This chapter highlights the significance of improving connectivity in Central Asia in the context of Russia's full-scale invasion of Ukraine. It draws attention to the region's reliance on a limited number of trade partners and export commodities. While Central Asia's trade performance has shown resilience, close ties to Russia expose the region to political and supply insecurities. The chapter emphasises the renewed momentum surrounding connectivity and the region’s desire to integrate into global value chains to reduce its exposure to downside risks. It discusses the role of transport connectivity in mitigating distance penalties, increasing competitiveness, reducing trade costs, and boosting trade volumes. Additionally, the chapter addresses the relevance of trade facilitation and the utility of the OECD's Trade Facilitation Indicators (TFIs) in identifying ways to improve connectivity.
Trade Facilitation in Central Asia
1. Setting the scene
Abstract
Russia’s invasion of Ukraine reinforced the need for Central Asia to improve connectivity
Central Asian economies rely on a small number of trade partners
By 2021, the export profile of most Central Asian countries remained concentrated on a small number of partners and products for both imports and exports(Figure 1.1). Europe continues to be an important trade partner, even if Central Asian exports to Europe consist chiefly of energy commodities, and exports have declined since 2019 (OECD, 2021[1]). By contrast, trade with China has increased, but during 2020-22 was subject to border closures due to the country’s zero-COVID policy. From 2016 to 2021, Russia’s importance as an export destination rose for all countries except Tajikistan. Russia and China held an even more dominant position in imports in 2021: their import shares ranged from 44.4% in Uzbekistan to 72.1% in Kyrgyzstan. This dependence has increased for Kazakhstan, Mongolia, and to a lesser extent, Uzbekistan. Of note is Central Asia’s importance as an export destination for Kyrgyzstan and Tajikistan, as well as a source of imports for the latter. For most countries of Central Asia, regional trade has increased since 2016.
Figure 1.1. Share of exports and imports from Central Asia with main partners (2016 and 2021)
Note: the Observatory for Economic Complexity’s definition for Europe is used. Europe excludes Russia. Central Asia includes Afghanistan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, and Uzbekistan. *Kyrgyzstan’s ratio of imports to GDP in 2016 was 116.8% and in 2021 140.7%.
Source: OEC, World Bank
The trade performance of Central Asia has proven surprisingly resilient to recent shocks, but significant downside risks remain
Central Asia’s trade has emerged in a better shape than initially anticipated following Russia’s full-scale invasion of Ukraine. Russian enterprises have sought to overcome import barriers, including for technological goods, as they face high uncertainty, restricted access to international markets, and subdued domestic demand that may continue as the economy shifts towards autarky (World Bank, 2023[2]; EBRD, 2023[3]; German Council on Foreign Relations, 2023[4]). While these firms move away from established supply lines, Central Asian economies are increasing trade with Russia by exporting their products, providing transport and re-exporting services, intensifying their dependence on Russia (EBRD, 2023[5]). Russia-Kazakhstan trade, in particular, benefits from the Eurasian Economic Union (EAEU) – a common customs area with unified technical standards – and standardised gauge width for rail traffic. In the first five months of 2023, Kazakhstan’s exports to Russia rose 45.1% year-on-year. Over this same period, Kazakhstan’s imports from the European Union (EU) and the United Kingdom (UK) increased by 82.8% and imports from non-EU/non-EAEU countries jumped 72.6% – suggesting a substantial uptick in re-exports (Bureau of National Statistics, 2023[6]). Intermediary trade in dual-use goods risks secondary sanctions despite government assurances to comply with Western sanctions (Reuters, 2023[7]).
Though trade has remained robust so far, close ties with Russia leave Central Asia vulnerable to political and supply risks. Exposure is the highest in terms of trade, freight transit, and investment, due to the region’s close political and economic integration with Russia, limited export partners, and insufficiently diversified economies (ITF-OECD, 2019[8]; OECD, 2022[9]). Recent OECD surveys assessing the business climate in Kazakhstan and Uzbekistan found that 97% of respondents respectively have faced logistical challenges due to the disruption of supply chains in Kazakhstan and 85% in Uzbekistan (OECD, 2023[10]; OECD, 2023[11]). Moreover, even if sanctions are raising the cost of trade for the region, Russia remains an important transit country for Central Asia (OECD, 2022[9]). For instance, over 80% of Kazakhstan’s oil exports transited through Russia in 2022, despite efforts to find alternative routes. Repeated cessations of oil transit through Russia and the deteriorating security of civilian maritime navigation in the Black Sea, accentuated by attacks on the Black Sea port of Novorossiysk – through which most of Kazakhstan’s oil is shipped – show the risks involved in over-reliance on a single partner (Reuters, 2023[12]; The Jamestown Foundation, 2023[13]).
In this context, connectivity has gained renewed attention
Central Asian states have shown a strong desire to integrate into global and regional value chains
The importance of connectivity is substantial, as global value chains are increasingly interconnected and spread out all over the world. These challenges are exacerbated by the region’s relative distance to major markets, such as Europe, which remains the largest export destination for nearly all countries of Central Asia, incurring significant distance penalties that cannot be eliminated. Transport connectivity can mitigate such issues and increase Central Asia’s competitiveness, promoting regional integration, reducing trade costs, and increasing trade volumes (ITF-OECD, 2019[8]). Global value chains continue to experience disruptions, including those triggered by COVID-19 and the Russo-Ukrainian war. International sanctions have increased the cost of shipping cargo along the Northern Corridor running from China through Russia to the European Union (EU), causing significant delays and global freight tariff increases. As shocks are placing logistics under further stress and increasing uncertainty around trade costs, countries are looking for solutions to address their evolving connectivity needs. The disruptions to freight on the Northern Route could accelerate the shift in regional trade and transit strategy towards Central Asia, especially through the Trans-Caspian International Transport Route (TITR, also known as the Middle Corridor) that traverses Central Asia and the Caucasus through Türkiye and the Black Sea to Europe. The TITR has gained renewed attention as a viable alternative to the Northern Corridor for Asia-Europe transit and for regional integration. Trade facilitation measures are key in offsetting some of the time and cost increases experienced by firms and consumers and in opening new routes. The ongoing implementation of the World Trade Organisation (WTO) Trade Facilitation Agreement (TFA) helped provide the basis for country responses to global shocks, with countries at all levels of development making progress in facilitating trade since the TFA entered into force in 2017 – including Kazakhstan, Kyrgyzstan, and Tajikistan1.
Trade facilitation is crucial to global value chains, as it reduces the time and cost associated with moving goods. Governments should consider more than just the domestic and regional impacts of trade and transport infrastructure development. Closer collaboration and joint planning between economies are essential for improving connectivity and competitiveness. This collaboration is equally crucial for implementing "soft" policies that enhance trade logistics and competitiveness, as trade facilitation can be achieved through streamlining procedures across supply chains, not just investing in physical infrastructure. Efficient border management plays a critical role in eliminating unnecessary delays and increasing predictability in border clearance processes. For instance, trade facilitation reforms improving border crossing times across Central Asia could increase overall road traffic by an estimated 11% by 2050, with positive traffic gains for all countries of Central Asia – but especially smaller ones such as Kyrgyzstan (ITF-OECD, 2019[8]).
To help governments improve border procedures, reduce trade costs, boost trade flows and reap greater benefits from international trade, the OECD has developed a set of Trade Facilitation Indicators (TFIs) (see Table 1.1). The TFIs help identify areas for action and enable the potential impact of trade facilitation reforms to be assessed. Trade facilitation encompasses various factors, such as information availability, involvement of the trade community, advance rulings, appeal procedures, fees and charges, formalities (both documents and automation), procedures, border agency co-operation (both internal and external), and governance and impartiality. The OECD TFIs help track the specific areas where progress has been made in the implementation of the WTO TFA, as well as other trade facilitation policies. The TFIs also help identify where further reforms are needed. Their value added lies in identifying changes in both the regulatory frameworks for trade facilitation and their implementation in practice. The 11 major indicators thus cover the full spectrum of border procedures for more than 160 economies across the globe. The TFIs take values from 0 to 2, where 2 designates the best performance that can be achieved.
Trade facilitation reforms can help Central Asia benefit from trade and unlock trade prosperity
Efforts across Central Asia to facilitate trade have borne fruit, as TFI performance has improved significantly for all economies in the region since 20192. Uzbekistan, Kazakhstan, and Tajikistan were among the top four trade facilitation performers in the Europe and Central Asia region in 2022, with Kazakhstan having made the greatest absolute progress since 2019. Yet, despite these strides, Central Asia is still among the poorest performing regions in trade facilitation.
As a result, and at the request of the government of Kazakhstan, this report aims to support Central Asia’s efforts to improve its trade facilitation environment. Based on recent OECD work, the second chapter of this report provides region-wide recommendations common for Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan to improve their business environment based on the OECD’s TFI analysis. It focuses on (i) prioritising trade community feedback in improving informational content and streamlining procedures to respond to the pressing needs of traders; (ii) digitalising and harmonising regional standards of documentation requirements to reduce the time and financial burden of cross-border trade; and (ii) implementing systemic border agency co-operation mechanisms to boost regional co-ordination and collaboration. Subsequent chapters are dedicated to Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, taking stock of progress in each country before recommending initiatives to overcome remaining trade barriers at the national level.
Table 1.1. OECD TFIs: Overview of key dimensions and measures
Source: OECD analysis.
References
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[4] German Council on Foreign Relations (2023), Tech Sanctions Against Russia Turning the West’s Assumptions Into Lessons, https://dgap.org/system/files/article_pdfs/DGAP_Analyse_2023_03_EN.pdf.
[8] ITF-OECD (2019), “Enhancing Connectivity and Freight in Central Asia”, International Transport Forum Policy Papers No. 71.
[10] OECD (2023), Insights on the Business Climate in Kazakhstan, https://www.oecd.org/publications/insights-on-the-business-climate-in-kazakhstan-bd780306-en.htm.
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[2] World Bank (2023), Europe and Central Asia Economic Update - Spring 2023, https://openknowledge.worldbank.org/server/api/core/bitstreams/004535c2-fbcd-4e96-9439-bc4bc502c2b3/content.