ECONOMIC TRANSITION IN CENTRAL ASIA

Dr. Shabir Ahmad Khan*

Introduction

This particular paper focuses on the economic transition of Uzbekistan, Turkmenistan, Kazakhstan, Kyrgyzstan and Tajikistan. The work is an effort to collect and organise data from different sources on the Central Asian economic transition authored by Russian, American, English and Central Asian scholars in order to study Central Asia’s successes, failures, and achievements in the march towards market regulated economic system. It looks into the economic structure of Central Asia and discusses economic growth, transition strategies, monetary reforms, status of privatization, foreign direct investment (FDI) and foreign trades of Central Asian Economies since independence.

Economic Structure of Central Asia

The economies of Central Asia (Uzbekistan, Turkmenistan, Kazakhstan, Kyrgyzstan and Tajikistan) were all centrally planned and followed development strategies determined by Moscow during Soviet era. The important questions like what to produce, how much to produce and where to produce were decided by Moscow and implemented through the Republican Ministries and other organs at the republican level.  The Soviet division of labour was most obvious in the Central Asian republics which were mainly producers of raw Material. The Uzbek economy was exclusively cotton dependent and the republic produced 70 percent of raw cotton of the former USSR. Turkmenistan had experienced a boom in natural gas production during the closing decade of the USSR while the Kazak republic inherited a more diversified economy in the region relatively, with grain exports and a variety of mineral and energy resources. The mainly mountainous Tajik and Kyrgyz republics had fever exploitable resources. However, the two main rivers of Central Asia, Amu Darya and Syr Darya originate in mountains bordering Kyrgyz and Tajik republics irrigate the lower riparians Uzbekistan, Turkmenistan and southern Kazakhstan. Thus based on the division of labour, Kazakhstan became the “grain basket” of former Soviet Union, Uzbekistan popularised for “cotton monoculture” where cotton became “white gold” for the former Soviet republic, Turkmenistan also produced large quantity of cotton (10 percent of former Soviet Union), however specialised in gas production while Tajikistan and Kyrgyzstan specialised in hydel-power generation. Both Tajik and Kyrgyz were the “recipients” republics. The economic catastrophe of Central Asia in the immediate post Soviet period (1991-1995) was directly linked to the peculiar structure of the division of labour that enveloped Soviet Central Asia.

The Republic of Uzbekistan has nearly 80 percent of desert and around 11 percent arable land. It is the fifth largest producer of cotton in the world while second largest exporter of cotton after USA. However it is a net importer of food. The republic has major gas deposits (currently second largest gas producer in CIS) and also possesses some oil. It occupies a strategic position in Central Asia bordering all other Central Asian states including Afghanistan. Though Uzbekistan is double land locked, which poses transportation difficulties in foreign trade, the republic has inherited the best infrastructure in Central Asia from the Soviet period. The relatively developed rail and road infrastructure helps Uzbekistan to become a vital regional hub for transit and transportation. With the biggest population in Central Asia (26 million), Uzbekistan has the advantages of significant human resource potential as well as a large size of domestic market. Uzbekistan’s industrial sector include electric power, natural gas, petroleum refining, chemical (primarily production of mineral fertilizer), gold mining, textile, machine building, car making, ferrous and non-ferrous metal and food processing.  

During Soviet period, Uzbekistan mainly served as a raw material source supplier particularly cotton. The emphasis on cotton production turned the whole economy into cotton monoculture. To facilitate cotton production, the republic had developed agro-industry for the production of cotton cultivators, cotton harvesters/pickers, tractors and ginneries as well as excavators, pumps, generators and huge pipes for irrigation purpose. Cotton thus became white gold for the republic which produced 70 percent cotton of the whole Union. However the republic could process only 4 percent of its domestic production beyond the ginning in 1984.

The Republic of Turkmenistan was also a raw source supplier to the former Soviet Union and the secondary industry remained undeveloped. Before the 1980s, the main product was cotton with irrigation provided by the Kara-Kum Canal. However, during the last years of the USSR, the republic rapidly expanded its natural gas production. In the immediate post Soviet period, natural gas accounted for 70 percent of Gross National Product (GNP). Almost all the electricity generated in the republic was produced by using gas. It is thought that 85 percent of the republic may lie on gas and oil. The agriculture sector employed about 40 percent of the labour force in 1992. The sector heavily concentrated on cotton production (17.5% of the total Soviet production). Since independence, the government has encouraged expansion of food crops. The industrial sector employed about a tenth of the labour force in 1992. The only industries that developed were related to the production of primary goods. The main branches of industry were: oil refineries, textile enterprises, food processing, construction materials, a chemical industry, carpets, gas stoves and cables of various kinds. In 2007 Agriculture made 16.7% of GDP, industry 39.2% and services 44% of the GDP.

The Republic of Kazakhstan possesses huge hydrocarbon resources (untapped) and has considerable agriculture potential. The republic with one fifth, (40 million ha) of its cultivated land was a major grain particularly wheat producer and an important animal husbandry region of the former USSR. It is the only Central Asian state where cotton assumed less importance and was concentrated only in southern region i.e. Chimkent. Grain was grown in the northern rain fed areas. In 1996 agriculture contributed 13 percent to the GDP , while in 2007 the share of agriculture in total national income had dropped to 5.7 percent.   Kazakhstan’s relatively large industrial sector is based on the extraction of natural resources and also on relatively large machine building sector specialising in construction equipment, tractors and agricultural machinery and some defence items. The most important sectors in industrial production are those based on the processing and use of fuel and mineral resources first place belongs to the fuel and power industry, 42 percent of GDP next is ferrous and non-ferrous metallurgy, 23 percent of GDP, on third place food industry contributing 14 percent to GDP, followed by machine building and metal works with 7 percent, chemical and petrochemical industry 3.5 percent, and production of construction materials 3.1 percent in 1996. Recently fuel industry has emerged as a significant sector of the economy due to foreign investment. In 1996 industrial sector contributed 31 percent to the GDP where first place belonged to the fuel and power generation (42% of the total industrial production). Coal forms the basis of the republic’s power industry which produced two third of the total power 58.7 bln kwh in 1996. In 2007, the share of industry in gross national product has reached to almost 40 percent, according to CIA World Fact Book.

The Republic of Kyrgyzstan also inherited an agriculture dominant economy from the USSR like other CARs. However, contrary to Uzbekistan, the focus of agriculture was more on livestock (two third of the total agri-production) than farming. In 1995, 65 percent of the population lived rural life and 42 percent employed in agriculture including animal husbandry as well as crop cultivation. The crops include fodder and animal feed, wool, tobacco, cotton, sugar beet, grain and fruits. At the eve of independence agriculture contributed approximately 40 percent to the national GDP while industry 30 percent. The main industries are power generation, metallurgy, agro-machinery, food, textiles and electronics. Numerous rivers and mountains make hydro-electricity generation the greatest potential of the republic. The power generation proved to be the most profitable industry in post Soviet period. The republic has earned $70-80 million annually by exporting electricity to neighbouring Uzbekistan and Kazakhstan in 1996. The republic also started to export electricity to China in 1992. Kyrgyzstan contains insignificant oil and gas reserves but there are huge amounts of other minerals i.e. gold, coal, mercury rare earth metals and antimony. The industrial sector, employed 20.8 percent of the workforce in 1994, includes branches as machine building (vehicles, machine tools, electrical machines and tools), mining (extraction of mercury, gold, coal, and oil), hydro-electric power generation, construction material, consumer goods; textiles, shoes and food processing.

The Republic of Tajikistan is endowed with water and mineral resources like Kyrgyz republic. The country has more than 30 important gold deposits and has the potential to become one of the world’s largest producers and exporters of hydroelectricity. Some 70 percent of the population live in rural areas and the economy produces a few agricultural and industrial items for export while bulk of food, machines, equipments, and consumer goods are imported from other republics. During Soviet periods, Tajikistan was also an important producer of cotton and the republic accounted for 11 percent of the crop grown in the former USSR , as 40 percent of the cultivated land was occupied by the cotton. The main industrial products were aluminium, electric engines, power transformers, cable and agricultural equipment. About 90 percent of these products were exported to other republics of USSR while it imported almost all its gas and oil, coal, agricultural equipments, cars, cycles, home appliances and cotton articles. Industry accounted for 29 percent of the GDP and agriculture for 38 percent of the GDP and 43 percent of the total employment in 1990.

Economic Development and Transition Strategies during 1990s

During the period of 1991-1995 there was a general decline in the economies of Central Asia. The Gross Domestic Product (GDP) fell by almost 50 percent in Tajikistan, 48 percent in Kyrgyzstan, 43 percent in Kazakhstan with somewhat smaller contractions in Turkmenistan 29 percent and particularly in Uzbekistan where the GDP fell by only 17 percent. The decline overtook every sector of the economy but was more severe in the industrial sectors while the fall in agricultural sectors was less precipitous. This contraction in the economies of Central Asia during the first half of 1990s caused mainly due to the following reasons:

1. Structure of the economies was based on the division of labour as mentioned earlier.
2. Economic disintegration that progressed at an un-precedently high rate. One can divide the former Soviet states into two kinds of republics, “the donors” and “the recipients”. The development of the latter (recipients) depended on receiving resources and profits from the economically more developed regions which created unequal relations in economic exchange between different republics. This disintegration of economic exchanges and relations therefore resulted in sharp declines of GDP in Central Asia.
3. And the economic decline in the region was the result of the self-destruction of the command economic system. Because without first demolishing the command (planned) economy, it would have been impossible to enter the trajectory for a normal market economy. Thus dismantling the centrally planned economy created severe problems as the supply links and demand sources were disrupted by the new national borders and attempts to retain sources with in national borders. All attempts to preserve or continue the common economic framework of the past proved abortive once and for all. With the liberalization of foreign economic sector due the break-up of USSR into independent states, trade among CIS shrank more than three fold during 1992-1999 and mutual trade figures were down in almost all CIS nations, except Tajikistan and Russia.

During the second half of the decade (1990s), the growth rates in the economies of Central Asia started an upward trend, i.e. the decline stopped. In Uzbekistan, Kazakhstan and Kyrgyzstan GDP growth rates turned positive in 1996, Tajikistan achieved its positive GDP growth in 1997, while in Turkmenistan GDP growth rate turned positive in 1998. In the year 2000 Uzbekistan was the first Central Asian republic to attain the growth level of 1989. Kazakhstan’s GDP a year later in 2001 had reached to just 84 percent of the 1989 level, while in the same year (2001) Turkmenistan’s GDP was an estimated 96 percent of the 1989 level, Kyrgyzstan’s GDP was an estimated 71 percent and Tajikistan’s was only 56 percent of the 1989 level.

Strategies for Economic Reforms

Since independence, the Central Asian Republics (CARs) have adopted and pursued different strategies for economic development despite many similarities of the economic structures inherited from one single unit i.e. USSR. Each of the Central Asian republics has chosen its own model of economic development, followed its own strategy for transition and adopted its own government system and transformation pace. Uzbekistan adopted a special “Uzbek Model” for building a market economy. That model referred to a gradual, step by step approach, the priority of economy over politics but dominant state role in economic reforms and state control remains pervasive in every sector of the economy and a strong social policy i.e. controlled prices, and subsidies on health, education and other necessities. Independent Uzbekistan had two commodities i.e. cotton and gold, readily available to export now on international prices. These commodities could be easily diverted to world markets as they don’t need any pipeline that passes through or by-passes Russia. Other economic as well as social sectors were financed by the revenue earned from the export of these commodities.

The development model during transition in Uzbekistan is based on resource extraction produced by the agricultural sector, in particular cotton. The outflow of a net surplus from agricultural sector (as the subsidies in terms of inputs and credit were exceeded by the taxation through the procurement system), provides the budget and the monetary authorities with substantial domestic finance. An exceptional feature of the Uzbek economy during 1990s was that its economic performance, measured by GDP, since 1989 was the best among all former Soviet states and better than many Eastern European transition economies. Though cotton sector and to some extent gold have served as shock absorbers for the Uzbek national economy during the transition however the policy must be given credit because the prices of cotton and gold fell globally during the second half of 1990s but Uzbekistan’s GDP continued to grow. In 2000 it was the only Central Asian republic to achieve the pre-independence level of growth. Uzbekistan, a net energy importer in Soviet era, was sufficiently successful in developing domestic energy sources and therefore did not suffer from the shift to world prices on intra-CIS trade and it ceased to be a net oil importer in 1995. Due to the better GDP performance, the domestic demand for energy remained high which Uzbekistan met with the growth in production of oil and gas by expanding and developing the existing as well as new fields.

There was hyperinflation in 1994 (1568 percent) with consumer prices rising by 645 percent in 1992 and 534 percent in 1993; inflation fell sharply in 1995 but the lowest inflation rate was achieved in 1998. However, the enormous declines in output as mentioned earlier have led to significant increases in poverty level throughout the region and like wise in Uzbekistan. More importantly the revival in economic growth rates has not necessarily led to falling poverty levels. This phenomenon can be partly explained by the existence of other factors, such as income inequality, which determines how economic growth affects poverty and vice versa. For instance if income in-equality is high, the benefits of an increased economic growth will not be distributed equally across the population, which will lead to increase in the incidence of poverty. Nonetheless study shows that economic performance of Uzbekistan was the least bad among the economies of transition and better than all the CIS.

In the Republic of Turkmenistan, strategy for economic transition during 1990s was to use the rents from natural gas to keep the population satisfied with an essentially unchanged economic system. Turkmenistan shared the general decline of output and rapid inflation during the early 1990s but both were more moderate than Kazakhstan, Kyrgyzstan and Tajikistan. Natural gas, main export of the country, had been under-priced in the Soviet era, so it benefited from an immediate shift to improved terms of trade increasing GNP by over 20 percent as well as having the luxury of a product that could be exported for hard currency. At the time of independence, Turkmenistan was the fourth largest gas producer in the world and therefore its gas export to other former Soviet republics remained a major revenue earner in the years after independence. In 1996 gas revenue accounted for 60 percent of GDP.

Although Turkmenistan’s gas reserves are the fourth largest in the world, its options are very limited to use this potential as its customers (the CIS) are strapped in cash. In 1996 Russia refused to buy 11 bln cubic metre of gas from the republic and Ukraine, Georgia, Azerbaijan and Armenia owed Turkmenistan almost $1.5 bln while by the next year (1997), the total debt of the mentioned consumers of Turkmen gas had reached almost $2bln. Turkmenistan had to drastically reduce gas supplies to the debtors particularly Ukraine which led to a sharp decrease in gas production. Supplies were resumed after negotiations with Russia and Ukraine in 1999.

Turkmenistan was a net food importer during Soviet era; however in 1998 & 1999 the republic had record grain harvests. In 1999 grain production increased to 1.4 mln tons making the republic self sufficient in food supply. Turkmenistan was among the main suppliers of raw cotton with its total production second only to Uzbekistan (17 percent of USSR in 1990) while 65 percent of its grain requirement were met by inter-republican supplies. The self sufficiency in grain was achieved by diversifying/shifting land from cotton cultivation to grain sowing. Thus both Uzbekistan and Turkmenistan diversified their agriculture by changing crop pattern in favour of wheat at the expense of cotton as well as forage and other crops. Turkmenistan’s GDP growth did not turn positive until 1998 but in and after 1999 it has been reported quite high. The GDP growth rate was -5.3 percent in 1992 while -17.3 percent in 1994. A further substantial fall in GDP was mainly caused by the suspension of gas exports to major CIS customers owing to increasing arrears in payments as mentioned earlier. GDP in 2001 was an estimated 96 percent of the 1989 level.

Thus Turkmenistan has maintained strict control over the economy and has avoided economic reform. Economic policy aimed to minimize change while maintaining popular support through consumption subsidies (gas, water, electricity and bread are free to households) and poverty rates appear not to have risen as much as elsewhere in Central Asia because income distribution is fairly egalitarian. The access to and exploitation of resource rents in Uzbekistan and Turkmenistan explains their resistance to economic reform in contrast to Kyrgyzstan and Kazakhstan which needed foreign assistance to develop their resources before export earnings could flow in. However, Uzbekistan did different from Turkmenistan in that government was not viscerally opposed to change and policy of gradual reform was not a euphemism for no reform. Although Uzbekistan scored poorly on western-based transition indicators, it differed fundamentally from Turkmenistan’s lack of any serous transition strategy. One can also conclude that rents or export revenues earned from resources were efficiently utilised by Uzbekistan and different sectors of the economy were financed by these revenues, while Turkmenistan due to poor governance could not manage and utilised these export revenues for capital making.

Kazakhstan, according to Richard Pomfret and Kathryn Anderson, initially appeared to be following the Kyrgyz republic on a liberal path but the president became more autocratic as the decade progressed and the economy became more like an economy of favours and influence or “crony capitalism” than the market economy envisioned by the reformers. Although Kazakhstan inherited a relatively diversified economy in the region with grain exports and a broadly established industrial sector accounting 31 percent to the GDP, it could push its GDP, in 2001, to only 84 percent of the 1989 level. There are contradictions on decline in Kazakh GDP between different sources. According to one source, the Kazakh GDP declined by 49.8 percent with a 54 percent fall in industrial production during 1992-94 while another source reports that during the same or even a year later (1995) the republic’s GDP had reduced by 31 percent in comparison to 1991 and its volume corresponded to the level of early 1990s. By 1996 the GDP turned positive and since then the republic has achieved high economic growth due to foreign investment and increased oil exports.

The main reasons for the early 1990s crises were disrupted economic links with other ex-USSR states, errors in the privatisation process and lack of control of the governable economic process by state bodies. By the mid 1990s, recession in production and investment had decelerated to some extent however the Russian crises of 1998 badly affected the Kazakh economy as the republic conducts around 30 percent of its foreign trade with Russia. Nonetheless many observers and economists, studying the area, are agreed upon that Kazakhstan has the brightest future in Central Asia because of its vast natural resource endowment. It is proved by its average per capita income that reached to $1780 in 2003 making it second only to Russia in the CIS and by its huge foreign direct investment inflows (see FDI section).

The republic of Kyrgyzstan with less hydrocarbon resources to rest on during early transition period, embraced the advices of financial institutions and followed what ever the IMF and World Bank said in order to have funds. The Kyrgyz republic has been termed as the most liberal reformer among the Central Asian republics, as mentioned earlier due to meagre resource endowment the republic followed the instructions of world financial institutions and consequently earned strong support from IMF and World Bank. It became member of WTO in 1998 but many observers are sceptical whether the republic in fact has well a functioning market economy. The republic’s GDP declined by 45 percent during 1991-95. The GDP growth turned positive in 1996 and the economy to the republic grew rapidly in 1997, fuelled by a more than 30 percent increase in net exports mainly gold. Gold formed 75 percent of the products supplied to foreign markets and the foreign exchange earned was used to repay debts to Western creditors. In 2001 the GDP was an estimated 71 percent of the 1989 level.

In the republic of Tajikistan, besides the transition hardships, civil war like situation exacerbated the economic crises and the GDP fell by 51 percent during the period of 1991-1995, the worst in Central Asia. The civil war restricted economic reforms where positive GDP growth was achieved in 1997; the annual per capita income was less than $200 by far the lowest of all transition economies. An estimated 85 percent of the population live below the poverty line. In 2001 GDP was only an estimated 56 percent of the 1989 level.

Revival of Economic Growths

Central Asian republics appear to have turned the corner during last few years where economic growth accelerated to unprecedented levels, due to high prices of their resources (gas & oil), macroeconomic management and infrastructural developments. There are predictions that after a decade or so the Central Asian Republics would set to join the rank of middle income countries. After nearly a decade of dismal economic performance, the Central Asian Republics have put together a booming economic performance since 1997. The economies grew by almost 6 percent during 1997-2001 while for the period 2001-2005, the average growth rate for the economies of Central Asia have been recorded as 9.7 percent, highest in the post transition period for any group of countries. The average growth rate for Tajikistan during 2002-04 has been recorded as 10 percent. Kyrgyzstan’s GDP grew by 7 percent in 2003-04. By the end of 2003, Uzbekistan’s per capita income had increased to $840. The GDP growth rate in Uzbekistan amounted to 7.7 percent and 7 percent for the years 2004 and 2005 respectively and the aggregate growth in the economy was 30.1 percent since 2000 and 28.2 percent sine 1991. Kazakhstan’s value added sector grew by more than 10 percent per annum during 1998-2003 and the republic’s per capita income increased to above $1200. Similarly Turkmenistan has also raised its per capita income to more than $1200. The expansion and development of manufacturing sector has played important role in this economic revival of Central Asia. Though oil and gas continue to drive the industrial sector, the rest of the industrial sector and manufacturing also increased.  The recent industrial recovery in the CARs is closely linked to the performance of manufactured exports that grew by around 10 percent per year for the region as whole during 1998-2003. However the structure of manufacturing sector varies from state to state. In Tajikistan and Turkmenistan, cotton products (textile and garments based on the foreign investment from Korea and Turkey) form over 80 percent of manufactured exports and similarly 37 percent in Kyrgyzstan. Kazakhstan’s manufacturing sector is dominated by the steel and iron with chemicals and plastics as well as machinery and transport equipment.

The Central Asian republics have also controlled the inflation. The inflation rate has fallen significantly throughout the region over the past few years, reflecting improved macroeconomic stability. Average inflation rate for the CARs as a group declined from 20.4 percent to 6.9 percent between 1997-2001 and 2002-2004. As a result the total debt for the CARs has typically fallen as percentage of GDP as the total debt of the region has not increased substantially since late 1990s.  

Monetary Reforms

In Central Asia monetary issues were crucial in the early phase of transition because they encompass the key temptation to deviate from an effective development strategy. The temptation was to subsidise directly or indirectly groups suffering from transition (for example by raising or holding down bread prices) and to subsidise certain economic activities. Such measures involved increased government expenditure which under current circumstances (i.e. inadequate government revenues and limited opportunities to issue government debt) could only be financed by increasing the money supply. In the post Soviet period CARs used tight monetary policy to control inflation and kept on providing subsidies. The republic of Uzbekistan introduced its own transitional currency “Soom Coupon” on November 15, 1993 followed by the permanent currency “Soom” in July 1996. The Soom Coupon was officially at par with the rouble, but it immediately depreciated against the rouble on the free market. Initially exchange was not compulsory because rouble was also in circulation, however in Dec 1993, limitations were imposed and food was sold only for Soom Coupons.

According to official data, the inflation rate was 4 percent in 1990 and almost 100 percent in 1991. Next year (1992) witnessed a growth in wholesale prices of both industrial and consumer goods. Fixed prices were maintained for such essential as meat, butter, sugar, tea, flour, bread and some other goods which were sold to the population with ration cards. The free index of prices of consumer goods and services (1990 = 100) was 206 points in 1991 and 1439 points in 1992 and the price of the minimum fixed set of food increased almost 5 times in 1992. After the introduction of fully fledged national currency July 1996, the government banned the use of foreign currencies in commercial transactions as of 15 Oct. 1996. All the payments and settlements between individuals and legal entities were to be conducted only in the Soom. On 1st March 1995 IMF approved a loan under the systematic transformation facility and the first instalment of $74 million was to be used for macro economic stabilisation and reducing inflation. However IMF suspended a standby loan of $185 m in 1996 due to state control on foreign exchange. Almost all prices were liberalised by 1998 except flour, energy, housing ser ices and some transportation tariffs.

The financial policy of the republic has been to direct financial resources, partly through banks to priority sectors and enterprises. Banks act as agents of the government in enforcing monetary and fiscal policy by i controlling cash supply and liquidity ii monitoring financial transactions and ii automatically deducting outstanding taxes from depositors on behalf of tax authorities. Uzbekistan, undoubtedly, has market institutions more developed than before however the output prices of major agricultural products cotton and grain are set by the government and there is no private market for the sale or purchase of these products because the government purchase all the out put.

The republic of Turkmenistan introduced its own currency “Manat” on November 1, 1993, with exchange rates of 500 Roubles/1 Manat and $1/2 Manats. Rouble and Manat remained in circulation until on Dec. 20, 1994 when Manat was made the sole legal tender. Turkmenistan shard the deteriorated macro economic environment of Central Asia with high inflation, a substantial current account deficit and a large depreciation in the exchange rate, especially on the black market. The budget deficit was around 15 percent of GDP in 1998, financed mainly through foreign borrowing. Inflation rate has been recorded as 100 percent for the year 1997. The republic has strictly controlled price policy subsidised by the state. Public utilities remain a major source of subsidies to domestic enterprises as power, gas and water are supplied virtually free of charge. Before Nov. 1993 only the prices of imports and products having a high proportion of imported feed stuffs were liberalised. Prices were liberalised more at the beginning o 1996 and market prices apply to all goods except meat and flour. However the citizens continue to have free use of local services such as gas, water supplies, electricity and food stuff.

The republic of Kazakhstan remained in the rouble zone till August 1993 when the Russian Federation issued new rouble notes. The tougher conditions imposed by Russia for the supply of new rouble notes in late September 1993 led to the introduction of Kazakhstan’s own currency “Tenge” on 15 Nov. 1993. Roubles could be exchanged for the Tenge at the rate of 500 to one and each citizen could exchange up to 100,000 Roubles. Following the introduction of the Tenge, the aim was to reduce the monthly inflation rate and restriction of budget deficit. Before that, Kazakhstan deregulated prices (80 percent of wholesales prices and 90 percent of retail prices) which resulted in hyper inflation approximately 3000 percent during 1992; it however fell to 2260 % in 1993, 1258% in 1994 and 52% in 1995. In July 1991 Kazakhstan announced that IMF had offered a $450 m loan for a reduction in annual inflation rate to 26-28% by the end of 1996. In 1997-98 the budget deficit remained at 3.6% of GDP and the government financed the deficit without direct credits of the NBK (National Bank of Kazakhstan) but foreign lending remained the main source of deficit spending. Kazakhstan well managed strong foreign capital inflows with out sparking inflation. The inflation remained under control registering 9.8% in 2000 and similarly under 10% in 2001. The 1998 budget deficit level of 4.2 % of the GDP has been turned into a slight surplus in 2000 and Kazakhstan became the first former Soviet republic to repay all of its debt to IMF by paying back $400 m in the year 2000.

The republic of Kyrgyzstan was the first Central Asian state to issue its own currency “Soom” in May 1993. Roubles were accepted in exchange for new currency at the rate of 200 Roubles per 1 Soom. Kyrgyzstan received immediate help for its new stance from IMF and World Bank. The IMF approved a SDR (Special Drawing Right) 16.25 million equivalent to $23 million loan and also set up a SDR 27.09 million equivalent to $39 million standby credit. World Bank also announced its first credit of $ 60 m through its soft loan with co-financing of $70m from Japan, the Netherlands and Switzerland. The NBK (National Bank of Kyrgyzstan) continued with a rigid financial policy, rationalising expenditure and therefore reduced inflation from 31% in 1996 to 20% in 1997. The extent of liberalisation of prices and trade in Kyrgyzstan continued to exceed that of its neighbours and the country is still the only WTO member in Central Asia.

In 1993 while other Central Asian republics introduced their own currencies, Tajikistan agreed to remain in rouble zone with the aid of credit from Russia for the conversion to new rouble notes. However, after the failure to introduce new Russian rouble as legal tender, an independent national currency “Tajik rouble” was introduced on May 10, 1995. The economic crises manifested itself in the diminished exchange rate o the Tajik rouble, which went down two times with in the first nine months of 1997. The Tajik rouble when introduced in 1995 had been set at 50 per US $; its exchange value fell to 2400 in 2000.   In July 2000, the Central bank established an inter bank foreign exchange market replacing earlier foreign exchange auctions. Since the introduction of the new currency, the “Somoni” in late Oct. 2000, the Somoni replaced Tajik rouble at the rate of 1Somoni = 1000 Tajik roubles, the exchange has stabilised to some extent while the inflation rate also dropped to 32.9 in 2000. Tajikistan faced high inflation among the CARs. During the period of 1991-1993, the price level grew by 26,179% in the republic. In 1998 the average salary was just $12 in the republic. Price control lifted on 80 percent of all goods in 1992 while prices of staple consumer products such as flour and milk were controlled. The prices of agricultural commodities (cotton, grain and silk) electricity, fuel and transport are subject to control.

Privatisation in Central Asian Republics

Privatisation refers to the process of transferring the ownership rights of public or state enterprises to private individual or group of individuals. Privatisation in the republics of Central Asia has been slow generally and its pace varied from country to country and likewise the progress. Typically the countries of Central Asia planned their privatisation program in three stages. The first stage focused on the Privatisation of small scale enterprises, housing and small scale whole-sale trade. The second stage privatisation entailed mass privatisation of medium-scale enterprises. Privatisation during these stages was implemented through auction sales, employ buyouts, and outright donation to workers. The third stage involved case by case privatisation of large-scale enterprises including natural monopolies and infrastructure in some of the republics. Due to political, economic and social transition in these republics, it is not surprising that the privatisation process has been inconsistent in application and difficult in nature. According to IMF report private sector of Uzbekistan made 45 percent of GDP in 1999, Turkmenistan 25 percent, Kazakhstan 55 percent, Kyrgyzstan 70 percent and Tajikistan 30 percent while as whole the private sector’s share constituted less than one-half of GDP.

In the republic of Uzbekistan, privatisation was glacially slow during the last decade. The process was not only slow in agriculture and industry but privatisation from below i.e. the creation of new small-scale activities by entrepreneurs was also very little. Therefore fewer kiosks and a few private restaurants appeared on the streets of cosmopolitan Tashkent in 1993 than Almaty or even backward Bishkek. Except the services that was totally privatised, state control is pervasive in the economy. Residential houses were also privatised and by early 1995 more than 82 percent of the out put in trade and public food services belonged to the non-state sector. By the end of 1997 all small and medium sized enterprises in retail trade, services, food industries, transport and construction had been privatised. Though the government announced a mass privatisation program in 1998, the privatisation of large enterprises and key industries such as fuel, energy and railway still has not been initiated.  In 2003 non-state sector contributed 75 percent to GDP and private sector 42.3 percent. Non-state sector, according to Uzbek authorities, defined as having less than 50 percent holding while private sector as 100 percent privately owned. The process of privatisation of large and small scale enterprises in Uzbekistan involves conversion into joint stock companies with shared divided into four equal blocks i.e. 25 percent each for insiders, outsiders, foreigners and the state. 25 percent for insiders have been taken by the mangers and employees in most of the cases but the shares for outsiders (nationals) and foreigners have not been sold and the state continues to hold majority of the shares. Since a percentage (25%) has been divested, these partially divested enterprises have been declared as non-state sector in statistics which creates confusion over reported state, non-state and private enterprises. Privatisation methods have been diverse including auction, direct sales, joint ventures and floatation on the stock exchange. Vouchers were excluded from the beginning and plans envisaged of a buy-out by staff that were given shares of enterprises’ profit and depreciation fund to assist purchase.

In agriculture sector the most important step was the abolition of state farm and their conversion into cooperative enterprises. Their privatisation took the form of restructuring them as joint stock companies known as ‘Shirkat. However, land still belongs to the state which can neither be sold nor purchased. In fact the principal approach was de-statisation rather than restitution or privatisation and land can not become private property. Farm restructuring has taken different forms. Most of the state and collective farms have been transformed into joint stock companies by evaluating the assets and distributing total share value to collective farm members or state farm employees on the basis of salary, length of service and other assessments of labour input. In 2002, 90 percent of the agricultural enterprises were join stock companies know as Shirkat.

The republic of Turkmenistan started privatization in 1994 and till mid 1997, 1856 out of 4800 Turkmen concerns suitable for denationalisation changed ownership in services and small-scale whole-sale trade. However the privatisation of medium and large scale enterprises has rarely begun in Turkmenistan. Land reforms in Turkmenistan initiated at the end of 1996. The program provided for an initial two years free lease, but no right to sell. These leases were based on fulfilment of state out put targets for cotton and wheat. In Feb. 1999, Turkmenistan privatised 56 objects including large privatised units as the Charjou Construction material plant, Tejen tinning factory and the Turkmenbashi dairy farm. According to EBRD as mentioned by Ian Jefferies, private sector contributed 25 percent to the GDP in 2001. Ten medium sized enterprises in textiles were privatised in 1999. All the large enterprises, including cotton ginneries food processing and material building plants are state owned. In the year 2000 only six of 280 companies listed for privatisation were privatised in which shares were distributed among the workforce, the management and key suppliers to the plant. According to EBRD report “privatisation has stalled in the republic. It is one of the few countries in the region where small scale privatisation has not been completed. Besides, all strategic assets remain state owned and the government tends to hold at least 50 percent stake in all new commercial investments. The slow progress with privatization may also be attributed to a number of factors including the limited set of enterprises eligible for privatization and the fact that those offered for sale are loss–making or non–operating units with obsolete technologies or small enterprises mainly in the trade and catering businesses.

In the republic of Kazakhstan, Privatisation has proceeded farther than nearly any other Central Asian country, with two-thirds of all firms already in the private sector by 2006 according to the EBRD. Prices are almost completely market based. Banking and other financial institutions are much better established than elsewhere in the region. However large scale enterprises in energy, communisation and transportation are still state owned. Iniating in 1991, approximately 10 percent of the small scale enterprises’ assets were sold directly to managers and workers that year. By 1993 the republic privatised 90 percent of the small-scale enterprises (with fewer 100 employees). In 1994, the country launched its massive privatisation program by creating “investment privatisation fund” and by distributing privatisation checks (vouchers) to the citizens. All citizens received tradable checks/vouchers for direct purchases of shares in state enterprises. Employees typically received 5-10 percent of the shares while the fund could bid for 40-51 percent of the company value and the remaining shares were sold in cash auctions.

In 1996, a law on privatisation came into effect according to which preferential treatment of workers was abolished and only two privatisation methods i.e., direct sales and auctions were introduced. In 2001, private sector contributed 65 percent to the GDP. Medium size enterprises have been privatised by selling shares for vouchers in auctions. The privatisation of large-scale enterprises on a case by case bases continued after a1996 and enterprises in the power, energy and communication sector were privatised which attracted considerable foreign investor interest. In 1997 two oil companies, a copper plant, a manganese plant and a 40 percent stake in Kazak-telecom were sold to foreign investors. The government retains controls over key assets such as oil and gas transportation, telecommunication and the railways. In 1994 Kazakhstan had introduced management contract scheme for large state enterprises, with the aim of bringing in the management and technological expertise of foreign investors while limiting their financial risks in exchange for bonuses, shares in profit or right to purchase the majority of the enterprises’ share at the end of contract. Management companies were obliged to redeem, up front, outstanding arrears of the enterprise, implement pre-privatisation restructuring or carryout specified investment projects. However by early 1997 the government ceased awarding new contracts after having missed success.

The republic of Kyrgyzstan embarked on a rapid privatisation program in 1992. By 1993 the Kyrgyz republic had completed privatisation of small-scale enterprises through out-right sales by its state property fund established in 1991. Consumer services, trade, and food services’ enterprises privatised at high pace during 1992-93. By 1995, 62 percent of industrial sector was privatised. The dominant form/way of privatisation was direct sale to the labour collectives. As privatisation extended to larger  enterprises, it increased the share of enterprises reconstituted as state join stock companies and the share of those leased with an option for later privatisation (either through conversion into joint stock companies or through purchase by individuals or employ collectives). The republic applied voucher scheme when every adult citizen were given a voucher according to salary and length of service. Though some 230,000 people had participated, only a few thousand people mainly, deputies, government members, heads of provinces and districts became owners of major enterprises, property, land and other state owned facilities. Large privatisation involved 50 percent share being retained by the state, 30 percent being sold to employees at 30 percent discount rate, the remaining 20 percent being sold to the public (who may use their vouchers) to foreigners s or to other related enterprises (e.g. suppliers).

Interest free loans were also made available to encourage private purchases of small and medium-sized enterprises. The predominant method of large-scale privatisation had been the competitive bidding with the cash bidding (by individual investors for up to 70 percent of the equity) and voucher auctions and investment funds for 25 percent of the equity while 5 percent of the equity preserved for the labour collectives). A rough estimate in 2002 of the private sector as percentage of GDP was 60 percent for the republic, which is highest among the CARs. In 2006 the share of private sector in GDP has reached 75 percent in the republic. In agriculture sector, land leases were introduced for up to 50 years, however by 1995, period of land use rights extended to 99 years. State and collective farms were transformed into joint stock companies. In 1994 state procurement was abandoned and replaced by domestic supply agreements. About 20 to 30 percent of out put was to be sold to the state. Though the republic is most liberal reformed, 50 percent of the population was living in poverty in 2003 and 8 percent of the population lives on under $ 4 per day.

In the republic of Tajikistan, privatisation gained momentum during 1998. Privatisation has mainly taken the form of ownership transfers to labour collectives or leasing arrangements. The share of private sector in the GDP was estimated at about 20-30 percent in 1998 and 40 percent in 2001. Tajikistan also introduced vouchers known as ‘privatisation cheques’ used for government arrears on wages and pension and used to purchase shares. Twenty two cotton ginneries were privatised through internal tenders in 1999 and the sale of all remaining state owned cotton ginneries took place in 2000.

Foreign Direct Investment (FDI) in Central Asia

Foreign Direct Investment (FDI) refers to investment by foreigners in fixed assets for production capacity to make goods or produce services for profit making. It is a long-term engagement with management participation in an economy other than that of investor. It is distinguished from foreign portfolio investment which involves foreign stock purchases through local market and neither involves construction or purchase of immovable assets for production capacity and nor management participation. FDI contributes to the transfer of technology, skill, experts and access to export markets in a convenient package and therefore is much sought after. It undoubtedly, can play a crucial role in the development process of developing countries. Economies in transition such as those in Central Asia are no exception as they realise the important role of FDI in strengthening their transition process.

FDI in the republic of Uzbekistan has mainly taken the form of joint ventures (JVs). Tax incentives were awarded to joint ventures e.g. with 30 percent or more investment JVs had been granted a seven year tax holiday. The FDI, in the republic amounted to $145 m during the period of 1990-93.   In 1992 the largest joint venture of the period was with the US-based New Mont Mining Corp mainly for gold production. In 1994, BAT (British American Tobacco) started investing $200 m to acquire 51 percent of state-owned Uz-tobacco. During the same year, Coca-Cola joint venture began production in Uzbekistan. South Korea’s Daewoo has invested $ 658 million to produce cars in Uzbekistan. The Uz-Daewoo car plant has been manufacturing 200,000 cars per year. South Korea is also the largest foreign investor in the republic’s textile sector. It has invested over $300 m in four mills. According to the Uzbek textile association (Uzbekengilsanoat), around $700 m of foreign investment has been attracted into the textile industry and seventeen joint ventures have been established representing Turkish, Korean, European and Japanese interests. (Japanese-Turkish-Uzbek knitwear factor is located at Shakhri-sabz). Daewoo’s investment into the Uzbek economy already exceeded $1 bln . In 1995 a JV with Germany in vehicle plant was established for manufacturing 3000 medium-size Mercedes buses and 1000 small and medium size trucks. The Turkish-Uzbek vehicle plant opened at Samarqand in 1996. The Uzbek American JV “Uz-Case Mash” assembles agricultural machinery in the republic. In 1997 new investment of New Mont Gold of the USA was insured and total investment into gold production industry reached $200 m.   

In the oil and gas sector, the Bukhara oil company was put into operation during 1997 with the participation of France and Japan ($221m). In the same year a gas-compressor station was put into operation in the Kashkadarya region with US-Japanese consortium. The project cost estimated at $163 m with foreign investment accounting for $142 m of that total was financed by US and Japanese banks. Another oil refinery at the Ferghana was constructed by Japan. By 1st Oct. 1997, according to official statistics, the FDI inflows into the republic had reached $6 bln. India has stakes in 31 enterprises, 13 of them are JVs, 5 with 100 percent capital, and 13 with capital less than $150,000. India’s company Spentex has invested $81 m in Uzbek textile sector.

The volume of FDI in the republic of Turkmenistan has been very modest considering the country’s enormous natural resources. Inward FDI flows into Turkmenistan, which averaged around $125 million during 1999–2001, were mainly in the form of production sharing arrangements in the oil sector and joint ventures in the non–oil sector, although the latter were very modest mainly due to non–supportive government policies. The state-control mechanisms and restrictive foreign exchange system have created a difficult foreign investment climate. The lacking of a sound institutional frame work for implementing privatisation policy has been the most important obstacle in attracting foreign investment. Foreign direct investment was just $170 m in 2001. In 1998, the amount of investment into Turkmen economy’s fixed assets was $660 m, 30 percent more tan the past year (1997). Turkey is playing a leading role in Turkmen cotton refining and textile industry and owns a considerable share of the property in this industry. Two oil companies from Japan and one of Turkey have invested $125 m into Turkmenbashi oil refinery. The 200 km long Turkmen-Iran gas pipeline, built with Iranian credit was put into operation in Dec. 1997. In 2006, Turkmenistan’s FDI had reached to an estimated $2.8 bln.
The republic of Kazakhstan ranks outstanding among the CIS in terms of attracting FDI. Due to huge natural resources and sufficient human resources, Kazakhstan has attracted considerable amount of FDI and had the highest cumulative FDI inflows per-capita (among CIS) during 1990-2001. By Sep. 1997 foreign investment had exceeded $7 bln i.e., $165 per citizen, five times more than in Russia at that time. For 2001 FDI recorded at $2.760 bln which was double of the total net FDI inflow of $1.250 bln during the year 2000. By the end of 2001, FDI into the republic had touched the figure $12 bln. The republic has attracted around 75 percent of all FDI into Central Asia since the year 2000. Oil and gas sector of the economy remained in focus for FDI e.g., 81 percent of the total FDI of $12 bln went into the oil and gas sector of the economy.

USA is the major investor in Kazak oil with having 33.7 percent of the total cumulative investment since 1993. The US oil giants like Chevron Texaco, and Mobil both have invested billions of dollars in Kazak oil and gas sector. The second largest foreign investor is the United Kingdom with 14.8 percent of the total cumulative foreign investment in the republic. The third largest foreign investor country is the republic of Korea with 12.4% of the total investment, followed by China 4.4%, Turkey 4.1%, Canada 3.1%, Italy 4.1%, Japan 2.4 %, Indonesia 2.2% and Germany 2.1%. Factors responsible for this enormous FDI inflow are:

1. Hydrocarbon resources endowment
2. Prospects for a regional market and relatively  large domestic market 
3. The skilled and educated labour force
4.  And political stability.

Because of these strength Kazakhstan has been viewed by the foreign investors as an emerging market. However, FDI in sectors other than oil and gas is limited due to its landlocked nature and distance from world markets.
The republic of Kyrgyzstan has been able to attract but a small amount of FDI since 1991. In mining sector, non-ferrous metallurgy sector and tourism, the major active partners are companies from USA, Canada and Germany. In power production, agriculture and hotel services, Chinese companies are most active while in trade, light and food industry, the companies from Turkey, Switzerland, South Korea, China and Japan are participating. Joint entrepreneurship activities have developed rapidly with Sinkiang Autonomous Region of China in agriculture and trade. The construction projects of hotel complex and trade centres have been implemented jointly with China and Korea. The Kyrgyz-Korean JV manufactures electronics. The total volume of FDI in the republic was $760 m in 1997. The largest foreign investment, so far, is in the mining sector i.e. Kumtor Gold Mine a JV with Canadian Cameco Gold Company. The Kumtor Gold mine has the seventh largest gold reserves in the world with underground reserves of an estimated 200 tonnes. Total cost of the project is $370m the single largest foreign in the republic. The JV is one third (30%) owned by the Canadian Company and two-third (70%) by the state. The Canadian company’s investment in the republic comprised 38.1 percent of the total cumulative investment during the period of 1995-2001. The second largest foreign investor is the US with around 14 percent of the total investment, followed by Turkey with 12 percent, UK 9.3 percent, Germany 6.8 percent, and Korea 6 percent. Foreign investment in transport and communication sector, manufacturing sector and construction sector is low while a considerable amount has been invested in trade and services sectors.

In the republic of Tajikistan, civil war like situation during the first half of 1990s, and political instability with security concerns were the main impediments in attracting FDI. Therefore, the republic with total cumulative foreign investment of $166m during 1993-2001 is the lowest among CI’S. The largest amount of FDI inflows are concentrated in the mining and textile sectors of the economy with 45 percent and 42 percent respectively, during the period 1993-2001. The British companies including Nelson Gold Corporation are the major foreign investor which operate Zeravshan Gold mine with 44.9 percent of the total cumulative foreign investment in the republic. The second largest foreign investor in Tajikistan is the republic of Korea with 23.6 percent of the total FDI, followed by Italy 20.5 percent, Luxembourg 2 percent, Netherlands 1.7 percent and China with 1.4 percent.

Foreign Trade of CARs

Since independence, the CARs have diversified their foreign trade considerably by establishing market-based links with former Soviet republics as well as finding new markets out side the CIS. After the disintegration of the USSR, the foreign trades of the new independent states in CA were more often influenced by the political situation rather than by mutual advantage. The breakdown in inter republican supplies of material goods and services with in the frame work of the earlier Soviet division of labour and industry led to an abrupt reduction in trade between states. Although breakdown in the traditional links among the states of the ex-USSR may be seen to have had an adverse effect on the development of individual sectors in the economies of each country, there have also been some positive outcomes. One of them is that transition of the CARs to payment in hard currency led to a more practical attitude to foreign trade.

In Uzbekistan, as the state leads reforms and its role is pervasive, the trade sector is not exempted. Though by mid 1995 export quotas and licensing systems was reduced from 70 percent to 11 percent, the list includes cotton and gas accounting for over half non-gold exports. The bulk of foreign trade is still channelled through state-owned foreign trade companies and there are limits on enterprise access to hard currency for the purchase of imports. Exporters now have to surrender 50% of their foreign exchange revenue to the state which was 30% prior to 1999. The republic of Uzbekistan mainly exports gas, cotton, gold and nitrogen and phosphate fertilizer. The republic exports gas to Russia, Kazakhstan, Kyrgyzstan and Tajikistan. The export of gas has increased 9 times during the period 2002-2006 from 1.4 bln cm to 12.65 bcm annually. The state has a trading monopoly in the export of cotton and gold which generate most of the foreign exchange earnings (over 40%).

Uzbek-Russia trade was to $2 bln in 2005, which amounted to $4 bln in 2008.   Uzbek trade volume with Afghanistan had reached to $155m in 2005 from $62 m in 2000. Uzbek-India trade had been estimated at around $150 m in 2005, however according to Irina Komissina, Uzbek-India trade turnover during 2007 was $63.5 m. Pak-Uzbek bilateral trade turn over reached $80 m in 1998, dropped to under $10 m in 2000 and during 2006-07 it was just $8 m. Uzbek trade volume with USA was $341 m during 2003. China recently has become a major trade partner of Uzbekistan. Bilateral trade turnover between China and Uzbekistan amounted to more than $1 bln by 2007. Korea is also an important trade partner of Tashkent. Uzbek-Korea trade turnover exceeded $850 m in 2007. With in Central Asia, Uzbek-Kazakh trade made up $703 m in 2006. Uzbek-Tajik trade turnover was $235 m in 2006 making Uzbekistan second largest trading partner of Tajikistan after Russia. Uzbekistan did a trade of $50 m $40 m with Turkmenistan and Kyrgyzstan respectively in 2006.

Major exports of the republic of Turkmenistan are gas, oil and cotton. In the mid-1990s, gas and oil comprised 85% of the total exports (gas 47% & oil 38%) followed by cotton fibre, and textiles. Foreign trade and economic relations of Turkmenistan remain under state control .the state committee for foreign economic relations issues export and import licenses. A half of electric power produced in the republic is also exported to CIS. The main import items are Machines, equipment and means of land transportation (35% of the total imports) food (24%), metal, chemical (10%), crude oil, and oil products. It imports mainly from UAE, Iran, Turkey, Russia, Germany and Ukraine. The limited capacity of the existing natural gas pipelines and lack of alternative natural gas export routes (two thirds of gas exports go to Russia’s Gazprom) are already beginning to constrain the country’s natural gas export potential and are making exports vulnerable to disruptions.

The main destinations for Turkmen exports are Ukraine (30%), Iran (16%), Russia, Kazakhstan, Turkey (7.8%), Azerbaijan and Austria. In 1997, the republic had an unfavourable balance in its foreign trade for the first time since independence. Its imports exceeded exports by $380 m mainly due to the suspension of gas supplies to the CIS countries on payment issue. Turkmenistan has re-oriented its trade to non-CIS. Russia ceased cotton purchase in Turkmenistan and its supplies to other CIS were also constrained because of non-payment. Turkey, Switzerland and Pakistan became the major buyers of its cotton during the late 1990s. During the year 2006, Turkmenistan’s foreign trade turn over increased by more than 10% over the year 2005, with a trade surplus of $789 m. the main trading partners were European countries with 54% of the total volume of foreign trade. The share of the Asian countries was 39.2%. The republic’s trade remained in surplus with Russia ($880m), Iran (206 m) and Italy ($193.8). Russia is the largest trading partner of Turkmenistan and the bilateral trade between the two states amounted to $4 bln in 2007.

The republic of Kazakhstan has also diversified its foreign trade to a great extent since independence. Initially there was a marked growth in bartering activities and the amount of currency coming into the country decreased. On the other hand exports to the world market also suffered a downward turn. After a considerable recession in the volume of foreign trade during 1992-94, increased animation was noted in the country’s foreign trade operations by mid 1990s. The total volume of foreign trade was $10.5 bln in 1996 (120% of 1995), the export being $6.2 bln (125%). However, after a revival of foreign economic activities during 1995-97, a new recession began in 1998. With a trade turnover of 17% less than in 1997 and reduction in exports up to 17% with a declined trade balance. In 1999 fuel and oil products accounted for 40% of total exports. Other export items of the republic include ferrous and non-ferrous metals, machinery, chemicals, grain and coal. In 1998, the republic imported 30% of engineering supplies, mainly equipments for food production and medical devices and 20% of the total imports were fuel and power. The country also imports chemical industrial products, food, vehicles, mineral fertilizer, electric and electronic equipment and textile articles.

The principal trading partners of Kazakhstan in 2000 were:
Russia with $1782 m exports and $2459 m imports
Bermuda: $1358 m exports
Italy: $892 m exports and 155 m imports; $737 m balance.
China: $669 m exports and $154 m imports; $515 m balance.
Germany: $566 m exports and $334 m imports; $232 m balance
Ukraine: $269 m exports $80 m imports; $89 m balance
UK: $231 m exports and $219 imports: a$12 m balance
US $211 exports and $277 imports; -$66 m balance
Uzbekistan: 139 exports $73 m imports; $66 m balance.

Russia is the largest trade partner of the republic. Kazak-Russia bilateral trade amounted to $8 bln in 2007. Kazakhstan’s foreign trade turn over has grown at an average rate of 19.1 percent per annum during 1996-2006. In recent years, high oil prices and increased oil exports volumes have contributed to this growth in foreign trade. Currently oil exports make over 50% of Kazak total exports, generating 40% of the republic’s total revenue. Kazakhstan’s manufacturing sector has also played important role in its foreign trade growth. While the manufactures exports of whole Central Asia as a region grew about 10% annually during 1998-2004, Kazak manufactured exports were three times higher than the other CARs.

Total trade turnover of the republic in 2007 was over $13 bln excluding the unofficial shuttle trade with a trade surplus of $3.5 bln. According to official figures total trade turn over amounted to $22 bln in 2008 registering a 39% increase from the beginning of 2008 with $9 bln balance. The major export markets for Kazak goods are Italy (18%), Switzerland (17.6%), Russia (10%), and China (9.4%) while the principal suppliers (Kazak imports from) are Russia (39%), China (8%), Germany and the US.

The republic of Kyrgyzstan traded mainly with CIS during early post Soviet period and at the initial stage of economic reforms, however, the share of former Soviet states dropped below 40% in 1998. The republic still retains close trade relations with Russia, Uzbekistan, and Kazakhstan which accounted for 90% of the country’s export and 90% of import in 1997. Kyrgyzstan’s export to the CIS consists of non-ferrous metals and minerals (mainly gold and uranium), wool, agro products (mainly lump sugar and tobacco) food, power electronic devices (produced by Kyrgyz-Korea JV) and some agri-equipments. In return the republic’s economy depends more than other on the importation of oil, gas, ferrous metals, chemicals, drugs, machines and some food items from the former Soviet republics. Exports outside of former USSR were confined to non-ferrous metals, and their ores (35% of the total) and agricultural products (31%) and woollen and silk articles. Main imports were consumer goods, cloths, food, as well as equipments and chemicals. In 1995 foreign trade operations were performed with more than 40 countries outside CIS. The republic exported textile and textile articles (produced by JV with Turkey & Korea) (38% of the total exports) and metals (36%) to countries other than CIS. Textile and garment make 37% of the republic’s manufactured exports. The main partners for hard currency are China (54%), Britain (23%), Turkey (20%), Germany (14%) and Cuba (13%). 20% of goods were exported and 14% imported under barter deals. Most of the imported goods come from Turkey, Germany, China, Japan, Pakistan, Canada and Bulgaria. Imports include machine and equipment (33.5%) mainly technical and elector-mechanical equipments, trucks, cars refrigerators, TV sets and Video equipments. Most of imported consumer goods were finished food items.

The republic has very liberal trade regime and no capital account restriction. The top customs duty was reduced by 10% at the beginning of 2000 and the average tariff is now 5.2%. However, trade is considerably hampered by corruption in the customs services. In Kyrgyzstan export growth fluctuated from negative to strong growth due to increased gold exports and its high prices. Though, Kyrgyzstan has liberal trade regime and member of WTO, international trade has so far failed to boost its growth and productivity. The republic is dependent on its non-WTO member for access to market. There are numerous difficulties and restrictions on good flowing form Kyrgyzstan to Uzbekistan and Kazakhstan. Russia is the largest trading partner of Kyrgyzstan with a bilateral trade of around $1bln in 2007. In the non –CIS trade partners China assumes the first position. Most of the Kyrgyz-China trade in barter, conducted by ethnic Kyrgyz or Kazakh who are Chinese citizens. According to the Kyrgyz government as reported by RIA Novasti, the republic’s foreign trade turnover had reached $3.4 bln in 2007; the main exports included agricultural and mining products to Switzerland, Russia, Uzbekistan and Afghanistan while imports included oil products, coal, cars, equipment, chemical products and basic metals from Russia, Kazakhstan, China and the United States. According to an IMF Study one third of increase in the republic’s exports during 2000-2004 was due to the rise in global prices for gold. In the year 2004, the republic’s commodity composition of its exports was as: Mineral product, energy resources, cotton fibre and metals 73% while other 27%. Though the republic became WTO member in 1998, it could not create a healthy impact on its trade so far because other CARs are not members yet. The trade volume with China is more than $300 m currently.

The republic of Tajikistan depends to a greater extent on the maintenance of its economic connections with other CIS states. In 1997 Tajikistan’s foreign trade turnover reached $1.5 bln. The main export items were primary aluminium and cotton fibre, however their share in the total exports had dropped from 98% in early 1990s to 56% in 1997. Similarly trade partners also diversified and as compare to the 24% of the total cotton export to non-CIS in 1992, in 1997 the main customers of cotton were Switzerland, China, Hungary, Latvia and Austria while Aluminium was supplied mainly to the Netherlands. However the share of CIS has increased in the imports of the republic i.e. from 57% in 1996 to 64% in 1997. Tajikistan’s main trading partner with in CIS was Uzbekistan (66% of exports & 55% imports) and Russia (21% exports & 24% imports) till 1999. The republic has a relatively open trade system. Import tariffs were unified at 5% in May 2002; however, private importers and exporters continue to face non-tariff barriers such as import/export licenses.

According to Dr. Saidmumin Kamolov, export quotas on aluminium and cotton are lifted and in 2000 both these commodities along with electricity formed 80% of the total exports which had reached $1.63 bln in the year. The share of machinery and other technical tools in the republic’s total imports is almost negligible mainly due to the undeveloped industrial/technological sector. The major import items include aluminium oxide (a raw material used for Aluminium production), natural gas, grain and flour. The republic had a positive trade balance with Russia one of its largest trading partner for the year 1999-2000. Tajikistan exports cotton, fruits, vegetables and tobacco to Russia: in 2000 Tajikistan–Russian bilateral trade volume was $376 m. Tajikistan’s 2nd largest trading partner is Uzbekistan with a total trade of $336 m in 2000. Though Tajikistan remains dependent on CIS for imports, its exports are diversified to more than 55 countries outside the CIS.

Conclusion

In the immediate post Soviet period, steep decline in Central Asian GDPs was mainly because of economic structure of Central Asia, highly based on the principle of division of labour and secondly due to the suddenly disrupted supply links and demand sources as a result of break up of the Union. One can conclude that these republics have nonetheless averted a full-blown economic collapse. The intensive export of raw materials and metals, foreign investment, credits from international financial institutions, the upsurge of entrepreneurial activity of the local population, political stability and at last but not the least, the desire of the two powerful neighbours - Russia and China – to avoid destabilisation in the region all this enabled Central Asian republics to first avoid a total break down in their economies and then start economic revival. The FDI inflows in Kazakhstan can be referred to as resource-seeking FDI (to exploit natural resources of the country) while Uzbekistan can be put in the category of export-oriented FDI (to utilize cheap labour and other factors of production in order to be competitive in international market) as well as market-seeking FDI (to have access to the domestic market of the country). In fact CARs have attracted less FDI as compare to east European and Baltic states. Generally net FDI has been short of levels needed to support high growth in the regional states. These small FDI inflows into CARs reflect poor investment climate owing to incomplete structural reforms and low privatisation. Regional cooperation such as removing trade barriers among CARs would attract FDI because the regional states are too small to attract market-oriented FDI while CARs can be viewed in regional context for market-seeking FDI if they could develop regional cooperation.

By studying trends in foreign trade sector of the CARs, one can conclude that the exports of CARs are mainly composed of primary products. In 2005 crude oil composed 60% of Kazakh exports, mineral products, electricity, and cotton fibre made 73% of Kyrgyz exports, cotton fibre and Aluminium and precious metals contributed 80% to Tajik’s exports, cotton fibre, natural gas, mineral products, and gold made about 80% of Uzbek exports and similarly oil and gas and cotton fibre composed more than 80% of Turkmen’s exports. Thus heavy reliance on a few primary commodities export, CARs are vulnerable to abrupt swings in trade turnovers due to volatile world market prices of the commodities. At the same time CARs, due to limited exports of manufactured goods, derive little benefits from trade in terms of attracting FDI and gaining access o advanced technologies. The share of intra-regional trade among CARs has decreased from 8.4% in 1999 to 6.5% in 2005. Further trade policies in CARs vary form very liberal in Kyrgyz and Tajik republics to fairly liberal in Kazakhstan and to quite restrictive in Uzbekistan. Significant trade barriers include prohibitions and licensing of exports and imports of certain commodities, registration of export-import contracts, tariffs and other taxes on imports and taxes on exports. Transit through neighbouring countries is also expensive and time consuming. (Therefore, regional integration and removal of border barriers in trade would not only ensure gains in trade but would also offer more attractive environment for foreign investors).

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