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Russia’s developing trade and investment ties in Central Asia will increase as it repositions itself East due to sanctions placed upon it by the West. This will include the relocation of some Russian manufacturing to the region, these are emerging economies with significant industrial growth potential.

When looking at this from the EU perspective, when stripping out the Russian energy component, the EU’s export trade with Russia accounted for about €70 billion, but these were not in product categories that Russia cannot source from elsewhere, although the importation of certain refined chemicals may take time to resolve. In 2021, the most exported manufactured goods to Russia from the EU were machinery & vehicles (44 %), followed by chemicals (23 %) and other manufactured goods (22 %). Much of this can be obtained from Central Asian manufacturing capability – meaning we can expect to see in coming years an increase in both industrial and manufacturing productivity from the Central Asian region as it integrates into Russian and South Asian supply chains.

The Russia-Ukraine conflict is altering Asian geopolitics in ways never seen before. The Central Asian countries (we have included Mongolia in this mix) have a long association with Russia due to their common Soviet-era history, and remain trade linked via both the Commonwealth of Independent States (individual free trade agreements) and in some cases, the Eurasian Economic Union (a full free trade bloc). All are recipients of huge amounts of Russian and China Belt and Road Investment, as well as being members of the Shanghai Cooperation Agreement, a geopolitical bloc that handles regional security and trade issues. Afghanistan, in the centre of the region, remains both a threat and an opportunity for all. However, improved connectivity and increasing trade ties are being to have an effect as the region becomes more closely integrated, with energy again a major driver yet with the potential to underpin manufacturing capabilities. We also look at China’s Xinjiang Province in this section as it is an important part of Russia’s relations with China and Central Asia.

Kazakhstan

Kazakhstan is both a member of the CIS and the EAEU, and an important transit component both for energy supplies to China from Russia but also in transit trade between China and the EU.  15,000 trains travelled between China and the EU in 2021, with the majority being routed via Kazakhstan and onto ports in Russia and Belarus prior to continuing their journey to Europe. With Belarus and Russian ports now sanctioned, some 1 million containers are now grid-locked having been barred from entering the EU, a position that will take months to resolve.

There are other options. Kazakhstan’s Caspian Sea Port at Aqtau will certainly boom, however will need infrastructure and expansion investment to do so – from Aqtau the Caspian maritime routes to Azerbaijan’s Baku Port can be utilized for onward transit via rail through the Caucasus and via either Georgia or Turkey to the Black Sea and maritime transit to EU ports in Bulgaria and Romania. This route though is not without current bottlenecks and will again require investment to get up to speed. At present, Chinese, and Asian products bound for EU markets are using the time-honored Suez Canal route – but this is both more time-consuming, polluting, and expensive.

As an aside, the West’s sanctions on Russia and the massively increased use of shipping from Asia and the United States to service supply chains to the EU have blown all COP26 agreements out of the water.

This puts Kazakhstan in something of a quandary, with a reduction of transit fees and a redundancy of some logistics infrastructure and investment. However, plans are afoot. Kazakhstan, Azerbaijan, and Georgia are creating the ‘Eurasian Rail Alliance‘ to better coordinate and facilitate rail logistics between them and improving time, gauge differences turnover and shipping efficiencies to better use the Kazakh-Azeri-Georgian multimodal route.

In terms of Russia, interconnectivity between Caspian Sea Ports at Astrakhan and Lagan remain intact, as does rail transportation to China and other Central Asian markets. The economy has rebounded in 2021, and after social unrest issues and subsequent political reforms being introduced, the country appears to be following a more open plan of reforms and development. That would be attractive to some Russian manufacturers, looking to relocate certain manufacturing businesses out of sanctioned Russia and into Kazakhstan.

Russian-Kazakh bilateral trade reached US$19 billion in 2020, with Russia exporting gold, petroleum and automotive products and Kazakhstan exporting Iron ore and other minerals. In the year 2020-21 bilateral trade increased @35%. Kazakhtan’s trade with the EAEU also improved in 2021, with this continuing. January 2022 trade figures showed a 29% increase.

Kazakhstan’s trade with the European Union has also increased, although a dip can be expected given the Russian sanctions and rail transit issues. Kazakhstan and the EU signed an Enhanced Partnership and Cooperation Agreement (EPCA), which entered into force on 1 March 2020, and this has also helped boost bilateral trade. Italy, Netherlands, and France were the largest traders with the country.

Turkmenistan

Turkmenistan has always kept its cards close to its chest and has preferred to maintain a strict policy of neutrality. Consequently, it has opted not to join the numerous regional alliances, although it is a permanent guest to the Shanghai Cooperation Organisation. It has developed an importance in regional trade and development however in recent years; at it shares a long border with booming, yet landlocked Uzbekistan, a border with Afghanistan, and has a Caspian Sea Port at Turkmenbashi.

That means it has transit potential as a spur of the INSTC to reach into Uzbekistan and later, Afghanistan, and connect Uzbekistan in particular to the EU markets (see the Uzbekistan entry for further details). China, as ever interested in connectivity infrastructure, sees huge opportunities in developing Turkmenistan’s road and rail infrastructure while the country is also developing alternative energy resources such as solar power (70% of the country is desert) and wind farms. Turkmenistan is also the energy source of an important Central Asian energy route, the TAPI gas pipeline which transits Afghanistan, reaches into Pakistan and will terminate in India. That is of great regional significance as Afghanistan requires energy resources to reconstruct as does Pakistan in its desire to industralize. Russian energy companies have long been active in the country, providing technical support. Those paths to Afghanistan have already begun as peace descends, with Turkmenistan building an industrial processing park on the border at Serhetabat that will extend infrastructure to Afghanistan’s Herat, a key commercial hub and vital in reconstructing the country.

Russian trade with Turkmenistan is just under US$1 billion per annum, with trade mainly in industrial pipelines, with some shipping and agricultural trade in the mix.

Uzbekistan

Uzbekistan is something of a pioneer in Central Asia, having embraced market reforms and opening up since the death in 2016 of the hardliner President Islam Karimov. Those reforms appear to have been well-thought out, and progressive. Uzbekistan is a member of the Commonwealth of Independent States (CIS) which means it has bilaterally arranged free trade agreements with other CIS members, including ties with Georgia. This has developed some significance, as Uzbekistan also has a ‘Deep and Comprehensive Trade Agreement’ with the European Union (as does Georgia) and the UK. The upshot of this is that Uzbeki exports to Georgia are up 88% in the first two months of 2022 as Georgia is positioning itself an an EV auo manufacturer with EU markets in its sights. Uzbeki components are a large part of that, with goods exported via Turkmenistani ports through to Baku and onto Georgia. China’s BYD are a major player in Georgian EV production.

The country has recently become an Observer to the Eurasian Economic Union, suggesting a free trade agreement is being evaluated. In Central Asia, that would give free trade access to Kazakhstan, Kyrgyzstan and Russia. Uzbekistan is also a member of the Shangahi Cooperation Organisation. Reforms meanwhile are continuing, with the country announcing earlier this month (March 2022) that it would embark on a programme of reform and development of its State-Owned Enterprises. Key to this has been the experience of China, who is Uzbekistan’s largest trade partner closely followed by Russia. Uzbeki 2021 exports rose by 34.4%.

Part of Uzbekistan’s appeal lies in its reserves and existing technologies which make it ideal for EV production capabilities. Just prior to the Ukraine conflict, VW Russia had discussions https://www.russia-briefing.com/news/volkswagen-russia-looking-to-set-up-ev-manufacturing-in-uzbekistan.html/ with the Uzbeki government concerning the development of EV vehicles in the country.

Current Russia-Uzbekistan bilateral trade is running at about US$6 billion, with Russian exports making up about 2/3 of this. Russia exports lumber, oil, and metals, while Uzbekistan exports gas, ethylene and cotton. Bilateral trade has been growing at rates of 6% but this can be expected to increase. In light of the Ukraine situation and sanctions on Russia, it can be expected that the relocation of some Russian manufacturing capacity to Uzbekistan is likely to occur.

Afghanistan

Afghanistan remains Central Asia’s primary concern and biggest challenge after the 20-year debacle of US invasion and subsequent occupation (an irony given the situation in Ukraine). Russia in particular is well versed with the complexities having fought its own war against Islamic extremists in the decade 1979-89. With the Taliban back in power, but with the Americans gone, the Afghanistan question is now back in the hands of the regional powers to deal with and has been long planned for – the formation of the Shanghai Cooperation Organisation (SCO) in 2001 was partially to prepare the region for such an eventuality. The problem with the Taliban is their lack of cohesion and potential to be taken over by even more radical Muslim groups such as ISIS. While the Taliban restrict their activities to influence over the people of Afghanistan only, groups such as Al-Qaeda and ISIS claim jurisdiction over all Muslims and have declared jihad on all who oppose them. At present, both Russia and China are treading carefully to establish exactly who is who within the makeup of the new Taliban government and where subversive elements may be. Today, the potential for peace in the country is the highest it has been for 50 years, as all impacted sovereign nations are now part of the official SCO grouping and have seen vested interests in keeping Afghanistan stable. This now includes Iran and Saudi Arabia. Assuming this can be achieved, there is the potential for national Afghanistan reconstruction, which can take place from several directions.

Just last week, China’s Foreign Minister Wang Yi and Russian counterparts attended the Organisation of Islamic Cooperation annual meetings held this year in Islamabad. Afghanistan was prominent on the agenda. Immediately after that, separate Russian and Chinese delegations flew to Kabul to discuss security and development issues with the Taliban Foreign Minister, Amir Khan Muttaqi. There were several issues for conversations, not least renewed work on the strategically important TAPI (Turkmenistan-Afghanistan-Pakistan-India) gas pipeline, which the Taliban have said they will protect and which will provide them with both energy and transit fees. Alongside that are longer term proposals for rail connectivity from Iran through Afghanistan and onto Pakistan, which would link Afghanistan to the INSTC multi-modal network. China has also stated that it would be willing to extend its massive CPEC infrastructure project, which essentially exists to help industrialize Pakistan, into Afghanistan. Given required security and financing issues, measured against peace and productivity, that is more rather than less likely to occur. 

Russia will also be in the mix with this, providing both security and project assistance, and especially in the energy sector. Getting industrialization into Afghanistan and helping hardened warriors convert into skilled and semi-skilled machine operators remains the ultimate goal. Russian trade with Afghanistan is small, but likely to develop in strategic areas. Russia has been sending supplies of wheat and other foodstuffs into the country, with values of some US$151 million in 2020, with Afghanistan exporting agricultural produce. Interestingly, Russian supplies of sawn wood have suddenly increased over the past six months, suggesting that some basic reconstruction is already underway and pointing to a resurgence of Russian exports of construction materials.

Kyrgyzstan

Kyrgyzstan is a member of both the Commonwealth of Independent States (CIS) and the Eurasian Economic Union (EAEU) although geographically it is closer to China, and shares a long, if mountainous border with the PRC. That mountainous terrain has inhibited Kyrgyzstan’s trade capabilities in the past, with access open only via high terrain mountain passes.

Kyrgyzstan’s major exports include gold, cotton, wool, garments, meat, mercury, uranium, electricity, machinery, and shoes, its largest markets are China, the UK, Russia, Kazakhstan, Uzbekistan, and Turkey. There are mining and smaller opportunities in the fabrics industry. There have been long discussed plans to develop rail connectivity between China and Kyrgyzstan through to Uzbekistan, a route which would transform the country and open up access to Central Asia and China. Diplomacy has been clearing the path: a 30 year old border dispute between Kyrgyzstan and Uzbekistan was resolved in 2021 to allow minds to concentrate on improved connectivity issues.

The rail solution however presents obstacles, not least the engineering difficulty and expense – over 50 bridges and 90 tunnels would require construction with an overall cost estimated at US$4.5 billion. Discussions are continuing however it appears a regional financing solution will need to be found. Until that time, Kyrgyzstan remains more of a China play, and it has done well from Belt and Road connectivity – Kyrgyz foreign trade rose 19.5% in 2021 a significant jump for a relatively small and inaccessible economy. Russia-Kyrgyz bilateral trade reached US$1.75 billion in 2020, with energy and metal products being the primary Russian exports, and Kyrgyzstan exporting scrap metals, wools and fruit. Meanwhile, Kyrgyzstan’s trade with China’s neighbouring Xinjiang Province has risen 34.4% in the first two months of 2022 to reach US$1.33 billion, a record high.

Xinjiang Province

China’s Xinjiang Province is more in the Western news media these days for issues relating to the Uyghurs, however the Province, and its capital city Urumqi are important players in Central Asia, including Russia. Urumqi is Central Asia’s second largest city after Kabul and certainly its wealthiest.

It is connected by high-speed rail through to China’s national rail network as well as close to the southern border with Pakistan, with long held plans to continue the line into Pakistan and terminate at Islamabad. If undertaken, that would create rail connectivity with Afghanistan, currently achievable only by road and air. To the north, Gas Pipelines pumping Russian gas enter China from Kazakhstan, running alongside the rail border at Horgos inland port.

It is likely that trade between China and Russia will increase following Western sanctions on Russia, especially in commodities, with Russia’s border with China extending another 3,500 km east through to the Russian Port of Vladivostok.  China needs commodities and Russia may have to sell these cheaply. In terms of Xinjiang, trade is likely to develop in energy, as well as wheat and other agricultural produce. The issue where Xinjiang differs from China’s northern Heilongjiang border and cities such as Harbin is the proximity to Central Asia.

Chinese logistics companies in Xinjiang have seen their share prices skyrocket the past few weeks in anticipation of increased Russian trade. However, the main longer term influence can be expected to be financial: Urumqi is well-positioned to be a regional financial and investment hub for Afghanistan and Central Asia, there is already precedence of Sino-Foreign Xinjiang businesses being listed on the Shanghai and Shenzhen stock exchanges. With Russia so close, wishing to move east, and Central Asia in need of serious amounts of investment capital, Russian corporate investors may soon be making their way to Urumqi in search of Chinese partner financing to assist. We certainly see the potential for increased interest in Urumqi as a Chinese-Russian Central Asian development hub. This appears to be happening, last week, Xinjiang Customs Officials stated that Xinjiang’s foreign trade with Russia for the first two months of 2022 ‘increased significantly’ – a loose term, yet typically deployed by China for gains in excess of 30% growth.

Mongolia

Mongolia is not technically part of Central Asia, however its connectivity with Russia, China and Kazakhstan make it an important regional component. It is already on the Trans-Siberian rail routes, while plans to built Power of Siberia 2 pipelines transiting Mongolia to bring Russian gas to China are already underway. This to some extent limits Mongolia’s role to that of transit facilitation, although the country does have huge reserves in coal and minerals. Ulaan Baatar’s position since independence from the USSR in 1992 has always been to remain politely distinct from both Russia and China, however its ability to provide transport and pipelines between the two will accelerate trade and investment.

Russia-Mongolian bilateral trade was up 24% in 2021, reaching US$1.8 billion. The main exports of Russia to Mongolia were Refined Petroleum, Raw Iron Bars, Railway Freight Cars, Electricity, and Insulated Wire. The main imports by Russia from Mongolia were Feldspar, Knit Socks and Hosiery, Knit Sweaters, Other Engines, and Railway Freight Cars. It is also worth noting that the two countries have embarked on a series of trade initiatives designed to boost this, while the modernisation of the Trans-Mongolian railway is on-going. Over the past decade, Russian-Mongolia rail cargo volumes have doubled and are now running at 30 million tonnes per annum.