Wednesday, 06 September 2017

The EU and Central Asia: Expanding Economic Cooperation, Trade, and Investment

Published in Feature Articles

The EU and Central Asia: Expanding Economic Cooperation, Trade, and Investment

Svante E. Cornell and Johan Engvall

Since the independence of the Central Asian states, this landlocked region has taken time to reconnect with the world, including Europe. Twenty-five years ago, many underestimated the diverse challenges – infrastructural, economic, political – that impeded the region’s trade and connectivity with the rest of the world. Yet as trade statistics show, much has been accomplished in a quarter century. The EU may not be a major security actor in Central Asia, but its importance as an economic partner is universally acknowledged. While energy relations were a key driver of cooperation in the early days of independence, the emergence of Central Asia as a corridor for land-based trade between Europe and Asia is in the process of overtaking energy and establishing itself as the main vector of economic relations.

Since the independence of the Central Asian states, this landlocked region has taken time to reconnect with the world, including Europe. Twenty-five years ago, many underestimated the diverse challenges – infrastructural, economic, political – that impeded the region’s trade and connectivity with the rest of the world. Yet as trade statistics show, much has been accomplished in a quarter century. The EU may not be a major security actor in Central Asia, but its importance as an economic partner is universally acknowledged. While energy relations were a key driver of cooperation in the early days of independence, the emergence of Central Asia as a corridor for land-based trade between Europe and Asia is in the process of overtaking energy and establishing itself as the main vector of economic relations.

Accepting this reality, this article focuses on three key strategic areas of relevance for the development of EU ties with Central Asia. The first concerns the priorities in EU assistance to Central Asia, where we argue for a much more hands-on approach focusing on quality of governance, working in tandem with governments to reform key institutions of importance for trade and investment. Second, we urge that the role of Central Asia as a transit corridor be considered in an even larger picture than is customary, as a land corridor not just to China but to the Indian subcontinent. And third, we urge the refocusing of attention on the Trans-Caspian connection, including Caspian sea security issues.

Promoting Good Governance

An important facet of Central Asian life is the resilience of the Soviet institutional legacy. The Soviet Union was a vast administrative state; its myriad agencies regulated, in an authoritarian fashion, most facets of economic activity. But as western scholars knew from at least the late 1970s, the Soviet administrative state was also highly corrupt. The need for institutional reform at independence was thus enormous; but it was not the focus of most western assistance to post-Soviet states. As a result, reforms have been piecemeal and incomplete; strong vested interests continue to oppose reform in many sectors; and to a considerable extent, a Soviet-like mindset continues to permeate state institutions. In practical terms, this “mindset” means an idea of civil service that is particularistic, and far removed from the universalistic conception of the modern western state. Government positions tend to be viewed not as jobs in which the civil servant’s task is to serve the public; but as opportunities for rent-seeking. The more unstable the political system of the country in question, the more rapid and uncontrolled this rent-seeking tends to be.

This state of affairs offers the most entrenched obstacle to the development of EU-Central Asia economic relations. Unless the Central Asian states develop better-functioning and more accountable institutions, their ability to gain their rightful place in the world economy will be delayed. This is true for transport and trade as well, where much of the focus has been on physical infrastructure, which is a necessary but far from sufficient condition for Central Asian trade routes to be actually used by anyone. Indeed, one could catalogue at length the number of western-supported projects that have been stillborn, or failed, because of the incompetence or outright resistance emanating from unreformed government agencies in Central Asian states.

Given how much was known of the Soviet administrative state, it is perhaps surprising that institution-building, or the promotion of good governance more generally, was not made a priority in most Western assistance programs. In fact, the paradigm governing the formulation of policies toward former Soviet states in the early 1990s focused strongly on the promotion of democracy rather than on the quality of governance. Indeed, the approach to these states borrowed heavily from the 1975 Helsinki Final Act, especially its division of the overall relationship into three “baskets” – where the security and economic baskets remained, but the Helsinki-era “human rights” basket was supplanted by “democratization”.

The problem was that in hindsight, official bodies in both America and Europe tended to treat democracy not as the outcome of a complex series of relations and preconditions, but as an independent variable. A similar assumption underlay much of the talk of market economies and the institutions that embody them.  This unstated assumption had the great advantage of enabling bureaucrats to assign the promotion of “democracy” or of “market economies” to separate offices and charge them with doing the job, largely in isolation of other factors and conditions, and the tasks that needed to be accomplished to advance them.  This was a time when the “transition paradigm” dominated western thinking on political evolution, which assumed that, in the words of Thomas Carothers, “any country moving away from dictatorial rule can be considered a country in transition toward democracy.” Further, it assumed that underlying conditions – economic, political, institutional – “will not be major factors in either the onset or the outcome of the transition process”. In addition, the predominant thinking was based on developments in southern Europe and Latin America: Based on this experience, it assumed that democratic transition was “being built on coherent, functioning states”. Yet as Carothers puts it, this line of thinking “did not give significant attention to the challenge of a society trying to democratize while it is grappling with the reality of building a state from scratch or coping with an existent but largely nonfunctional state.”

In practice, the policies that were developed did not advance the cause of democratization. The reason for this is that by treating “democratization” essentially as an independent variable, western governments and private foundations stripped away from it all the preconditions that were in fact essential to its success. This flaw, it should be noted, was much more prevalent in the U.S. Freedom Support Act and subsequent U.S. policies, whereas the EU and the Council of Europe have indeed spent more energy on institution-building, as the EU Rule of Law Platform is an example of.

That said, western assistance – in particular bilateral government programs – has too often come to adopt an adversarial attitude toward government, either directly, or more often through the support for non-governmental organizations with outright adversarial attitudes to governments. This has reduced trust between western countries and organizations and the Central Asian states, without succeeding in the state aim of furthering democracy.

It would make sense for EU efforts in Central Asia be directed in much greater part to the promotion of what scholars have termed “Good Enough Governance,” something that is in turn a prerequisite for the development of democratic government.  This means that assistance should be focused less on seeking to effect change from outside the state; and more toward working to reform state institutions from within. In other words, this means adopting a more realistic approach to incremental change, seeking to work with the Central Asian states, not on them or even against them as has often been the case. In the short term, this means identifying those areas where an EU reform agenda aligns with, rather than opposes, the priorities of Central Asian governments. This means that the most likely areas to effectuate change are not in the key political areas; but very much in the areas of promoting the functioning of economic and in particular legal institutions. The streamlining of procedures, and development of e-government, rank among these priority areas. Gradually, this can build an agenda for broader reform that will over time reach into the political sphere as well; but in the meantime, it would improve the lives of millions of Central Asians, while also furthering EU interests in continental trade.

Given that institutional development is of paramount importance for economic development, the EU’s perception as a balancing power in the region provides a comparative advantage in offering collaborative partnerships in governance reforms where Russia and China have little to offer.  This raises the following implications:

  • The EU could embark on a concerted drive to apply current and future advances in technology to state governance, in order to simplify trade, investments, and other private sector activities.
  • The EU should choose reform initiatives not only based on likelihood of success – i.e. easier targets – but should also actively seek out the most flawed institutions in the region as partners, and not shy away from working to establish partnership in countries and sectors considered the most difficult, including Turkmenistan.

Looking South

The concept note that accompanied the Program for the conference that formed the basis for this article mentioned Iran, China and Russia as important factors in EU thinking on Central Asia in trade terms; yet it failed to mention the Indian subcontinent. Indeed, the most visible action in economic matters today involve China; Central Asia is generally viewed primarily as a transit corridor for trade between Europe and China. Over the next decade, this is likely to remain the case. And the security situation in Afghanistan, in practice, has meant that in the twenty-five years since independence, Central Asia’s economic ties to the Indian subcontinent have been suboptimal, to say the least.

Yet the challenges China’s economy face as its population rapidly ages are well-known. Meanwhile, the question arises whether it is likely that manufacturing in other regions in Asia undergo the same kind of boom that China experienced over the past generation. If so, it would seem likely that these countries will be as interested as China in reaching the European market, and that they will seek to adapt the New Silk Road network, as presently conceived, to serve their best economic interests. Demography tells us that there are two realities of the year 2040 that are of overwhelming importance to the future of European trade with Asia and the potential role of Central Asia, particularly Kazakhstan, Uzbekistan, and Turkmenistan in such trade. First, by then the population of the Indian subcontinent will be nearly half again larger than that of China, and that India’s population will be much younger than that of China. As a recent CACI & SRSP Silk Road Paper has detailed, the total population of India, Pakistan and Bangladesh is projected to be 2.1 billion; India’s alone will be 1.6 billion, while China’s will be 1.4 billion.

Of course, that will not matter if the current political realities persist: trade within the subcontinent and between it and Central Asia is hampered by political issues, primarily the India-Pakistan conflict and the unrest in Afghanistan.  Yet as intractable as these problems may be, it would be wrong to assume that they will remain static. India-Pakistan trade is already beginning to take off. And historically, the Indian subcontinent was a larger trading partner to Central Asia than any other; indeed, the distance Almaty to New Delhi is half that between Almaty and Beijing. And Central Asia did function as part of the land trade routes connecting South Asia with Europe.

The implications are several. First, a program that focuses exclusively on the connection of China to Europe and the Middle East ignores what is potentially an equally important corridor, namely, the ancient caravan road connecting Kazakhstan, Turkmenistan, and Uzbekistan with the Indian subcontinent via Afghanistan, a route that over many centuries played a crucial role in connecting Europe and India. It is true that a route from India to Europe via Iran and the Middle East is more direct, yet tensions in the Middle East threaten to render such a route insecure for the foreseeable future, and strengthen the case for a Central Asian route. Moreover, routes from the Indian subcontinent through Central Asia and Kazakhstan are the most direct path to Northern Europe. China’s Silk Road Economic Belt project has many virtues, but it in no way addresses India’s growing need for a land-based trade corridor to the West.

While it is in the EU’s interest to support China’s Silk Road Economic Belt initiative, it should at the same time be planning concrete and separate measures to develop Central Asia’s links to the Southern Corridor connecting the Indian subcontinent and the West and removing impediments to such a corridor in Afghanistan and Pakistan. Concretely, this highlights the strategic importance of Turkmenistan for Europe, as it is the country most ideally situated to play the key role in a transit corridor to the subcontinent. This raises the following implications:

  • The EU should integrate issues regarding continental trade in its relations with the Indian subcontinent, particularly India and Pakistan.
  • The possibility of the development of this trade route over the medium-term should change the EU’s approach to Turkmenistan, which would be the key country in that regard.

The Caspian Connection

Surprisingly, Western relations with Central Asia are often considered in isolation from the territory that geographically connects Europe with Central Asia: the South Caucasus and the Caspian sea. Thus, when Hillary Clinton announced the U.S. New Silk Road Initiative in 2011, this initiative omitted the South Caucasus entirely, a flaw corrected only three years later, by which time the initiative itself was largely moribund. Similarly, both in Europe and the United States, Central Asia and the South Caucasus have come to be managed by different administrative departments. Unfortunately, such organizational matters severed the important connection between Western interests in the Caucasus and Central Asia, which were indeed understood to be joined at the hip in the 1990s. In the EU, the inclusion of the South Caucasus in the Eastern Partnership, while Central Asia was the subject of a separate strategy, has reinforced this division. It has also had practical implications, as it has led to a lack of coordination in EU policy vis-à-vis the two regions.

This occurred at precisely the time the importance of East-West transport corridors connecting Europe to China and India via the Caucasus was becoming more apparent. It also greatly hampered efforts to develop Trans-Caspian pipelines at the very time that Europe seeks to diversify the sources of its energy. The U.S. government continues to pay lip service to a Trans-Caspian gas pipeline but has failed to advance the project in any meaningful way. The EU has embraced the idea of a Trans-Caspian pipeline from Turkmenistan and has sent senior officials, including the president of the European Commission, to promote it. Yet the absence of involvement by member states leaves the EU unable, as yet, to close the deal. Even without regularized consultations among offices dealing with the Caucasus and Central Asia, the EU has come closer than the U.S. to embracing the importance of linking both sides of the Caspian. The European TRACECA initiative accords the Caucasus the role it merits. Unfortunately, TRACECA’s sole focus is on transport to and from China, and has never been expanded to embrace transit and trade across the Caspian to Turkmenistan, Afghanistan, Pakistan, and India. After being nearly moribund for a decade, TRACECA is now being revived in response to China’s activism in the area.

Yet more is needed, in particular as concerns the role of the maritime security. As the Caspian becomes an increasingly important trade corridor linking Europe with Asia, the security of the Caspian sea becomes an acute matter. Just as Russia’s annexation of the Crimea showed in the case of the Black Sea, it would be relatively easy for Moscow, in possible cooperation with Iran, to create a new reality in the Caspian sea that would heavily impede both European and Chinese trade interests. Russia’s efforts to militarize the Caspian are well-known, and have yet to meet an adequate response. This heightens the dichotomy whereby Russia asserts itself as the key actor in matters of hard security in the post-Soviet space, whereas Europe and China increasingly dominate economic matters. But this dichotomy cannot long survive; for the economic interests of Europe and China dictate that their economic security interests be safeguarded in one form or another.

  • The EU should take the initiative to design a consultative body among transit and end users on economic security matters concerning the Caspian sea with the involvement of China, local states on both sides of the Caspian, as well as Russia and Iran.
  • The EU should take steps to further increase coordination between its efforts in Central Asia and the South Caucasus.
  • The EU’s stabilizing role in Georgia through the EU Monitoring Mission should be seen as part and parcel of a broader strategy that focuses on trade and transport to and through Central Asia.
  • This raises the importance of the EU amplifying its role in the management and resolution of the Armenia-Azerbaijan conflict, which is currently absent, because this conflict is a main risk to the EU’s interests in a secure transport corridor across the Caucasus.


How should the EU take advantage of its status as a major trade partner of the Central Asian countries? Much has been done in recent years, mainly due to China’s vast investments, to develop the physical infrastructure required for turning Central Asia into a corridor for land-based trade between Europe and Asia. However, to become a truly competitive participant in the global supply chains, the Central Asian states need low and predictable trade costs. To reap the full benefits of the new roads and railroads, focus must be placed on the “soft” infrastructure that makes trade possible. Building responsive and effective state institutions is essential for developing an economic environment where the type of private sector economic activities needed to support trade can flourish.

While there has been considerable resistance to institutional reform, the fall of oil prices and recent trends in the region’s two largest states indicate that a new era may be dawning. The reforms sketched out by both President Nursultan Nazarbayev of Kazakhstan and Shavkat Mirziyoyev of Uzbekistan in the past year suggest a newfound willingness to engage in reforms that improve state performance. While it remains to be seen how much will be implemented, these developments provide an opportunity for Central Asia’s western partners – who are the only ones competent to assist in any reform agenda – to strengthen their role, and the EU is particularly well placed in this regard.

The EU needs to consider whether regional cooperation is most effectively accomplished through a grand regional strategy, or more likely to come around as a byproduct of concrete bilateral partnerships. Further, the EU needs to promote potential synergy effects between the different “baskets” of security, economy and human rights/democracy in its relations with the region. And finally, it appears that economic interests must be the key building bloc of EU strategy for the region, and, if so, the private sector should be accommodated into such a strategy.

AUTHORS’ BIO: Svante E. Cornell is Director, and Johan Engvall a Research Fellow, with the Central Asia-Caucasus Institute and Silk Road Studies Program, a Joint Center affiliated with the American Foreign Policy Council in Washington DC and the Institute for Security and Development Policy in Stockholm. ( Engvall is also a Research Fellow with the Swedish Defense Research Institute. This article is based in part on the authors’ concept note prepared for a Conference entitled “EU-Central Asia Relations”, organized by the EU Special Representative for Central Asia in Brussels in February 2017. The views expressed in this article are those of the authors only, and do not represent those of the European Union. 

Read 29153 times Last modified on Friday, 15 September 2017

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