Central Asian Economies Forge Ahead with Strong Growth Despite Geopolitical Challenges
Author: Samantha Fanger
Oct 13, 2023
Central Asia is expected to see major economic growth in 2024 according to a recent report by the European Bank for Reconstruction and Development (EBRD). The report showed that Central Asian economies have overcome recent geopolitical challenges thanks to the region's economic diversification efforts, an upsurge in Russian emigres, and substantial remittances. In fact, despite the economic uncertainties in its neighboring economies, Central Asia saw the largest upward revision of all other regions in ERBD’s latest bi-annual growth forecasts.
Looking ahead, the EBRD's projections paint a promising picture, with regional GDP growth expected to maintain its momentum at 5.7 percent for the current year, poised to rise to 5.9 percent by 2024. More and more trading partners, most notably in Western Europe, have inked trade and investment deals with Central Asia, giving way to a new regional economic landscape. Central Asia has emerged as a crossroads, linking together the East and West with its expanding transit routes. “[Central Asian countries] are now serving as an intermediary in trade between Western Europe and Russia,” Chief Economist of the ERBD, Beata Javorcik, commented on the region’s economic resilience since Russia’s invasion of Ukraine.
A large part of this economic growth is attributed to the development of the Middle Corridor route. This trans-Caspian route is a multi-modal land and sea transport corridor, helping products move from as far as China to Europe through Kazakhstan, Uzbekistan, Turkmenistan, across the Caspian Sea to Azerbaijan, Türkiye, and the Black Sea to Europe. In addition to its transit role, the route opens doors for Central Asia to reach European markets. The Middle Corridor has quickly picked up momentum since Russia’s invasion of Ukraine, evidenced by a 20 percent surge in freight through the port of Baku in 2022 and similar growth in cargo and container transit through Georgia. With increasing investments in the Middle Corridor’s development, Kazakhstan’s Ministry of Energy predicted an upward trajectory for the project, anticipating 6.5 million tons of cargo in 2023, 7.5 million tons in 2024, and 15 million tons in 2025.
Recognizing its economic potential, international powers are actively engaging in efforts to strengthen ties with the South Caucasus and Central Asia. China, through its Belt and Road Initiative (BRI) has made promises to deepen economic ties with Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Georgia through foreign direct investments in infrastructure projects. Simultaneously, the European Union (EU) is keen on expanding its presence in both regions, offering support for infrastructure projects, such as the construction of a Black Sea electric cable to transport energy from Azerbaijan to Europe. Central Asia fits neatly into the EU's Global Gateway Initiative, a program aimed at developing port and rail infrastructure as an alternative to China's Belt and Road Initiative, though China would use the Middle Corridor as a transit route—ensuring its viability.
According to the report, Central Asia’s labor migrants have also played a substantial role in the region’s economic resilience. In the immediate aftermath of Russia’s war on Ukraine, Central Asia’s remittances fell, but have since surged. In 2022, Russia registered 3.5 million new migrant workers, 90 percent of which originated from Central Asia. Remittances from Kyrgyzstan, Uzbekistan, and Tajikistan experienced a significant surge in labor migration to Russia in 2022 compared to the previous year, with Uzbekistan witnessing a 72% increase and Tajikistan recording a notable 40% rise.
Due to the size of their population, Central Asian remittances wield significant economic influence in their respective countries. Remittances play a significant role in the economies of some Central Asian states, particularly in Uzbekistan, Kyrgyzstan, and Tajikistan, representing amounts equal to 21%, 31%, and 51% of their GDPs in 2022, respectively. It's crucial to note that the inflow of remittances into Central Asia isn't solely linked to remittances sent by labor migrants but also encompasses the significant capital migration of Russian firms and citizens, particularly following the Ukraine conflict.
The influx of capital from Russian companies and individuals who have resettled in Central Asian countries over the past two years has also made a significant contribution to the region's remittance data and its optimistic economic outlook. This wave of Russian migrants brought with them a skilled workforce and increased consumer spending. Although Central Asia has attempted to reduce its economic reliance on Russia, trade ties were maintained with Russia. At the same time, the region has served as an intermediate to fill the void left by international firms departing the Russian market. This surge in trade has resulted in a substantial increase in money transfers to Central Asia from abroad, bolstering bank deposits and profitability, which have improved initial losses in currency values and ruble devaluation. Moreover, the relocation of Russian firms and individuals has sparked heightened demand in various sectors, including retail, real estate, and hospitality, thereby contributing to the region's economic vitality, through increased food and energy prices also created challenges for domestic populations.
However, although the surge in infrastructure investment has been a driving force in Central Asia’s economic boom, it's worth noting that the Regional Economic Prospects (REP) report cautions that rising borrowing costs could impact the scale and appetite for investment in the region. Additionally, recent disruptions in water and energy supplies have prompted discussions on long-overdue tariff reforms and better resource management. However, such reforms have caused and continue to cause stress on local populations due to price hikes, such that governments will need to simultaneously enhance living standards to prevent their domestic populations from suffering.
Still, the favorable economic outlook reflects Central Asia’s efforts to increase regional cooperation. As Russia’s economic influence declines and interregional transshipment activity rises, leaders in the South Caucasus and Central Asia are acknowledging their growing interdependence. Moreover, countries in the South Caucasus and Central Asia are aligning their foreign policy outlooks in response to broader geopolitical shifts. Embracing multi-vector foreign policies and deepening cooperation among themselves, these countries are reinforcing their independence and marking their significance in the global economy.