Their economies are slumping, nonetheless according to a new report by Commerzbank, Central Asia and Mongolia are becoming increasingly important, not only as a vital supplier of natural resources, but also on account of their geographical location as a crossroads between Europe and Asia. Commerzbank forecasts that future economic growth in the Central Asian republics will be higher than the global average. Is it worth a look?

The significance of the Central Asian republics and Mongolia can only rise over the long term, even if the boom of the last few years is probably over for the time being, according to a new study by Commerzbank.

“As a result of the proximity to China and Russia, the vast amount of catching-up vis-à-vis the industrialised nations, high foreign investment, and the long period of excellent global economic development, Central Asia and Mongolia have been able to rapidly industrialise and post high growth figures since the start of the new millen­nium,” explains Rainer Schäfer, head of country risk analysis at Commerzbank. “In the majority of these countries, raw materials continue to dominate foreign trade and foreign exchange inflow. The reserves of natural gas, gold, and copper, as well as the production of cotton, are of global significance; yet develop­ment in this area is not over by far, despite significant infrastructure investment taking place. Greater diversification with a simultaneous reduction in the high degree of government regulation is necessary so as to secure long-term prosperity in the Central Asian region.”

The differences between the countries in the region are substantial, however. The most important trading partner for Germany is currently Kazakhstan, which has profited from the energy boom of the past decade thanks to its extensive oil reserves. The rapid rise of China and the associated increase in demand for raw materials saw an increase in prices, driving rapid growth in the country – which also has other resources in abundance. Measured in terms of the per capita gross domestic product (GDP) Kazakhstan has, as a result, virtually caught up with Russia, and is thus the richest nation in the region by far. Kazakhstan is also clearly ahead of China, where GDP per capita is $7,000, placing the country on about the same level as Turkmenistan, which has major natural gas reserves and is expanding its process­ing capacities.  Neighbouring Uzbekistan has a position among the top ten gold exporting nations and cotton producers. It has rich uranium deposits and energy reserves, as well as major development opportunities in the “silk road tourism” sector and a diversified manufacturing industry.  

Economic activity in the Caucasus and Central Asia (CCA) region is weakening, mainly because of the near-term slowdown and rising regional tensions affecting Russia, a key trading partner and sources of remittance and investment inflows, as well as weaker domestic demand in a number of CCA countries. Near-term risks are to the downside and tied to the fortunes of large trading partners. Policies need to focus on bolstering economic stability and, where needed, short-term support to ailing economic growth. In addition, a new model for high, sustained, diversified, and inclusive growth is needed to set the direction for economic policies for the next decade. 

Tajikistan and Kyrgyzstan have major water resources, says the report, which are also of significance to their neighbouring countries. “Both countries are heavily dependent on remittances from immigrant workers employed in Russia. To date, Mongolia has only been able to utilise a small portion of the development potential of the country’s massive raw material deposits”. Mongolia too is looking to exploit its river systems. Among the most recent initiatives is a plan to develop the 300-MW Shuren hydroelectric project.  Mongolia has received funding from the World Bank’s International Development Association for technical assistance to MINIS, which includes the proposed study of the Shuren project on Mongolia’s Selenge River. Under the same program, the government recruited consultants to prepare specifications for a feasibility study of dam construction on Mongolia’s Orkhon River including hydropower.

Despite the dynamic growth rates seen in past years, the potential cooperation between Germany – a major exporter and high-tech leader – and Central Asia/Mongolia has not yet been tapped in full.

“We assume that in the future economic growth in the region will be considerably higher than the global average, and that, as a result, business relations with Germany will be further intensified,” says Axel Bommersheim, regional head at Commerzbank – Financial Institutions. Commerzbank already accounts for a substantial portion of the processing and financing of foreign trade dealings with Central Asia and Mongolia. The Bank has been present in the region for many years with its own representative offices in Kazakhstan, Turkmenistan, and Uzbekistan, which also serve the neighbouring countries of Kyrgyzstan, Tajikistan, and Mongolia. It has a network of 5,000 correspondent banks worldwide and maintains close relationships with a number of international financial institutions such as the European Bank for Reconstruction and Development (ERBD), the World Bank subsidiary International Finance Corporation (IFC), and the Asian Development Bank (ADB).

For its part, Mongolia looks to be trying to establish a multi-focused development strategy.  It’s parliament may vote as early as this week on draft legislation to develop multi-billion dollar casinos which the country’s politicians hope will stimulate a slumping economy and diversify away from the mining industry. At a meeting on February 12th, the country’s Cabinet Secretariat approved a draft of a bill that would target private partnerships to build two casinos targeting China’s high-roller gamblers. The move comes as countries across Asia from Vietnam to South Korea are building large-scale casino resorts to lure the region’s wealthy gamblers, particularly from China, to boost consumer spending, leisure industries and economic growth. Las Vegas Sands, MGM Resorts and Genting Bhd have all signalled their desire to expand their footprint in Asia. If a bill is passed later this week, it is expected to be quite onerous and possibly exclude Mongolians from gambling in them. It would also be something of a turnaround as  Mongolia annulled legislation permitting casinos in 2010 because of concerns over corruption and social issues.