Development or Regression?

In 2021 the countries of Central Asia and the South Caucasus—some call it Eurasia, other the Silk Road re­gion—will celebrate thirty years of independence. Theoretically, this period should have provided suffi­cient time for each to have formed a new economic model, set and at least partially attain long‑term de­velopment goals, and developed a foreign policy model for optimal interaction with investors, in­cluding foreign ones. However, the experience of the post‑Soviet republics under consideration in this essay, which does not aspire to be comprehensive but should rather be considered a prelimi­nary assessment, indicates that independence is neither a prereq­uisite for successful development nor one that centers of achieving a sustainable increase in popular welfare.

Despite the fact that in 1991 standards of living and educational and economic attainment in the Soviet republics that are examined in this essay were approximately similar, after three decades of inde­pendent development the countries under consideration have been sig­nificantly stratified in terms of na­tional wealth, types of political and social systems, and the specifics of their economic activities.

Former fraternal repub­lics look today as if they are countries from dif­ferent continents. Since the breakup of the Soviet Union, some have done very well, others less so.

Former fraternal republics look today as if they are countries from different continents. Since the breakup of the Soviet Union, some have done very well, others less so.

In considering the economic dimension of independent devel­opment, we can assert that, with a few exceptions, these countries have not managed to seriously re­form the model inherited from the USSR. Instead of rebuilding their economies so as to integrate them into global produc­tion chains, a ma­jority of them have squandered the in­dustrial potential built during the Soviet era. Conse­quently, the overall investment attractiveness of these countries remains at a suboptimal level.

Two markers or indicators stand out as effective tools to analyze the systematic work of a state as a responsible actor in domestic economic policy and in penetrating foreign markets: its investment attractiveness and the responsibility of its approach in working with non‑state internal and external players.

With a few exceptions, the countries of the Silk Road region have not been able to achieve serious success in creating a competitive, diversified, and open economies with effective systems for pro­tecting private property and investors’ rights.

Unfortunately, it can be stated that, again with a few exceptions, the countries of the Silk Road re­gion have not been able to achieve serious success in creating a com­petitive, diversified, and open economies with effective systems for protecting private property and investors’ rights. Moreover, most Eurasian countries have not even officially set such a goal for them­selves. Given contemporary global conditions, characterized by a cutthroat international economic environment, none of the states in question can ex­pect high‑quality development and improvements of their respective socio‑economic situations without building the ca­pacity to attract foreign investment on the basis of international best practices and a focus on harnessing the latest technologies.

That being said, the growth of investors’ interest in the countries of Central Asia and the South Caucasus continues to be facilitated by the systematic de­velopment of regional integra­tion projects, as well as transport infrastructure within a number of major projects, such as the Belt and Road Initiative, the Eurasian Economic Union (EAEU), the Southern Energy Corridor, TRACECA, and so on. A final determination to direct in­vestment into a country made by a series of important factors, some of which are featured in an April 2020 report on the investment attractiveness of the countries of Central Asia and the South Caucasus issued by a team of analysts at the Moscow‑based ECED Expert.

The purpose of that study, as well as this essay, is to rank the coun­tries of Central Asia and the South Caucasus by ordering those that are, in the view of this author, the most promising and potentially profitable for investors and safe from the point of view of doing business and pro­tecting property rights. In this case, investment attractiveness was as­sessed on the basis of an analysis of the development of the region’s countries, considerations in­volving the stability of political insti­tutions, an evalu­ation of economic potential, and the openness and hard to quantify “friend­liness” of each country towards domestic and for­eign investors.

The first section of this essay consists of a brief discussion of each of the countries belonging to the core of the Silk Road region, in alphabetical order. This is then fol­lowed with a list rank‑ordering them in terms of investment attractiveness, with brief explanations provided.

In making my determinations on the positions of countries in the region, I have had recourse to the macroeconomic stability indices provided by three leading rating agencies—Fitch, Moody’s, and Standard & Poor’s—as these form the basis for decisionmaking about investments for many inves­tors. The countries with the best and most stable financial systems in the region—namely Kazakhstan and Azerbaijan—have the highest recommended in­vestment ratings of the region’s coun­tries. Among the other countries, Georgia and Uz­bekistan form a second‑highest cluster. The ob­vious weak partic­ipant is Turkmeni­stan, which has not been included on the lists of ratings agencies for a de­cade due to a judg­ment made that the statistics pro­vided by the country are unreliable.

I have also made use of criteria found in the World Bank’s an­nual “Doing Business” flagship reporting series. There we can see that the countries of the region are working to improve their rankings by improving their respective busi­ness environments. This work has brought results. Over the past sev­eral years, some of the Silk Road region countries have significantly increased their presence at the top of the ratings list. Georgia became the region’s un­disputed leader in the latest report, taking seventh place overall in the global ranking. However, prog­ress in other countries is also im­pressive. On the World Bank’s list of top 40 ease‑of‑doing‑business countries from the Silk Road region we see (in addition to Georgia) Kazakhstan and Azerbaijan. Armenia is in 47th place, which is at first glance impressive but for the fact that only a few years ago it was in 35th place. Uzbekistan is rapidly improving its business envi­ronment, moving from 150th place in 2016 to 76th in the latest World Bank report. Kyrgyzstan has fallen in the rankings whilst Tajikistan has moved up quite impressively.

Political stability, conti­nuity of economic and investment policies, and stability of foreign policy contacts with key trade partners are also import­ant parameters of invest­ment attractiveness for any country.

It is also critical to note in this introductory section that political stability, continuity of economic and investment policies, and sta­bility of foreign policy contacts with key trade partners are also im­portant parameters of investment attractiveness for any country. The Central Asia and the South Cau­casus countries are largely states in political tran­sition from a so­cialistic political model. Therefore, the impact of po­litical processes on investment at­tractiveness is very high. In this re­gard, the current political situation in all selected countries needs to be taken into account with regards to stability and vulnerability to desta­bilization; potential foreign policy risks were also reviewed.

All this being said, we can now turn to an examination of each of the countries that make up the core of the Silk Road region, in alphabetical order.

Azerbaijan

In general, the situation in the country is quite stable: Presi­dent Ilham Aliyev’s team controls the situation in the republic, and the pro‑government party has a stable majority in the parliament after its latest electoral victory in February 2020. The main challenge for the political system is managing the ongoing large‑scale renewal of the political elite due to the departure of the older generation of politicians who worked under Heydar Aliyev, the country’s former president and father of the current one.

The formation of a new balance of power in the Azerbaijani polit­ical system may be associated with the emergence of points of tension between different political groups within the elite. At the same time, the authority and political weight of the president in many ways enables him to effectively stop intra‑elite conflicts in time and prevent such internecine episodes from adversely affecting the system as a whole.

The main military and polit­ical challenge for the country re­mains the problem of Nagorno‑ Karabakh, whose sovereign owner­ship the republic defends in a long‑standing dispute with Armenia. The November 2020 tripartite ceasefire that brought back most of the occu­pied lands under the direct control of Baku marks an important turning point, but it is not a peace treaty.

On the scale of internal political stability, Azerbaijan is a very stable state, which means that a balanced political system has been formed in the country, which implies a fairly balanced power vertical, a stable so­cio‑economic situation, and broad electoral support for the country’s leadership.

From the point of view of the for­eign policy model, Azerbaijan has a pragmatic approach to building relations with major regional players. At the same time, Baku is trying to build equidistant relations with key global centers of power, while having intensive economic ties with all of them. The existence of the conflict with Armenia for Nagorno‑Karabakh has been a long‑term challenge for consoli­dating the conditions for the establishment of a healthy investment climate, as each new escalation could have resulted in military risks for Azerbaijan’s energy, industrial, and transport in­frastructure. How­ever, the Second Karabakh War has largely mitigated this threat: it brought about not only a military victory for Azer­baijan but also opened new in­vestment opportunities for internal and foreign businesses. The newly‑liberated territories represent new areas for massive construction and economic development.

The November 2020 vic­tory against Armenian forces strengthened dras­tically Aliyev’s authority and credibility at home and abroad, making him the most respected leader in Eurasia.

Mean­while, in political terms the November 2020 victory against Armenian forces strengthened drastically Aliyev’s authority and credibility at home and abroad, making him the most respected leader in Eurasia.

Armenia

In contrast to Azerbaijan, Yerevan’s defeat in the Second Karabakh War brought the polit­ical situation in the country to the brink of disaster. Before the start of the war, the internal political situ­ation in the country has gradually stabilized after the revolutionary changes that took place in April 2018. By and large, the team led by prime minister Nikol Pashinyan had never held high positions in government before, although in the wake of popular street protests and with unusually high public support his team quickly gained almost complete control over Armenia’s political system (the same could not be said, however, with respect to the military and the civilian security sectors).

The results of the Second Karabakh War, including the terms of the tripartite agreement ending it, were considered disastrous in many Armenian circles. Immediately after the announcement of the signing of a truce with Azerbaijan with the mediation of Russia, protests began in Yerevan demanding Pashinyan’s res­ignation. With ebbs and flows, these have continued until the present day. An early election has been called, and the prime minister’s political future re­mains uncertain. Armenia continues to face months of political turbulence, with ambiguous prospects for stabili­zation. Coupled with battlefield and diplomatic losses due to the war, the investment and economic situation in Armenia will remain extremely nega­tive in the medium term.

The border with two of its four neighbors (Azerbaijan and Turkey) remains closed in the aftermath of the Second Karabakh War, although that may change in the time ahead. Relations with its other two neigh­bors (Iran and Georgia) are not exactly smooth, since Iran itself is under sanctions and cooperation with it does not sufficiently com­pensate for the closed borders with Azerbaijan and Turkey. Ties with Georgia are also uneven due to the complex nature of relations between Tbilisi and Yerevan’s main geopo­litical partner, Moscow. Given that only through the territory of Georgia can Armenia trade with Russia and other partners in the EAEU, the country’s difficult geopolitical position is obvious.

Georgia

The internal political situation in Georgia is currently quite unstable. The positions of the ruling “Georgian Dream‑Democratic Georgia” coalition remains vulner­able, despite having a majority in the legislative chamber as a result of recent elections. Over the past few months, the Georgian opposition has organized mass protests, boy­cotting the work of the parliament, and organizing what it has called “corridors of shame” for members of the ruling elite. A key demand of the opposition is to switch to a proportional electoral system that would allow it, so it says, to com­pete on more even terms with the ruling coalition. The authorities are not ready to grant this and other concessions. Georgia’s Western partners—the EU and the United States—have so far been entirely unable to break the impasse.

Georgia is also characterized by a difficult socio‑economic situation, which is manifested in a sharp depreciation of the national currency, a state budget deficit, and a drop in the standard of living of the gen­eral population. The government’s anti‑crisis measures do not corre­spond to the scale of problems in the economy and may be ineffective due to a lack of available material resources. It seems that a high level of political tension will remain the prevailing reality. The situation may develop according to the most negative scenario, including some sort of revolutionary change of power. Thus, the country’s political stability assessment continues to be very low.

The foreign policy situation for Georgia is no less complicated and tense. The key conflict factor is the loss of Abkhazia and South Ossetia and the support both breakaway territories continue to receive from Russia. This configuration creates long‑term foreign policy tension for Georgia, which has to deal with the reality of having a constant con­flict with a key economic partner, namely Russia. For the moment, Tbilisi has no choice but to live with this contradiction, putting its political posture above its prospects for economic stability and develop­ment goals. In such circumstances, potential economic projects have a significant risk of foreign policy destabilization.

Kazakhstan

In March 2019 the country’s first and only president since inde­pendence, Nursultan Nazarbayev, announced his resignation as head of state and proposed his longtime associate, Kassym‑Jomart Tokayev, to become his successor. (This was later formalized in an election.) Thus, the first ever transition of power in the history of the republic was launched. However, a genuine transfer of power and resulting movement to a post‑Nazarbayev era has not yet occurred. Nazarbayev remains at the helm of the country’s ruling party and chairs the state’s Security Council. Kazakhstan thus maintains a sort of dual power sit­uation. On the one hand, Tokayev is the formal president and head of state, but Nazarbayev’s ambitions, political weight, and constitutional powers make him the de facto head of state.

Such a dual power arrangement is quite risky, especially for the po­litical class of Kazakhstan, as it al­lows different groups to play on the contradictions and differences in the approaches of the two leaders to achieve their particular goals. Moreover, given the presence of several centers of power, Tokayev’s political weight is at a suboptimal level: he has been unable to con­solidate his authority sufficiently to fully control all the levers and mechanisms of government nec­essary for effective leadership. The transition remains ongoing.

In general, Kazakhstan has a stable electoral situation, and the weakness of the opposition assures it cannot become a serious destabi­lizing factor. The main risks come from the uncertainty surrounding the final transition of power and the presence of a hidden split in the political elite, hidden tensions in society due to socio‑economic problems, and a complex ethnic situation.

The foreign policy model of Kazakhstan, built on the principle of a balanced multi‑vector ap­proach, reflects the pragmatic in­terests of the republic as much as possible. The country remains an important part of key regional in­tegration projects like the EAEU and the Collective Security Treaty Organization (the CSTO), while actively developing relations with other leading centers of power in China, the United States, the EU, and others.

Kyrgyzstan

The key event in the recent political life of the country took place in October 2020 with the annulment of the parliamen­tary elections as a result of op­position protests and allegations of vote rigging. The incumbent president, Sooronbay Jeenbekov, resigned after appointing a prime minister who was acceptable to the opposition. After a period of uncertainty, Sadyr Japarov was elected president in January 2021, equipped with enhanced executive powers endorsed by a constitutional referendum.

The political elite remains di­vided along regional and clan lines, and the difficult socio‑economic situation in the country is such that the new leadership will have trouble stabilizing the political one.

Taking into account the coun­try’s socio‑economic crisis, one can conclude that there may be a rise in national populism in public policy characterized in part by calls to squeeze out foreign in­vestors and conduct a policy of nationalization. Japarov came to public prominence a decade ago through a lively campaign to re­nationalize the massive Kumtor gold mine, and since becoming president has been sending mixed signals on the issue. Moreover, while Kyrgyzstan is unlikely to withdraw from the EAEU, the possibility of torpedoing some of the country’s obligations to the Union remains actual.

Kyrgyzstan’s foreign policy model assumes a strong orienta­tion towards the Russian Federa­tion for reasons having mainly to do with economic interests and security issues. At the same time, Bishkek has relatively stable re­lations with other world power centers, notably China and the United States. It is also important to take into account the country’s high external credit debt, most of which is owed to China. Mean­while at the regional level, Kyrgyz­stan regularly has border disputes with Tajikistan and trade disputes with Kazakhstan, which seriously affects the country’s overall invest­ment climate.

Tajikistan

Presidential elections were held in Tajikistan in fall 2020. The country’s leader since 1994, Emomali Rahmon, was re­elected yet again. The March 2020 parliamentary elections were also carried out under full control of pro‑government parties.

Despite the ruling elite’s con­tinuing success in consolidating power, Tajikistan remains a country with a fairly high risk of political instability. This is due to a number of factors, the most im­portant of which are: unresolved economic problems (lack of jobs, a high level of real unemployment, rising import prices against the background of the fall in the na­tional currency, the continuing outflow of Tajik migrants from Russia); gradual archaization and degradation of the administrative state apparatus, high level of cor­ruption, and links with organized crime; dissatisfaction of regional and clan groups with Rahmon’s policies and the unavailability of serious channels for the authorities to receive feedback from society; and the ongoing Islamization of parts of society driven by the pos­sible infiltration of radical Islamist elements from neighboring coun­tries (Afghanistan) and the Middle East (Syria, Iraq).

Tajikistan’s foreign policy model is generally quite balanced, with smooth relations with all partners, but sometimes foreign policy fac­tors have an impact on the eco­nomic situation and the position of investors. The risk of state insol­vency is not just a theoretical pos­sibility. A potentially worrisome precedent was the transfer of rights to a gold mine project to China in the face of the Dushanbe’s inability to repay previously received loans.

Turkmenistan

Due to the country’s rigid presidential model, the po­litical situation remains relatively stable even in the face of difficul­ties in the socio‑economic sphere. At the same time, the further deterioration of the economic situ­ation in the context of reduced hy­drocarbon export revenues, over‑borrowing, and the possibility the government will be unable to meet its social obligations may prompt the Turkmenistani author­ities to invite new investors and open some sectors of the economy (gas production, in particular), but without changing the condi­tions for foreign investment. The recently signed agreement with Azerbaijan to jointly develop Cas­pian Sea hydrocarbons could be­come an economic game‑changer.

The country also faces a com­plex set of military and terrorist threats related to the situation in Afghanistan. The long, weakly protected border with an unstable country as well as the appearance of Islamic State emissaries in the border areas with Turkmenistan creates a whole range of new risks for Turkmenistan.

Its foreign policy of official neu­trality should ideally guarantee the republic equal relations with all foreign policy partners, but in reality the situation is more com­plicated. Isolation, weak involve­ment in regional projects, and the insecurity of the long border with unstable Afghanistan do not create the most positive background for investment projects in the country.

Uzbekistan

The political situation in Uzbekistan remains stable five years after the transition of power and the arrival of Shavkat Mirziyoyev as president. The pres­ident confidently controls the ad­ministrative apparatus and remains the most influential player in the political system, even in the con­ditions of liberalization of political and social processes in the country. Thanks to systematic work on re­form that are in many ways trans­formational, Myrziyoyev has a high level of support and approval from the population. The parliamen­tary elections held at the end of December 2019 showed that de­spite the presence of five parties, each of which won seats in the legislative chamber, they all occupy their own niches in the existing po­litical system whilst all support the president.

Uzbekistan is becoming a Central Asian success story and is inching towards Kazakhstan. Per­haps the most efficient reference point to gain further details on the achievements of its ongoing trans­formation, especially with regards to its foreign policy, is to refer the reader to the interview with its foreign minister, Abdulaziz Kamilov, published in the previous edition of Baku Dialogues. Here it is sufficient to underline that trade turnover in terms of volume and geography, as well as investment inflows, have been growing rapidly in recent years.

Rank Ordering

With this we can now come to rank‑ordering the coun­tries that make up the core of the Silk Road region. The country that tops this list is Kazakhstan. Its con­fident pole position demonstrates that even against the background of the current power transition, the country is developing quite suc­cessfully with respect to its neigh­bors, using geographical transit op­portunities and natural resources to nearly optimal advantage.

The country has serious eco­nomic potential, a large domestic market of 19 million people cou­pled with the markets of the EAEU countries, rich reserves of natural resources, a legislative framework focused on attracting investors, a set of programs for the develop­ment of a non‑resource economy, and, accordingly, the existence of favorable conditions for investors in these areas.

Meanwhile, political risks associated with the uncertainty surrounding the transition of power, the presence of intra‑elite conflict potential, corrup­tion risks, and a complex inter‑ethnic situation are relatively low.

Coming in second and third, respectively, are Azerbaijan and Uzbekistan. Virtually tied with respect to the number of points in the aggregate analysis of most pa­rameters, Azerbaijan holds a slight lead due to the duration of its do­mestic stability and its recent battle­field and diplomatic triumphs.

All three of the Silk Road region’s leading states (Kazakhstan, Azerbaijan, Uzbekistan) have a fairly large mar­ket, natural resources, and sustainable political models that allow them to realize their economic and investment potential.

That being said, all three of the Silk Road region’s leading states (Kazakhstan, Azerbaijan, Uz­bekistan) have a fairly large market, natural resources, and sustainable political models that allow them to realize their eco­nomic and invest­ment potential.

In the case of Azerbaijan, posi­tives include: significant resource potential; political continuity and stability; good transport accessi­bility and developed transit oppor­tunities; a relatively large market (10 million people); an economic policy focused on the admission of foreign investors; streamlined ad­ministrative services; and measures to reform the economy, diversify it, and increase its attractiveness to investors. The main minus is the monopolistic, semi‑closed nature of the non‑oil economy dominated by major domestic players, but also a high degree of state regulation of the economy.

In the case of Uzbekistan, the positives include a large domestic market (over 34 million people); a diversified economy; the avail­ability of its own resource base; political stability; and ongoing ef­forts to systemat­ically reform the country’s economy and create favor­able conditions for investors. Disad­vantages include: strong state intervention in the economy; a weak financial system; corruption and a burdensome bu­reaucracy (especially outside the capital); the presence of social con­tradictions; low purchasing power of the population; and low qualifi­cation of labor resources.

Fourth place goes to Georgia, thanks to its past reform successes and the fact that it man­aged to maintain a high level of transparency and attractiveness to foreign institutions. Domestic polit­ical turbulence has not fundamen­tally changed this situation, which is all the more impressive given that the country neither has significant natural resources nor a capacious internal market.

Advantages include: favorable conditions for doing business; fa­vorable transit location; relatively diversified economy; and ongoing efforts to strengthen economic and migration ties with the European Union. Disadvantages include: deep structural problems in the economy due to the breakdown of relations with traditional economic partners (e.g., Russia); unresolved foreign policy disputes and seces­sionist threats (e.g., the conflict with Russia and the situation in Abkhazia and South Ossetia); seemingly permanent political in­stability; and risks of social protests.

Fifth, sixth, and seventh place go to Kyrgyzstan, Armenia, and Tajikistan, respectively. These three former Soviet republics each offer an inexpensive labor force, lim­ited but important mineral reserves, and a favorable climate for the devel­opment of agriculture. At the same time, they are each characterized by underdeveloped infrastructure, a narrow domestic market, corrup­tion and burdensome bureaucratic procedures, state intervention in the economy, and the lack of real mech­anisms for entrepreneurs to protect their rights.

In the case of Kyrgyzstan, specific advantages include: relatively liberal legislation; the work of the author­ities to create favorable conditions for investment; an inexpensive labor force; favorable conditions for the development of agriculture; devel­oped light industry and a healthy tourism sector; and the country’s participation in the work of the EAEU;. Disadvantages include: state interference in the economy; a number of serious precedents pointing to difficulties faced by foreign investors in implementing projects in the country; repeated re­visions of previously reached agree­ments with foreign investors; lack of continuity of the political course; high risks of political instability; spread of Islamist ideology; narrow­ness of the domestic market; and low qualification of the labor force.

In the case of Armenia, advan­tages include: a relatively diversi­fied economy; a skilled workforce; and a relatively favorable invest­ment climate. Minuses include: a high risk of political destabilizaton; a transport blockade; an insignifi­cant resource base; the presence of social contradictions; and psycho­logical issues as a result of losing the Second Karabakh War.

In the case of Tajikistan, advan­tages include: a low‑cost labor force; availability of a number of minerals; and a favorable climate for the development of agricul­ture. Disadvantages include: poor infrastructure; a narrow domestic market; high risks of political de­stabilization; corruption and heavy bureaucracy; state interference in the economy; and a lack of real mechanisms for entrepreneurs to protect their rights.

Eighth place goes to Turkmen­istan. Despite the presence of large hydrocarbon reserves and the state’s enormous transit potential, Ashgabat still has not realized its great economic potential due to its tight political model, which implies serious control over all economic activity in the country.

Advantages include: the presence of large hydrocarbon reserves; high transit potential; political stability and continuity of the economic course; and the adoption of mea­sures by the authorities to reform the economy and maintain stability in society. Disadvantages include: total control of the country by a tight‑knit group centered on the head of state over the economy; lack of protec­tion of property rights; high corrup­tion and bureaucratic inefficiency; the danger of the Islamization of society; risk of destabilization due to the crisis in Afghanistan; and over‑dependence on hydrocarbon exports to China for state revenues.

Reflecting on the Top Three

When speaking about the future development of countries, it is important to take into account those that are most im­portant in terms of the readiness of a given state to improve its business environment, namely assessing its development programs and invest­ment policies. These areas—in con­trast to the availability of natural resources and the geographical lo­cation of the country—are change­able: they can be improved if there is sufficient political will and a corre­sponding desire to develop properly.

With respect to the countries of the Silk Road region we see that, with rare exceptions, a systematic approach to national development and the setting of long‑term goals for economic growth is lacking. The same is true for their respective investment policies. While each of the countries discussed try to nom­inally have progressive laws pro­tecting the rights of investors at the level of legislation, in practice busi­nesses and foreign investors usually have virtually no real mechanisms and institutions to protect their in­terests before the state authorities.

Among the countries of Central Asia and the South Caucasus, at present only three— Kazakhstan, Azerbaijan, and Uzbekistan—are carrying out systematic, comprehensive work to develop their economies and create favorable and comfortable policies for investors.