KYRGYZSTAN: PROBLEMS, OPPORTUNITIES

John BanksSenior Associate
Robert EbelSenior Manager
International Resources Group Washington, D.C.

Kyrgyzstan is a country of 4.3 million persons in Central Asia with Kazakhstan bordering to the north, China to the southeast, Uzbekistan to the west, and Tajikistan to the southwest.

Among Kyrgyzstan's major ethnic groups, Kyrgyz account for 52% of the population, Russians 22%, and Uzbeks 13%.

Since independence Sept. 7, 1991, from the Soviet Union, Kyrgyzstan has found itself in a very difficult position. The economy is in rapid decline with industrial output likely to fall 20-25% in 1993.

Inflation is at or exceeds hyperinflation levels. And although salaries have increased substantially, in real terms the average worker faces declining purchasing power. There is no reliable banking or taxation system, and labor discipline continues to decline.

The situation in the energy sector is particularly strained.

In the past, cheap--subsidized--energy from the Soviet Union in whatever amounts were required resulted in a focus on increased industrial output with little concern for energy conservation. Before 1990, the supply of fuels and energy in Kyrgyzstan increased 2-3%/year. Consumption of fuels and energy grew at a similar rate, resulting in high rates of energy consumption per unit of national income, which continues unchecked.

As a member of the Soviet Union, Kyrgyzstan had been overwhelmingly dependent on energy imports (Table 1).

Oil and gas production are minimal, there are no refineries in the country, and all petroleum products are brought in from Russia, Kazakhstan, and Uzbekistan. Natural gas is supplied from Turkmenistan. Although there are domestic reserves of coal, imports from Russia and Kazakhstan account for 55% of supply.

However, there is significant hydropower potential in Kyrgyzstan. Energy officials have clearly identified development of this resource as the path to energy independence and economic progress.

Here is an overview of Kyrgyzstan's energy sector:

CRUDE OIL, PRODUCTS

Oil production is about 2,400 b/d, while consumption is estimated at 30,000 b/d, resulting in virtual total dependence on imports. All major oil deposits have been drilled, and production continues to decline as a result of water encroachment and natural decline of reservoirs.

Although the government has foreign assistance in reviewing geologic and seismic data in an effort to determine the extent and viability of exploiting oil resources, there is no pipeline infrastructure.

The main supplier of petroleum products is Kazakhstan. It provided 50% of Kyrgyzstan's product imports in 1992, followed by Russia with slightly less than 30%.

Difficulties in the Russian oil industry, where oil production is falling rapidly, have a direct impact on the supply of petroleum products from Russia to Kyrgyzstan. As the winter of 1992-93 approached, Kyrgyzstan's imports of Russian gasoline were running just 56% of the previous year's level, while imports of diesel fuel were off about 51%, and those of fuel oil were down 66%.

For the country as a whole, authorities expect a deficit in petroleum product supply of 20,000 b/d. That is a very severe deficit, considering that consumption of all products in 1992 is likely to be less than 30,000 b/d when final figures are in.

NATURAL GAS

Current natural gas consumption is estimated at 1.9 billion cu m/year, of which only 3% is produced domestically.

Traditionally, Kyrgyzstan has imported its gas from Turkmenistan via Uzbekistan.

Since the breakup of the Soviet Union, however, Turkmenistan has raised natural gas prices substantially and Uzbekistan has increased transit tariffs.

District heating officials in Bishkek, Kyrgyzstan's capital, estimated natural gas prices increased from 20 rubles/1,000 cu m in 1989 to about 10,000 rubles/1,000 cu m in 1992.

In addition to sharply increasing prices, Turkmenistan has reduced deliveries to Kyrgyzstan, preferring to sell gas for hard currency to western customers.

COAL RESOURCES

Kyrgyzstan's coal resources are estimated at 1.36 billion metric tons, mostly brown or lignite with very high ash content. Less than 1% has been exploited to date.

The country's coal industry is in deep crisis, with working conditions at mines and living conditions for miners significantly deteriorating. In addition, mining costs have risen dramatically. As a result, coal production has fallen by about 40% in the past 2 years.

This trend is worrisome because demand for coal is increasing due to the rising cost of petroleum products--especially fuel oil--and natural gas and to the increasing unreliability of imports of those fuels.

For example, Bishkek's district heating system depended on coal to fuel 20% of generating capacity in 1990, but coal's share increased to 50% in 1992. The cost of coal for the district also increased from 12 rubles/billion cal in 1989 to 2,400 rubles/billion cal.

The government estimates that, to meet demand, coal production should climb to 4 million metric tons/year by 1995 and 4.7 million metric tons/year by 2000 from an estimated 1992 level of 2.25 million metric tons. This, however, will require significant investment from outside sources.

ELECTRICAL POWER

Although already the most developed energy subsector in Kyrgyzstan, further development of hydropower resources and electrification of the economy are the pillars on which the government seeks to base long term economic stability and independence.

Hydropower accounts for 80% of all of Kyrgyzstan's electricity production, and electricity accounts for 60% of the country's total energy output.

The government estimates that only 9% of total hydropower resources have been exploited to date. Potential electricity output from hydropower capacity is estimated to be 4.6 million kw-hr/year. One of the key issues in developing this potential, however, is expansion and upgrading of the power transmission network, especially the integration of northern and southern networks.

The manufacturing infrastructure for electrical components, equipment, and machinery exists and forms a base from which upgrades, expansions, and further investment can be added.

INVESTMENT OPPORTUNITIES

Based on this overall energy scenario, the government of Kyrgyzstan has highlighted priority areas for investment where seeks foreign-especially U.S-investors. Here are the priority areas:

Hydroelectric power--review of expansion plans, feasibility studies for development of sites, construction of small hydropower units, upgrade and expansion of transmission network.
Electrification of the economy--formation of joint ventures with western companies to manufacture equipment, appliances, and other components, as well as to upgrade and rehabilitate manufacturing plants.
Coal--determine reserve base, upgrade facilities, review markets and expansion plans, integrate environmental impact assessments, introduce cleaner processes and technologies.
Development of a legal and regulatory framework, especially as it relates to attracting foreign investors.

Kyrgyzstan's government is taking substantial steps to solve economic problems. Compared with neighboring Central Asian republics, Kyrgyzstan is seen as having progressed further in its economic reforms, particularly in its efforts to privatize the economy. Price liberalization has been introduced on a broader scale than in other former Soviet republics.

Kyrgyzstan, like all other newly independent republics of the former Soviet Union, sees much of its economic salvation in the encouragement of foreign investment.

But severe constraints to significant U.S. investment remain.

Kyrgyzstan is remote from the rest of the world and landlocked. And with the ruble remaining nonconvertible and the ability to repatriate profits uncertain, except through barter or the export of raw materials, interest in Kyrgyzstan could be marginal for some time.

However, great progress is being made in laying the foundation for closer economic cooperation between the U.S. and Kyrgyzstan, particularly in the encouragement and protection of investment (Table 2).

There are opportunities for the adventuresome U.S. investor. Kyrgyzstan's democratic survival depends in large part on foreign technical and financial assistance.