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Kazakhstan Steering through Troubled Waters

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Earlier this year, the Central Asian nation of Kazakhstan announced a new campaign called “Invest in Kazakhstan,” which was designed to attract foreign investors. Throughout the campaign it released new commercials that enticed potential investors with exemptions from corporate income tax, land taxes, property taxes, and customs duties for up to ten years.

To lure new stockholders, the commercials promised state-in-kind grants (like goods, services and expertise), stability of investment legislation (drawing on the 2003 Kazakh Law of Investments which virtually guaranteed the stability of assets), strong protection of investors’ rights, no work permits for foreign labor, and visa-free entry for citizens of many countries. As if these benefits weren’t enough, Kazakhstan went even further, offering thirty percent cash back on investments. One would think that with this kind of economic bait – and the fact that Kazakhstan had very low debt – foreign investors would be jumping at the opportunities. So why hasn’t the country been able to draw more foreign investment?

Perhaps, with the exception of multinational oil companies, potential investors are turned off by the many disadvantages there are to investing in Kazakhstan. In addition to being quasi-democratic and geographically landlocked, Kazakhstan’s private sector lacks experience, still has to develop a larger educated workforce, and suffers from global doubt as to its financial ability to follow through on the aforementioned promises. It also doesn’t help that Kazakhstan acts like an autocracy at times in that its government is known for its lack of transparency and has high levels of corruption. It maintains tight controls over the press, lacks diversity, and has an unimpressive civil rights record. Dealing with these political complications would be an inevitable headache for investors.

Perhaps most importantly, Kazakhstan is currently dealing with a currency crisis where capital is hemorrhaging at an alarming rate. The tenge, Kazakhstan’s native currency, was tightly controlled for years until the government decided to switch to a floating exchange rate. This decision, due to falling crude prices around the globe, caused the tenge to lose almost a quarter of its value. However, as the dominoes have fallen in reaction to cheap oil from China to South Africa, Kazakhstan’s government still does not appear too concerned. In fact, while everyone else is calling it a crisis, Kazakh leadership is calling it a normal “transition.”

Even though Kazakhstan has recovered some of its losses (ten percent), there is still a very good possibility it will drop again in the next few weeks. This is because of the tremendous pressure on Kazakhstan by its neighbors. Like other emerging markets in the region, Kazakhstan – a country that is sandwiched between Russia and China – is economically dependent on both regional superpowers. Its economy is linked to Russia’s and has been negatively impacted by the Russian sanctions caused by the crisis in Ukraine. This impacts Kazakhstan on two fronts: the Russian ruble has become so weak that Russians can hardly afford Kazakh goods and, at the same time, Russian imports are threatening to flood Kazakhstan’s market with low-cost imports. To make matters worse, there is a weaker demand for Kazakhstan’s exports by China, the second-largest economy in the world. China’s recent move to devalue its currency – the Yuan – may have been done to boost the country’s exporters in an attempt to make their products cheaper and easier to sell. This could very well spark a currency war in the region and further damage susceptible currencies in emerging markets, including Kazakhstan. In sum, China’s devalued currency, Russia’s plummeting ruble and crushing sanctions, and the likely increased supply of oil from Iran after the new nuclear accord – all exacerbate the problem in Astana and may be putting Kazakhstan’s long-term economic future on shaky ground.

It appears that Kazakhstan, still resolute to integrate into the global market community, has an ambitious plan to use its WTO and EEU memberships to boost its image and attract new investments. Furthermore, the Asian Development Bank (ADB) just announced it will loan Kazakhstan one billion dollars so it can resume governmental programs designed to stimulate the country’s economy. This loan presents Kazakhstan with an opportunity to diversify, create new jobs, provide continued support and services to its disadvantaged citizens, grow its private sector, and build up smaller businesses. Unfortunately, making substantial domestic policy changes pertaining to civil liberties and democratic freedoms do not appear to be a part of the strategy at the moment.

While it is difficult to know exactly how this complex economic strategizing will play out in Kazakhstan, there is one thing we do know. Kazakhstan’s President Nursultan Nazarbayev – the only leader the former Soviet Republic has had since its independence in the early 90s – has great energy and enthusiasm for the future of his country. His grand geopolitical ambitions strive to take the country to new heights of economic, political and industrial growth. While Kazakhstan is considered authoritarian by international standards, by regional standards it is regarded as a much “softer” version than its Asian counterparts. This may give it an important edge as it strives to stay innovative and relevant while expanding its political, military, diplomatic, and economic reach.

Another important demographic factor is just how young the country is, in both population and geopolitical terms. For one, Kazakhstan has managed to utilize its resources and the productive capacity of citizens to not only break away from its domineering progenitor but also set itself up for long-term sustainability. It transformed itself mostly into a market economy that, under the right conditions and strategies, could dramatically transform and deepen from international trade and investment. While it would certainly be a stretch to describe Kazakhstan as a wealthy nation, it most definitely is not a poor one. Post-Soviet Kazakhstan has been remarkably responsible with its fiscal, industrial, trade and macroeconomic policies. Plus, it has worked very hard to carefully cultivate relationships with other countries so that Kazakhstan is largely regarded within the region as a stable and rational geopolitical voice.

While Kazakhstan still needs to diversify its overconcentration on natural resources, the country still has time, opportunities, important economic alliances, and room to grow. Kazakhstan’s economy and political ties do not necessarily have to remain constrained by corruption and political controls either. For the country to overcome the challenges it currently faces and to attract foreign investors, it needs to continue to embrace innovation that can accommodate social unity and a more balanced policy geared towards diversification and development. Perhaps the greatest challenge of all, but also provide definitive proof to the global community (and its foreign investors), is the willingness of the country to venture more boldly with democratic freedoms and civil liberties experiments that will accentuate and reinforce its sound economic strategies. Being able to develop both economically and democratically, to show the world that unlike so many emerging economies Kazakhstan is not afraid to give its people and its system more independence and freedom, might be the one element of harmony that will distinguish the country from all other competitors and, ironically, provide it with the stability to ride out the cyclical nature of economic crisis.

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Central Asia

The Track to Prosperity

Sabah Aslam

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The world is rebalancing and one of the key gears of this shift is that the tide has turned towards eastern hemisphere. The world is being reshaped here, not just politically but also economically. The long awaited curse has now been lifted as the cogs of new era are positioned in destiny of eastern hemisphere. As liberalism re-emerges over international arena, the thrust of this new order is in trade and connectivity.

One such cord to this anecdote is Uzbekistan and its rising role in the infrastructural developments and regional activity. This Central Asian region and Afghanistan had been conflict zones for long periods of time but now Asian picture is changing. With changing regime in Pakistan, US-Taliban Dialogues going on in Afghanistan the dynamics of regional politics are changing. Tashkent already has cordial relations with Kabul and thus leads many developmental projects in the Afghani land including the Hairatan to Mazar-e-Sharif Railway Project. Being the only country without any rift with Kabul administration, Uzbekistan is seeking to put its influence not by force but by the fist of development. Mutual benefits of both countries can open new doors to regional connectivity and prosperity. Not only this, Uzbekistan is determined for regional connectivity with various projects including Central Asian countries, china and South Asia. Uzbekistan also shares good relations with Pakistan, which is its second largest trade partner in the region after Russia. Also Uzbekistan also shares the floor of Shanghai Cooperation Organization with Pakistan. But after the changed ruling party and its policies, Uzbekistan came up with better ideas.

One such venture was recently proposed by the delegation led by Uzbekistan’s foreign minister, Mr Abdulaziz Kamilov, who visited Pakistan and met his Pakistani counterpart, Mr Shah Mehmood Qureshi at the end of the last year. The proposal which may evolve into Euroasian concept of interconnectivity, aimed at connecting Pakistan with Uzbekistan through a railroad network which will pass via Afghanistan’s Mizari-Sharif. The two possibilities for the construction of lines are Mazar-i-Sharif-Khulm-Puli-Khumri-Doshi-Surabai-Jalalabad-Torkham on Pakistani side or along Surkhan – Puli-Khumri – Doshi – Surabai-Jalalabad-Peshawar (Pakistan).

The proposal if implemented will have far-reaching outcomes, booming the trade which is the dire need of economy for these countries. The trans-afghan railway project will not only connect Pakistan to central Asia and its market but also open doors to Russia, which can also play key role in the economics of the nation. The five year plan which was presented in December of 2017 by Uzbekistan involved such developments which will help the country to boost up its economy by establishing transit trade routes benefitting the economy and amplifying the regional connectivity. The trade route between Uzbekistan and Pakistan will allow access of central Asian states to open waters enabling their reach to the rest of the world through the deep sea port of Pakistan.

The Uzbek soil is enriched with the production of cotton and sugar and apart from this the agro-machinery in Uzbekistan is more advanced than in Pakistan since Islamabad and Tashkent already are trade partners which can clearly be seen as in 2018 the trade between two, crossed the 90 million US dollars mark. This trade volume can reach new altitudes if the direct link is established between the two countries and Pakistan, a country with agro centered economy, can have advanced parameters.

Such collaborations not only can decrease the trade deficit but also boon the local industry and economic growth can be achieved in areas which are underdeveloped. Also the majority of the population in this part of the world lives below the poverty line, the track can help in improving their living standards. Various studies indicate that high cost of trade in this region is because of lack of interregional infrastructure. Therefore leading to lower prices of trade can help raising lower class and expanding middle class. Also when there is a market, Foreign Direct Investment comes in rushing. Hence overall the conditions of the states would improve drastically over the years.

Uzbekistan has been long interested in Afghan soil which is conflict ridden from its postmodern to modern history. It is difficult for the landlocked Uzbekistan to have a global access. Thus in order to open its trade tentacles Uzbekistan needs Afghanistan and to outreach globally it needs a port which is deep sea. The proposal if comes into reality will make good use of Pakistan’s strategic location, making Pakistan as the focal point for regional trade and its connectivity with the rest of the world. Uzbekistan and Afghanistan are landlocked states and need a country like Pakistan with warm water sea ports for getting to hot waters.

A railway line will reduce the cost of transportation and make it convenient for the two states for getting a suitable sea port. Also, a train would take not only goods but also people. This would lead to increased people to people contact. With people connected together, peace and stability in the region would be comparatively easy to attain. Developing the underdeveloped areas of Pakistan and Afghanistan and the sense of insecurity which is visible will be minimized. These developmental projects can enhance the capacity to achieve collective prosperity and enrich the relation between the countries. Consequently, a better image of these countries will eventually be projected. Through such initiatives the whole eastern region will be interconnected with each other and trade will be boomed benefitting participant countries.

Apart from this, the world has now left with only a few untapped resources which are mainly located in central Asia and Afghanistan. If odds don’t go against, it will be a great victory for Pakistan to be connected with Central Asian states directly through the rail road network. With the new shift and East into light, everyone is eyeing on Asia and its proximities for energy reserves. Pakistan, once connected through railroad, can take maximum possible advantage of this untapped potential in the region which would not only be beneficial for countries itself but for Pakistan as well.

Recent proposal can curb the miseries of Afghanistan and steer it into a healthy voyage of productivity, and through developments peace and security can be achieved in the Afghanistan. Such initiatives will open doors not only for Pakistan, Afghanistan and Uzbekistan but also for the countries that have potential markets. Apart from this, these acts will make region interdependent which further can deescalate the tensions among countries opening them for each other and becoming market for each other. The regional connectivity will also boost the integration and regional harmony.

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Central Asia

Belt and Road Initiative in Central Asia and the Caucasus

MD Staff

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Left to right: Speakers Johannes Linn of the Brookings Institution, Harinder Kohli of the Emerging Markets Forum, ECA Chief Economist Asli Demirguc-Kunt, and Caroline Freund, World Bank Director of Trade, Regional Integration and Investment Climate. The panelists discussed the Belt and Road Initiative in Central Asia and the Caucasus. Photo: World Bank.

The massive Belt and Road Initiative (BRI) plans to build roads, railways, seaports and other trade infrastructure in dozens of countries in the Eurasian continent. The BRI aims to connect Asia to Europe, and the initiative has steadily expanded economic corridors and projects as far as Africa.

Two of the planned corridors of this ambitious project will run through countries in the Central Asia and South Caucasus. These countries are mostly land-locked, and their transportation infrastructures and quality tend to be low.

“If properly implemented, BRI transport projects are expected to reduce travel times and trade costs, potentially leading to enhanced trade, foreign investment which would translate into higher economic growth and poverty reduction for the countries involved,” said Asli Demirguc-Kunt, chief economist of the World Bank’s Europe and Central Asia (ECA) region.

“However, there are also significant risks involved, and the initiative can leave countries with excessive debt and poor quality projects; and there are potential environmental and social costs,” Demirguc-Kunt said. “So the question is how can these countries maximize the benefits and minimize the risks?”

Economists Harinder Kohli of the Emerging Markets Forum and Johannes Linn of the Brookings Institution spoke about the BRI at the inaugural ECA Talks event, a series of monthly talks in which researchers exchange and challenge ideas about key issues affecting the region.  Their talk was based on a study that draws on background notes prepared by experts from the region on their countries’ perspectives on the BRI, hence providing an “inside-out” perspective. 

One of the constraints to good analytical work in this area is that no comprehensive dataset exists with reliable information about BRI project costs, conditions and terms of financing.

“There are great benefits to be had but also considerable risks that need to be addressed in one way or another,” said Linn. BRI investments should reflect country priorities and be integrated with national and regional plans.  Macroeconomic constraints, especially debt sustainability, must be carefully monitored and respected. 

Governance and corruption issues are important as in any large infrastructure project, so there is a need for greater transparency on terms and conditions of these projects, for example open and transparent public procurement.  Some BRI routes pass through ecologically important landscapes lacking adequate protections, posing a wide range of environmental and social risks, which need to be addressed.

Reaping the benefits will also depend on soft investments made to support trade. Such soft investments include ensuring the efficient operation and maintenance of projects after they are built and improving trade logistics at border crossings. Kazakhstan, for example, stands to receive a potential $5 billion annually in transit fees from goods moving through it to other markets.

BRI projects also include investments in energy, mining, agriculture, communications, and technology to improve trade connectivity. But not everyone will benefit from BRI projects, which will usher in more global trading competition and labor mobility. Countries will need to consider ways to compensate businesses and workers that are eventually forced out.

“What we need is to have more data and more information,” said Caroline Freund, World Bank director of trade, regional integration and investment climate. “This is the only way we are going to understand where the benefits come from.”

World Bank

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Kazakh police raid raises spectre of China’s long arm

Dr. James M. Dorsey

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A police raid on a Kazakh group documenting the plight of Kazakhs and Uyghurs caught in a brutal crackdown in China’s north-western province of Xinjiang is about more than a government seeking to please Beijing in the hope that it improves the lot of its ethnic kin while preserving diplomatic and economic relations.

Amid suspicions that the raid on the offices of Atajurt Eriktileri and the arrest of activist Serikjan Bilash was carried out as a result of Chinese pressure aimed at squashing criticism of the crackdown, the raid seemingly reflects an increasingly aggressive Chinese effort to impose its will on others and ensure that they observe the respect and deference that China believes it deserves.

Atajurt Eriktileri supports relatives of people who have disappeared in Xinjiang and says it has documented more than 10,000 cases of ethnic Kazakhs interned in China.

Police on Sunday sealed the group’s office in Almaty, Kazakhstan’s largest city, seized the group’s computers and archives and flew Mr. Bilash, who said he was being accused of “inciting ethnic hatred, to the Kazakh capital of Astana.

The East Turkistan Awakening Movement, a Washington-based Uyghur exile group, said Mr. Bilash had been arrested on charges of “creating tensions between #Kazakhstan and #China.”

The Kazakh police raid is but the latest incident pointing to China’s more aggressive form of diplomacy that includes an increasing number of undiplomatic comments by Chinese diplomats across the globe.

At times, those comments are couched in civilizational terms steeped in what political scientist Zhang Weiwei describes as the rise of the civilizational state under President Xi Jinping.

Describing the trend towards a civilizational state that involves a rejection of Western concepts, including notions of human rights and freedom of religion, Financial Times columnist Gideon Rahman noted that China was not alone in its embrace of the idea as an alternative to the traditional concept of a nation state based on national borders and language. Mr. Rahman suggested that the concept was also gaining currency in countries like India and Russia.

Chinese Foreign Minister Wang Yi defended his diplomat’s more outspoken statements by pointing to China’s need to stand up for its “rightful and lawful interests.” Mr. Wang insisted that China would not tolerate infringements of its sovereignty and national dignity.

“Chinese diplomats, wherever we are in the world, will firmly state our position,” Mr. Wang told journalists this weekend covering the National People’s Congress.

Former senior Singapore diplomat Bilahari Kausikan noted that “China does not just want its new status recognised as a geopolitical fact; China wants its new status accepted as a new norm of East Asian international relations; a hierarchy with China at the apex. Most countries accept the geopolitical fact; few accept the norm.”

Examples of China’s more aggressive attitude abound while the Kazakh raid suggests that China’s concepts of deference and respect amount to far more than traditional notions of respect. They also provide a potential insight into the values and norms that in China’s view would undergird a new world order.

China’s notion of deference was put on display last September at the Pacific Islands Forum when Beijing’s ambassador to Fiji, Du Qiwen, allegedly demanded the right to speak before Tuvalu prime minister Enele Sosene Sopoaga. The forum’s host, Nauru president Baron Waqa accused the Chinese envoy of being “insolent” and a “bully.”

Both Nauru and Tuvalu, to China’s chagrin, maintain diplomatic relations with Taiwan.

Similarly, Papua New Guinea police were called after Chinese officials allegedly tried to force their way into the office of the country’s foreign minister in a bid to influence the final communique of last November’s Asia Pacific summit.

The summit ended without a final statement because of disagreements between the United States and China. Chinese officials dismissed the report of them having attempted to gain access to the foreign minister’s office as “a rumour spread by some people with a hidden agenda.”

In an oped in The Hill Times, an Ottawa-based newspaper, Lu Shaye, China’s ambassador to Canada, described as “Western egotism and white supremacy” demands that China release two Canadian nationals arrested in China.

The two Canadians are being held in apparent retaliation for the detention in Canada at the behest of the United Sates of senior Huawei executive Meng Wanzhou on charges of having misled banks about the company’s business dealings with Iran.

A series of incidents in the wake of a visit to Sweden last September by the Dalai Lama involving Chinese tourists and a satirical Swedish television show that poked fun at Chinese visitors and excluded Taiwan and parts of Tibet from a map of China drew the ire of the Chinese embassy in Stockholm.

The embassy denounced Swedish police as “inhumane,” decried “so-called freedom of expression,” charged that the tv show “advocate(s) racism and xenophobia outright, and openly provoke(s) and instigate(s) racial hatred and confrontation,” and issued a safety alert to Chinese tourists because of multiple cases of theft and robbery and poor treatment by Swedish police.

In line with Mr. Wang’s justification of his diplomats’ more undiplomatic approach, Brookings fellow Ryan Hass told Bloomberg that the envoys were “matching the mood of the moment in Beijing… Some in Beijing also seem to be growing frustrated that China’s rising national power is not yet translating into the types of deference from others that it seeks.”

The raid in Kazakhstan, like earlier cases such as Egypt’s return at China’s request in 2017 of up to 200 Uyghur students to an uncertain future in the People’s Republic, suggests that Beijing maintains an intrusive, far-reaching definition of its concept of deference and respect.

Kazakh activists charged that the raid was indicative of the kind of pressure applied by China. “Our government doesn’t want to spoil relations between Kazakhstan and China,” said Atajurt’s lawyer, Aiman Umarova.

There was no independent confirmation of assertions that Chinese pressure prompted the raid.

In a video statement, Mr. Bilash confirmed that he was Kazakh police custody and had not been detained “by either the Chinese or Chinese spies”.

Mr. Bilash’s wife, Leila Adilzhan, said she was “afraid our government will give him to China.”

That may be one step too far for the Kazakh government given mounting anti-Chinese summit among Kazakhs and public demands that Kazakhstan be more forceful in its standing up to China for the rights of Kazakh nationals and Chinese citizens of Kazakh descent. Kazakhs constitute the second largest minority in Xinjiang after Uyghurs.

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