Central Asias? Maneuvering in a fragmented market

Russian Federation President Vladimir Putin’s recent anouncemment that visa regime would be introduced soon for all CIS citizens is a sad corollary to the escalating rivalry and outright war now hotting up in Central Asia, primarily fueled by the jockeying of the two largest ethnic groups there.

Kazakhs and Uzbeks have lived side by side, if uneasily, for eons. Uzbeks consider Kazakhs a bit wild, with nomad blood and not much culture. Kazakhs disdain the sedentary, peasant culture that defines Uzbeks. In Soviet times, eternal brotherhood was proclaimed. Since independence, eternal brotherhood has been proclaimed. In fact, Uzbeks and Kazakhs have always shared a common low-key animosity which recently even erupted into an open armed border conflict.

A series of high level talks to delimit borders and activate inter-regional ties, which culminated in a meeting in April of the presidents of Kazakhstan, Uzbekistan, Kirgizstan and Tajikistan, have tried to reverse a dangerous deterioration in regional political relations as anti-government terrorists carry out another summer offensive in the mountains of Kirgizstan and Tajikistan.

The main economic problems are settlement of trade and transport debts and establishment of a normal trade regime between the two countries. Despite the fact that the two countries signed a free trade agreement in 1993, with the other Central Asian states joining in 1996, there is very little legal trade except official state-to-state deals. Outstanding debts, even when they are relatively trivial, remain a sore spot on both sides. Much of the blame rests with Uzbekistan for its lack of convertibility (the official rate of the soum is about 1/4 of the black market rate), though both countries can be accused of political posturing.

Transport and trade decline sharply

Rail and road traffic from Uzbekistan, which is doubly landlocked, to Russia and Europe has fallen drastically since independence as Kazakhstan began charging hefty hard currency transit charges. Hostility between the countries has meant many trains have been cancelled, and the main Tashkent-Moscow train has been rerouted through western Uzbekistan and Karakalpakstan to short the leg through Kazakhstan, adding an extra day to the grueling 3 day trip.

What little trade there is between the two major powers of Central Asia has been steadily declining. Uzbekistan's lack of currency convertibility and the generally primitive state of the banking system in Central Asia means that it is impossible to settle trade payments in any rational way. To make matters worse, since the standoff over transit charges heated up last year, Kazakhstan slapped a 200% tariff on imports from Uzbekistan, and Uzbekistan reciprocated.

This means that a major production decision must rely on local supplies or hard currency imports from outside Central Asia. "Kazakhstan and Uzbekistan ideally are one market, and instead there is hardly any trade," said one exasperated local business consultant.

The lack of normal trade relations has another unwitting consequence: large-scale smuggling. In the leather industry, chemicals once supplied automatically via the plan must now be purchased through an ‘intermediary’ at inflated prices. Such unofficial black-market sourcing of course means uneven quality of output, reducing the exportability of such goods.

Recent accusations in Britain that BAT actually condoned widescale smuggling of its cigarettes duty-free across Central Asian borders in the 1990s, if true, would have been a natural corollary to a trade situation characterized by political pettiness and economic disincentives to legal trading.

New visa regime

A new development promises still more headaches for foreigners serious about long-term involvement in Central Asia: the visa war. Getting visas to this part of the world has always been difficult, taking an inordinate length of time, and requiring formal invitations and by no means cheap registration with the local police.

However, locals did not need visas, and foreigners could use their visa for one of the CIS countries to make 3-day trips to other CIS countries (on the pretext of "transit") without hassling with the foreign ministries or the police.

With the increase in terrorism throughout the CIS recently, first the 3-day transit loophole was closed for foreigners, requiring visas even for legitimate transit across CIS states. Then last year, Turkmenistan decided to require visas from all non-residents, CIS or otherwise. The other Central Asian states, led by Uzbekistan, have jumped on the bandwagon, as if terrorists are likely to be stymied by bureaucratic border regulations.

Protests against the new regime have been loud in a part of the world where protests are rarely heard at all. As a result, locals are still crossing between Kazakhstan and Uzbekistan without visas, though all luggage and cargo is inspected, causing long delays. The visa regime with Kirgizstan has already been instituted. Ironically, Central Asians still need no visas to go to Russia, though Russians need visas to come here, and in Uzbekistan must pay in dollars (through the nose) for plane and rail transport and hotels.

In words, the countries are comradely brothers; in deeds, they are jealous rivals, with Mother Russia watching and increasingly trying to maintain order. Herself worried about the heat in this unstable part of the continent, Russia has finally announced it too will soon require visas from all parties.

Bad relations complicate investment decisions

With the new visa regime, local operations for foreign companies operating in the region have become even more difficult. For example, a routine trip by the cargo transport firm the cargo transport firm Globalink's Uzbek rep for a meeting at head office in Almaty is virtually impossible now, requiring a week of preparation and $80 for a visa. A year-long visa will only be issued to someone resident and working in Kazakhstan, so Globalink's rep in Uzbek can no longer attend meetings in Almaty.

Globalink and advertising firms such as D'Arcy have found it necessary to open offices in both Almaty and Tashkent to service their few customers. BAT and Philip Morris decided to split the national cigarette markets. To operate successfully in Central Asia, even small NGOs such as Eurasia and Counterpart Consortium have offices in at least Kazakhstan, Uzbekistan, Tajikistan and Kirgizstan in order to smooth political feathers and overcome visa, transport and currency problems.

Shifting trade patterns

As the Great Silk Road comes alive again, Uzbekistan and Turkmenistan are less dependent on Kazakhstan for contacts with Europe. Already Coca Cola and Procter and Gamble have their base for operations in Central Asia out of their Turkish office and ship goods through Turkey and Iran. Uzbekistan ships much of its cotton through Iran and Turkey now and plans to increase the use of this alternate route to Europe.

Uzbekistan also proclaims a policy of self-sufficiency in its major import from Kazakhstan - wheat, though so far this has been less than a success. The silver lining here for investors is that this drive for self-sufficiency has opened a healthy market for seed imports and development of new varieties of potatoes, wheat, and cotton to suit the dry, hot climate.