Alarm bells have been ringing throughout Washington in recent months about China’s rising prowess in newly emerging economies. However, in Central Asia, the United States is moving to confront China as the State Department signals the acceleration of investment projects in the region. Compared to China's exorbitant investments and Russia's regional legacy, the State Department's new 'Economic Resilience in Central Asian Initiative' (ERICEN) might appear small or insignificant. On the contrary, this is a necessary move, coming at the right time. But is it enough to compete against China’s long-game strategy?

The relationship between the United States and Central Asia has traditionally been somewhat limited. Initially, after the region was released from the constraints of the Soviet Union, the United States promised a partnership at this most crucial initial stage. Despite this, U.S.-Central Asian relations meandered along a different trajectory as China and Russia became the preeminent economic powers in the region. With Washington’s limited capacity to encourage investment by private companies, and with, at least initially, limited rule of law and independent courts in the region, as well as a high level of corruption, many U.S. companies had little incentive to invest in the region. Yet, at a time when Western powers are attempting to reduce Russia’s role in the global economy, and as corporate portfolios are being rearranged to respond to the shifting global situation caused by Russia’s criminal invasion of Ukraine, the resource wealth and economic capabilities of Central Asia are more important than ever.  

 Source: Secretary Antony Blinken Twitter | U.S. Secretary Blinken arrives in Kazakhstan on February 28 for the C5+1 Summit.

On February 28, coinciding with Secretary Blinken’s visits to the region, the U. S. Department of State announced an additional $25 million in funding for the ‘Economic Resilience in Central Asia Initiative’ to enhance President Biden’s approach towards the former Cold War space. First implemented in September 2022, its primary goal is to give the region the assets needed to prosper in the global economy, specifically through regional connectivity. It calls for a reassessment of the United States' role in the region, and it attempts to encourage private interest through U.S.-funded initiatives, such as enhancing the infrastructure along Trans-Caspian trade routes, facilitating “the movement of Western multinational companies to Central Asia,” and expanding “English-language education for young professionals across Central Asia to build a skilled English-speaking workforce.” However, although these programs have the potential to significantly expand U.S.-Central Asian engagement, there is still one looming obstacle to consider: China.

Over the past two decades, and specifically within the months since Russia’s invasion of Ukraine, China’s long-game strategy has sparked fears among foreign investors that any move will have to compete with the massive Chinese financial capabilities. Part of this has to do with China’s ambitious Belt and Road Initiative (BRI), now rebranded as the ‘Global Development Initiative’, that includes plans to funnel large investments into Kazakhstan, Turkmenistan, Uzbekistan, and other Central Asian states to construct the needed infrastructure to supply Western markets. 

When the initiative first began, it was a project that seemed to benefit everyone. It provided an output for the overflow of dollars in China’s state-run banks, underdeveloped states received massive loans to tap into their resources and start their export economies, and it yielded a demand for Chinese construction firms. Agreements affiliated with this initiative reached 147 countries, with many of these agreements being signed in Central Asia and the greater Caspian Region. 

Source: Shutterstock | China's subsidized road in Almaty, Kazakhstan. 

However, this progressive initiative lured poor and underdeveloped countries into debt traps, left Chinese banks with at least $1.6 trillion in unpaid loans, and left unfinished construction projects throughout Central Asia, such as Line-D of the Central Asia-China gas pipeline. Even after Chinese development finance rebounded from its 2015 deficit, experts are suggesting that export growth will continue to decline with the potential recession looming in the West. At the same time, there’s been a worldwide growth in negative perceptions of the BRI, especially in countries that had received loans previously. With the burden of massive unpaid debts, many Chinese banks have little interest in continuing these projects, and the deterioration of positive BRI perceptions in invested countries has undermined Chinese banks’ abilities to spark new agreements.

In Central Asia, China has already accumulated a large sum of debt. Tajikistan owes an estimated $3.3 billion to foreign investors, half of this owed to China, amounting to 27% of its total GDP. And, Kyrgyzstan has an estimated $4 billion in unpaid loans to China, an estimated 40% of its total GDP. Although other countries like Turkmenistan, Kazakhstan, and Uzbekistan, have been able to pay their debts through oil, gas, and renewable energy profits, there have also been reports of ‘hidden debts’- state-initiated entities used to circumvent borrowing restrictions and to channel infrastructure spending. Jamestown Foundation states, “These loans amount to 16 percent of GDP in Kazakhstan, 23 percent in Turkmenistan, and 9 percent in Uzbekistan.” China has indeed led massive infrastructure projects in Central Asia, benefitting the region’s transport logistics and energy capacities. However, these advancements have laid heavy debts still being repaid, limiting the region’s capacities for alternative infrastructure projects and funders. As the COVID-19 pandemic wanes, China is adjusting rather than abandoning its BRI strategy. 

The characteristics of this revision began surfacing in 2020 when China’s President Xi Xinping told Chinese construction firms that their projects should resemble “meticulous drawings,” and he reminded them that “small is beautiful.” This sentiment stuck, and since, there’s been a steady decline in construction investments. For overall BRI investments, construction projects substantially downsized from $496 million in 2021 to $321 million in 2022. And, to further exacerbate its shrinking geographic footprint, Chinese construction firms have begun reducing their projects in the region and elsewhere. This complicates things as some insurers, like Sinosure, are refusing to grant loans to countries already indebted to China.

Source: Shutterstock | China's President Xi Jiping welcomes guests to 2016 G20 summit. 

Further, the Covid-19 pandemic considerably slowed the progress of foreign investment projects, and China is unlikely to rebound as quickly as it would like. China’s foreign direct investment (FDI) fell by 72% in 2020 compared to the five years prior, and it did not see an adequate bounce back in 2021 or 2022. Focusing on the region, according to AEI’s China Global Investment Tracker, Kazakhstan received $1.05 billion for new construction programs and investment in 2021 and only $410 million in 2022; this is far from the nearly $2 billion received in 2019. Globally, FDI has been on a downward trend since the years before the pandemic, but for China, new loan restrictions have accelerated this decline. 

The Chinese government has pressured banks to pull back on foreign investment and lend domestically rather than overseas to prevent future domestic economic turmoil. And to make it more difficult for Chinese banks, the United States has begun ramping up efforts to restrict Chinese investing abilities through U.S. Securities and Exchange Commission (SEC) regulations. In 2022, the SEC moved forward with a law that grants U.S. inspectors the ability to review audit records and delist companies on the foreign stock exchange if audit regulations are not followed. This has already affected several Chinese companies and is expected to continue as auditors review annual reports. While Chinese stock prices tumble and companies fall under immense pressure to comply with SEC regulations, their insecurity will significantly limit their ability to continue foreign investment projects in Central Asia. 

This new era has fostered questions about the scale of investments and the sustainability of China’s burdensome loans. Countries in Central Asia are approaching a massive global infrastructure investment gap between the cost of much-needed construction projects and funding availability. China will unlikely step in to solve this challenge, leaving these countries in search of alternative investors. 

 For the United States, China’s efforts to restructure its economic relations and downsize projects might complement the new ‘Economic Resilience in Central Asia Initiative’ by targeting a region that China cannot continue to support to the extent it did in the recent past. However, just as China has learned from its initial mistakes in its BRI and begun adapting to new market trends, the United States needs to do the same. The United States has used its majority votes in IFIs, like the World Bank and the International Monetary Fund, to argue its economic capacities in emerging economies. But these IFIs only provide funding if certain social and environmental conditions are met. Although this conditionality is more beneficial to these countries as global environmental and social standards rise, it’s a disadvantage in the rising competition against China, which does not implement these standards. The recent Central Asian initiative will not solve these deeply seeded investment policy and regulation issues. However, at the very least, it will initiate a discussion regarding future U.S. investment policies within the region.

 Washington’s $25 million in additional funding cannot compare to the billions spent by China. Still, as China has tarnished its global reputation with debt traps and abandoned projects, the United States has been granted a window of opportunity to “serve as a catalyst for increasing private sector investment,” as Secretary Blinken said during his visit to Uzbekistan on March 1.

With a focus on English-language education, workforce training, cross-national employment opportunities, and solutions for technological and business bottlenecks, the ERICEN lays the groundwork for prosperous trade relations and business partnerships, offering a potential alternative to China’s BRI initiative. The United States cannot overtake the influence of Central Asia’s great-power neighbors, but it can emphasize U.S. comparative advantages in terms of international standards that bring greater long-term benefits. Russia’s crumbling reputation, coinciding with China’s declining BRI, has provided a backdrop for a reimagined relationship with these much-needed partners. ERICEN is a small first step in the right direction. The United States should continue these efforts to encourage new projects and investment in the Central Asian region.

 

Editor: Ambassador (ret.) Richard Hoagland