Jacopo Dettoni in Almaty -

Kyrgyzstan, which up to now has a poor track record for attracting foreign investors, hopes entry into the Russian-led Eurasian Economic Union (EEU) in May will lead to a FDI bonanza, but analysts are sceptical that the expectations are realistic.

The EEU, alongside a liberal tax system, give Kyrgyzstan the opportunity to attract annual foreign investment of up to $6.5bn, deputy Prime Minister Valery Dil said in Bishkek in January.

The EEU was launched on January 1, 2015 by Russia, Kazakhstan and Belarus to create a common market spanning former Soviet Union countries. Armenia and Kyrgyzstan signed the treaty in 2014, with the latter officially joining in May 2015.

“We are entering the union on very good conditions,” President Almazbek Atambayev said after signing the treaty, referring to the financial aid pledged by Russia as part of the overall deal. “A total of $300mn is being provided to develop the border and a $1bn Russian-Kyrgyz development fund has been established.”

However, using the EEU as a magnet for foreign direct investment still seems ambitious.

Those figures are “absolutely unrealistic”, Aza Migranyan, head of the Moscow-based Economics Department of the CIS Institute, tells bne IntelliNews.

“First of all, there’s a lack of preparedness in the republic's economy for the conditions of the EEU, and, secondly, in spite of almost five years of negotiating and expressing interest in joining the customs union, Kyrgyzstan has not reoriented itself from trade activities to production activities, and, thirdly, there is the unpreparedness of the customs infrastructure.”

Kyrgyzstan boasts internationally recognized potential in mining, thanks to its vast endowment of precious metals and coal, but it has also an important hydro-electrical power sector,  agricultural sector, food industry, and light industry.

“To bring all of these industries to the level of the world’s leading competitors would require the aforementioned $6bn, but under the EEU these industries will meet competitors from Russia, Kazakhstan, and Belarus, so their prospects are not so rosy,” Migranyan said. “Today, relatively attractive investment projects can attract approximately $2.3bn.”

Foreign investors may also be deterred by the country’s reputation for not playing by the rules. An increasing number of foreign investors, which claim their rights were widely violated while investing in the country, have brought forward lawsuits against the government in international arbitration courts. Total claims have grown to about $1bn, authorities confirmed in 2014, a menacing figure for a $7.5bn economy.

Most of them come from the mining sector. Kazakh mining group Consolidated Exploration Holdings is suing the government for $548mn for revoking its license at the Jerooyaltyn gold mine in 2010. Canadian junior mining company Stans Energy has already been awarded an arbitration claim of $118mn in a similar case regarding a license for the development of rare earth deposit Kutessay II.

“Mining has been a very problematic sector of the country’s economy throughout the past 20 years. Main problems mining companies face include inconsistency in decision-making by a number of state agencies (especially in issuing and revoking licenses) and resistance by local communities,” Askar Sydykov, deputy executive director of Bishkek-based International Business Council, tells bne IntelliNews.

Even the Kumtor gold mine - the country’s largest gold mine, the single biggest contributor to GDP and a barometer of the country’s investment climate – has been affected. Different groups in the Jogorku Kengesh, Kyrgyzstan’s parliament, have repeatedly called for the nationalisation of the stake held by Canadian mining group Centerra Gold, spooking investors. 

The EEU will help trigger an upgrade of the local market institutions as the country gears up to join the EEU common financial market. Yet that will not happen before 2025, “so short term membership is unlikely to have an impact on the country’s image unless the government addresses the issue at its own discretion”, Migranyan says.