As Kyrgyzstan approaches the two-year mark of the April 2010 revolution, its future socio-economic prospects have gone from bad to worse. Anti-foreign investment rhetoric since the parliamentary and presidential elections has encouraged an unprecedented level of instability in the business environment for multinational companies. Foreign development assistance will decline significantly following the 2014 NATO withdrawal from Afghanistan and the 2015 Millennium Development Goals target date, especially given the financial austerity measures demanded by the domestic politics of leading donor countries. Taken together, decreasing foreign investor interest paired with decreasing foreign aid will come to a head in 2015 with serious budget deficits, unemployment and consequently real socio-economic challenges for the country.
BACKGROUND: Since the collapse of the Soviet Union, the Kyrgyz economy has relied heavily on international development assistance and the metals mining sector for economic survival – two significant sources of revenue that are now in jeopardy.
The U.S. remains Kyrgyzstan’s largest bilateral donor, providing over US$ 1 billion in assistance since the country gained independence in 1991, including close to US$ 150 million in aid during the 2010 revolution and approximately US$ 41 million in 2011. Other significant donors include NATO members such as the United Kingdom, Germany and Turkey (note: Russia and China, though believed to be top donors, do not publically release their development assistance data). Because country donor institutions like USAID often do not directly implement their funding priorities, the millions of dollars that donors pump into the economy each year sustain a bloated Kyrgyz civil society of NGO employees that in essence receive salaries from foreign governments but keep the country’s services industry alive, particularly in the capital city of Bishkek. To highlight with an anecdote, in a recent lecture to Bishkek-based Central Asian graduate students, when asked about planned career tracks almost all students intended to work for an NGO; only a fraction of the hands went up for government or private industry.
But with domestically-driven austerity measures figuring into bilateral donor budgets, development assistance to Kyrgyzstan is expected to decline over the long term, with 2015 serving as an apt bureaucratic end point for several programs as the Millennium Development Goals comes to a close. The U.S., for instance, maintains that the most important foreign aid programs going forward are those in Afghanistan, Pakistan and Iraq while all other programs are subject to significant cuts. Depending on the result of the 2012 presidential election cycle, cuts could be even more severe as Republican candidates like Mitt Romney question U.S. international aid policies given the country’s own US$ 15 trillion debt. “I happen to think it doesn't make a lot of sense for us to borrow money from the Chinese to go give to another country for humanitarian aid,” he said recently to one audience, in a quote more applicable to Kyrgyzstan than he likely realized – roughly 60 percent of official imports to Kyrgyzstan come from neighboring China. The UK’s Department for International Development (DFID) office in Bishkek, rumored to be closing since Prime Minister David Cameron was elected under an austerity platform in 2010, will finally close its doors this April.
IMPLICATIONS: The country receives on average approximately US$ 60 million per year in rents from the U.S. government for the use of the Manas Air Base, a transit center for NATO forces in Afghanistan, which itself is responsible for several direct and indirect economic benefits. According to a source familiar with the agreement, the Kyrgyz government is so dependent on the quarterly US$ 15 million installments that the payments of many government salaries and utilities bills are timed to the fund’s deposit. Despite such reliance, closing the base is a popular political talking point with Kyrgyz President Almazbek Atambayev repeatedly calling for its close by summer 2014.
The Kyrgyz Republic is also heavily dependent on the mining sector for sustaining the country’s budget. The Kumtor gold mine, for instance, represents close to 10 percent of the country’s GDP. The mine is operated by Centerra Gold, a company traded on the Toronto Stock Exchange in which the Kyrgyz Republic owns around 33 percent. Along with the state’s sizable ownership share, the company also pays a 13 percent gross revenue (not profits) tax that goes straight into the Kyrgyz treasury – by most standards conditions very favorable for the host government. Regardless, since the parliamentary elections in 2010 there have been growing calls for increasing the government’s share in the company, with politicians fanning the flames of populist, anti-foreign investment sentiment. The effects of such remarks are felt across the country by foreign operated mines that have had to shut down temporarily due to labor strikes or threats of violence. Kumtor was forced to suspend operations for several days in early February due to strikes and another foreign mining multinational, Talas Copper Gold, only recently came online again after closing in October 2011 due to death threats to local employees and mob violence that caused around US$ 1 million in equipment damages.
The net effect of decreased foreign aid, decreased geostrategic significance following the closing of Manas Air Base, and decreased foreign investment due to a riskier business environment is a country that will face significant socio-economic challenges in 2015 as unemployment increases and budgetary contributions decrease. Geo-politically, as one director for an international NGO predicted to me, after the 2014 NATO withdrawal the Central Asian states will likely become a “backwater” for the U.S. Private investment by U.S. companies in the country is already low (basically just Coca-Cola and the Hyatt, as one official reminded me), as is EU investment, and a negative trend in the business risk environment will only make the country less attractive to traditional foreign investors.
The indirect effects of the NATO withdrawal and decreasing development assistance will be equally dangerous. The “spill-over effect” scenario from instability in Afghanistan will likely increase border tensions with Tajikistan and Uzbekistan; existing narcotics networks will also strengthen. And with fewer donor dollars to support NGOs, the Kyrgyz “brain drain” of intelligent, multilingual young adults finding better opportunities outside the country will only be exacerbated.
Kyrgyzstan in 2015 looks particularly disheartening in light of the fact that the parliament appears to be incapable of forming a majority that can govern effectively. Recent interviews with members of parliament leave the impression of a chamber half populated with legacy politicians pursuing self-interested agendas and the other half young, inexperienced and without a clear vision on where they want to take the country. The role of the presidency also appears to remain quite pronounced despite a revolution that was supposed to ensure that a return to authoritarianism would be impossible.
The doomsday scenario is thus: decreasing budgetary contributions and increasing unemployment meets increasing regional radicalism supported by a burgeoning black market, all coming together in an event, likely in the proximity of the Fergana Valley, which leads to an overreaction by Kyrgyz forces which in turn mobilizes latent, country-wide dissatisfaction with the government since the 2010 revolution. The blame will fall on the parliament, allowing for a return to authoritarianism endorsed by the stability-at-all-costs regional partners of Russia and China. Kyrgyzstan in 2015 will have taken one step forward and two steps back since 2010.
CONCLUSIONS: Kyrgyzstan faces significant challenges in the near term that neither the parliament nor the president seems to be taking seriously. A Kyrgyzstan without a U.S. military presence is understandable in principle, but not in the absence of an honest discussion on how the country plans to make up the difference on the significant rents and indirect economic benefits the base brings to the country. And if the trending on operational challenges for foreign investors continues, even the more risk-inclined investors will see the Kyrgyz business environment as closer to Tajikistan and Uzbekistan than more investor-friendly Kazakhstan, and as such the country’s mineral wealth potential will continue to go unrealized.
AUTHOR’S BIO: J. Edward Conway is an independent political risk consultant and a doctoral candidate at the Institute of Middle East, Central Asia and Caucasus Studies at the University of St Andrews in Scotland.