in 2020 to alleviate the economic crisis caused by the coronavirus pandemic.
Under Uzbekistan President Shavkat Mirziyoyev, the share of national reserves held in gold has risen from under 50 percent to two-thirds. However, analysts see a problem in this overreliance on gold, as it suggests a lack of diverse revenue sources to support increasing public spending.
Modernization Efforts Boost China-Tajikistan Relations
China is set to assist Tajikistan in modernizing the Central Asian nation’s largest industrial enterprise, the state-owned Tajikistan Aluminium Company (TALCO) aluminum plant. The plant is a legacy of Soviet rule, having been built in 1972.
TALCO, which Tajik President Emomali Rahmon has called the "business card" of the country’s industrial base, is the largest aluminum manufacturing plant in Central Asia and is Tajikistan’s primary industrial asset. With the metal being essential in industries ranging from automobiles and aerospace to construction and electronics, TALCO plays a crucial role in supporting these sectors. The plant’s aluminum output has been on an upward trajectory, with a 7 percent rise in production in 2023, reaching over 66,000 tons. Despite this growth, production bottlenecks are hindering further expansion, prompting TALCO to seek investors.
Chinese Foreign Minister Wang Yi's two-day visit to Tajikistan in May resulted in the signing of a cooperation program for 2025-26. An earlier meeting in Beijing culminated in Chinese support for Tajikistan’s development and accelerating other key infrastructure projects like the China-Tajikistan highway.
This latest protocol marks a major step forward in bilateral relations, although details on construction timelines and financial commitments were not fully disclosed. According to official Chinese data, Tajikistan saw the largest percentage increase in trade turnover of all the Central Asian states, with a 54 percent rise in 2023 compared to the previous year, totaling $3.9 billion. Despite this, Tajikistan's trade volume with China remains the lowest among the Central Asian states.
Stat of the Month
2.65 million: According to the latest data published by Azerbaijan’s Statistical Committee, in 2022 the total number of nights spent in hotels in Azerbaijan was 2,647,100. More than half of these stays, 55.1%, were in the capital Baku. Hotel revenues increased by 70% year on year, according to the agency.
What We’re Reading
Silk Road leads from Uzbekistan to London for landmark exhibition, Dalya Alberge, The Guardian