Special Report – Belt and Road

Central Asia offers exciting opportunities for investors with a strategy

Countries in the region are open to international cooperation and are keen to capitalise on opportunities presented by Beijing’s ‘Belt and Road Initiative’, but ‘outsiders’ are advised to consult those with local expertise before investing

PUBLISHED : Wednesday, 27 September, 2017, 4:17pm
UPDATED : Wednesday, 27 September, 2017, 4:17pm

One quick look at the map shows that the long-term success of Beijing’s ambitious global economic strategy, the “Belt and Road Initiative”, will hinge, to an extent, on the buy-in of the countries in Central Asia.

Many “outsiders” unfamiliar with the region still tend to think of those nations as one bloc, harking back to the way things worked in the Soviet era.

Today, though, with their differing systems and geo-economic priorities, the landlocked countries of the Eurasian heartland are far from unified in terms of their plans, outlook and approaches to opportunities. For potential partners and investors based in Hong Kong, China or elsewhere, that is one of the first lessons to absorb.

“There is no one-size-fits-all investment pattern for Central Asia and the Caucasus,” says Alexey Kalinin, director of the SKOLKOVO (Moscow School of Management) Institute for Emerging Market Studies. “Therefore, investing requires a lot of local expertise, specifically to understand the business culture, political system and some of the peculiarities that are likely to come up. Generally, these countries are very open to international cooperation, but it is also important to remember that the people are very attached to their national culture, traditions, religion and relationships.”

In some cases, steps taken to improve the investment climate centre on opening up established sectors to greater external participation. For instance, the likes of Kazakhstan, Azerbaijan and Turkmenistan, with their wealth of natural resources, are at the forefront of these types of development.

In others, the objective in attracting overseas capital and expertise is to upgrade infrastructure, enhance services, or kick-start new industries.

Accordingly, right across the region, plans are in place to further develop the transport, energy, water, and telecommunications infrastructure. There is a new focus on sustainable agriculture and non-wood forestry in Kyrgyzstan and Uzbekistan. Regulations are being updated to promote software development and services, notably in Armenia, which some international companies are now sizing up as a regional hub. And the renewable energy sector is starting to take off with Kazakhstan, in particular, showing the way.

So, as things unfold, Hong Kong companies should have no shortage of opportunities. However, in identifying potential partners, it will obviously pay to stick to a well thought out strategy and within clearly defined parameters.

There is no one-size-fits-all investment pattern for Central Asia and the Caucasus,”
Alexey Kalinin, director, SKOLKOVO Institute for Emerging Market Studies

“At the outset, I would recommend working with trusted international consultancies that have sufficient staff on the ground and have been long established in the region,” Kalinin says. “Also, when it comes to the ‘Belt and Road Initiative’, we often hear about connecting China and Europe, but rarely about the benefits various projects are supposed to bring to Central Asia. In some ways, that could be the greatest challenge: the people of Central Asia might not necessarily agree to be just a ‘transit point’. They have their own aspirations and vision for their countries – and those have to be taken very seriously.”

Past precedent has also shown that some international investors underestimate the intra-regional dynamics. They are keen to forge ahead with all kinds of big-picture schemes, but stumble when encountering obstacles they didn’t adequately anticipate.

“The region has enormous diversity,” Kalinin says. “There is no single currency, legal system, economic zone, or foreign trade union. This can lead to miscalculations. Therefore, most initiatives have to be carefully tailor-made if they involve local and international stakeholders.”

Having sounded those notes of caution, though, he is also quick to emphasise that countries in the region are very interested in opportunities Beijing’s initiative can bring. Governments are setting up special departments to attract investors, and some are going further by conducting recommended internal reforms and adopting more market-oriented models.

“We are positioning ourselves for the ‘Belt and Road Initiative’, which we see as very important for developing our country’s [Kazakhstan’s] long-term economic potential,” says Dauren Tasmagambetov, head of assets privatisation and restructuringat Samruk-Kazyna National Wealth Fund, which plays a major role in state-related investment. “This is not just in natural resources – oil and gas – but also for the logistics sector and other industries.”

As part of a government privatisation programme, the plan is to sell stakes to overseas investors in some 800 enterprises, a proportion of which currently belong to Samruk-Kazyna, with an estimated total market capitalisation of US$40 billion.

A Kazakh delegation will be in Hong Kong on October 16 for a special presentation setting out details of the key projects the country is now opening to overseas investment. “The privatisation programme offers a lot for investors from China,” Tasmagambetov says. “We are also planning an international finance centre under English law, along with government subsidies, tax incentives, and exemptions from import customs duties for certain strategic projects.”