Invasion Woes: Is Russia’s Loss Kazakhstan’s Win?

August 8, 2023 Topic: Kazakhstan Region: Eurasia Blog Brand: Silk Road Rivalries Tags: KazakhstanRussia-Ukraine WarRussiaChina

Invasion Woes: Is Russia’s Loss Kazakhstan’s Win?

The overt disapproval of Moscow’s actions in Ukraine, nonetheless, shows that the Central Asian states are no longer satellites of Moscow.

Following Russia’s invasion of Ukraine, multinational companies operating within the Russian Federation have been forced to re-examine their ties with Russia. Some initially decided to unwind their investments, close stores, and pause their operations. Others opted to exit the country completely. As of June 15 this year, a total of 546 firms have pulled out of Russia, according to a tally by Yale University. 

However, relocating a business from a country such as Russia has proven to be a mammoth task, laden with bureaucratic hurdles and serious financial losses. That is why some companies are deciding to remain in the region—preferably in a country from where they can have access to the vast untapped Central Asian market. Realizing this opportunity, Central Asia’s largest country—Kazakhstan—decided to make hay while the sun shines.

Looking at a map of the Eurasian landmass, one sees Kazakhstan smack dab in the middle of it all. Not only does it share a 7,644 km border with Russia, it is bounded on the east by China, and on the south by Kyrgyzstan, Uzbekistan, the Aral Sea, and with Turkmenistan and the Caspian Sea to the southwest. 

Central Asian nations offer large untapped markets and, among former Soviet states, are generally considered to pose relatively low geopolitical risk. Western and multinational companies shifting businesses to Central Asia goes hand-in-hand with last year’s unprecedented influx of Russian migrants to countries such as Kazakhstan, Kyrgyzstan, and Uzbekistan—an unforeseen outcome of the war. The first wave of migration—immediately after the invasion—brought skilled Russian engineers and IT specialists to the region. The second wave came following Vladimir Putin’s announcement of a mobilization of reservists—and brought Russians from various social classes to the region. By the end of October 2022, Kazakh estimates put the total number of Russians entering the country at close to half a million. It is unclear how many decided to remain in the country and how many moved on to secondary or tertiary locations. Similarly, the authorities in Kyrgyzstan stated that 184,000 Russians had arrived in the country from January to September 2022, while Uzbekistan’s Interior Ministry reported that about 395,000 Russian citizens had arrived in Uzbekistan during the first nine months of 2022. Both waves boosted domestic consumption, particularly in sectors catering to these migrants, such as accommodation and restaurants. 

Central Asian governments quickly sensed an opportunity to reap economic benefits from the influx of skilled workers. Kazakhstan offered foreigners employed in the expanding industrial park in Astana five-year visas and extensive tax exemptions. Uzbekistan adopted new policies granting foreign IT specialists and their families a special three-year working visa. Kyrgyzstan has also introduced initiatives for attracting Russian exiles in an effort to build up its IT industry. In addition to manpower, Central Asia is also benefiting from international firms relocating from the Russian market. As of 2022, some 600 U.S. companies are operating in the region with an average of $45 billion in investments. One recent in-depth study by the European Bank for Reconstruction and Development has shown that the corporate exodus from Russia has given an economic lift to the region. The region's economy is expected to grow by at least 5.2 percent this year and 5.4 percent in 2024.

As geopolitical turbulence usually exposes one country’s relation with the other, the war in Ukraine exposed Kazakhstan’s vulnerabilities to the Russian economy. In the first two weeks of the conflict, Kazakhstan’s currency, the tenge, lost 20 percent of its value against the dollar. The invasion of Ukraine severely affected supply chains in Kazakhstan, which counts both Russia and Ukraine as trading partners. Disrupted supply chains made delays in Kazakhstan’s manufacturing sector and caused a sharp dip in March 2022. However, despite such challenges—the sector bounced back in August 2022—indicating that companies have been able to recalibrate their supply chains. The national currency likewise rebounded.

The Russian invasion of Ukraine has had a positive impact on the value of Kazakhstan’s exports. From January to September 2022, exports from Kazakhstan amounted to $65.8 billion, 47.5 percent higher than in the same period of 2021. This was largely explained by the increase in commodity prices. Sanctions slapped on Russia resulted in companies relocating to neighboring countries, allowing them to shield their import-export businesses and receive payments in foreign currency. In Kazakhstan, this was reflected in foreign direct investment rising 18 percent in the first months of 2022. Russian migrants boosted the region’s trade in services, including air travel, accommodation catering, and banking. Kazakhstan’s exports of services to Russia increased by 75 percent in the first nine months of 2022 year on year. 

Kazakhstan's President Kassym-Jomart Tokayev, an experienced diplomat and a fluent speaker of Chinese and English, along with some French, can read the tea leaves. His country, long aligned with Russia’s sphere through the Eurasian Economic Union and Collective Security Treaty Organization, is now turning to Western tech, expertise, and know-how. The new Astana stock market (AIX) is basically all Nasdaq equipment, and its legal structure is based on English law and financial market rules out of London. He has made significant strides to attract more international business and investment, overhauling virtually every facet of doing business in the country in an attempt to facilitate and increase foreign direct investment, including implementing various reforms and policies to stimulate non-oil sectors, encouraging foreign investment and private entrepreneurship—such as Special Economic Zones and industrial parks—which offer attractive incentives for businesses to set up operations, fostering innovation and technological advancements. 

Kazakhstan was recently ranked first in terms of net foreign direct investment (FDI) in thirty-two landlocked developing countries, whose inflow rose by 6 percent to $20 billion last year, followed by Ethiopia, Uzbekistan, Mongolia, and Uganda. It also took first place with the highest indicator recorded among the post-Soviet countries in the past five years. The country’s gross foreign direct investment (FDI) reached $28 billion in 2022, a record-high in the past ten years, with the top investing countries being the Netherlands with $8.3 billion; the United States, $5.1bn; Switzerland, $2.8bn; Belgium, $1.6bn; China, $1.4bn; and Russia and South Korea with $1.5bn each.

There has also been a flurry of visits by European Union officials to Kazakhstan, including the October 2022 visit of the European Council president Charles Michel and the November 2022 visit of the EU High Representative for Foreign Affairs Josep Borell, with discussions revolving around the Trans-Caspian International Transport route. The EU’s renewed focus on Kazakhstan coincides with the EU’s ongoing energy crisis and attempts at diversifying its energy suppliers. 

For some Central Asian states, the war in Ukraine represents a decisive turning point in the regional balance of power. Though Kazakhstan’s foreign policy continues its tightrope walk, there is no doubt a tangible accent on reducing the country’s dependencies on Russia, while boosting its ties with the West, Turkey, and Gulf countries. 

One thing is clear: Russia is losing its luster in Central Asia and Moscow-led organizations, such as the Eurasian Economic Union and the CSTO, are likely to become ever more unattractive among Central Asia leaders—if not museum artifacts. Regional political rearrangements are already visible, both regarding relations with outside powers and intra-regional cooperation dynamics. Equally profound for the region and for Kazakhstan’s future per se is the ongoing “decoupling” between China and the West, and Astana’s search for a new equilibrium.

The multitude of military, political, economic, and cultural links between Russia and Central Asia developed over the past century or so will not disappear overnight. 

But the overt disapproval of Moscow’s actions in Ukraine, nonetheless, shows that the Central Asian states are no longer satellites of Moscow.

Harun Karčić is a journalist and political analyst covering the Balkans and Turkey. Over the past decade, he has authored numerous articles on Islam and foreign influence in the region, including Saudi, Iranian, Turkish, and more recently Chinese and Russian. He also regularly reports on Muslim minorities in Europe and rising right-wing nationalism. He tweets @HarunKarcic.

Image: Shutterstock.