Central Asia as a Strategic Region for Trade and Investment
The geographical region widely considered as Central Asia comprises Kazakhstan, Azerbaijan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. The diverse region boasts a mix of upper-middle- and low-income countries with significant strategic importance due to their geographic location and abundant natural resources[1]. The region has a long history as a central area for global trade, dating back to the Silk Road trade network during China’s Han Dynasty over 2000 years ago. These historic routes extended more than four thousand miles from China to Europe, connecting eastern and western markets and putting Central Asia at the epicentre of trade and globalization, generating immense wealth[2].
The modern-day Central Asia region still benefits from its strategic geographic position between China and Europe and the abundant natural resources, low public debt, a young population, and a growing labour force found in the countries that comprise it. These countries have also benefited through their increased integration into the global economy over the last decade, driven mainly by natural resources and labour. During the 2000s, the Central Asia region emerged as one of the most dynamic global economic regions, trading goods and services globally to help support domestic demand, reduce poverty, and share prosperity throughout the region. These resource-rich countries have already achieved or are approaching the upper-middle-income status, mainly on the back of solid demand for their natural resources[3].
Being such an important geopolitical and economic region, Central Asia has been swiftly developing; thanks to foreign direct investments (FDI), the gross inflow totalled $378.2 billion between 2007-2019[4]. The European Union (EU) countries invested 40 per cent of total FDI in Central Asia. China has been developing logistics and transit routes through projects as part of its Belt and Road Initiative (BRI), sometimes referred to as the New Silk Road. In addition to investments, the EU and the United States provide significant grant funds to support public and political institutions, projects for environmental protection, and civil society development. The EU alone provided the region with approximately $1.2 billion in aid between 2014 and 2020[5]. These initiatives recognize the importance being placed on integrating Central Asian countries into the global economic arena.
Economic Development and Opportunities in the Region
While the investment activities in Central Asian countries have been picking up, there are still significant opportunities for economic growth and sustainable development within the region. With its plethora of natural resources and location as one of the main transit passages between EU countries, China, and Russia, the region has many inviting attributes for further investments.
Despite being a central trade route between Europe and China, improving conditions for trade within the Central Asia region itself is particularly critical, given some of the inherently challenging conditions. The economic structure of Central Asia is one of low density and long distances. The combined population of the countries in Central Asia is approximately 75 million[6], spread unequally over a relatively large geographical area, including large deserts and high mountains with limited connectivity[7]. The landlocked and remote location of the Central Asia region paired with its rugged topography means there are additional transport costs and transit times needed for regional and international shipments within the region[8].
Despite these barriers, the economic expansion of other nearby countries, such as China and Russia, creates an unprecedented opportunity for Central Asia to emerge as a hub for trade and commerce. The region should benefit from closer intra-regional connectivity, deeper ties with traditional partners, and growing trade relations with some fast-growing nearby economies such as China, India, and Turkey[9].
Although each Central Asian country pursues its own individual development paths, they share similar challenges regarding cross-border resource management, underinvestment in sustainable infrastructure, and economic diversification and growth challenges. Since Central Asian countries are all relatively small economies, they will need to promote regional trade policies and closely integrate into the international trading system to achieve sustainable economic development[10].
ICIEC’s Role in Central Asia
Currently, three of the five Central Asian countries are ICIEC Member Countries – Kazakhstan, Turkmenistan, and Uzbekistan. ICIEC supports trade and investment flow for these Member Countries by providing insurance solutions to mitigate political and commercial risks. Through its range of solutions and its preferred creditor status, ICIEC also assists Member Countries in attracting FDI for projects in critical sectors for their sustainable development and national objectives.
ICIEC plays a critical role in promoting intra-OIC trade between Central Asian Member Countries and Member Countries in other regions. As part of its mission, ICIEC seeks to increase global trade integration, foster cooperation among markets in the Global South, and support in periods of trade turmoil. To achieve this, ICIEC is working closely with its IsDB Group peers, namely IsDB, ITFC and ICD, to enhance the Group’s synergy and expand joint operations in Central Asia.
Kazakhstan
Kazakhstan attained ICIEC Membership in 2003. Since joining, ICIEC has insured a total of USD 1.94 billion for trade and investment in Kazakhstan: USD 996 million in coverage for the import of strategic goods into Kazakhstan and USD 939 million in cover for exports out of Kazakhstan.
During this time, ICIEC has maintained an excellent relationship with Kazakhstan’s national Export Credit Agency to help them support their national exports. In 2014, ICIEC signed a Memorandum of Understanding for cooperation with KazakhExport to promote collaboration and expand the insurance capacity of both institutions. In 2015, ICIEC extended USD 21 million in reinsurance support to KazakhExport to export locomotives to Azerbaijan Railways.
In 2020, ICIEC worked with Eurasian Machinery, the official distributor of Hitachi Construction Machinery (HCM) in Kazakhstan and Central Asia, extending USD 9.5 million in Specific Transaction Policy, covering 80% of the total sales contract and assisting in the import of capital goods. This cover provided Eurasian Machinery with four Hitachi excavators to the Kazakhstan mining sector and helped support Kazakhstan’s mining sector by increasing production capacity and securing new jobs.
ICIEC is also closely following the PPP projects in Kazakhstan and is contacting the Kazakhstan PPP Center and international banks to support PPP projects in Kazakhstan.
Turkmenistan
Turkmenistan is the most recent Central Asian country to join ICIEC membership in 2019. Since then, ICIEC has been growing its presence within the country, seeking opportunities to promote foreign direct investment, expand Turkmenistan’s exports, and prioritize support for projects that contribute to Turkmenistan’s strategic development goals. The Corporation stands ready to catalyze support in Turkmenistan by mitigating political and commercial risks for trade and investment by providing its Shari’ah compliant insurance solutions for banks, corporates, export credit agencies, and other insurers.
Currently, ICIEC is engaging with several international banks to support transportation and agricultural sector projects.
Uzbekistan
Uzbekistan joined ICIEC Membership in 2019. ICIEC has since facilitated several seminal sustainable development projects in Uzbekistan, amounting to USD 126 million in total cover. ICIEC contributes to foreign direct investment and advances Uzbekistan’s specific development goals by facilitating investments in strategic sectors.
In one such project, ICIEC provided a total cover of USD 54 million in Specific Transaction Policy for transactions between two of China’s largest telecommunications equipment manufacturers and Uzbekistan’s state-owned telecommunication operator in line with the Government’s National Development Strategy for 2017-21. The two projects involved modernizing the mobile broadband access network in the Eastern and Western regions of Uzbekistan, expanding the data storage and processing centre, and supporting new technology that will increase access to critical services.
ICIEC’s continued support of infrastructure-related projects in Uzbekistan can help mobilize the private sector and financial resources from abroad. For example, ICIEC is in contact with the PPP Development Agency and international banks to explore opportunities to support PPP projects such as energy and hospital projects in Uzbekistan. ICIEC is cooperating with international banks for their lines of finance to Uzbek banks and entities. ICIEC is also in dialogue with the Investment Promotion Agency under the Ministry of Investments and Foreign Trade to sign an MoU to attract FDI into the country.
In June 2020, ICIEC and Uzbekinvest, the Export-Import Insurance Company of Uzbekistan, signed a Memorandum of Understanding that supports joint efforts, expanding the insurance capacity of both institutions.
Looking Ahead
The diverse natural resources, plentiful human capital, and burgeoning SME sector in the Central Asia region are grabbing investors’ attention, providing many promising future opportunities. To enhance growth and overcome the existing challenges of a lack of sustainable infrastructure and economic diversification, the Central Asia region will have to implement new policies and strategies and lean on political risk insurers, such as ICIEC, to support ventures into new markets.
Greater infrastructure development could give Central Asian economies a critical boost by enhancing growth, poverty eradication, climate change mitigation, and recovery from the impacts of the COVID-19 pandemic. Effective infrastructure projects, such as ICIEC’s reinsurance support to KazakhExport to export locomotives to Azerbaijan Railways, can induce positive spillover effects on economic growth, employment, and trade. The Central Asia and Caucasus region require a combination of the soft and physical infrastructure to achieve a sustained growth pattern. This will require financing solutions and new funding sources to tackle the region’s infrastructure investment gap. Along with infrastructure development, regional connectivity barriers need to be scaled down so that potential inter-, intra-, and extra-regional trade can be expanded[11].
Central Asian countries and their respective governments should also seek to expand economic diversification, having primarily integrated with the world economy through their natural resources, which account for about 65 per cent of exports in Kyrgyzstan, Tajikistan, and Uzbekistan, and more than 90 per cent in Kazakhstan and Turkmenistan[12]. This heavy reliance on a few primary commodities exports makes the Central Asian region vulnerable to abrupt swings in volatile world prices for these commodities and complicates economic management. To counter this, some of Central Asia’s more advanced economies have already begun pursuing economic diversification and advancement accompanied by structural reforms to invite further new investments in the region[13]. This will help expand FDI flows beyond extractive industries. ICIEC’s services in the region can also expand FDI flows and foster economic diversification by supporting local exporters of non-oil commodities in reaching new markets.
ICIEC will continue to support its Member Countries, businesses, and citizens in the Central Asia region by facilitating sustainable development projects in both soft and hard infrastructure, by encouraging investments in strategic sectors, and by offering a range of risk mitigation solutions to help increase global trade integration and prosperity in the region.
[1]https://www.worldbank.org/en/region/eca/brief/central-asia
[2]https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative
[3]https://www.wto.org/english/thewto_e/acc_e/Session1SarojKumarJha12stCenturySilkRoad.pdf
[4]https://astanatimes.com/2020/12/fdi-to-central-asia-reached-378-2-billion-over-past-13-years/#:~:text=NUR%2DSULTAN%20%E2%80%93%20The%20Central%20Asian,of%20which%20totaled%20%24378.2%20billion.&text=FDI%20to%20Kazakhstan%20reached%20%243.6,important%20geopolitical%20and%20economic%20region
[5]https://astanatimes.com/2020/12/fdi-to-central-asia-reached-378-2-billion-over-past-13-years/#:~:text=NUR%2DSULTAN%20%E2%80%93%20The%20Central%20Asian,of%20which%20totaled%20%24378.2%20billion.&text=FDI%20to%20Kazakhstan%20reached%20%243.6,important%20geopolitical%20and%20economic%20region
[6]https://www.worldometers.info/world-population/central-asia-population/#:~:text=Countries%20in%20Central%20Asia&text=The%20current%20population%20of%20Central,among%20subregions%20ranked%20by%20Population
[7]https://www.wto.org/english/thewto_e/acc_e/Session1SarojKumarJha12stCenturySilkRoad.pdf
[8]https://www.adb.org/sites/default/files/publication/29927/central-asia-trade-policy.pdf
[9]https://www.wto.org/english/thewto_e/acc_e/Session1SarojKumarJha12stCenturySilkRoad.pdf
[10]https://www.adb.org/sites/default/files/publication/29927/central-asia-trade-policy.pdf
[11]https://www.adb.org/sites/default/files/publication/688061/adbi-book-developing-infrastructure-central-asia.pdf
[12]https://www.brookings.edu/blog/future-development/2019/12/13/encouraging-transformations-in-central-asia/#:~:text=Nearly%2030%20years%20ago%2C%20the,the%20middle%20of%20the%201990s
[13]https://www.forbes.com/sites/arielcohen/2020/12/08/foreign-investment-in-renewables-and-beyond-the-last-best-hope-for-central-asias-economic-recovery/?sh=26368a2f5ebf
