CIS and Central Asia Have Resource Wealth to Drive Through Short-Term Fragility

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The Commonwealth of Independent States (CIS) and Central Asian states have moved into an area of comparative uncertainty after a trend of strong recovery following the economic crisis. Forecast GDP growth rates for 2012 have been trimmed as the commodity-driven economies look at wary sentiments among international customers.

Growth forecasts have not suffered a drastic collapse and are generally healthy compared to most world regions, but in some cases predicted growth is being gradually revised downward in small increments of one-half of a percentage point.

Kazakhstan, rich in mineral resources and now considering exporting 1.5 million tons of crude oil to China annually, is rated by the International Monetary Fund (IMF) at 5.6% GDP growth in 2012, after a current forecast of 6.5% for 2011. Uzbekistan is down to 7.0% for 2012, following a forecast 7.1% for 2011, and Turkmenistan is down to 7.2% from 9.9%.

Trending upward are Mongolia from a forecast 11.5% GDP growth rate for 2011 to 11.8% for 2012, and Afghanistan, moving from 7.1% to 7.2% in 2012. The regional CIS forecast is up to 3.9% growth in 2012, after 3.8% in 2011.

Mongolia will continue to be a source of metals and minerals sector news in the coming year with new, rich resource deposits driving new project launches and the commencement of mega-project construction in the iron ore, coal, copper and gold sectors. The potential size of Mongolia's mining sector allows for a medium- to long-term view on projects, but there could still be short-term problems, as the foreign funding needed to develop projects goes through a dry period. Nevertheless, with resource-hungry neighbors like China, India and Russia, demand and competition for commodities should keep growth figures on the upside.

Massive rail and infrastructure development is necessary to exploit the potential of Mongolia's commodity trade in a country with the 19th-largest area in the world, at 1.5 million square kilometers, and a population of 2.75 million. In the short term, volatility in international commodity prices for resources such as copper could make medium-term forecasts safer than those for 2012.

Steven Barnett, IMF assistant director for Asia and the Pacific, said that the country's economy had made a remarkable turnaround from the recent crisis. "This success reflected the authority's commitment to pursue sound economic policies, a recovery in copper prices, and timely support from the international community. With coal output rapidly increasing and two massive mining projects in the pipeline, Mongolia has a bright economic future and an opportunity to spread prosperity to all of its citizens," said Barnett.

A problem currently on the minds of miners and governments is the latter's intentions to take higher stakes of up to 50% in projects, and revise existing contractual agreements along the same lines. This is a global trend in resource-rich and dependent nations. If international commodity prices fall sharply, Mongolia's exports and budget revenues would be hit hard. That would be a good time to have mutually satisfactory agreements with international miners with deep pockets and funding ability.

Afghanistan's Ministry of Mines is due to put three copper and two gold deposits out for tender in February 2012, and a major oil basin in the north of the country will also be offered for development. This follows the opening of bidding for the massive 2 billion-ton Hagigak iron ore deposit to international bidding this year. China has already been awarded the copper mining rights at Aynak, in Loghar province, with stringent infrastructure and social development clauses.

Projects in the country must have security as a prime consideration, as terrorism and violence remain rooted in the country. At the same time, regional trade development is being promoted with Afghanistan seen as a crucial link in the network of markets through South and Central Asia. This new "Silk Road" would demand the construction of new highways, rail links and energy pipelines, according to a U.S. administration spokesman.

International meetings are under way in a wider effort to build up the Afghan private sector, help create sustainable economic development in the country and create economic integration between South and Central Asia. Regional pipeline and rail projects are already under way in the Southern and Central Asian trade network.

Kazakhstan is the largest economy in Central Asia and holds major resources in oil, natural gas, uranium, chromium, lead, zinc, manganese, copper, coal, iron and gold. The oil sector accounts for 60% of total exports and more than 25% of GDP. Industry contributes 43% of GDP, the services sector 52%, and agriculture 5%, but the latter sector provides work for 30% of the labor force. When the Kashagan Caspian Sea oilfield begins production between 2015 and 2020, it is estimated that the country's economy will grow by a factor of 2.5 to 3.

Although the hydrocarbons and mineral-based sectors have paused in their growth, development in the mining and metals sectors is forecast to progress in 2012 and continue through to 2015. The 5.6% growth forecast for 2012 appears to be well founded.

In other CIS energy-exporting economies, growth is expected to moderate as energy prices recede in 2012, according to the IMF. Azerbaijan will show the greatest range of growth from 0.2% in 2011, rising to 7.1% in 2012. Oil-related maintenance projects caused an extreme drop in growth in 2011, but resumption of production and the acceleration in non-oil GDP growth will lead to a rebound in 2012.

The other factor in the region that could affect growth rates and development is the possibility of social unrest and the resulting dislocation of services and production. Belarus and the Kyrgyz Republic have already experienced street violence involving state forces, and continued social and political upheavals in the Middle East could again spill over into the region.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.