Country Risk Profile – Kyrgyzstan
Overview
Kyrgyzstan, officially the Kyrgyz Republic, is a landlocked country situated in the Tian Shan and Pamir mountain ranges. Bishkek is the country’s capital and largest city. Kyrgyzstan is bordered by Kazakhstan, Uzbekistan, Tajikistan, and China. Around 94% of the country lies above 1,000 metres elevation, and 40% above 3,000 metres. Over 80% of the country lies in the Tian Shan mountain range and 4% is permanently under ice and snow. Most of the population live in the foothills of the mountains, concentrated around two urban areas, the capital Bishkek in the north, and between Osh and Jalal-Abad in the west.
The country has experienced instability since independence in 1991: political upheavals in 2005, 2010 and 2020 led to the overthrow of presidents. Opposition figure Sadyr Japarov, who came to power following the October 2020 revolution and the subsequent resignation of then President Sooronbai Jeenbekov, was elected president in January 2021 with 79% of the vote. Freedom Houses categorises Kyrgyzstan as a consolidated authoritarian regime, with a score of 11/100.
The country remains divided along ethnic lines, with nationalist movements capable of inciting considerable levels of instability, mainly in their southern strongholds. Election periods are prone to unrest. In addition, high levels of poverty and political instability, endemic corruption and organised criminal activity remain major concerns.
Kyrgyzstan is rich in resources, including gold, rare earth metals, coal, oil, and natural gas, forests, arable land, and pastures. The country’s main exports include gold, uranium, hydropower, and agricultural products, but its economy is heavily dependent on remittances, gold production, and foreign aid, making it vulnerable to external shocks.
Political Risk
Domestic politics
Since the October 2020 revolution and the resignation of the then president, Sooronbai Jeenbekov, Kyrgyzstan has been led by Sadyr Japarov, officially elected president in January 2021. Major constitutional changes were adopted in April 2021 by referendum, moving the country from a parliamentary to a presidential system. The referendum considerably strengthened presidential authority, concentrating political power in the presidency and reducing the size and role of the parliament. As a result, national governance currently takes the form of a centralised presidential system with weak separation of powers, an oversized role for the head of national security, and only a small but outspoken political opposition. Elections are generally free and competitive, but vote-buying and the use of administrative resources to undermine equality of opportunity are commonplace.
Freedom of speech and civil society
The civic sector attempts to play an active role in public life by keeping a check on those in power and intervening in times of crisis, and the media landscape is relatively free, with the existence of a certain degree of pluralism and the growth of investigative and data journalism. However, the civic and media sectors are dependent on donor funding and come under attacks from authorities and nationalist groups who exploit the ‘foreign agent’ rhetoric. Although freedom of speech and freedom of the press are both enshrined in law, these rights are severely restricted in practice. Self-censorship due to political pressure is common. Some journalists have been intimidated and harassed by political figures and subjected to arbitrary raids, arrests, and cyber-attacks.
Corruption
The 2022 Corruption Perceptions Index ranked Kyrgyzstan 140th of 180 countries. Corruption and nepotism in political office are widespread, while the fight against corruption is largely a pretext for authorities to go after political rivals or new revenue sources. State actors are heavily involved in organised crime and criminal organisations, and the state apparatus is closely linked to both. State officials not only facilitate criminal markets, but also participate in them, especially in the drugs trade. In recent years there have been significant arrests of high-level politicians in an attempt to root out corruption within the state, although the underlying purpose of these arrests has been questioned by observers. The judiciary suffers from political influence, corruption, and low public confidence.
Economic Risk
World Bank data shows that economic growth in Kyrgyzstan reached 7% in 2022, driven by gold production, agriculture, and the services sector. The latter was supported by trade-related services and additional demand stimulated by the reallocation of Russian citizens to Kyrgyzstan. On the demand side, growth was sustained by private consumption and public investment. Data also shows that inflation reached 14.7% in 2022, fuelled by increases in world food and fuel prices and by rising domestic demand.
The budget deficit increased to 1.4% of GDP in 2022, up from 0.3% a year earlier. Tax revenues rose from 24.5% to 29.2% of GDP, due to increased imports and improved tax compliance. Expenditures increased from 32.8% to 38.4% of GDP as a result of significant wage increases for public servants, doctors, teachers, and social workers, and higher capital expenditure.
The World Bank expects GDP growth for 2023 to moderate to 3.5% due to the contraction in gold production and the slowdown in agriculture and the service sector. On the demand side, growth is expected to be supported by consumption and investment, while net exports are expected to make a negative contribution. Inflation is set to remain high, at about 10% in 2023, but should gradually moderate by the end of 2025. The budget deficit is expected to widen in 2023 due to the full-year effect of public sector wage and benefit increases. However, the budgetary position should be consolidated in 2024-25 due to higher revenues from the mining sector, restrained spending on goods and services, and lower capital expenditure.
Business climate
The International Trade Administration considers that Kyrgyzstan remains a frontier market oriented towards high-risk investors, although President Sadyr Japarov has expressed the desire to attract greater and more diversified foreign direct investment (FDI) and to develop a green economy to contribute to sustainable economic growth.
Foreign investors can come under greater scrutiny than domestic investors, and the country’s ability to provide an investment-friendly environment continues to face many challenges.
The legal framework for foreign investment is broadly in line with international standards, but enforcement of these laws and private property rights is weak, and criminal investigations into commercial disputes are not uncommon.
Overall, the business climate presents a high risk to investors.
Security Risk
Demonstrations and social unrest
Demonstrations occur over various political and economic issues. They are generally small-scale but can turn violent during security force interdiction. Ethnic and communal tensions can escalate into clashes, particularly in the south.
Human rights
Police officers reportedly engage in arbitrary arrests, politically motivated arrests, and extort people by threatening them with legal proceedings. There are reports of serious human rights abuses including the use of torture by law enforcement and security agencies. As a result, public confidence in the law enforcement agencies is limited. However, public trust has been enhanced by community-based policing systems, which improve cooperation between police, local authorities, civil society, and the media.
Border security
Due to its mountainous topography and rugged landscape, Kyrgyzstan’s borders are difficult to monitor, making the country vulnerable to organised crime. Borders between Kyrgyzstan and Uzbekistan and between Kyrgyzstan and Tajikistan, in particular, are difficult to monitor due to widespread criminality and long-standing ethnic tensions in these areas.
Organised crime
Numerous informal criminal networks and dozens of criminal gangs operate in Kyrgyzstan, mainly engaged in smuggling illicit goods. While gangs in the southern region are mainly involved in drug trafficking, criminal networks in the north concentrate on racketeering and the misappropriation of state assets, as well as the smuggling of Chinese goods. There is a strong collaboration between local criminal networks and foreign actors, particularly in the areas of human trafficking, drug trafficking and crime related to non-renewable resources, due to the transnational nature of these markets. Private-sector actors are mainly involved in financial crimes such as embezzlement, tax evasion, and corruption.
Inter-state conflict
Tensions with neighbouring Uzbekistan, Tajikistan, Kazakhstan and China tend to revolve around territorial disputes. Cross-border skirmishes can occur, particularly with Uzbekistan and Tajikistan. A new border conflict with Tajikistan erupted in September 2022, causing widespread destruction of civilian infrastructure, the death of more than 10 people and the displacement of around 140,000 people on the Kyrgyz side. The border conflict between Tajikistan and Kyrgyzstan is a longstanding one whose main flashpoint is the Ferghana valley, which is dotted with territorial enclaves that exacerbate disputes over land and water in this densely populated region.
Geopolitical Risk
Russia
Since Kyrgyzstan’s independence, Russia has been considered as its closest economic, military, and, in some cases, cultural partner.
Moscow is one of Bishkek’s main trading partners, notably as the primary destination for Kyrgyzstan’s non-gold exports and the sole supplier of petrol and natural gas to Kyrgyzstan. Russia is home to about one million Kyrgyz migrant workers, whose remittances account for around 30% of Kyrgyzstan’s GDP.
Russia plays an essential role in Kyrgyzstan’s security. Not only is Kyrgyzstan a member of the Collective Security Treaty Organization (CSTO), but Russia also maintains active troops at the Kant air base.
Russia’s political influence remains strong, due to its economic role and the public support it enjoys in Kyrgyzstan. The latter is critical, as it allows Moscow to influence Bishkek’ policies and politics from within. However, following Russia’ full-scale invasion of Ukraine, fears and questions have been raised about the next target, such as continued association with Russia.
China
Despite serious rifts between their populations, China and Kyrgyzstan enjoy an increasingly close relationship, based on economic dependence. Around 42% of Kyrgyzstan’s imports come from China, a higher percentage than that of any other Central Asian country. As of July 2022, Kyrgyzstan’s debt to China represented 42.9% of its GDP. In 2019, China invested $301 million in Kyrgyzstan. China’s investment and economic cooperation projects in Kyrgyzstan cover transport, communications, electricity, mineral resource development, and agriculture.
Kyrgyzstan controls the Tien Shan mountain range, which surrounds the main land connection between Europe and Asia. As China invests billions of dollars in a global effort to rebuild its overland trade belt, Kyrgyzstan stands out as a crucial entry point between vast mountains. Maintaining a favourable and dependent relationship is therefore essential for Beijing.
Conclusion and forecast
The constitutional changes adopted by referendum in April 2021 moved Kyrgyzstan from a parliamentary to a presidential system, considerably strengthening presidential authority, concentrating political power in the presidency, and reducing the size and role of the parliament. As a result, national governance is highly centralised in the person of the President, and the separation of powers is weak. Any other major reforms will have to be closely monitored, as will the reaction of the population, which has the power to make presidents resign, as was the case during the October 2022 revolution.
GDP growth for 2023 is expected to fall to 3.5% due to the contraction in gold production and the slowdown in agriculture and the service sector. Inflation is set to remain high, at around 10% in 2023, but should gradually moderate by the end of 2025. Kyrgyzstan will remain a frontier market oriented towards high-risk investors, while foreign investors will continue to be more closely monitored than domestic investors.
In terms of security, tensions at the border between Tajikistan and Kyrgyzstan will remain the main concern, even though the two countries signed an agreement to resolve the border dispute in October 2023. The border will need to be closely monitored, as another deadly conflict could erupt between the two countries.
Although Kyrgyzstan is considering whether or not to remain associated with Russia following the war in Ukraine, Moscow will continue to exert a strong influence over Bishkek, politically, economically, and in terms of security, making it unlikely that Kyrgyzstan will look to other powers to to turn to other powers to replace Russia. The economic relationship between Kyrgyzstan and China makes them dependent on each other, not least because Kyrgyzstan is in a strategic location for the development of Beijing’s Belt and Road Initiative, but also because Kyrgyzstan depends on Chinese investments and economic cooperation projects to develop its infrastructure. We can therefore expect relations to develop further over the coming months.