“The fear is increasing in Central Asia that a default domino is just around the corner and, looking at the overall stance of both their strategic partners, Moscow and Beijing, they are bound to look for alternatives. India is best situated at seizing this opportunity and this can be a step at changing the balances with China and Russia”, – writes analyst Dimitris Simeonidis, exclusively for CABAR.asia.
On April 12th, Sri Lanka announced that it would suspend its foreign debt payments of approximately $35 billion, with the objective of avoiding a hard default. The main reason is considered to be the severely limited foreign reserves in combination with the spikes in food and energy prices, on the aftermath of the Russian invasion of Ukraine. However, Colombo has long been under severe financial stress, which is attributed to different factors by different commentators. Voices from India, as well as from elsewhere within the international community, assert that the failure of the Sri Lankan economy is the result of the Chinese debt-trap diplomacy, whereas other experts, based in Beijing (but not only), reject these claims and point towards the overall 16 loans that Colombo has received from the IMF. The most alarming issue that is raised, nonetheless, is the fact that the debt structure of Sri Lanka is very similar to that of several Central Asian. Combined with the Central Asian economies dependence on Russia, the picture becomes significantly more worrying. Should we be afraid of a potential default domino? Could this change the dynamics in the Russia-China dominance in the region?
Cases with many similarities
The buildup to D-day comprised of specific steps. Colombo resorted a record 16 times to the IMF for arrangements under conditions that were largely unfavorable for the economic growth of the country and had mostly the macroeconomic contraction as a result. At the same time, high on the creditors list is China, holding 10% of the Sri Lankan external debt with the objective of pursuing projects that are part of the Belt and Road Initiative within the country. One of these projects was the Hambantota Port, which, as with most white elephant projects, was a massive failure and, in order to collect the debt, Beijing took control of the asset for a 99 year period. Moving from one loan of the IMF to another, combined with the ones from China, led to the eventual incompetence to pay off the debts and to eventually declare a default.
Several Central Asian states have faced virtually the same financial stress. Kyrgyzstan, for example, owing an external debt of over 60% of its GDP, has made 12 arrangements with the IMF and more than 40% of this debt belongs to Beijing. The lack of transparency in the agreements with China makes it increasingly challenging to know the exact terms of each loan. The fact, however, that Chinese firms operate most of the valuable assets such as the gold mine in Solton–Sary and the oil refinery in Kara-Balta paints a similar picture to the one in the Hambantota Port. There has already been much anxiety among the leadership on how the debt will be repaid and the situation in Ukraine only makes things more challenging and puts the Kyrgyz economy further into austerity.
Tajikistan is in the exact same boat. In fact, Dushanbe very recently sent a delegation to New York to negotiate the 6th deal with the IMF for financial aid. The Central Asian nation, with a 50% debt-to-GDP ratio, has received more than 70% of its loans from the Chinese Exim Bank, while at the same time the National Bank of Tajikistan owes more than 80% of its debt to the IMF. Similarly to Kyrgyzstan and Sri Lanka, Dushanbe has several assets that are operated by Chinese state-owned firmed, with the gold mine in the northern Sughd region being the latest crown jewel. The country is in a dire situation and, together with the dependence on remittances from Russia that have been at a halt since the invasion of Ukraine, it seems that there is no way out of this financial crisis.
An increase in the anti-China sentiment
Despite the fact that, as mentioned, the national governments carry the main responsibility and also the list of lenders is long, there has been an anti-China sentiment among these local communities. Following the Sri Lanka default, protests escalated and the general view of the public in Colombo is that China’s debt-trap diplomacy is the main reason behind the economic catastrophe. Similarly, in Bishkek, after the disruptive events that put Japarov into power, massive threats and shakedowns in Chinese businesses took place. Tajiks are also strongly against mining deals with Beijing, there are however very few public protest, predominantly due to the deterrence capabilities of the Rahmon government.
Why is it important to India? What are the gains?
China, reflecting on the trajectory of the Central and South Asian actors, is gradually reducing its financial support and backing from its involvement so far. At the same time, Russia, facing a huge financial fatigue because of the war in Ukraine is not expected to be a reliable partner to bailout these countries. The timing couldn’t be better for India to become more geopolitically active in the region. There are numerous potential gains, especially on the energy sector, since Delhi is heavily invested and stands to gain a lot from the construction of the TAPI pipeline, from the TUTAP interconnection as well as other new efforts to connect upstream Central Asian states with downstream South Asian ones. This will come complementary to the already existing efforts from India to grow closer to Afghanistan, following the humanitarian aid after the Taliban takeover. Afghanistan is considered a strategic partner for the energy transition by many, due to its enormous amount of rare earth metal reserves. India can fill in a large vacuum, either as a security guarantor or as a financial one in both regions, increasing its energy security via land routes and also increasing trade volumes, surpassing neighboring China in growth.
India has proven financial capacity to support state actors, as it has shown in Afghanistan, but also in the alleged upcoming financial support that it will provide to neighboring Sri Lanka. The growing economy of India, if the rebound from the pandemic crisis is as expected, can provide Central Asian states with the funding necessary to complete the construction of the infrastructure needed, especially on the energy and industry (processing) sectors. This will provide good return on investment for Delhi, because several of the upstream energy and electricity projects are expected to benefit downstream South Asia. Assuming the role of a security guarantor would be a much more complex task. India’s main supplier of military equipment is Russia, and there is very little chance that the South Asian country will attempt to provoke its main supplier.
The emerging role of Turkey
Over the past decade, Turkey has been increasing its footprint in Central Asia in all terms. On the institutional side, its initiative to establish the Organization of the Turkic States has somewhat unified the region under a certain theme. It has also significantly increased trade volumes with Uzbekistan, increasing from $2.4 billion in 2019 to $3.4 billion in 2021. These volumes increased with Kazakhstan as well, from $3.9 billion to $4.1 billion, but also with Kyrgyzstan, which reached $836 million in 2021. At the same time, it has been consistently providing military support to these states, with Ankara’s state of the art Bayraktar drones. After their success in the Nagorno-Karabakh war, but also their dominance over the Russian military forces in the Ukraine war, they have gained popularity among Central Asia. Not long after that Bishkek moved forward with their purchase, followed by Kazakhstan and Uzbekistan, whose Ministers of Defense signed Memoranda of Agreements with Ankara on that matter. Finally, it has been indicated both by Uzbekistan and Pakistan that the presence of Turkey in the region, as security guarantor for Afghanistan, would be something desirable. In return, Turkey has portrayed eagerness in working together with regional partners on peace. Unfolding its strategy on the region, Turkey has audibly depicted that it can fill in the void, predominantly as a security guarantor in the region.
If there is any hesitance to be expected by Ankara, when it comes to assuming a more important role in the region, it will stem predominantly from its very sensitive position in the Russia-Ukraine dispute. Turkey has acted mainly as a mediator between the two sides, facilitating talks towards cease fire or even peace. President Erdogan has taken a stance of support to both sides, on one hand providing Ukraine with the TB2 Bayraktar drones, but on the other side not taking part in sanctions imposed towards Moscow. Becoming the main security guarantor in Central Asia, a region dominated by Russia, might lead to a more hostile stance by the Kremlin, which is not what the pragmatist Turkish president would want. He could, however, be the main financial supporter of countries such as Kyrgyzstan or Tajikistan. Regarding the larger Central Asian states, such as Kazakhstan and Uzbekistan, Turkish firms could contribute to the infrastructure construction part, but they would lack the financial capacity to fully support them.
The constant efforts from Iran
Iran is also among the key players that eyes the looming power vacuum in Central Asia. The oil and gas-rich state has continuously contemplated over the great importance of maintaining stability in the neighboring region as part of its national security agenda. While trade with Central Asian states might not be Tehran’s strong suit, neighboring Afghanistan continues being a strategic partner, with trade volumes surpassing $2.9 billion, more than double of what the trade volumes with Pakistan are. Turkmenistan and Central Asia in general is considered to be a transit path for the trade with Kabul and Iran can see this as a starting point from a broader collaboration with these countries. Most of them are oil and gas producers and a potential isolation of Moscow will severely limit the options of countries like Turkmenistan and Kazakhstan to sell their natural resources. Tehran can offer alternative pathways and provide them with access to the sea, laying down a compelling argument for collaboration. Ashgabat has already initiated negotiations with Iran on taking advantage of the port of Chabahar via a pipeline connection or through road transportation of oil. If the rest of the regional state actors grow desperate with the continuation of the war in Ukraine, there is a high probability that more of them will seek alternative routes and the Persian Gulf is in a great position to welcome such proposals.
Iran can find a great set of partners to overcome existing sanctions and to be more resilient towards future ones, should Europe and the USA resort to hardening their stance in the future. Reflecting on that from Central Asia’s side, nonetheless, facing currently the effects of connection to a sanctions-hit economy like Russia, there is expected to be reluctance on working with Iran on trade and finance. Military support will be even more difficult to provide, as it will raise even more red flags to the global community, at a time when the Eurasian community is already under great stress due to the Russian invasion of Ukraine.
Conclusion
The looming default of Sri Lanka is just another piece in the puzzle of the shifting geopolitical world order. The fear is increasing in Central Asia that a default domino is just around the corner and, looking at the overall stance of both their strategic partners, Moscow and Beijing, they are bound to look for alternatives. India is best situated at seizing this opportunity and this can be a step at changing the balances with China and Russia. What Delhi ought to look out for, nonetheless, is provoking any of these global powers. Russia, for instance, is heavily invested in being the security guarantor in Central Asia and an aggressive approach from India on that regard might lead to a turn for the worse in its relations with its main military supplier. Similarly, Turkey has positioned itself greatly in the region and could assume a more important role, it should proceed however keeping the balance between Russia and the West intact. It has a much lower financial capacity than Delhi but can provide better expertise on the military sector. Lastly, Iran is in the weakest position, primarily due to the relations it maintains both with the West and with Russia. It could prove to be a solid partner for Central Asia, especially on the field of energy trade, because of its strategic position.
The countries of Central Asia ought to make wise decisions, so that they avoid having the fate of Sri Lanka, while at the same time detaching from the triangle they are in with China and Russia. They should take into considerations the main characteristics of each key state actor and make well-informed decisions that will not lead to an escalation of the Russia-Ukraine conflict in the rest of Eurasia, while at the same time guaranteeing a diversification of their economies.