On 18 June, the EU's international special envoy for sanctions, David O'Sullivan, visited Kazakhstan to discuss compliance with anti-Russian sanctions by the country's authorities. "On the specific issue of sanctions, there were a couple of problems that arose for Kazakhstan, where we have been able to make a lot of progress," the European official said during the visit. O'Sullivan emphasized that the EU "respects Kazakhstan's decision not to join the sanctions." Considering this, it is pertinent to ask: "Can Central Asian countries be threatened with sanctions for expanding economic relations with Russia?"
The European Union has promised not to impose sanctions on Central Asian countries
The issue of Russia and Russian companies circumventing the sanctions regime through Central Asian countries has been a concern for European officials since the beginning of the conflict between Russia and Ukraine. This concern has prompted EU representatives to actively visit the region to negotiate with Central Asian countries. The latest package of US sanctions includes several companies from the region, but Western countries have specific red lines regarding trade relations between Russia and border states, particularly the prevention of re-exporting military goods or goods, which can be used in military production. During a meeting on 2 June 2023, European Council President Charles Michel assured Central Asian leaders that the European Union has no plans to impose sanctions against their countries for circumventing the sanctions regime.
Moreover, European companies may have an interest in developing economic cooperation with Russia through Central Asian countries. Russia, with its large market of 140 million people, combined with the Central Asian countries' market of about 220 million people, presents significant economic opportunities. Kazakhstan and Kyrgyzstan are members of the Eurasian Economic Union (EAEU), and Uzbekistan and Tajikistan are part of the EAEU free trade zone. Central Asian countries are becoming hubs for large Russian companies to relocate their production or supply chains, and other nations, such as South Korea, may also be interested in expanding economic cooperation with Russia via Central Asia. Russia already leads in the number of established businesses in Uzbekistan and Kazakhstan. As of 2022, Russia is the largest foreign investor in Uzbekistan.
Furthermore, the European Union is reluctant to impose sanctions on Central Asian countries as it could adversely affect relations between the EU and the region. The sanctions already imposed target specific private companies operating in Central Asia rather than the countries themselves.
Formation of a new mechanism of interaction between Central Asian countries and Russia
The anti-Russian sanctions have prompted a search for new forms of economic cooperation between Russia and Central Asian countries, involving other major economic players in Asia and Europe. Large companies are increasingly interested in working with the Russian market, leading to the transfer of some production to Central Asian countries and an expansion of their own industrial production in the region. This shift is influenced by the region's geographical location and the availability of a growing young labor force.
Uzbekistan has seen a notable influx in automotive production according to Automotive Logistics. The Uzbek government has partnered with various foreign companies to enhance its automotive manufacturing capacity. For example, the Chinese company BYD has established a joint venture with the Uzbek government-controlled car company UzAuto to build a factory in the Jizzakh region. This facility aims to produce 50,000 hybrid and electric cars annually, with plans to scale up to 300,000 units in the future, adds Automotive Logistics. Additionally, companies like Kia, Exeed, and Chery are expanding their operations in Uzbekistan, contributing to the country's goal of producing 1 million vehicles per year by 2030.
Beyond the automotive industry, other sectors are also experiencing growth. Uzbekistan has entered into several investment agreements, including a $9.6 billion package with South Korea, focusing on high-tech and innovative cooperation. This indicates a diversification of industrial activities beyond traditional manufacturing, aiming to enhance technological capabilities and infrastructure in the region.
Kazakhstan is actively inviting representatives of companies planning to cease operations in Russia. Deputy Minister of Foreign Affairs of Kazakhstan, Almas Aidarov, stated that 401 companies have received invitations to relocate to Kazakhstan. In early March 2024, it was reported that 41 companies worth more than $1.5 billion were relocating from Russia to Kazakhstan, according to Vice Minister of National Economy of Kazakhstan, Bauyrzhan Kudaibergenov. Additionally, 37 more companies with a total capitalization of about $1 billion are in the process of relocating from Russia. Among those moving are Honeywell, InDriver, Fortescue, Skoda, GE Healthcare, and Philips. KIA will also open a car manufacturing plant in the Kostanai region, likely targeting the Russian market. The Kostanai plant will be KIA's first in Kazakhstan and the world where it will open foreign production at its own expense.
Western Strategy Towards Russia: Increasing Restrictions on Foreign Payment Transactions
Western countries are increasingly focusing on restricting the ability to make payments with Russian banks, rather than imposing sanctions on Central Asian countries for re-exporting goods to Russia. Experts suggest that the recent US sanctions package could lead to a significant risk of a 10-25 percent collapse in exports and imports over the next six months due to the inability to pay for foreign trade transactions in dollars and euros. This could result in a shortage of critical imports and a stall in investment activity, with a potential decline in export revenues.
One of the most notable measures is the enhanced restrictions on foreign financial institutions that facilitate transactions with sanctioned Russian entities. This includes a broad array of Russia's largest banks and their subsidiaries, which are now cut off from the U.S. financial system and the global financial network provided by SWIFT (Society for Worldwide Interbank Financial Telecommunications). These restrictions have made it extremely difficult for Russian banks to conduct cross-border payments, forcing them to resort to less efficient and more costly alternatives. Consequently, Russia will need time to adapt to the new realities of trading in the external environment and to find new platforms.
Written by: Eldaniz Gusseinov
Eldaniz Gusseinov, is a Non-Resident Research Fellow at Haydar Aliyev Center for Eurasian Studies of the Ibn Haldun University, Istanbul.
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