Kyrgyzstan faces uncertain times

By bne IntelliNews July 26, 2010

Clare Nuttall in Almaty -

Existing investors are sticking it out in Kyrgyzstan, but no new investments are expected until at least after the next round of elections, now due to take place in October 2011. But to keep a lid on ethnic strife, the interim government needs to improve the economy quickly.

Kyrgyzstan lacks the oil and gas of its Central Asian neighbours, but efforts to establish an attractive business climate had met with some success. The country was one of the top reformers on the World Bank's latest "Doing Business" index, rising from 80th place in 2009 to 41st place this year. It scored particularly highly in the categories for starting a business, getting credit and protection for investors. It is also the first - and as yet only - Central Asian republic to achieve World Trade Organization (WTO) membership.

All that changed in April, when a wave of violent protests spread across the country, forcing the president, Kurmanbek Bakiyev, into exile in Belarus. A new government, headed by Rosa Otunbayeva, was confirmed in office by a referendum on June 27, but even with this endorsement stability in Kyrgyzstan remains tenuous.

Even so, several long-term investors appear committed to their operations in Kyrgyzstan despite the continuing threat of more violence. According to the Ministry of Economic Regulation, there has actually been a 2.7% increase in investment in the first half of this year, compared with the same period of 2009. Local news agency reports that investment in fixed assets totalled roughly $280m, mainly due to investments in infrastructure construction including the Kambarata hydroelectric power project and several major highways, housing and mining.

Centerra Resources, the operator of the Kumtor gold mine, said in a statement issued immediately after the April revolution that its operations would "continue uninterrupted and are currently unaffected by the unrest in the country." Centerra is helped by Kumtor's remote location in the Tian-shan mountains, some 430 kilometres by road from the capital Bishkek. Manas Resources, a Kyrgyzstan-focused mining company listed on the Australia Securities Exchange, announced on June 18 that it had started drilling at its Shambesai Gold Prospect to the west of Kyrgyzstan's second city Osh. Manas said in a statement that the area had been unaffected by the violence in the south, and operations were continuing "without any major disruption."

"Foreign investors on the ground, especially in the mining sector, have made long investments are inclined to stay," says Anna Walker, Kyrgyzstan analyst at the Control Risks Group. "However, it's unlikely that new investors will consider coming to Kyrgyzstan at present. After the de facto nationalisations of companies perceived to be connected with Maxim Bakiyev, investors are worried that if they conclude an agreement with the government, their business could be expropriated in future. "

Fears of more violence

The interim government has made a big effort to reassure foreign companies that their investments are safe, even as it's taken steps to nationalise many of the businesses and assets perceived to have links with the former president's son Maxim Bakiyev and other members of the Bakiyev family.

The most high-profile casualty has been AsiaUniversalBank, but four smaller banks were also taken over by the government, as were KyrgyzTelecom and Severelectro - two major utilities companies privatised to alleged Bakiyev associates at the beginning of this year. Vugar Khalilov, a former BBC journalist and founder of Bishkek-based PR agency Flexi Communications, is on trial on charges of money laundering. These charges are believed to be politically motivated since Khalilov once served as a spokesman for Bakiyev.

Uncertainty about the new regime's hold on power and the possibility of renewed violence are also causes for concern. Clashes in south Kyrgyzstan in June killed up to 2,000 people, according to unofficial reports, and were particularly terrifying for the random nature of some of the attacks. The local press reported people in unmarked cars turning up at locations in the southern cities of Osh and Jalalabad and opening fire on anyone in the area.

While the violence was brought under control after four days, fears of another outbreak remain. "An uneasy calm has now descended over the area and the June 27 constitutional referendum was conducted peacefully," says a report from the International Crisis Group. "However, there remains significant potential for the violence to reignite unless effective security measures and a reconciliation process are promptly put in place."

"The situation is outwardly stable," agrees Walker. "But although there are no clashes in the streets, the underlying tensions have not been addressed. There is potential for further violence in the months to come."

With its history of ethnic violence, the south remains the most likely hotspot, but there have also been clashes between Kyrgyz and Meskhetian Turks in the north as well as some anti-Chinese sentiment recently.

However, the trigger is as much economic as ethnic. Part of the reason for the tensions in the south, is that ethnic Uzbeks have traditionally been more commercially oriented, running successful businesses, which has created some tension with rural Kyrgyz. It was the growth in inequality and perceptions of corruption by a wealthy elite that led to the deposing of both Bakiyev and his predecessor Akayev. The government will need to make inroads into solving the country's economic problems if it's to maintain stability.

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