A New Dawn for Central Asia?(World Economic Forum(Davos Summit) Day 2)

A New Dawn for Central Asia?

As the world struggles to sustain growth, could Central Asia be the next region to watch?
Key Points

• Central Asia is a pivotal hub for Eurasia and key to the region’s energy security; new regional infrastructure in railways, roads and pipelines is enhancing this position.
• The customs union between Russia, Belarus and Kazakhstan will become the fifth largest economy in the world by 2016, ahead of Germany.
• Diversifying Central Asian economies away from oil and gas remains a priority and a challenge, but the region is committed to improving the competitiveness of its processing and service sectors.
• The region’s countries are taking a diverse range of measures to attract more foreign direct investment, including promotion of democracy, respect for human rights, the rule of law and tax breaks. 

Synopsis
Central Asia acts as a bridge between Europe, Asia and three of the four BRIC nations, but its landlocked status means it has to cooperate regionally in order to succeed. New regional infrastructure projects are enhancing its pivotal position, including the Baku-Tbilisi-Kars (BTK) rail line linking Azerbaijan, Georgia and Turkey, the new Silk Road between China and Europe, and the Trans-Anatolian gas pipeline (TANAP) connecting the Azeri waters of the Caspian Sea to the western borders of Turkey. Such projects consolidate Central Asia’s critical role in ensuring energy security for both Europe and Asia.
In addition to infrastructure projects, regional economic integration is creating new markets. For example, the customs union formed in 2010 between Russia, Belarus and Kazakhstan encompasses 170 million people and will become the fifth largest economy in the world by 2016 – ahead of Germany. A flat income tax rate of between 10-13% among these economies may also attract individuals seeking a lower tax regime than in Western Europe.
The countries of the region face a number of key challenges, including diversification of their economies out of oil and gas. Azerbaijan has used resources generated by the energy sector to reinvest in new sectors such as ICT; the country aims to launch its first telecommunications satellite next month. Non-energy sector economic growth in Azerbaijan has reached nearly 10%. Azerbaijan has begun investing in real estate in Russia, France and the United Kingdom, as well as in petrol stations in Switzerland through its state oil company SOCAR, Finding a niche in European investment projects, however, is not easy.
Kazakhstan is looking to reduce its dependency on exports of natural resources, which currently account for over 70% of all exports; equally, over 70% of foreign direct investment currently goes into oil, gas and mining sectors, while just 10% goes into processing industries. The Kazakh government is working with its processing and service industries to improve their international competitiveness, and aims to join the WTO this year in a bid to attract more foreign investment into these sectors. Kazakhstan has systematically reduced the number of government licenses and permits required to do business, which has also had the effect of reducing opportunities for corruption.
For Georgia, strategic and economic priorities are to: turn towards European markets while maintaining friendly relations with Russia; create a functioning democracy which respects the rule of law and human rights; deal with the policies of past administrations in order to bring violations of human rights to light; and encourage a deeper dialogue between the international community and Central Asian countries about energy security and cooperation.
For the Russian enclave of Kaliningrad, situated between Poland and Lithuania on the Baltic Sea and geographically separated from the rest of Russia, the strategy for attracting foreign investment has been to make the enclave the “Hong Kong of Russia” by offering tax and customs breaks for new businesses.
For Turkey, the only strategic option for Central Asian economies is to adopt a regionally orientated approach, in which regional interdependency and planning are as important as creating national structures. Turkey’s economic success in the past 10 years has been due to opening society to regional trends and embracing the rule of law, good governance and long-term stability. The dynamism of cities along the Silk Road bodes well for the economic future of the region. 

Disclosures
This summary was written by Jonathan Walter. The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum.


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