The Steppe #8
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:
Uzbekistan’s FDI bonanza
Azerbaijan’s COP29 hopes
Kyrgyzstan’s business transparency
Kazakhstan’s EU double-edged sword
Mongolia’s Economic Forum
China’s energy interests in Tajikistan
Please don’t hesitate to contact us for feedback and tips at eurasia@montfort.london
Uzbekistan Cashes In
Foreign investments in Uzbekistan have surged by 20% as of June 2024, marking a significant milestone in the nation’s push to eradicate poverty and achieve upper middle-income status by 2030. While some challenges remain, Uzbekistan’s efforts to create a more investor-friendly environment are clearly paying off.
Since launching major liberalization efforts in 2017, Uzbekistan has been on a roll, implementing ambitious reforms to liberalize its economy and create a more investor-friendly environment. In 2020, a new tax code came into effect, slashing corporate income taxes by nearly 50% and simplifying taxation for private entrepreneurs. Additionally, the government has been urging local administrations to ramp up efforts to attract FDI and bolster the private sector. In some cases, the government has provided financing for many development projects, especially in energy, mining, and export-oriented manufacturing industries.
IT outsourcing has also been a driver. Farkhod Ibragimov, CEO of IT Park Uzbekistan, a free enterprise zone set up to attract foreign IT companies to set up in the country, said:
“Since the beginning of 2024, Uzbekistan has attracted over 130 foreign IT and outsourcing companies — almost a third of the amount attracted over the previous four years combined, exceeding 500 companies by the end of the first half of 2024. The number of IT exporters has increased to over 800, with more than 250 companies starting since January 2024, almost half of the total involved in exports over the previous four years combined. This indicates that the measures and business climate created in Uzbekistan through our government's initiatives are bearing fruit, making Uzbekistan one of the most attractive investment destinations, and creating new jobs for our local professionals at the same time.”
The results are striking: in 2023, Uzbekistan’s economy saw 6% GDP growth, with FDI soaring to over $7.2 billion. At the third Tashkent International Investment Forum in May, President Shavkat Mirziyoyev said, “Last year alone, foreign investment almost doubled,” and noted the more than $60bn of foreign investment the country has received in recent years.
China, South Korea, Russia, Kazakhstan, and Turkey have emerged as major investors, with energy, metallurgy, and chemicals leading the sectors attracting foreign capital. In 2024, the nation advanced 607 projects valued at $1.3 billion and launched 80 initiatives involving both foreign and Uzbek investors, amounting to a total investment of $14 billion. The government is prioritizing investment in green energy, public-private partnerships, and industrial development.
The Steppe spoke with Oybek Khalilov, President of the American Chamber of Commerce in Uzbekistan, for his view:
“It is an exciting time for Uzbekistan to see so many investors coming here and taking advantage of the new conditions for FDI put in place. The onus is now on the Government to continue to introduce and perfect legislation that encourages investment, uphold and protect the rights of international investors, and follow through on large scale plans including privatisation of the economy.”
Despite these positive developments that have created new trade and investment opportunities, challenges remain. These include the nation’s underdeveloped banking sector and low economic diversification. But, if Uzbekistan tackles these issues, it is well-positioned for more economic development and to secure its place as one of the region’s economic heavy weights and maybe even achieve its high middle-income ambitions by 2030.
Azerbaijan Splashes Cash Ahead of COP
Azerbaijan, as host of this year’s COP29 UN climate talk, announced plans to launch a $500 million climate investment fund. The move – and the response – highlights how COP29 is shaping up to be all about the crucial role of developing countries in the global effort to decarbonize.
This is the second COP in a row that an oil-producing host nation has launched a climate finance venture ahead of the summit. Last year, the United Arab Emirates, which hosted COP28, announced a $30 billion fund. Similarly, Azerbaijan’s fund, primarily funded by its state oil company Socar, aims to encourage fossil fuel companies to contribute to climate finance. This initiative intends to reinvest returns and potentially allocate 50% of its capital to developing countries.
Developing countries are essential in the global transition to net-zero emissions. Over the next decade, these countries will experience some of the fastest economic and population growth worldwide. The IMF predicts that, compared to 2021, developing countries' GDP could rise by 40 percent to over $60 trillion by 2028, translating to a per-capita increase of over 30 percent. Just from 2021 to 2022, Azerbaijan’s GDP grew 43.58%.
Historically, the focus has often been on developed nations to reduce their carbon footprints given their outsized contributions to global emissions. But, this COP aims to highlight that the responsibility of mitigating climate change is a shared one.
Azerbaijan’s announcement of this fund has raised eyebrows primarily because it involves fossil fuel companies in climate finance with voluntary and limited contributions. This isn’t unique to Azerbaijan though, as other oil-producing nations have taken similar steps. The inclusion of fossil fuel companies in climate finance highlights the complexity and necessity of involving all stakeholders in the transition to a sustainable future.
This could be a sign that this year's COP is also about fostering international cooperation and ensuring that developing countries have access to the necessary resources, technologies, and financial assistance to make this transition smoothly and effectively. Azerbaijan is already increasing its renewable energy production, particularly in solar power, but it can do a lot more. Investing in renewable energy, energy efficiency, and sustainable infrastructure can create new economic opportunities and build resilience against the adverse effects of climate change.
Montfort Eurasia will be following COP closely in the run up to November. Keep your eye out for updates and opportunities for engagement in the coming weeks!
New Reforms for Kyrgyzstan
Kyrgyzstan has become a destination for foreign investment in mining, textiles, and agriculture. Now, investors are seeking better governance, something Kyrgyzstan needs help to do. The Asian Development Bank’s (ADB) recent announcement of a $50 million injection into the Kyrgyz Republic’s fiscal and public management reforms is designed to do exactly that.
While Kyrgyzstan is still considered a frontier market, President Sadyr Japarov's administration aims to attract more diverse foreign direct investment (FDI). This funding will help the nation reach those goals.
The funding is largely aimed at overhauling public financial management, corporate governance, and procurement processes for state-owned enterprises. This support is poised to significantly contribute to the country’s resilience by improving transparency and fiscal efficiency –– making the country a more reliable destination for investors.
Crucially, these reforms are expected to support ongoing tax policy changes, such as simplifying the tax code and reducing loopholes, which can make the tax system more equitable and efficient.
Despite incremental progress, Kyrgyzstan’s budget transparency remains low, scoring 61 out of 100 in the 2023 Open Budget Survey (OBS). Countries like Russia and Kazakhstan fare slightly better, highlighting the Kyrgyz Republic’s significant room for improvement. OBS reports that while transparency has advanced, some issues persist, such as the complexity of budget proposals and insufficient details on revenues, expenditures, and debt.
Increased transparency, which involves clear and accessible information on financial activities and government policies, correlates with higher FDI inflows.
Kazakhstan’s Double-Edged Sword
Kazakhstan’s largest trade partner might surprise many: it’s not Russia, its fellow treaty member in the Eurasian Economic Union, but the EU. Trade with the EU is booming, with turnover from January to May 2024 reaching $20.2 billion—a 14.3% increase from the same period last year. While crude oil continues to dominate Kazakhstan’s exports to the EU, Kazakh officials and businesspeople are eager to diversify.
While Kazakhstan seeks new markets for local producers, the EU’s attempts to reduce its reliance on Russian oil reinforce Kazakhstan’s trade performance ties to hydrocarbons. The nation has shown significant economic resilience to external shocks including the Russia-Ukraine War, the reliance on oil still presents a vulnerability to address.
Recognizing this, Kazakh authorities and the private sector are working to diversify. Officials have developed a supportive framework for export promotion, including policy design and implementation bodies coordinated by the Ministry of Trade and Integration (MTI). However, these activities often lack a specific focus on SMEs, and areas such as monitoring, branding, and financial instruments need more development.
Improving connectivity is crucial for promoting trade diversification with the EU. In May 2022, the OECD launched a project to enhance trade connectivity in Central Asia and export promotion in Kazakhstan. However, challenges remain due to long distances from Europe, infrastructure bottlenecks, and weak trade facilitation.
Kazakhstan's economy is still dependent on a limited range of export commodities and trading partners. Prioritizing better connectivity is essential for integrating Kazakhstan into global value chains, ensuring economic resilience, and expanding transregional trade.
Mongolia Economic Forum 2024
The 14th Mongolia Economic Forum (MEF), held on July 8-9 in Ulaanbaatar, showcased Mongolia's burgeoning economic significance in the region. Despite limited attendance of foreign investors and C-level executives, the forum drew 2,000 guests, including state officials, private sector representatives, and academics, reflecting Mongolia's impressive recent growth and ambitious vision for the future.
At the Forum, Prime Minister Luvsannamsrai Oyun-Erdene emphasized that Mongolia’s GDP has grown to over $20 billion in 2023, with a per capita GDP of $5,875––an achievement that positions Mongolia as the 12th fastest growing economy in the world. Klaus Schwab, founder of the World Economic Forum, lauded Mongolia’s progress on social media, noting its transition to becoming an upper-middle-income country within a year.
While the MEF itself did not directly result in major deals, Mongolia’s economic potential is undeniable. Just a few days after the MEF wrapped up, the IFC announced its investment in Mongolia’s first social bond, pledging up to $100 million to support the country’s sustainable finance market and job creation. This news isn’t just important for employment and more inclusive economic growth potential––it’s also a signal of stability and potential.
The MEF’s forward-looking emphasis on Mongolia’s upcoming four-year economic plan and investor dialogues underscores significant future potential. This year's absence of high-profile agreements presents an opportunity for Mongolia to refine its approach, turning promising discussions into concrete investments and partnerships moving forward.
Tajikistan: Central Asia’s New Cleantech Hub?
China is increasingly viewing Tajikistan as a key strategic and investment partner, particularly in the energy sector. Since 1991, Chinese investments in Tajikistan have surpassed $5.3 billion, with significant projects like the Dushanbe TPP-2 power station, multiple 500 kV and 220 kV substations, and extensive power lines. The Export-Import Bank of China has supported these developments with $880 million in concessional loans, underscoring the depth of China's commitment to Tajikistan's energy infrastructure.
Chinese firms such as Power Construction Corporation of China (Power China) and Huawei are actively involved in Tajikistan's energy sector. Recent agreements with Chinese energy companies TBEA and Powerchain aim to advance renewable energy by constructing wind and solar power plants with a combined capacity of 1500 MW. China's current focus includes the development of solar power plants in the SEZs Pyanj and Dangara, with a planned investment of $400 million.[EK1]
The investment does, however, raise the spectre of the ‘debt trap’ once again, an issue raised many times in recent years – as of the beginning of 2022, 60% of Tajikistan’s foreign debts were owed to China, and there has been speculation that these debts have been leveraged by China to extract further deals and concessions from its neighbour.
The expanding cooperation extends beyond energy to other sectors such as mining, transportation, and agriculture. Discussions have also highlighted security collaboration and regional integration through frameworks like the Shanghai Cooperation Organization (SCO) and the "Central Asia plus China" format. The upcoming visit of Chinese President Xi Jinping to Dushanbe is expected to further enhance bilateral relations and energize collaborative efforts in these areas.
Stat of the Month
1.08 million: After Russia's invasion of Ukraine in February 2022, many skilled Russian workers, particularly IT specialists, moved to Central Asia. This trend increased following the mobilization announcement in September 2022. According to the Migration Data Portal’s latest figures, by October 2022, half a million Russians had entered Kazakhstan. From January to September 2022, Kyrgyzstan reported 184,000 Russian arrivals, and Uzbekistan saw about 395,000. Neither Kyrgyzstan nor Uzbekistan specified how many remained.
What We’re Reading
Homeing or It’s All About the Bench, Maria Gunko, EVN Report
Meet the Olympic Uniform Designers Who Won Over the Internet, Armani Syed, Time