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Taming the Bear while Riding the Dragon? Central Asia confronts Russian and Chinese economic influences

Dompter l'ours et chevaucher le dragon. Les économies d'Asie centrale face aux influences russes et chinoises
Julien Vercueil

Résumés

Trois vagues d’influence extérieure se sont développées en Asie centrale depuis 1992 : occidentale, russe et, plus récemment, chinoise. Cet article cherche à déterminer dans quelle mesure les influences économiques russe et chinoise peuvent désormais être considérées comme concurrentes. Il débute en distinguant plusieurs degrés d’influence économique exogène, pour appliquer ce canevas à la région. Il différencie ensuite ces pays suivant la structure de leur régime d’accumulation et la manière dont ils peuvent être touchés par ces changements exogènes. Troisièmement, il propose une appréciation des canaux par lesquels les influences chinoise et russe peuvent s’exercer en Asie centrale. Enfin, il documente les transformations actuelles qui accroissent la présence chinoise et augmentent le risque de dépendance extérieure structurelle des pays d’Asie centrale.

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Texte intégral

The author wishes to thank Violaine Delteil, Eric Magnin and two anonymous referees for their very useful comments and suggestions. Many thanks also to Victor Rodwin for his editing work. All remaining errors and omissions are of the author’s responsibility.

1Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan form a group of Central Asian countries that where part of Soviet Union before its demise in 1992. Their territory is bordered by China, India, Pakistan, Afghanistan, Iran, the Caspian Sea and Russia (Map 1). These countries will be, in a restrictive sense, coined “Central Asia” in this paper. While being diverse in terms of economic structures, political regimes, geographical situations and recent economic and political trajectories, these countries share a common institutional legacy – the Soviet one – and a pervasive Russian influence on their soil.

2Accordingly, these economies still face Russia’s macroeconomic evolution, but the policies they adopted vis-à-vis their northern neighbor over the past twenty-five years have been quite different. Thus, it seems important to ask whether their different policies have affected Russia’s influence on them. Furthermore, this question is timely considering the growing economic pressure of China.

Map 1. Geographical overview of central Asian countries

Map 1. Geographical overview of central Asian countries

Source: author’s conception

3From both institutional and political economy perspectives, studying the evolution of central Asian countries is interesting too, especially if one addresses the problem posed by their economic dependency. Starting from a heavily distorted economic structure bequeathed by more than fifty years of colonialism and socialism (Manz, 1998), these landlocked and poorly industrialized economies have been abruptly confronted by the disruption of their former colonial ties. It should be emphasized that these nations neither provoked this disruption, nor were they prepared to respond to it. In most cases, the political elites who were in charge of the republics’ administration during the Soviet period retained their power after its demise. More than twenty-five years later, one of these historical leaders is still in charge – Nursultan Nazarbayev in Kazakhstan. National political changes must be taken into account when analyzing the evolving economic policies pursued by central Asian countries since the 1990s.

4The Soviet Union’s collapse and the ensuing transformational crises caused central Asian trade relations with Russia to plummet (Freinkman et al., 2004). After 2000, two major exogeneous shocks, once again transformed the regional landscape: first, the end of Russia’s great depression, followed by a recovery that allowed Russian companies to return and/or strengthen their presence in several countries of central Asia; second, the rapid rise of China, engaging more activities abroad and therefore offering new economic opportunities for central Asian businesses and governments.

5To be sure, each central Asian country has been running its own policy regarding trade, investment and capital flows, which explains why similar changes in their environment do not necessarily have the same impact on all of them. But over the last decade, the central Asia region has increasingly appeared as a field of competition between Chinese and Russian companies – but also between their political, technological and economic influences. After the financial crisis of 2008 and, more importantly, a second shock that hit the Russian economy severely in 2015-2017, the balance between the two countries’ economic impacts on the region began to tip to the Chinese side. What is more, at a time when western and Russian involvement in the region was declining, China tempted these countries, with huge promised investments, to join its grand New Silk Roads project.

6Is this to say that there is no more dependency on Russia in Central Asia? In what sense does it make to use the term of “dependency” in this context? Confronted with two gigantic neighbors that tend to use their political influence to advance their economic interests – and vice versa – is there a chance for central Asian economies to escape the status of dominated economies, using each regional power to balance the other? In short, can they tame the bear while riding the dragon?

7In this exploratory paper, I first distinguish between degrees of exogeneous influence in order to apply this framework to the region. Second, I differentiate the structure of accumulation regimes among these countries and the ways they can be influenced by exogeneous changes. Third, I assess the channels by which Chinese and Russian influence can be felt in Central Asia. Finally, I document the current transformations that are increasing the Chinese presence and raising the risk of structural external dependency for central Asian countries.

1. A qualitative scale for assessing exogeneous influences

8For the sake of clarity, I begin by making some basic distinctions between different meanings of the term “dependence”. From the perspective of a country, it is obvious that each degree of economic openness leads to a form of dependence. Yet, there must be diverse forms of dependence, since there are many ways in which exogeneous pressures can be exerted on the national economy and its ability to define its own policies. To clarify this point, I distinguish:

  • the level of external sector liberalization of an economy is given by the extension of rights allowed by domestic policies and institutions to non-resident agents who seek to develop their activities within the national territory, and to residents who want to trade or invest abroad;

  • the level of openness is given by the weight of external flows (exports, imports, remittances, foreign direct investments, capital flows) in the domestic economic activité;

  • the external vulnerability / exposure is given by the nature and importance of the impact an external economic shock can produce on the short-term trajectory of the national economy;

    • 1 Among which, institutions governing property rights.

    the dependence is the extension of external vulnerability in the long run. It is the outcome of the structural characteristics – be they geo-economic, technological, institutional1, and/or political – that shape national economies. Dependence reveals the extent to which external constraints tend to constrain, in the long run, domestic policies and institutions (Fig. 1).

Fig. 1. From economic liberalization to dependence: constraints on domestic policies

Fig. 1. From economic liberalization to dependence: constraints on domestic policies

Source: author’s conceptualization

9For the levels of liberalization and openness, a direct measurement can be made by choosing a relevant set of criteria representing these two dimensions. Such criteria are regularly discussed and redefined by international organizations such as the World Bank, IMF, WTO, OECD or EBRD in order to provide a basis for benchmarking countries and recommending policy options for them. While some of these criteria may be challenged, I nevertheless, rely on them since my analysis remains sufficiently broad so as not to be jeopardized by their shortcomings. However, as far as external vulnerability and dependence are concerned, a more refined set of assessment methods should be conceived. Indeed, these two dimensions are hypothetical by nature. Consequently, to infer the extent and the nature of the country’s exposure, their assessment must rely on a theoretical framework by both case studies and economic modelling.

10In most cases, the relations between the four stages of exposure to external factors are summarized in fig. 1. But there are exceptions. For instance, it is possible to imagine a country presenting a high level of vulnerbility to external shocks without being largely liberalized or, on the contrary, a country relatively immune from structural external vulnerability, whilst being largely open. The size and degree of diversification of domestic economies account for these exceptional cases. Bearing in mind these disclaimers, I rely on the schema in fig. 1 to analyze the five central Asian countries which, I assume do not present an exception to it.

Table 1. Selected indicators for Central Asian countries

Population, 2017 (Mns)

GNI 2017 (Atlas method, Bns US $)

Per capita GNI 2017 (int’l

PPP $)

Weighted average tariff ratea

Trade openness

(X+M)/GDP,

2017c

Index of financial openness (0 to 1)a

Kazakhstan*

18,0

142,3

23440

4,7

61,9%d

0,2

Kyrgyzstan*

6,3

7,0

3620

2,7

98,5%

0,3

Tajikistan*

8,9

8,8

3670

7,2

56,6%

0

Turkmenistan

5,8

38,3

17320

(2,9)b

28,4%e

0,2

Uzbekistan

32,4

64,2

7130

8,7

41,3%f

0g

*: member of WTO

a: Kunzel, 2018, p. 15 and 26.

b: Official data not accurate (latest data available dates from 2002).

c: X: Exports of goods and services; M: Imports of goods and services.

d: 2016.

e: Exports and Imports of goods only.

f: 2015.

g: this assessment is likely to be outdated since the new presidential administration of Uzbekistan has taken steps toward current account convertibility of the national currency in September 2017.

Sources: World Bank database 2018 if not stated otherwise, author’s calculations

  • 2 Kyrgyzstan adopted the most liberal policies in the region both in political and economic spheres.
  • 3 The Commonwealth of Independent States (CIS) was created in 1992 by twelve former soviet republics.
  • 4 Tajikistan is a member of WTO since 2013, Kazakhstan since 2015.
  • 5 It is especially the case in Turkmenistan. As a recent World Bank sectoral report put it, “baseline (...)

11By and large, Kyrgyzstan is the most open economy of the region, both by trade and financial flows (Table 1, Graph 1). This stems from the liberal policies pursued since the country’s access to sovereignty2, and from the fact that its border with China allowed it to benefit from the transit of Chinese goods going to CIS3 countries, mainly Kazakhstan and Russia (Map 1). Kazakhstan and Tajikistan are slightly less open than Kyrgyzstan, even if their trade regimes have been liberalized during their accession negotiations to WTO4. Uzbekistan is less open, a structural characteristic that is supported by the low level of liberalization of its external sector and its low level of FDI, but its gradual opening began late in 2017 (Graph 1). Finally, even if its official average tariff rate appears to be low, Turkmenistan is the least open economy of the region, with a noticeable exception in the investment sector since the share of FDI stocks in its GDP appears to be one of the highest. Its radical-neutral geopolitical stance has delayed its adherence to international accounting standards for statistical, financial and economic information. In contrast to Uzbekistan, Turkmenistan has not sought an observer status at WTO. Moreover, its long-lasting dictatorship precludes its ability to collect and display reliable economic statistics. Especially in Uzbekistan and Turkmenistan, in the pure Soviet tradition economic statistics have been subject till now to tight political control, which explains their poor quality, among the lowest in Asia5. Hence, even if some improvements seem to be on their way in Uzbekistan, any statistical treatment concerning these two countries – and, to a lesser extent, Tajikistan – must be interpreted with caution. This paper is no exception.

Graph 1. FDI Stocks in % of GDP, 1992-2017

Graph 1. FDI Stocks in % of GDP, 1992-2017

Source: author’s calculations, UNCTAD Database

12In this first comparison among central Asian countries, I focus on their susceptibility to western and liberal influences. I delineate fundamental socio-economic domains in which institutional arrangements – called “institutional forms” in Boyer’s (2015) regulation theory can be influenced by external forces. Starting with the country’s level of participation in major international economic organizations, I propose brief assessments of the extent to which the judiciary system, the definition and protection of property rights, the State’s influence on the economy, the monetary, banking and financial systems, the competition regime and the wage-labor nexus and industrial relations have been affected by western-type institutions (Table 2).

Table 2. International influence on selected national institutional arrangements

Institutional arrangements

Kazakhstan

Kyrgyzstan

Tajikistan

Turkmenistan

Uzbekistan

Overall assessment of Western influence

Largely influenced

Largely influenced

Moderately influenced

Weakly

influenced

Moderately & increasingly influenced

Participation to International organizations

IMF, WB member

WTO member (2015)

OECD candidate

IMF, WB (but not ICSID) member

WTO member (1998)

IMF, WB (but not ICSID) member

WTO member (2013)

IMF, WB (but not IDA) member

Not WTO member

IMF, WB member

WTO observer & candidate. Since 2017, moves toward integration

National judiciary systems

Weak independence

Weak independence

No independence

No

independence

No independence

Property rights

Private property of land possible with exceptions. Foreign ownership possible only for residential and industrial facilities.

IPRs formal protection (but enforcement is weak)

Private property of land possible. Foreign ownership possible only for residential land. Easy registration of property.

IPRs formal protection (but enforcement is weak)

Private property of land not possible but projected, with restriction for foreigners. Very weak judicial protection of IPRs

Private property of land not possible.

In practice, only foreign enterprises operating in the oil sector were granted full-fledged property rights. Arbitrary expropriations of foreign entities are not uncommon.

Very weak judicial protection of IPRs

Private property of land not possible. Expropriations of foreign entities occur.

Very weak protection of IPRs.

Foreign ownership prohibited in railway & power generation

Economic Role of the State

Samruk-Kazyna national welfare fund controls around half of the domestic economy.

Privatization program in course. Objective: reducing SOEs share in GDP to 15% by 2020

Significant economic role of the 166 SOEs of the country. No restriction in foreign participation to privatizations.

Significant economic role of SOEs in all major sectors, but all are open to foreign competition. “Birds are only permitted to fly with the government’s permission” (US businessmen quoted by the US Embassy)

Overwhelming powers of the Agency for Protection of Economic Risks, responsible for overseeing international investments in the country.

Eight Production Sharing Agreements (PSA) concessions are in force in the oil and gas sector (20-25 years period)

Extensive role of government in key sectors.

Starting in 2017, end of the State monopoly on trading of raw cotton. Privatization scheduled in the 2017-2021 development strategy

Monetary Regime

IMF Article VIII in force.

Financial system largely liberalized. Financial market labeled by western rating agencies.

Despite the narrowness of the first one, a second stock exchange was launched in Astana in September 2018.

Significant dollarization.

Cryptocurrencies prohibited

IMF Article VIII in force. National currency freely convertible. Financial system is largely liberalized, but capital market is narrow. Two stock exchanges. Banking system modestly internationalized. Blockchain technologies are being introduced in National Bank operations

IMF Article VIII in force. National currency freely convertible (restrictions since 2017). Financial system largely liberalized, but no stock market exists yet. Bank dominated by the governing elites and their family and friends. Foreign banks allowed to settle subsidiaries.

No application of IMF Article VIII.

No real internal convertibility of the national currency. Underdevelopment of the national financial system. Five foreign commercial banks in operation.

IMF Article VIII formally accepted, but not in force in practice.

Since 2017, transition to a system of free currency exchange. Underdeveloped stock market.

Five operating banks with foreign capital. State-owned banks control 60% of assets. Since 2018, national plan to allow bitcoin use.

Competition regime

SOE are believed to enjoy better access to natural resources, credit and licenses than private and foreign entities.

Member of the Extractive Industries Transparency Initiative (EITI)

IFRS accounting rules in function.

No restriction on foreign control of national industrial assets (except television broadcasters).

Influence of the American Chamber of Commerce and the International Business Council

Migration to IFRS accounting rules.

National treatment formally granted to foreign investors, but weak enforcement

The quasi-statist Union of Industrialists and Entrepreneurs enjoys a dominant position in the competition field, which is shaped by State – opaque - decisions. Discriminatory practices against foreign investors

Discrimination against private and foreign businesses competing with SOEs.

Labor relations

Employers-dominated labor code (restrictions to workers’ rights to strike).

Corporate Social Responsibility non-binding texts adopted (2015).

Maximum quota for foreign nationals in a registered company: 30% for executives, 10% for engineers and technicians.

Employers-dominated labor legislation (weak protection of strikers). No formal legal requirements for local employment (but pressures in practice).

Recent sporadic violent eruptions of workers’ protests against mine operators.

Employers-dominated labor legislation. Maximum quota for foreign workers in a registered company: 10 to 30%. Weak collective bargaining activity of trade unions

Labor code is barely used and courts do not perform their role in dispute resolutions Maximum quota for foreign worker in a registered company: 10%.

Restrictions to free movement of workforce within the country.

The labor legislation is hardly enforced. There is neither legal provision nor prohibition of the right to strike.. National discrimination continues to exist (e.g. in banking and auditing companies the chief accountants must be Uzbek nationals).

IMF: International Monetary Fund, WB: World Bank, OECD: Organization for Economic Cooperation and Development, ICSID: International Centre for Investment Settlement Disputes, IDA: International Development Association, WTO: World Trade Organization, IPR: Intellectual Property Right, IFRS: International Financial Reporting Standards, SOE: State-Owned Enterprise.

Source: author’s elaboration based on US embassies’ economic and commercial offices reports, 2018

13In sum, more than twenty-five years after their access to full political sovereignty, central Asian countries present varying degrees of openness and show diverse forms of susceptibility to western institutional pressure. Still, they share weak protection of labor rights, a competitive environment that is highly distorted in favor of companies that are well-connected to political power, a pervasive – still variable – role of government agencies in the economy, and a wide gap between the formal legal codes that are often based on western models, and their enforcement on the ground, which is characterized by uncertainty, corruption and arbitrary decisions. Along this dimension, these countries tend to resemble the model of “patrimonial capitalism” (King, 2007), even if for Turkmenistan and Tajikistan, the very term of “capitalism” might be considered as irrelevant. Among institutional forms, the monetary regime appears to be the most differentiating among countries. While Kazakhstan and Kyrgyzstan have adopted policies whose aim is to connect the national financial system to international markets, Tajikistan and Uzbekistan are still in an intermediate position, opening their current account but offering very few financial investment opportunities for residents and non-residents. In contrast, Turkmenistan continues to restrict drastically the convertibility of its national currency, not only for its own citizens but also for foreign investors (see Table 2).

2. A typology of central Asian States ties to the international economy

14Given their degree of openness and their ties to western institutions, how do central Asian economies react to external shocks? In order to answer this question, we have to take into account several characteristics of these economies. In particular, the local institutional context is such that it is impossible to ignore the role of the informal sector in the economy. According to various estimates and measurement methodologies, the informal sector – including criminal activities, such as drug trafficking for which Tajikistan, Kyrgyzstan and Uzbekistan are significant transit states (UNODC, 2018) – represents from 25 to more than 40% of GDP in the region (Abih & Medina, 2013; UNDP, 2006). It is nevertheless possible to track changes in the official productive structure of central Asian countries over the past decades, if we accept the hypothesis that activities in the informal sector are sufficiently widespread so as not to distort significantly these trends.

Graph 2. Productive structures in central Asia: sectoral shares in GDP, 1994-2017

Graph 2. Productive structures in central Asia: sectoral shares in GDP, 1994-2017

Note: dotted lines indicate ruptures in the series

Source: World Bank data, 2018. Author’s calculations for Graph 3.3.

15Since the 1990s, agricultural activities have declined in comparison to other sectors, while services have grown (Graph. 2). The fate of industry is more ambiguous: except in Kazakhstan, the share of total industry (including construction) has mainly been stable since 2010, but its inner structure has evolved. Hence, we distinguish between the manufacturing sector and extractive industries. While all countries include some extractive industries on their soil, Turkmenistan, Kazakhstan and – to a lesser extent – Uzbekistan, present the highest proportion of industrial output coming from this sector. Bearing in mind reservations due to the lack of accuracy of the dataset, it is possible to estimate the share of manufacturing value added in total industry for these countries – except from Uzbekistan and Turkmenistan – by using the World bank database. According to this source, over the last decade Kyrgyzstan and Tajikistan exhibit the highest average share of manufacturing output in total industrial output (60% for Kyrgyzstan and roughly 40% for Tajikistan), while the proportion is lower in Kazakhstan (around 30%).

Graph 3. Current account balances (% GDP, 1993-2016)

Graph 3. Current account balances (% GDP, 1993-2016)

Source: author’s elaboration based on IMF WEO database. Estimates start after 2016

  • 6 After the withdrawals of Georgia and Ukraine, CIS now regroups 10 of the 15 former soviet republics

16These differences can be interpreted in light of the structural features tying these countries to the international economy. It appears that the productive structure of central Asian economies has been driving their external economic relations. Graph 3 shows that oil and gas exporting countries (Kazakhstan and Turkmenistan) have enjoyed a current account surplus during high oil prices periods, while Kyrgyzstan and Tajikistan, which do not export hydrocarbons, exhibit a structural deficit. On its side, Uzbekistan benefits from a structural external surplus. Extending the typology proposed by Kurmanalieva and Fedorov (2012) for a set of CIS6 countries, I propose to classify central Asian countries along two dimensions that help to characterize their international regime: hydrocarbon exports on the one hand, personal remittances on the other (Graph 4).

17Type 1 – Oil and gas exporters - combines a variable level of trade openness with a high level of concentration of exports on hydrocarbons, whose share in total exports exceeds 50%. In sum, oil, oil products and gas exports account for more than 15% of their GDP. Conversely, these countries do not depend on revenue transfers from abroad for their currency earnings. In none of them do personal remittances represent more than 2% of GDP. Kazakhstan and Turkmenistan fall within this category;

18Type 2 – Eclectic currency earners - regroups countries that do not have sufficient oil and gas resources to rely on them for obtaining foreign currencies, but have instead developed a relatively balanced export portfolio: at least three product groups (raw materials, agricultural or manufactured products) share a significant, but not dominant part of exports, each representing between 10% and 30% of total exports. Personal remittances are significant, representing between 10 to 20 % of the GDP. Uzbekistan belongs to this group;

19Type 3 – Remittances earners - comprises countries that mainly export their workforce. Personal remittances amount to more than 20% of their GDP. Kyrgyzstan and Tajikistan are examples of this category.

Graph 4. Types of international insertion of post-soviet countries: oil & gas exports versus remittances

20

Sources: UN Comtrade database, World Bank database, author’s calculations. The dotted line shows the negative relation between oil & gas exports and remittances, both expressed as % of GDP, for the countries displayed in the graph. As far as the quality of the regression is concerned, the relatively high value of the coefficient of determination R2 (0,59), is counterweighted by the weak number of countries composing the sample (12).

  • 7 While not possessing hydrocarbon fields in its subsoil, Belarus belongs to this group because of it (...)

21Kazakhstan and Turkmenistan, that benefit from the most generous endowment in energy resources, obtain the bulk of their currency earnings by exporting crude oil and natural gas, along with Russia and Azerbaijan7. Kyrgyzstan and Tajikistan, while exporting raw materials (gold, rare earth, silver, aluminum, etc.) and agricultural products, rely mainly on remittances coming from the part of their population who emigrated mainly to Russia – but also to Kazakhstan. Outside central Asia, Moldova presents the same type of international insertion, with a large part of its remittances coming from the European Union. Uzbekistan is an intermediate case between these two opposite types, combining exports of cotton and other raw materials, among which there are few energy products, with remittances - mainly from Russia. It should be recalled that Uzbekistan is the least open economy in central Asia according to the Balassa ratio (Table 1), which means that it does not need to collect as much foreign currency as some of its neighbors (for instance, Kyrgyzstan) so as to meet its import needs. Outside central Asia, Ukraine, Georgia and, to a less extent, Armenia are also part of this “Eclectic currency earners” group.

3. Coping with China and Russia: trade and economic influences

  • 8 These trends show also a common tendency to slow-down over the last period.

22To what extent are central Asian countries vulnerable to external economic shocks coming from China and Russia? Theoretically, a first answer can be given by studying the synchronicity between short-term fluctuations within the region and the Chinese and Russian conjunctures. Unfortunately, data availability (in particular, monthly or quarterly figures) as well as data quality (especially as regards Tajikistan, Turkmenistan and Uzbekistan) are all but sufficient to allow for a meaningful quantitative assessment. Graph 5 shows nonetheless a tendency of GDP growth rates to evolve more and more synchronically, with a slight convergence trend that seems to develop over the period8.

Graph 5. Annual growth rates in Central Asia, Russia and China (1993-2018, %)

Graph 5. Annual growth rates in Central Asia, Russia and China (1993-2018, %)

Source: IMF WEO Database, October 2018. Estimates start after 2017. For Turkmenistan and Uzbekistan, official data are subject to major reservations.

23The consequences of the 2008 international financial crisis illustrate this synchronicity, at least for the economies that were the most open and the most strongly linked to Russia (Kazakhstan and Kyrgyzstan). As the crisis led several western banks that were active in central Asia to deleverage, downsize their subsidiaries or even leave the region, it severely reduced financing resources for local enterprises. Moreover, the fall of raw material world prices impacted currency earnings of the “Oil and gas exporters” group, while “Remittances earners” suffered from the recession in Russia and the slow-down in Kazakhstan. Finally, as the previous investment surge had not been selective enough (notably in real estate in Kazakhstan), non-performing loans increased rapidly in such countries as Kazakhstan and – to a lesser extent- Kyrgyzstan, posing serious threats to the stability of their banking systems.

Table 3. Trade intensity of Central Asia countries with selected partners (2017, % of total)

Exports

Imports

European Union

Russia

China

Rest of the World

European Union

Russia

China

Rest of the World

Kazakhstan

50,2

9,3

12

28,5

19,6

39,1

16

25,3

Kyrgyzstan

13,8

14,7

5,4

66,1

6,7

26,4

33,4

33,5

Tajikistan

4,7

2,5

4,7

88,1

5,4

20,7

39,1

34,8

Turkmenistan

4,1

1,1

83,7

11,1

23,1

7,9

8,4

60,6

Uzbekistan

2,7

11,8

17

68,5

17,1

21,9

23

38

Source: author’s calculations based on WTO and UN Comtrade databases

  • 9 Author’s estimates based on UN Comtrade and WTO databases (year of data 2017). For Tajikistan, Uzbe (...)

24In order to precise the nature of exogeneous influences that are at work in central Asia, we examine the structure of their external exchanges. The European Union, China and Russia are the main trade partners of central Asian countries (Table 3). Together, they represent up to 75% of Kazakhstan’s trade, two-thirds for Turkmenistan, a half for Kyrgyzstan and Uzbekistan and 40% for Tajikistan, while other main partners’ weights – Iran, Turkey, United States, Switzerland – count far less in average. Among the three, China is the most dynamic (World Bank, 2016, Gharleghi & Popov, 2018). Since 2000, China’s share in trade has grown rapidly and by now, China is Turkmenistan’s first client (more than 80% of the latter’s exports goes to China, being composed almost exclusively of natural gas), and the first supplier of Kyrgyzstan, Tajikistan (between 30 and 40% of its imports) and Uzbekistan (around one-fourth). Russia’s commercial presence is the strongest in Kazakhstan, where it represents 39% of imports. In other states its share amounts to 20 – 25%, except in Turkmenistan where it is less than 10%9. The ruble is a key currency in local foreign exchange markets, partly due to these countries’ historical ties with Russia. But euro and, above all, US dollar serve as reserve values. Accordingly, when conjunctural shocks affect Russia and its currency, as it was the case in late 2008 and 2014-2015, regional exchange rates responses are often synchronic (Graph. 6).

Graph 6. Exchanges rates in Russian Roubles (RR) of vive central Asian carences, October 2008-October 2018

Graph 6. Exchanges rates in Russian Roubles (RR) of vive central Asian carences, October 2008-October 2018

Source: author’s elaboration based on Central Bank of Russia data

  • 10 For more detailed analyses of recent financial sector developments in the region, see IMF (2016, 20 (...)
  • 11 Data from World Bank, 2018.

25While western banks were less active, Russian and increasingly, Chinese banks have managed to find their way in the blurry institutional environment of the financial sectors of central Asian countries10. Their capacity to provide resources for targeted investment and trade projects in the region is significant, even for relatively large economies as Kazakhstan. As we will see in next sections, this capacity has led several local actors on the verge of structural dependence. According to official figures, the gross external debt in Kazakhstan represented 135 % of GNI in 2016, in Kyrgyzstan - 125 %, Tajikistan – 59 %11. It has been growing constantly over the past decade and therefore signals a structural vulnerability for some indebted firms – a lot of them being State-owned. On its side, Turkmenistan managed to lessen its official external debt vis-à-vis western and other regional creditors, but at the same time embarked in opaque investment deals with China that ended up with even more potentially problematic outcomes.

4. From Russia to China? Central Asia on the brinks of new structural dependence

26Having been built during the tsarist and soviet periods, the main inherited transport infrastructures in the region are oriented toward Russia. This contributes to explain why trade with Russia is still nowadays more intense than what would be expected from gravity models. On the contrary, transport infrastructures with China are underdeveloped, owing partly to historical and political reasons – after 1960, the relations between the Soviet Union and China deteriorated abruptly and the technical sent by Moscow to Beijing was stopped, hence lowering the prospects of economic cooperation -, partly to geography – the majority of the Sino-soviet border in central Asia was located in the Tien San mountains and the Chinese bordering province was Xinjian, a poor region that had long been sparsely populated -. Given this heritage, it is all the more interesting that trade between central Asia and China developed so fast recently that it is by now more intense that what gravity models predict (World Bank, 2016; Gharleghi & Popov, 2018). However, it would be exaggerated to conclude from what precedes that the Chinese dragon is definitely going to drive the Russian bear out of the region. Russia has managed to maintain at least four strategic assets in the region, which are able to ensure him a long-lasting influence.

  • 12 For instance, owing to the Russian recession and the fall of the ruble exchange rate, the amount of (...)

27First, Russia represents an incomparable reservoir of job opportunities for migrant workers coming from “remittances earners” countries. Even if the amount of remittances is heavily dependent on the Russian conjuncture12, the regime of visa and work licenses can be used by the Russian authorities as a mean of pressure upon these countries. By joining the Eurasian Economic Union, Kyrgyzstan, like Armenia, enjoys a visa-free and work license-free regime in Russia. Conversely, it is not by chance that Uzbekistan and Turkmenistan, that do not depend as much as Tajikistan and Kyrgyzstan on remittances, pursue more independent foreign policies than their neighbors.

28Second, Russia is maintaining a strong influence on energy importers13 by its capacity to provide them with oil and gas solutions. For instance, in order to settle a debt owed by its national gas company (Kyrgyzgas) and to enable it to invest in the modernization of its aging infrastructures, Kyrgyzstan had to sell the company to Gazprom in 201314. This allowed Gazprom to gain full control of the gas supply chain in the country - transport and final distribution, inducing Kyrgyzstan not to depart too much from a policy line compatible with Moscow’s interests.

29Third, security provision is another key asset in Moscow’s hands. Over the two last decades, Russia has been maintaining or expanding its military presence in the region and plays nowadays a determinant role in securing its borders. For instance, Russia is co-founder and main partner of the Collective Security Treaty Organization, linking Tajikistan, Kyrgyzstan, Kazakhstan, Belarus and Armenia; but at the same time it maintains security agreements with other regional partners who are not member of this organization (Teurtrie, 2017). In Kyrgyzstan, its military base of Kant has no more to bear the presence of the neighboring US base of Manas, which was used by allied troops for supporting interventions in Afghanistan. Hence, in the current geopolitical conditions in the Middle East, Russia is seen by central Asian states as the warrant in last resort of regional security. This leaves to Russia a large leeway in political, economic and diplomatic discussions with its partners.

30Fourth, Russian nationals living in central Asia provide an evident and credible reason for Russia to maintain a strong influence in the region. This is true mainly in Kazakhstan, of which northern regions host a vast Russian population, often occupying managing positions. In 2017, Kazakh President Nursultan Nazarbayev introduced the Latin alphabet in place of the Cyrillic one in a symbolic move presented as a signal of modernity. But the Ukrainian precedent, where national languages struggles and the overall treatment of Russian minorities in the Eastern regions of the country triggered an open conflict with Russia, including involvement of Russian troops on the ground and annexation of Crimea, is present in all memories in the region, especially in Kazakhstan.

31Using these assets, Russia has secured an enduring influence in central Asia. One indirect outcome of this was the inclusion of Kyrgyzstan in the Russian-led Eurasian Economic Union (EEU) in 2015 (Vinokurov, 2017). Pushed by Russia to enter the EEU, the Tajik authorities have long hesitated, but don’t seem anymore to be keen to do so. It may be due to a diversification of their security policy, that is increasingly based upon cooperation with China.

32The Tajik case shows that things are progressively changing in central Asia. Everywhere in the region, the growing influence of China is blatant. The turning point might have occurred in 2013 and 2014, with the launch of the grand Chinese New Silk Road project (NSR) in Astana, Kazakhstan, by Xi Jinping, while Russia was entering a diplomatic and economic crisis after the annexation of Crimea in 2014. For Turkmenistan the turning point may even have been earlier, in 2009 when a gas pipeline going to China through Uzbekistan and Kazakhstan was opened. Beijing provided the financing (about $8 billion) for both gas field and infrastructure development. The geographic diversification of Turkmen gas deliveries was prompted by a blast in the Russian part of the pipeline used to export Turkmen gas that practically stopped deliveries15, following a long period of deteriorating relations between the national gas company and Gazprom16.

33Similarly, the 2015 recession in Russia provoked a drop of migrant’s revenues that induced central Asian remittances earners to seek more actively Chinese investment projects. For instance, in June 2016 a metal processing plant was launched in the northern Tajik town of Istiqlol, with a financing package of 200 million US $ coming from China17. In December 2017, an Uzbekistan-Kyrgyzstan-China railway project was launched in order to unlock accesses to the Middle East and to Europe through Caucasus (Gharleghi & Popov, 2018). It is noteworthy that before China, the European Union and Asian Development Bank promoted similar connectivity projects in the region with the aim to enlarge the capacity of the main transport corridors. Russia didn’t prove to be interested in modernizing this kind of infrastructures in central Asia. It remains to be seen whether China will be able in the coming years to succeed in developing regional connectivity, while the European-led TRACECA18 and the ADB-led CAREC19, whose aim was similar, were not so effective.

  • 20 Tajikistan considers price tag on relations with China” (Silkroadreporters.com, 25/12/2014) http:/ (...)

34As the Chinese involvement in central Asia soars, questions arise concerning the long-term impact of NRS on the external dependence of several central Asian countries. Chinese financial interventions, often involving the Chinese Development Bank (CDB), typically mix up loans, service providing and direct investments. Most often, they are bundled in packages comprising aid, concessional loans, trade agreements and investment projects. A common characteristic of these packages is their opacity. It appears that they almost systematically require that no less than half of the equipment, technology and services procured under the contract should come from China. Hiring requirements are also embedded in such agreements, meaning that Chinese firms, in order to deliver the service to the country, employ their own personnel, including unqualified workers. Hence their developmental spill-overs for the receiving countries are not necessarily as high as they could be. In the long run, this might trigger discontent in the local population, as it has already been the case in Tajikistan or Kyrgyzstan, fueling fears of rising Sinophobia in the region20. On the supply side, this type of conditionality allows Chinese State-owned enterprises to expand abroad and gain experience, progressively becoming tough competitors for their western equivalents.

35For recipient countries, the asymmetries that characterize their relation with the neighboring Chinese economy often involve growing vulnerabilities: the Turkmen model, by which large credit coming from Beijing (mainly, from the CDB) were disbursed in exchange for future gas supplies21, seems to have spread over central Asia. Agreements between China and Tajikistan cover agriculture, infrastructures, industrial production and mining, and reflects the weak bargaining position of Tajik officials vis-à-vis they Chinese counterparts22. While official statements predict brisk increases of total trade of Tajikistan with China till 2020, less than 10% of Tajik exports go to China. Moreover, Chinese enterprises appear to be more competitive in all sectors of activity. The in-kind collaterals asked for by the Chinese party in exchange of his financial support can be extensive: in Kyrgyzstan, contracts signed with Chinese banks for a power plant in Bishkek and a railroad line between the two countries23 include concessions and assets control - mainly mines - in case of default on credit repayment24. In Turkmenistan, the development of the second phase of the Galkynysh gas field has also been financed by CDB. It entails the compulsory delivery of 25 bcm25 of gas to China, while the total capacity of infrastructures is 30 bcm26. As the economic crisis is developing rapidly in the country due to the drying up of its export revenues, it is no more unlikely that the Turkmenistan will have to let Chinese companies control more of its core economic assets, putting an end to a long era of scrupulous policy of economic independence for the country.

36Finally, the asymmetric nature of the relation between China and its central Asian partners entails consequences that are not necessarily limited to the economy: outcomes are implicitly expected in diplomatic stances regarding China’s core interests, in particular the “One China policy”. This new situation led observers and scholars to employ such terms as “Chinese capture”27 or “predatory lending” (Jaborov, 2018; Tian, 2018) in order to qualify the new relation that is developing between China and central Asian states. Tajikistan is now involved in security deals with China, which is a breakthrough for China since Russia exercised till then the monopoly on security affairs in the region. There is a growing doubt among western observers concerning the capacity of the Tajik government to resist Chinese influence in the long run28.

Conclusion

37Three waves of external influence can be distinguished in post-soviet Central Asia: in the nineties and the beginning of the 2000’s, western companies quickly stepped in, and obtained the lion’s share of the assets sold during this period, mainly in the mining and oil and gas sectors. With them came western finance, with conditionality and accounting norms. But after the 2007-2008 financial crisis, several western financial establishments downsized their exposure to Central Asian states, precipitating the most open economies – notably Kazakhstan, but also Kyrgyzstan and Tajikistan - in an acute banking and financial crisis. Only the closed and weakly financialized Turkmenistan and Uzbekistan were shielded from this turmoil. Meanwhile, the Russian influence developed in the region, either by institutional means or by the more assertive strategy of State-owned energy suppliers (as Gazprom in Kyrgyzstan). Alongside with Russia, the institutional offer of the Eurasian Economic Union came in central Asia hand-in-hand with security, arms and energy offers. But, after the 2014 crisis in Russia, this star paled anew, leaving more room to the Chinese influence, that was precisely growing thanks to the launch of the “New Silk Road” initiative.

38These three successive layers of institutional and economic influences are currently overlapping in Central Asia. However, in the near future the Chinese layer might increasingly cover the previous ones. China is using scaled up financial means to become the dominant force in the region, harvesting the benefits of its commercial and financial presence in term of natural resources access and institutional and political influence. Whether this new influence is developmental for these countries is a matter of debate. At first glance, the external policies pursued by central Asian countries could appear as securing win-win deals with both sides, “taming the bear while riding the dragon”. But in the conditions settled by their counterparts, it could end up in exchanging poverty against debt.

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Notes

1 Among which, institutions governing property rights.

2 Kyrgyzstan adopted the most liberal policies in the region both in political and economic spheres.

3 The Commonwealth of Independent States (CIS) was created in 1992 by twelve former soviet republics.

4 Tajikistan is a member of WTO since 2013, Kazakhstan since 2015.

5 It is especially the case in Turkmenistan. As a recent World Bank sectoral report put it, “baseline macroeconomic date for Turkmenistan are not sufficiently reliable to make quantitative economic assessment” (World Bank, 2018, p. 25). Uzbekistan and Turkmenistan do not display balance of payment statistics fully comparable with other FMI members.

6 After the withdrawals of Georgia and Ukraine, CIS now regroups 10 of the 15 former soviet republics.

7 While not possessing hydrocarbon fields in its subsoil, Belarus belongs to this group because of its re-exports of Russian oil and oil products.

8 These trends show also a common tendency to slow-down over the last period.

9 Author’s estimates based on UN Comtrade and WTO databases (year of data 2017). For Tajikistan, Uzbekistan and Turkmenistan, figures are given as orders of magnitude, not as precise measures. They are based on mirror statistics of partner countries.

10 For more detailed analyses of recent financial sector developments in the region, see IMF (2016, 2017, 2018), Vera-Martin et al. (2018).

11 Data from World Bank, 2018.

12 For instance, owing to the Russian recession and the fall of the ruble exchange rate, the amount of money transferred from Russia to Tajikistan dropped from 4,2 billion $ in 2013 to 1,28 billion in 2015.

13 Energy importers are not exactly the same countries as remittances earners. For instance, due to geo-economic and infrastructure considerations, North Kazakhstan is importing oil and gas from Russia.

14  https://sputniknews.com/world/20130526181357205-Kyrgyz-Gvt-Approves-Agreement-on-Kyrgyzgas-Sale-to-Gazprom/ [accessed on November, 2, 2018].

15 For Turkmen gas deliveries, Russia played the role of transit state on the way to Europe.

16 See Overland, 2009, and https://www.reuters.com/article/us-russia-turkmenistan-gas-sb/turkmen-may-sue-russia-for-vacuum-bomb-pipe-blast-idUSTRE54S4TG20090529 [accessed on November, 2, 2018].

17 https://eurasianet.org/tajikistan-turkmenistan-submit-chinese-capture [accessed on November, 2, 2018].

18 Transport Corridor Europe-Caucasus-Asia.

19 Central Asia Regional Economic Cooperation program.

20 Tajikistan considers price tag on relations with China” (Silkroadreporters.com, 25/12/2014) http://news.tj/en/news/tajikistan-considers-price-tag-relations-china [accessed on November, 2, 2018].

21 The loans would total about $8 billion, with repayment coming from gas export proceeds. Source: https://asia.nikkei.com/Spotlight/Belt-and-Road/Belt-and-Road-debt-trap-spreads-to-Central-Asia [accessed on November, 2, 2018].

22 For instance, Tajikistan sold a gold mine in exchange of $300 million for building a power plant. Source: “Tajikistan considers price tag on relations with China” (Silkroadreporters.com, 25/12/2014) http://news.tj/en/news/tajikistan-considers-price-tag-relations-china [accessed on November, 2, 2018].

23 The amount of preferential credits offered by China is US $ 1,2 billion.

24  https://asia.nikkei.com/Spotlight/Belt-and-Road/Belt-and-Road-debt-trap-spreads-to-Central-Asia [accessed on November, 2, 2018].

25 Bcm: billion cubic meters.

26  https://asia.nikkei.com/Spotlight/Belt-and-Road/Belt-and-Road-debt-trap-spreads-to-Central-Asia [accessed on November, 2, 2018].

27 https://eurasianet.org/tajikistan-turkmenistan-submit-chinese-capture [accessed on November, 2nd, 2018].

28  https://eurasianet.org/tajikistan-chinas-advance-causing-increasing-unease-among-tajiks [accessed on November, 2nd, 2018].

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Table des illustrations

Titre Map 1. Geographical overview of central Asian countries
Crédits Source: author’s conception
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-1.jpg
Fichier image/jpeg, 92k
Titre Fig. 1. From economic liberalization to dependence: constraints on domestic policies
Crédits Source: author’s conceptualization
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-2.jpg
Fichier image/jpeg, 116k
Titre Graph 1. FDI Stocks in % of GDP, 1992-2017
Crédits Source: author’s calculations, UNCTAD Database
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-3.png
Fichier image/png, 38k
Titre Graph 2. Productive structures in central Asia: sectoral shares in GDP, 1994-2017
Légende Note: dotted lines indicate ruptures in the series
Crédits Source: World Bank data, 2018. Author’s calculations for Graph 3.3.
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-4.jpg
Fichier image/jpeg, 108k
Titre Graph 3. Current account balances (% GDP, 1993-2016)
Crédits Source: author’s elaboration based on IMF WEO database. Estimates start after 2016
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-5.png
Fichier image/png, 52k
Crédits Sources: UN Comtrade database, World Bank database, author’s calculations. The dotted line shows the negative relation between oil & gas exports and remittances, both expressed as % of GDP, for the countries displayed in the graph. As far as the quality of the regression is concerned, the relatively high value of the coefficient of determination R2 (0,59), is counterweighted by the weak number of countries composing the sample (12).
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-6.jpg
Fichier image/jpeg, 264k
Titre Graph 5. Annual growth rates in Central Asia, Russia and China (1993-2018, %)
Crédits Source: IMF WEO Database, October 2018. Estimates start after 2017. For Turkmenistan and Uzbekistan, official data are subject to major reservations.
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-7.png
Fichier image/png, 131k
Titre Graph 6. Exchanges rates in Russian Roubles (RR) of vive central Asian carences, October 2008-October 2018
Crédits Source: author’s elaboration based on Central Bank of Russia data
URL http://journals.openedition.org/regulation/docannexe/image/13626/img-8.png
Fichier image/png, 128k
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Julien Vercueil, « Taming the Bear while Riding the Dragon? Central Asia confronts Russian and Chinese economic influences », Revue de la régulation [En ligne], 24 | 2nd semestre / Autumn 2018, mis en ligne le 14 décembre 2018, consulté le 22 janvier 2019. URL : http://journals.openedition.org/regulation/13626 ; DOI : 10.4000/regulation.13626

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Julien Vercueil

Professeur d’économie, INALCO, Laboratoire CREE (EA 4513), julien.vercueil@inalco.fr

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