now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Viewpoint
Central Asia and Mongolia: emerging from the shadows
The five Central Asian republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, as well as Mongolia, have collectively made immense economic progress over the last two decades. This has been underpinned by rising global prices for oil, gas, uranium and gold – of which the region has vast deposits – as well as geographical proximity to increasingly resource-hungry China and Russia. On the whole, the region’s economies have been growing by more than 7% per year since 2000 – twice as fast as the global economy
Axel Bommersheim 14 May 2015
 
   

The five Central Asian republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, as well as Mongolia, have collectively made immense economic progress over the last two decades.

 

This has been underpinned by rising global prices for oil, gas, uranium and gold - of which the region has vast deposits - as well as geographical proximity to increasingly resource-hungry China and Russia. On the whole, the region's economies have been growing by more than 7% per year since 2000 - twice as fast as the global economy.

 

Such an emergence from the shadows provides huge opportunities for global businesses to ramp-up trade with the region, and not just in the area of natural resources. Indeed, the region's future economic growth will depend on trade diversification - providing opportunities in areas such as finished products and machinery, as well as the exchange of expertise.

 

However, the success of these new trading partnerships - and by proxy economic development - will rely on the excellence and durability of the local banking systems. On this front, they may need global support.

 

Export diversification is needed, and achievable. Without doubt, Central Asia and Mongolia's success story can be largely attributed to the commodity boom in recent years. Indeed, countries that are especially rich in commodities, such as Kazakhstan or Turkmenistan, have grown far quicker than those, such as Kyrgyzstan and Tajikistan, with fewer resources.

 

However, the commodities boom is over. As such, countries in the region must look more closely at natural resource markets to see where opportunities are opening up. Furthermore, they must diversify their export base.

 

Fortunately, the potential to do so is huge. For starters, the region is located along the historic Silk Road - a centuries-old trade network stretching from western China into Central and South Asia and onward to Europe - which is beginning to return to prominence.

 

Furthermore, the region's economies are increasingly becoming higher value-added producers. Take Uzbekistan, for example, which is strong in cotton and car production, as well as exporting oil and gas, while oil production in Kazakhstan has reached similar levels to that of Norway or Angola. In Turkmenistan, natural gas production capacities are being further developed and Mongolia has expanded its copper and coal mines.

 

Tajikistan, by contrast, benefits from its abundant water resources and generates hydropower which helps to power its aluminium smelting plant. Moreover, the region has seen a middle class develop, creating new businesses and jobs as well as generating sales and production opportunities for foreign companies.

 

The support of a strong banking infrastructure will be essential to the success of both the region's economies, and those businesses seeking to jump on the expanding trade opportunities.

 

The region's local banking systems are nascent - having only been established 20 years ago - and have grown very differently in terms of complexity, international market focus and transparency. As a result, their resilience to the financial crisis varied significantly. However, a trend common to all is their increased collaboration with international banks across multiple business sectors

 

Take Uzbekistan for instance, where international business has historically been hampered by the difficulties in converting local currency - the som - into foreign currency in order to settle trade (som is not freely convertible).

 

While the local banks have little influence over the process, they are, however, in a position to estimate the likely delays - meaning that they may sometimes be prepared to issue a letter of credit to support the transaction. Unfortunately, such projections are not always accurate enough to ensure that currency will be available even with the existence of a LC - delaying ultimate payment.

 

Global banks can smooth the process - confirming letter of credits and ensuring that the exporter receives payment on time and in full - ensuring international trade proceeds regardless.

 

What's more, the expertise of global banks will be essential in helping companies build up new trade relations with these countries, as well as in the training of local bank employees to ensure they have the skills to meet evolving client demands. Certainly, if Central Asia and Mongolian economies are to remain in the spotlight, such support is vital.

 

Axel Bommersheim is regional head CIS Countries, the Baltics and Mongolia at Commerzbank

 

Conversation
Henry Allen
Henry Allen
vice president, global FICC research
Deutsche Bank
- JOINED THE EVENT -
In-person roundtable
Securing the future
View Highlights
Conversation
Jenn Hui Tan
Jenn Hui Tan
global head of stewardship and sustainable investing
Fidelity International
- JOINED THE EVENT -
4th ESG Summit Webinar Series - Part 1
Paving the way toward net zero
View Highlights