Net Assessment of Central Asia

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Please see our new Content Guide! Menu Sign out Central Asia Net Assessment of Central Asia March 17, 2016 Given its geography and proximity to major global powers, the region is vulnerable to invasion and susceptible to being heavily influenced by external conditions. Central Asia is a highly strategic region. As we have outlined in our annual forecast, Eurasia is in crisis. From the European Union to Russia, China and the Middle East, chaos and instability are growing. Central Asia is at a crossroads. At Geopolitical Futures, we closely track stability in

Central Asia because what happens in the region can have spillover effects in Russia, western China, Afghanistan and even Syria and Iraq, and can impact U.S. interests in South Asia and the Middle East. A net assessment of Central Asia, unlike our other assessments, like Australia and Germany, cannot focus on the grand strategy of a particular country. Central Asia s five states certainly each have grand strategies, like any country. But what sets Central Asia apart and makes this net assessment distinct, is that developments outside the region are the primary force shaping Central Asia. Central Asia is slowly destabilizing, and the speed and extent of this destabilization depend in large part on political and economic shifts in Russia, China, Afghanistan and beyond. Geography is the primary reason outside forces are the main factors shaping the trajectory of Central Asia. Traditionally trapped between several major powers, including Russia and China, Central Asia is highly vulnerable to invasion. The region stretches from the Caspian Sea in the west to the Tien Shan Mountains in the south and the Altay Mountains in the east. The mountain ranges separate the region from Afghanistan in the south and China in the east. Kazakhstan, Uzbekistan and Turkmenistan are mostly flat, while Tajikistan and Kyrgyzstan are quite mountainous. In the region s north lies the vast Kazakh steppe. Kazakhstan shares a flat, 3,000- mile border with Russia a border that the country cannot defend. Nevertheless, even Central Asian countries further removed from Russia and separated from China by mountains are vulnerable. Since the late 600s, indigenous Turkic forces, different powers that controlled Persia (including Arabs and Turks) and the Chinese have all at various times controlled parts of the region.

Centuries of invasions and foreign rule contributed to the emergence of weak states with deep internal vulnerabilities in Central Asia. We have discussed how Europeans, through the 1916 Sykes-Picot Agreement, created artificial borders in the Middle East, thus laying the groundwork for the disintegration of Syria and Iraq that we are seeing today. Central Asia s modern-day borders were also drawn by outsiders, though in this case it was Soviet planners in the 1920s and 1930s. Today s borders are thus not organic and do not strictly reflect ethnic or national divisions. About 23 percent of Kazakhstan s population, for example, is made up of ethnic Russians. Ethnic Uzbeks make up about 14 percent of Kyrgyzstan s population and over 13 percent of Tajikistan s. Central Asia is thus a region where ethnic and regional tensions abound and threaten the unity of the modern states.

Geography and Soviet-era infrastructure planning contribute to ongoing tensions among the five Central Asian states. At the core of the tension is an intense competition over scarce resources, especially water. The region depends on two major rivers, the Syr Darya and Amu Darya. Under Soviet rule, the upstream countries, Tajikistan and Kyrgyzstan, provided water for the rest of the region through a centrally regulated plan that managed the use of a reservoir and water distribution levels in the region based on Soviet economic priorities. The other countries, in turn, provided energy to resource-poor Tajikistan and Kyrgyzstan. Following the fall of the Soviet Union, worries grew, especially in Uzbekistan, over upstream countries diverting water for power generation. At the same time, Central Asia s population is growing, intensifying the competition. Scarce resources, population growth and the use of energy and water as negotiating tools to pressure neighbors all threaten to increase ethnic and cross-border tensions, especially in the fertile and heavily populated Fergana Valley, which is divided among Uzbekistan, Tajikistan and Kyrgyzstan.

Interlocking Crises As a result of its geography and history of foreign domination, Central Asia is susceptible to crises emanating from outside the region. Over the past two years, several interrelated crises have emerged, forming a perfect storm that is slowly destabilizing the region. The Exporters Crisis We have discussed the implications of the global exporters crisis, and Central Asia is a region where the crisis is felt intensely. Central Asia s economic stability depends in large part on dynamics in international commodity markets. According to U.N. Comtrade data for 2014, mineral fuels, oils and distillation products made up over 77 percent of Kazakhstan s exports, with iron, steel, ores, copper and chemicals accounting for much of the rest. Low world commodity prices thus reduced Kazakhstan s revenues dramatically: in 2015, according to the National Bank of Kazakhstan, exports fell 42.4 percent compared to the previous year.

Turkmenistan is even more reliant on the export of mineral fuels, oils and distillation products, which in 2014 made up over 92 percent of the country s total exports. Neighboring Uzbekistan also depends heavily on the export of natural resources, but less so on energy exports. Cotton made up about 15 percent of its exports last year, while mineral fuels, oils and distillation products constituted nearly 17 percent and metals and precious stones made up over 22 percent. Low world commodity prices, therefore, have had a huge negative impact on government revenues and expenditure levels, as well as investment levels in the region. The Russia Factor Central Asia is highly exposed to Russia economically, especially when it comes to currencies, remittances and labor. Kazakhstan and Kyrgyzstan are both members of the Russian-led Eurasian Economic Union and all Central Asian countries, to varying degrees, send migrant laborers to Russia. Nevertheless, as the Russian economy weakens, partly due to the exporters crisis, its financial troubles are contributing to Central Asia s slow destabilization. A weakened Russian ruble, coupled with falling energy prices, had a significant impact on the region s currency markets. In fact, in August 2015, Kazakh President Nursultan Nazarbayev publicly admitted that the country s central bank spent $28 billion to boost the value of its currency, the tenge, since 2014. Kazakhstan, under pressure from the falling ruble, implemented a devaluation in February 2014 and ultimately floated its currency in August 2015. In Turkmenistan, the authorities devalued the country s currency by 18 percent in January 2015. Tajikistan s currency also lost much of its value, leading the country s government to shut down foreign exchange offices. In fact, the situation is so dire that in early 2016 the National Bank of Tajikistan reportedly ordered all credit institutions in the country to pay transfers made in rubles in Tajik currency only. Russia s downturn is also hurting remittance levels and labor markets. Many migrants who previously made a living in Russia have returned home to Central Asia due to deteriorating economic conditions. Remittances flowing from Russia to Tajikistan declined by over 65 percent in the first nine months of 2015 compared to the same period in 2014, according to Russia s central bank. For Tajikistan, a country with few resources, these remittances were a key source of revenue. A World Bank report indicates that in 2013, remittances from Russia to Tajikistan were the equivalent of 52 percent of the country s GDP. Russia s financial troubles are therefore both reducing much-needed income flows for Central Asian families and likely contributing to a rise in

unemployment as migrant laborers return. China s Slowdown There are already indications that China s economic slowdown is impacting Chinese investment and trade activities in Central Asia. China s economic role in Central Asia, both as a trading partner and a source of investment, has grown over the years. According to the Eurasian Development Bank, Chinese investment in Kazakhstan increased by $12 billion to a total of $22 billion between 2009 and 2013. China has also announced plans for billions of dollars worth of investment in infrastructure projects throughout the region, especially through Beijing s Silk Road initiative. However, China s slowdown, coupled with low world commodity prices, led the value of Kazakhstan s exports to China to fall from about $14.4 billion in 2013 to only about $9.8 billion in 2014. Moreover, Uzbekistan s exports to China fell from around $1.9 billion in 2013 to about $1.6 billion in 2014, according to U.N. Comtrade statistics. Turkmenistan s economy is particularly exposed to China: over 80 percent of Turkmenistan s exports in 2014 mostly energy went to China. China s slowdown is thus a major risk for Central Asian economies. With China experiencing economic troubles, it remains unclear when and how much of the promised Chinese investments will materialize. While some Central Asian economies are seeking to boost international investment, including from the U.S. and Europe, the prospects for economic diversification in the near term are limited. The Afghan Theater For Central Asia, the U.S. military drawdown and Afghanistan s return to factionalism is a threat. Afghanistan borders three Central Asian states: Turkmenistan, Uzbekistan and Tajikistan. The country is now in the process of returning to its factional roots, and with the U.S. withdrawing most of its troops, the government in Kabul is able to hold its current territories but cannot effectively mount operations against the Taliban. The region s governments worry about militants and violence spilling over, and about Central Asian aspiring militants crossing into Afghanistan to connect with groups operating in the country ranging from the Taliban to Islamic State. These militants could receive training and access to arms that could later be used inside Central Asia. Central Asian militants are already fighting alongside IS and other groups in Syria and Iraq and threaten to ultimately impact security in the Central Asian states.

Indicators of Instability There are already signs that the region is slowly destabilizing, and that Central Asian governments are worried about the impact of developments outside the region on their own positions of power. In an indication that the Turkmen leadership is worried about the stability of its rule, Turkmenistan s President Gurbanguly Berdymukhammedov has been frequently reshuffling top officials, replacing his national security minister twice since October. In early March, the president went as far as publicly condemning alleged corruption in the oil and gas sectors, an unusual public criticism from a leader in a strong dictatorship like Turkmenistan. Significantly, Radio Free Europe reported that in April 2015 a protest took place in Turkmenistan for the first time in 20 years, as 200 gas industry workers demonstrated over unpaid wages. The government in Tajikistan has also been noticeably concerned about conditions in the country and its own rule, conducting a serious crackdown on its political opposition. Both Tajikistan and Kyrgyzstan have reacted to the crises around them by boosting defense cooperation with Russia. In a sign that conditions are beginning to have a large-scale impact on ordinary workers, there are reports of thousands of entrepreneurs in Tajikistan returning their business licenses and workers in Uzbekistan facing delays in receiving their wages. Some protests have taken place across the region over deteriorating economic conditions, but thus far they have remained relatively small. Nevertheless, the behavior of the region s governments, as well as widespread cuts in government expenditures and the impact of weak currencies, reduced remittances and poor job prospects on the daily lives of people throughout Central Asia indicate that the process of destabilizing is already beginning. Conclusion Central Asia is surrounded by several major interlocking crises. It is a region fraught with internal tensions over ethnicity, Soviet-delineated borders, and an intense competition over resources. More important, this complex and divided area is highly vulnerable to outside forces. As Eurasia s interconnected crises intensify, we will be watching for indicators of growing public unrest and regime weaknesses. Budget cuts, layoffs, currency fluctuations, protests and government reshuffles are thus key to observe. Central Asia is slowly destabilizing, impacting geopolitical dynamics not only within the region, but across Eurasia.

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