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    February 18, 2008

    Political Risk Analysis: Kyrgyzstan

    By Our Risk Reporter from Risk Bureau

    Kyrgyzstan’s Tulip Revolution in March 2005 stimulated something of a changing of the political guard in the Central Asian region. But the new order was soon repeating the autocratic tendencies of the old. The new president, Kurmanbek Baikyev, proved unable to work with the parliament, and after March 2005 Kyrgyz politics continued in a state of flux. There were further government resignations, clashes within the legislature, the rejection by parliament of constitutional amendments to reinstate the president’s right to appoint a prime minister and government. Unrest in the country grew. In response, in October 2007, President Bakiyev announced a referendum on the issue of amending the country’s constitution since “the current parliament is not accountable to anyone”, and - as he saw it - must be subject to public control. Parliamentary elections followed in December 2007 and these, unsurprisingly, were won by the President’s Ak Zhol party. Only one other party reached the 5 per cent threshold needed to gain seats in parliament. The opposition had been wrong-footed, the incumbent `won’ a `landslide’, his opponents cited voting irregularities. Therefore, it is very much business as usual.

    Kyrgyzstan is essentially a clan-based society where regional and clan loyalties are infinitely more developed than a sense of national identity. Given that there are more than 80 ethnic groups, a western-style democracy looks as far away as ever. Former President Akayev was brought down because he favoured the clans from the north of the country, from whence he hailed, at the expense of those from the south. Mr Bakiyev comes from the south. And as was widely predicted, the current incumbent’s earlier promises of democratic reforms have fallen by the wayside: Kyrgyzstan has traded the rule of the Akayev family for that of the Bakiyev family. Some who argue that corruption is in fact worse now than it was under the previous regime.

    President Bakiyev has not managed to stem social discontent nor tackle corruption, as his restive countrymen highlighted when they demonstrated last April in the capital, Bishkek, demanding his resignation. If the president can’t deliver at least some improvement in living standards and some reduction in corruption under his new so-called mandate, then further instability is highly likely.

    The only remaining US military base in Central Asia is just outside Bishkek. Last September, the head of the Anti-Terrorism Centre (ATC) of the Commonwealth of Independent States – or Former Soviet Republics - noted that international terrorist organisations are attempting to gain access to uranium mines in Central Asia. The ATC’s main concern is over “the security of uranium-producing enterprises in Kyrgyzstan”. The Kyrgyz security services have stepped up measures to prevent terrorists from entering sensitive facilities. But the recent arrest in Kyrgyzstan’s Osh region of Abdulkhai Yuldashev, purportedly leader of the Islamic Movement of Uzbekistan (IMU), hardly serves to ease concerns. The IMU has been implicated in attacks which took place on Kyrgyz and Tajik border posts in May 2006, and which killed several police and customs officials. Some members of the IMU now refer to themselves as the Islamic Party or Movement of Turkistan.

    Despite the harsh environment, Kyrgyzstan has managed to maintain a certain stability and keep the IMF’s Poverty Reduction and Growth Facility programme on track. Exports to traditional markets like China, Russia and Kazakhstan, have remained on track, not least because investment in transport, chiefly on roads, has been increased.

    Mining remains a vital industry for Kyrgyzstan. The restructuring in 2007 of the Kyrgyz government’s stake in Centerra, the largest Western-based gold producer in Central Asia, shows that Bishkek has taken on board the need to foster a greater degree of stability in mining operations. That in turn ought to generate greater investor confidence. The then Kyrgyz finance minister predicted that valuation of his government’s holdings in Centerra would amount to roughly US$1 billion. That’s not inconsequential considering that the country’s estimated GDP stands at US$3.5 billion. Under the same arrangement Centerra and its Canadian parent Cameco received rights to mine more than 25,000 additional hectares adjacent to the sizeable Kumtor gold mine, although final ratification has been put back by further parliamentary deliberations. Part of the enticement is a less complicated tax structure in which profits for 2008 will be taxed at 11 per cent, rising gradually to 13 per cent from 2010 onwards. Given that Kyrgyzstan is the Former Soviet Union’s third largest gold producer after Russia and Uzbekistan, and that the potential for new mines at Jerooy and Taldy-Bulak offers intriguing possibilities, then one might argue that President Bakiyev would be sensible to capitalise on his country’s mining potential further. Oxus Gold’s experience on the ground there indicates otherwise, but then those familiar with Oxus know that there was antagonism on both sides.

    Nevertheless unemployment in Kyrgyzstan remains high and some estimates suggest that roughly 500,000 Kyrgyz, out of a population of 5 million, migrate overseas, mainly to Kazakhstan and Russia in search of work. So a worry for Mr Bakiyev as he enters a second term is the possibility of a brain drain. Increasingly, skilled workers like doctors and teachers are seeking more lucrative employment abroad.

    Forecast: Is this the end of a politically turbulent period?
    President Bakiyev has a crowded in-tray at the start of his second term. Kyrgyzstan is not in the first league of Central Asian nations in terms of natural resources, but its gold, coal, uranium, and considerable hydroelectric potential suggest that foreign investors will keep a watching brief. Much will depend on whether the country can put its political turbulence behind it and create a more inviting environment for investors.

    Investment Outlook: Mixed
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