Crossroads Asia

Amid Russian Downturn, Kyrgyzstan Turns to China

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Crossroads Asia

Amid Russian Downturn, Kyrgyzstan Turns to China

Kyrgyzstan is hoping that Chinese funds will secure its domestic political stability.

Amid Russian Downturn, Kyrgyzstan Turns to China

Kyrgyzstans’s Almazbek Atambayev (L), Russia’s Vladimir Putin (C), and China’s Xi Jinping (R) attend Russia’s “Victory Day” celebration in 2015.

Credit: Russian Presidential Press and Information Office

Bishkek is heavily dependent on workers’ remittances and trade with Moscow. That dependence is currently perpetuating a local economic recession that might facilitate civil unrest and challenge political stability. In effect, Kyrgyzstan has to look increasingly toward China as a major power to secure its economic growth amidst Russia’s downturn.

Russia’s ongoing economic crisis seriously affects Kyrgyzstan’s performance. More than one million Kyrgyz labor migrants are currently working in Russia, constituting 85 percent of the Republic’s remittances inflows and roughly one-third of its GDP. Moscow also accounts for one-third of Bishkek’s foreign trade volume and the national currency (som) has depreciated due to close ties to the Russian ruble.

Meanwhile, Bishkek’s major sources of income have also shrunk due to the country’s membership in the Kremlin-led Eurasian Economic Union (EEU). Dordoi Bazaar, the largest Kyrgyz market with an annual turnover of more than $2.9 billion, prospered before the accession due to re-exports of Chinese goods. However, trade volumes have now decreased by more than 50 percent due to EEU tariffs that limit the import from China. Similarly, the country’s second largest market, Karasuu Bazaar, suffers due to trade restrictions on the border with Uzbekistan, which is not a part of the EEU. Overall, Chinese exports to Kyrgyzstan have shrunk by nearly one-third since 2013, which has further triggered a local economic downturn.

The EEU membership has imposed additional pressure from neighboring Kazakhstan which seeks to operate Central Asia’s “largest bazaar.” The special economic zone in Khorgos will only become fully operational in 2020; however, it is already redrawing regional trade routes thanks to large-scale Chinese investments and the installed tax-free zone. Therefore, Dordoi Bazaar and Karasuu Bazaar might not be able to compete with the Kazakh giant in the long run.

The Kyrgyz Republic’s economy has likewise suffered due to gold price fluctuations. Kumtor Gold Mine, the country’s largest private sector employer and taxpayer, which traditionally accounts for 10 percent of GDP and more than 30 percent of Kyrgyz export, has experienced a decline in income, which negatively affected national growth perspectives. The mine’s productivity has also shrunk due to tensions surrounding the ownership status and environmental impact.

As the economic downturn in Kyrgyzstan deepens — GDP contracted by 4 percent in the first five months of 2016 — the Republic’s fragile political system comes under pressure. A combination of poverty, the surge of unemployed Kyrgyz labor migrants returning from Russia, and low GDP per capita ($1,200) could contribute to public dissatisfaction with the current political leadership and facilitate civil unrest.

Political stability in Kyrgyzstan is traditionally challenged during elections. Memories of the two revolutions that the country experienced in 2005 and 2010 are still fresh in minds of local politicians. As a result, balancing the crippling local economy is vital for the current leadership, considering upcoming local elections this year and presidential elections in 2017.

Bishkek could no longer afford to rely on Moscow to keep its economy and fragile political system afloat. As the current downturn is attributed to the recession in Russia, the Kyrgyz authorities believe that its northern neighbor cannot fulfill its obligations, including those within the EEU framework, which are vital for the Republic’s survival.

For instance, Moscow agreed to build two major hydropower projects in Kyrgyzstan a couple of years ago: Kambarata-1 and the Upper Naryn cascade. However, throughout the construction period Russian contractors only disbursed $37 million to finance the projects, despite the initial pledge surpassing $3 billion. Disappointed with Russia’s inability to finish the task, the Kyrgyz Parliament formally scrapped the agreement on January 20.

The Kremlin tried to smooth Kyrgyz frustrations by pledging to invest $1.5 billion in Kyrgyzstan’s gas pipelines by 2030. However, that project merely covers Kyrgyzstan’s growing energy needs and rather symbolizes Moscow’s long-term weakness. In effect, it has become obvious to the local authorities that it is better to start reorienting toward China, a major strategic partner capable of shielding Kyrgyzstan’s domestic stability.

On April 6, Kyrgyz Deputy Prime Minister Oleg Pankratov met with representatives of the State Power Investment Corporation of China to discuss the construction of hydropower plants in Kyrgyzstan. China’s ability to provide necessary funds combined with its experience in successfully constructing the Kemin and Datka hydropower plants are extremely appealing to Bishkek. The Chinese corporation has also expressed interest in constructing the 1,150-megawatt Kazarman hydropower cascade. Overall, the proposed cascades surpass Russia’s earlier bids and could generate more than 4.6 billion kilowatt-hours of energy annually, which exceeds the capacity of the largest operating Kyrgyz dam, Toktogul Dam.

Kyrgyz officials believe that Beijing’s long-term prosperity will be a great boon to the Kyrgyz economy. As China builds new hydropower projects, it might also decide to secure Kyrgyzstan’s geographic location for power export to other regions, in particular, to South Asia, which will mean additional investments in Kyrgyz infrastructure. Therefore, Kyrgyzstan welcomes the Chinese Silk Road Economic Belt initiative and believes that Chinese funds will boost local development and bring a long-awaited economic rebound.

The Kyrgyz authorities recently announced plans to relocate 40 Chinese factories and plants to the country as a bid to “reindustrialize” the nation. The list was impressive and included distillers, textile and cotton production lines, as well as silicon processing plants. The proposal was initially announced during former Prime Minister Temir Sariyev’s official visit to China in December 2015 and later confirmed during the meeting of Foreign Minister Wang Yi with President Almazbek Atambaev in Bishkek on May 22, 2016. The relocation would help in creating new jobs and reducing unemployment rates, as well as alleviating poverty. Furthermore, the move would strengthen the crumbling stance of the current political leadership.

Finally, Bishkek is also hoping that in the long run Chinese corporations might become interested in investing in local natural resources, which will further secure the Republic’s long-term stability. While Kyrgyzstan has rather scarce resources compared to neighboring Kazakhstan, it still has considerable deposits of uranium and other raw material that are largely unexplored.

Dmitriy Frolovskiy is a Moscow-based political analyst and writer. His writings have been featured in The Huffington Post, The Diplomat, Foreign Policy Association, Russian International Affairs Council, and others. Follow him on Twitter and Facebook.