kyrgyzstans fresh

Kyrgyzstan is trying to stabilise a volatile business environment by diversifying its economy away from gold and remittances, and employing an ombudsman to reassure investors. 

Following independence from the Soviet Union in 1991, Kyrgyzstan quickly learned that punching above its weight economically was the only way to stay relevant among its bigger and more influential neighbours. As the only democracy in Central Asia, the country set out on an ambitious journey, navigating both the challenges emanating from its fragile institutions and the whims of the strongmen ruling over its neighbours.

While progress has not been without hiccups, so far Kyrgyzstan has managed to pull off this delicate balancing act. This has involved engaging with a first wave of foreign investors, attracted by the country's mineral resources, while also becoming a hub for the re-export of goods from neighbouring China.

Kyrgyzstan is now refining its business proposition to embrace and adjust to the challenges of a quickly changing regional landscape and global economy. Capital, innovation and technology have become the key focus of its revamped Investment Promotion and Protection Agency (IPPA).  

Investment proposition

“First, we need investors with financial resources to improve our traditional sectors – agriculture, resources processing, manufacturing – and boost our trade turnover,” says Shumkarbek Adilbek Uulu, director of IPPA.

“Second, we need investors that can create new markets, produce new types of goods and services using our raw materials. Third, we need investors that can bring new technologies to our country. We don’t have the size of Kazakhstan or Uzbekistan; we can’t compete on that ground. Technology will drive future growth and give us a chance to focus on high added-value production.”

The recent ebbs and flows of the Kyrgyz economy have been closely tied to two major factors: gold production and the Russian economy. On the one hand, thousands of young Kyrgyz workers have moved to Russia in the past two decades. The cash they send back home has become a major lifeline for the domestic economy, with about one-third of the country’s GDP coming from remittances. According to World Bank data, in 2018 only Tonga had a bigger dependence on remittances than Kyrgyzstan.

A volatile atmosphere

If the Russian economy does well, the flow of remittances is steady. On the other hand, gold mine Kumtor, operated by Canadian Centerra Gold, is the main engine of the domestic economy. The mine, which has been in operation since 1997, contributed to about 8.6% of GDP in 2018, when its share in the country’s aggregate industrial output stood at 18.4%, according to company figures.

However, the running of the Kumtor mine has not been plain sailing for Centerra Gold. It took years of often tense negotiations for the company to strike an agreement with the Kyrgyz government over the restructuring of a 2009 deal that regulated the mining concession.

Nor was Kumtor an isolated case: several foreign investors have brought up arbitration claims against Kyrgyzstan in the past few years, not only in the extractive sector, but also in tourism and energy. They have mostly originated out of the country’s legal and policy volatility, all of which has cast a shadow of uncertainty over the country’s business environment – particularly compared with its neighbours, whose authoritarian political structures have generally proved to be better equipped for setting up a stable, predictable business environment.

Charm offensive

In order to address this volatility, the Kyrgyz government, the private sector and the international community came together with a landmark project aimed at reassuring investors over their long-term prospects in the country.  

“The commitment of the authorities to form a third-party recourse mechanism for businesses against the abuse of state power was renewed in 2016 with the issuance by the parliament of the decree on attracting and protecting investment, which emphasised the importance of the establishment of the business ombudsman [BOI],” the EBRD said on its website.

The post was eventually created in 2019, and former British ambassador Robin Ord-Smith became Kyrgyzstan's first BOI. “Many challenges ahead to build team and help protect business and entrepreneurs from illegal/improper state actions,” Mr Ord-Smith tweeted as he took office in October. 

Rich investment seam

The IPPA is also working to normalise the expectations of investors active in Kyrgyzstan. “Today we signed a memorandum of understanding with the IPPA, which will lead to the signature of a stabilisation agreement that will protect us from any possible changes of the tax regime in the future. It is a required step for us to start full-scale construction [of the Tulkubash gold mine] in 2020,” Artem Volynets, CEO of AIM-listed Chaarat Gold, told fDi on the sidelines of an event in London in November 2019. 

London-based Chaarat Gold has teamed up with Turkish mining company Çiftay to develop the Tulkubash gold mine, which will require a total capital expenditure of $120m to $130m, according to company data. Chaarat Gold is in the process of closing a project finance package to wrap up the construction phase and start producing gold from 2021. Undaunted by local challenges, the company is looking forward with renewed optimism as its Tulkubash project develops.

“We are long-term investors in the region and we are looking forward to acquiring other properties. We are aiming to build the leading gold company in the territories of the former Soviet Union. We are in the growth phase,” says Mr Volynets.

A change in tack

While Kyrgyz authorities are attempting to consolidate their traditional sources of growth and create a better business environment for major investors in the resources sectors, they are also aiming to diversify the economy away from mining and remittances to build resilience and to make it better able to compete in the global markets.

To this end, Kyrgyzstan received a $50m grant from the Asian Development Bank in 2019, and the IPPA is focusing on added value services and light manufacturing, as well as tourism. By renewing efforts to stabilise its democracy, Kyrgyzstan is paving the way for the private sector to flourish and take the country into the future.

This article is sourced from fDi Magazine
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