Crossroads Asia | Economy | Central Asia

How Attractive are Markets in Central Asia and the South Caucasus?

Investment attractiveness can be earned. How successful have the former Soviet states been in that regard?

By Stanislav Pritchin for
How Attractive are Markets in Central Asia and the South Caucasus?
Credit: Wikimedia Commons

In 2021 the countries of Central Asia and the South Caucasus will celebrate the 30th anniversary of their independence. The approaching round date gives an occasion to look at the successes of the independent states of the region in developing autonomous political and economic systems, the results of integration into world production chains.

By 1991, the standards of living, including educational standards, were approximately the same across the Soviet Union. But after almost three decades of separate development there is significant stratification of the former Soviet republics in terms of national wealth and the specific nature of their economic activity.  With rare exceptions, these countries have not been able to seriously reformat their economies, and in some countries political models inherited from the Soviet Union persist.

Assessing the investment attractiveness of the state is a good marker or indicator for analysis of the systematic work of the state as a responsible actor in domestic economic policy and in foreign markets, as well as the responsibility of its approach in working with nongovernmental internal and external players.

In mid-April, a team of analysts at the ECED Expert Center presented a report titled “Investment Appeal Map of Central Asian and the South Caucasus Countries 2020.” It was the second such report; the first was presented in March 2017. An assessment of countries was carried out on a whole range of parameters that have an impact on the investment attractiveness of the state: the positions of countries in various types of credit ratings and ease of doing business, macroeconomic indicators, the development of transport infrastructure, political stability and existing risks for investors.

The first section of the study is devoted to the positions of the countries of the region in various kinds of ratings. Basic for many investors are macroeconomic stability indices from the three leading rating agencies — Fitch, Moodys, and Standard and Poors. There were no surprises here, the countries with the best and most stable financial systems in the region, Kazakhstan and Azerbaijan, have investment ratings, that is, financial systems recommended for investors. Among other countries, Georgia and Uzbekistan were closest to the investment rating. The latter, moreover, began to receive agency ratings again in 2018 after a long break. The obvious weak link is Turkmenistan, which since 2011 has not been included in the rating lists of agencies due to the inaccuracy of the statistics provided.

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The governments of the countries of the region are currently trying to use the parameters analyzed in the World Bank’s Ease of Doing Business ranking as part of the rating to improve the business environment in their countries. And this is bringing results. The countries of the region have noticeably strengthened their presence at the top of the ratings. Georgia became the undisputed regional leader in 2019, taking seventh place in the global ranking. But progress in other countries is also impressive. Azerbaijan jumped from 63rd place in 2016 to 25th in 2019; over the same three years Kazakhstan improved its position from 49th to 28th place. Uzbekistan is rapidly improving its business environment, moving from 150th place in 2016 to 76th in 2019. But there are also negative trends. Armenia’s rating dropped from 35th to 47th, and Kyrgyzstan’s from 67th to 80th.

The second section of the report is devoted to macroeconomic indicators, the size of the economy, market capacity, purchasing power — these are key factors in deciding whether a company will enter a new market. In this regard, the top performers, obviously, are the largest countries of the region: Kazakhstan, Uzbekistan, Azerbaijan, and Turkmenistan. The most capacious market is Uzbekistan, which has a population of 33.4 million people but low purchasing power, with an average salary of $140 per month. The highest per capita GDP ($11,160) and average salary ($526 per month) are both found in Kazakhstan.

Transport connectivity is an important factor in investment attractiveness as well. No matter if a country is a large market or a successful producer, it is difficult to realize investment potential while remote from world markets. It is not surprising that geography has a key role in assessing this criterion. However, balanced development of transportation systems is important too. For example, Georgia, despite having an advantageous position at the intersection of transport routes and having access to the sea, cannot fully realize the development potential of its different regions due to the weak development of internal infrastructure. Another example, double-landlocked Uzbekistan, turned its geographical remoteness into an instrument of development due to its active development of internal and external transport corridors, leading to increased trade with neighbors. The leaders in this section are Azerbaijan, which is systematically both developing large transport projects domestically and subsidizing their development abroad, and Kazakhstan, which is also actively implementing a state strategy for transport flows.

The most important factor in terms of states’ readiness to improve the business environment, diversify the economy, and develop and support new sectors is the evaluation of development programs and investment policies. This area, in contrast to the availability of natural resources or the country’s geographical position, is quite man-made and can be improved given political will and desire to develop. And here we see that, with rare exceptions, the states of the region lack a systematic approach to their development. The same picture is seen with regard to investment policy. And while at the level of legislation, countries are nominally trying to have fairly progressive laws to protect the rights of investors, in practice, business and foreign investors usually have no real mechanisms and institutions to protect their interests before state bodies.

According to two important criteria, among the countries of Central Asia and the South Caucasus, there are two unconditional leaders — Kazakhstan and Uzbekistan — that are carrying out systematic, comprehensive work to develop their economies and create a favorable and comfortable policy for investors. Moreover, while Kazakhstan has traditionally been singled out in the post-Soviet space for its numerous, ambitious development programs, Uzbekistan has made a rapid breakthrough in the development and successful implementation of a whole range of industry-specific growth and development programs, which are generally included in the five-year structural strategy.

According to the final rating of investment attractiveness, Kazakhstan confidently took the first place, demonstrating 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. Nur-Sultan also held first place in the initial report three years ago. Azerbaijan and Uzbekistan shared the second and third places this year, gaining the same number of points in the aggregate analysis of all parameters. All three leading states have a fairly large market, natural resources, and sustainable political models that allow them to realize their economic and investment potential.

Georgia, thanks to its past successes in reforming, managed to maintain a high level of transparency and attractiveness to foreign institutions; as in 2017 it took fourth place, without having significant natural resources and a capacious market.

Armenia, Kyrgyzstan, and Tajikistan took fifth, sixth and seventh places respectively, repeating their results in the previous rating. These three republics have inexpensive labor, limited but important mineral reserves, and a favorable climate for the development of agriculture. At the same time, the republics are characterized by underdeveloped infrastructure, narrow domestic markets, corruption and bureaucracy, state intervention in the economy, and the lack of real mechanisms for entrepreneurs to protect their rights.

Turkmenistan took eighth place, the same as last time. Despite the presence of large hydrocarbon reserves and the existing transit potential, Ashgabat cannot realize its great economic potential due to its tight political model, which implies serious control over all economic activity in the country.

Summing up, it is important to consider this rating as very relative. The authors compared countries in the designated region and did not include other players in the rating. The situation would radically change at the top of the rating if, for example, any country from Eastern Europe, which has also been developing in the market for the same 29 years, were considered within the same framework.

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Stanislav Pritchin, PhD, is head of the analytical group at the Center for Central Asia and Caucasus Studies at Institute of Oriental Studies (Moscow), and an Academy Fellow at Chatham House.

The full report on which this article is based is available here.