Transforming Central Asia from a frontier market to a stable investment

WILDER ALEJANDRO SANCHEZ
US-Central Asia Trade and Investment event at the George Washington University, December, 12, 2024

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Central Asia is considered a frontier market. However, at least two of the five countries that constitute this region, namely Kazakhstan and Uzbekistan, are eager to diversify their economies and attract investors to new industries. While global geopolitics will remain unstable throughout 2025, Astana and Tashkent want to reassure investors that, in a volatile world and geographically distant region, investors should feel confident about “taking a chance” and investing in these countries.

To attract new investors, both governments are creating special economic zones and tax-free regimes that are more investor friendly. The two countries also engage in public relations campaigns to approach potential Western investors. For example, Uzbekistan organized the Third Tashkent International Investment Forum this year. There are also events in Washington, DC, as the American-Uzbekistan Chamber of Commerce (AUCC) co-hosted a panel titled “Beyond Geopolitics: Strengthening U.S.-Central Asia Ties through Trade and Investment,” held on December 12 at the George Washington University in the U.S. capital.

Similarly, Kazakhstan is quite active in the United States. On October 28, the Kazakhstan Finance Day was held in New York, organized by the National Bank of Kazakhstan. Marat Birimzhan, Kazakh Invest representative to the U.S., and Gabidulla Ospankulov, Chairman of the Investment Committee at Kazakhstan’s Ministry of Foreign Affairs, recently met with Illinois and Nevada business representatives to discuss investment opportunities. Moreover, Kazakhstan has an agency dedicated to engaging potential investors, Kazakh Invest.

Investment agreements and frameworks deserve special mention: international investment treaties serve as a critical mechanism for providing investors with assurances of equitable treatment and legal certainty when undertaking projects within a host country.

Both Kazakhstan and Uzbekistan have demonstrated their commitments to creating investor-friendly environments by being signatories of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, namely the ICSID Convention and entering into numerous Bilateral Investment Treaties (BITs) aimed at protecting foreign investments.

Since 2016, Kazakhstan’s government has introduced specialized court proceedings for investment disputes, established an Investment Dispute Panel within the Supreme Court to handle cases involving major investors, and launched both the International Arbitration Center at the Astana International Finance Centre (AIFC) and the International Council under the Supreme Court of Kazakhstan. The AIFC’s Arbitration Centre operates under English common law, a system widely recognized for its clarity, predictability, and investor-friendly approach.

Similarly, Uzbekistan has taken a proactive approach by establishing the Tashkent International Arbitration Center (TIAC), designed to meet the needs of both local and international investors. During the aforementioned GWU event, the author of this analysis asked the panel about the role of the AIFC’s Arbitration Centre or TIAC in fostering investor confidence. TIAC, for example, offers a “highly flexible framework” for dispute resolution, allowing parties to select the substantive law governing their contracts and disputes. This could include UK law, U.S. law, Uzbek law, or any other legal system agreed upon by the parties. While the center provides its own set of arbitration rules, parties retain the option to choose alternative rules, such as those of the International Chamber of Commerce (ICC), while having the arbitration administered by TIAC. This flexibility makes TIAC an attractive forum for resolving disputes.

Central Asia’s evolving arbitration landscape, supported by institutions like the AIFC Arbitration Centre and TIAC, underscores the region’s commitment to attracting and safeguarding foreign investment.

As for Washington, the U.S. engages Central Asia, and bilateral trade numbers are growing. Washington and Astana have the highest bilateral trade volume compared to the U.S. trade with other regional countries, reaching $3.3 billion in 2023 and $3.7 billion in 2022. Meanwhile, U.S.-Uzbekistan trade reached $430 million and  $320 million in those years. In March, the first Business 5+1 (or B5+1), meant to stimulate trade relations between the U.S. and Central Asia, was held in Almaty, Kazakhstan.

In terms of investment, companies from the U.S. and other Western states are widely present across Kazakhstan, Uzbekistan, and the rest of the region, namely Kyrgyzstan, Tajikistan, and Turkmenistan. However, their primary interest is the region’s energy resources, namely oil, gas, and minerals. Astana and Tashkent want to change that situation by encouraging investors to find opportunities in the IT, agricultural, and manufacturing sectors, to name a few. There have been some successes, like the October launch of “innovative drugs” production in Almaty by Swiss pharmaceutical giant F. Hoffmann-La Roche Ltd. in partnership with Nobel Almaty Pharmaceutical Factory. Moreover, PepsiCo will build a new facility for its famous Lay’s crisps, which is expected to be operational by 2026.

The region’s reliance on mining and energy resources will realistically not decrease anytime soon. However, the fact that many Western energy companies successfully operate in Central Asia should be a sign to other investors about the degree of investment stability countries like Kazakhstan and even Uzbekistan present.

It is worth adding that Astana wants to increase the country’s GDP from $321 billion in 2025 to $498 billion by 2029. Attracting new investors will be critical to achieve this goal. In other words, the pressure on Kazakh Invest and the AIFC is high.

Geography and connectivity are obvious concerns, given that Central Asia is far away from the major Western markets and consumers. Since the Russian invasion of Ukraine commenced, regional governments have invested in new transportation infrastructure and transportation agreements to bypass Russian territory and continue to deliver their goods to Europe and the international market. The Trans-Caspian International Transport Route (TITR), commonly known as the Middle Corridor, of which Kazakhstan is a founding member, is a prime example of this new attitude and objective. Meanwhile, the German logistics operator Rhenus is investing in Uzbek transportation infrastructure.

Without a doubt, Central Asia presents some challenges beyond the risks with any investment project, like the consequences of the Russian-Ukrainian war. Washington has applied sanctions on companies that support Russia’s military-industrial complex, some of which are based in Central Asia—another obvious red flag. Astana is also trying to convince Washington policymakers to repeal the Jackson-Vanik amendment, which prevents permanent normal trade relations. Hence, the term “frontier market” still applies to the region, but the situation is improving.

Central Asian governments like Astana and Tashkent want to diversify their investment partners. Interested investors should do due diligence and research this frontier market, as there are many opportunities for profit if they take a risk.

 

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President of Second Floor Strategies, a consulting firm in Washington, D.C. He covers geopolitical, defense, and trade issues in Central Asia, Eastern Europe, and the Western Hemisphere.

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