The Steppe, from Montfort Eurasia - January 2024 edition
The first edition of Montfort Eurasia's newsletter covering Central Asia and the Caucasus.
Hello, and a warm welcome to the inaugural edition of The Steppe, a new newsletter brought to you by Montfort Eurasia. This is your regular guide to the most important developments in the South Caucasus and Central Asia, tailored specifically for investors and business decision-makers.
As the region undergoes a remarkable economic boom, our mission is to serve as a central hub for insights, in-depth analysis, and expert opinions catered to the needs of market players.
Each edition, we’ll be sending you an overview of the critical issues shaping the region, including fiscal and business policies, as well as the geopolitical dynamics impacting the business environment across the nations of the region.
For this first edition, we take a look back at some of the key trends at play in the region from late 2023:
France’s diplomatic efforts
Kazakhstan’s digital currency
Mongolian bank listings
Uzbekistan’s economic growth
Georgia’s EU relations
Kazakhstan’s oil deals with China and Russia.
We also share a snippet of some Montfort Eurasia polling that assesses Western investor attitudes towards the region.
Please don’t hesitate to contact us for feedback and tips at eurasia@montfort.london
Our top story: France's Eurasian power play – a key trend for 2024
In late 2023, France began stepping up as a major emerging economic power in the South Caucasus and Central Asia, setting out its stall as a trade partner in what Russia has historically seen as its own sphere of influence. Alongside major European counterparts like Germany, France has been actively deepening ties in Eurasia. This regional shift is poised to profoundly impact global markets and shape developments in the region throughout 2024.
Emmanuel Macron wrapped up a charm offensive in early November that took the French President to capitals across Eurasia, sealing a lucrative new arms deal with Armenia and making strategic bids in the energy sector in Kazakhstan, Mongolia, and Uzbekistan. With the region sitting on a host of untapped fossil fuels and critical raw material used in everything from electric vehicles to solar panels, Paris is hoping the move will shore up its energy security as Europe races to end its reliance on Moscow.
A key challenge for Macron is ensuring access to uranium reserves. With 70% of France's electricity sourced from nuclear power, strengthening ties in the region, especially with major uranium suppliers like Kazakhstan, Mongolia, and Uzbekistan, offers up the prospect of a consistent uranium supply for French reactors. Macron also inked a 1.6 billion euro deal with Mongolia, unlocking uranium mining opportunities and positioning the French multinational Orano’s project in Mongolia to potentially account for 4% of global uranium production in the future.
The groundbreaking steps come amid growing challenges with key EU uranium suppliers, including a military junta seizing power in Niger, a nation providing 15% of France's uranium, and uncertainties surrounding Russia's uranium imports due to potential nuclear sector sanctions.
The French delegation’s whirlwind tour was also aimed at securing a stable supply of critical minerals. While in Ulaanbaatar, Macron struck a deal with Mongolia for lithium exploration. Though in a preliminary phase, it’s clear that the move empowers French enterprises to capitalize on the country’s mining resources and gives France a competitive advantage in global technological development.Â
These maneuvers show France’s big ambitions to balance regional power dynamics in Eurasia. Gaidz Minassian, French political scientist and international relations lecturer at Sciences Po Paris, highlighted the scale of the change, telling Montfort,
France is stepping up its efforts and investments in the Russian periphery and Asia to strengthen the interests of the European Union and show that it remains a major player. And this investment is not just economic, cultural or humanitarian; it is strategic, military and political in this world in transition.
France’s foray will have significant implications for the region. As well as paving the way for more foreign direct investment, a closer relationship with European capitals will press Eurasian states to clean up their act on corruption and incentivize them to ensure investors have faith in the rule of law. Likewise, developing sectors like mining and energy offers a starting point for other industries to emerge further up the value chain — Kazakh electric vehicles? Mongolian battery factories? It’s all up for grabs in 2024.
Montfort Eurasia Research: Western investor perspectives on Central Asia and the Caucasus
Central Asia and the Caucasus stand out as among the world's fastest-growing regions, propelled by advantageous demographics, abundant natural resources, and a dynamically shifting geopolitical landscape that strategically situates the region between the East and the West. Despite these promising factors, the region continues to be under-explored by Western businesses and investors.
Montfort Eurasia carried out groundbreaking polling among decision-makers in businesses across diverse sectors in the United Kingdom and the United States in late 2023 to gauge their understanding of the region, pinpoint perceived opportunities, and identify barriers that impede their increased involvement in Central Asia and the Caucasus.
4.92 out of 10
That’s the average level of understanding Western investors rate themselves and their businesses as having about Central Asia and the Caucasus as an investment destination.
The full report is coming later in H1 2024, but for now here’s what you need to know:
There is high investor interest in the emerging markets of Central Asia and the Caucasus, but there is a low level of understanding about them. Investors tend to underestimate trade flows and struggle to identify business-friendly countries in the region.
Investor confidence is hindered by reservations about security and stability in the region.
Georgia is viewed as the most business-friendly country by audiences in both the USA and UK, but UK audiences view Uzbekistan as far more business-friendly than those in the USA.
To bridge the understanding gap, our research found that increased awareness, better communication from governments and corporates, and improved media coverage is needed.
Kazakhstan launches digital currency
Late in 2023 Kazakhstan's National Bank introduced a digital version of its national currency, the Tenge, as part of a push to streamline everyday financial transactions and combat corruption.
Unlike cryptocurrencies, the Digital Tenge (DT) is centrally issued by the National Bank, distinguishing it from those operating on open and unregulated blockchain networks.
While proponents suggest it could enhance government spending transparency, concerns about privacy persist. National Bank official Binur Zhalenov has assured that the platform won't be used to track personal finances, allowing currency holders to maintain control over its usage.
Crucially, the DT is usable for offline transactions, enabling usage in areas with weak or no mobile signals, defying challenges in connectivity in the country’s many signal-blind zones.
Advocates say expanded access can unlock new opportunities for businesses targeting these demographics and that being a centrally issued digital currency by the National Bank ensures both speed and reliability, making it an appealing choice for businesses and investors.
Bank listing marks Mongolian economic evolution
When diving into the Mongolian economy, banks aren't typically the first splash investors make – it’s usually mining. But the tide is turning as all five of the nation’s systematically important commercial banks have now been listed.Â
XacBank LLC, Khan Bank, Trade & Development Bank (TDB), Golomt, and State Bank, are now listed in compliance with Mongolia’s updated banking code, which was adopted in 2021. The code requires SIBs to be listed and limits shareholding rights to 20%. As the nation seeks to diversify its asset base beyond mining, the stock exchange is seen as a platform for investment in various sectors.Â
The move is expected to enhance transparency and governance in the banking system while promoting shareholder diversification. Still, the sector grapples with undercapitalization and regulatory gaps, underscoring the importance of ongoing reforms.
Georgia’s EU odysseyÂ
In the face of geopolitical complexities and internal political challenges, Georgia's attainment of EU candidacy signals a strong commitment within the European Union to strengthen Eastern Europe against Russian aggression.
Despite geopolitical and internal political challenges, including democratic backsliding, Georgia has thrived economically, with a 5.2% annual growth rate from 2010 to 2019, and a 10.1% GDP increase in 2022, accompanied by record tourism and investment. However, while the majority of Georgians favor EU membership, achieving candidacy isn't guaranteed, especially with internal politics and Russian sanctions-evasion.Â
For potential investors, Georgia's current growth trajectory may downplay the significance of its candidate status. The key contributors to foreign direct investment, the UK and the US, are non-EU countries. Ongoing positive trends in Georgian stocks and foreign direct investment signal a stable environment, reflecting investor confidence in the country's resilience against potential crises.
Uzbekistan's economic surge
Late last year the International Finance Corporation (IFC) commenced a groundbreaking venture in Uzbekistan, making its most substantial investment in the country to date with a total of $1.568 billion in 2023. The move signals a significant confidence in the country’s economic prospects.Â
This deal includes a $49 million allocation for Uzbekistan’s inaugural Zarafshon wind power plant, set to start operations in 2025, alongside close to $1 billion designated for a thermal power plant in the Syrdarya region.Â
These initiatives represent an important step in addressing the country's growing energy demands while actively contributing to its decarbonization and energy transition efforts. The mobilization of these funds is poised to foster the development of critical infrastructure, potentially triggering positive ripple effects across various sectors of the country.
Kazakhstan plans to facilitate Russian oil transfers to China
Kazakhstan plans to facilitate the transit of more than 100 million tons of Russian oil to China by 2033, Kazakh President Kassym-Jomart Tokayev said in a November 2023 interview with Russian daily Izvestia.
The nation's oil pipeline operator KazTransitOil extended an agreement to deliver Russian oil to China by 10 years with the deal calling for an annual transit flow of 733 million barrels of oil.
Kazakhstan is betting on the move to pay dividends that, according to The Diplomat, warrant the risk of potential secondary sanctions which could be imposed by the U.S. and the EU. Notably, these sanctions would target specific companies, banks, and individuals rather than the entire nation.Â
With business leaders likely facing the most significant repercussions, it is uncertain whether secondary sanctions would prompt a change in policy. Nevertheless, even if Kazakhstan evades such punitive measures, investors may choose to withhold investment as a precautionary measure.
The oil deal aligns with Kazakhstan's endeavor to maintain an equilibrium between its relations with the West and Russia. Kazakh officials are still eager to assert Ukraine’s sovereignty in the ongoing conflict with Russia and to show that they take the West’s sanctions concerns seriously, introducing a new tracking system that would supposedly allow tracing of the movement of goods from border to border.