The Investment Environment Changes in the Mining Industry of the Kyrgyz Republic and Implications

Jinhong Joo

The Kyrgyz Republic is one of the most impoverished countries in Central Asia and its economic cooperation with Korea has been far from robust. However, the Kyrgyz Republic has untapped mineral resources including those of precious minerals that was first developed during the Soviet era. The Kyrgyz Republic is the 3rd largest gold producing country in Central Asia and is also noted for mining of rare earth elements. The mining industry is the most important export industry in the Kyrgyz Republic and the core industry of the Kyrgyz economy. The export of mineral resources represents more than 50% of total exports of the Kyrgyz Republic and the gold export accounts for the largest share of the country’s mineral resources export. The foreign mining companies have entered the Kyrgyz Republic since its independence but their operations have been less than successful due to severe interference of the Kyrgyz government. After the first revolution, the Bakiyev government put forth efforts to attract the foreign investment to its mining industry, which led to increased Kazakh and Chinese investments in the industry.

However, since the new Kyrgyz government declared the investment policy to attract foreign capital after the second revolution in 2010, the investment environment has deteriorated. The main reason for the deterioration is increased political risk from the change of political structure and an unstable political environment. The political risk stems from the fact that the government is a fragile coalition; the policies adopted are often the based on populism and there is much political strife surrounding the core industry, mining. Such political risk has obstructed the long term investment. In addition, the Kyrgyz government did not expend sufficient effort towards improving its investment environment. The investment environment for the mining industry as the Kyrgyz Republic's core industry also became worse, because of the government's policy of increasing its control over the mineral resources and the mining industry, in addition to rising conflicts between the Kyrgyz government and foreign mining companies resulting from the Kyrgyz government interference in the mining industry, conflicts between foreign mining companies and local populations around the mines, and the growing awareness among foreign mining companies of the negative investment environment of the Kyrgyz mining sector.

The Kyrgyz government policies to reinforce its control over mineral resources and the mining industry is not expected continue, however, as development of the Kyrgyz mining industry is essential for economic development in Kyrgyzstan, which is only feasible through infusion of foreign capital into the mining sector. There is actually historical precedence regarding Kyrgyz government easing regulations related to its mining sector as a response to the weak foreign investment into its mining sector. Also, any stringent policy on the part of Kyrgyz government would not be successful given the fragile coalition government, the parliamentary government system, and the nearly even distribution of parliamentary seats among parties. This is the reason why the failure of economic policy threatens to turn into political failure immediately. Recently, the Kyrgyz government's policy regarding the mining sector seems to have relaxed somewhat because of foreign mining companies' legal battles against the government and their announcements of possible divestment from the Kyrgyz mining sector, threatening and frustrating the government. On the other hand, the new Kyrgyz government's policy on mining sector is opposed to those of the former Kyrgyz government. The abolition of the former government's policy could ease the way for the new government, which means new mining projects permitted by the new government would not be overly burdened by regulations.

In summary, the present, deteriorated state of investment environment in the Kyrgyz mining sector could continue until the 2015 parliamentary elections changes the present distribution of present parliamentary seats. But the investment environment would be improved for the mid and long terms because the Kyrgyz republic sees prospects for continued exploitation of minerals such as gold and rare earth elements and the present Kyrgyz government does not have the economic and political leverage for exerting strong influence on the mining sector.

Therefore, based on this analysis of prospects for foreign mining companies and the investment cases, the implications for companies are as follows: First, the deterioration of the Kyrgyz mining sector's investment environment would continue at least until 2015 but the improvement of investment environment is expected for the mid and long terms. Second, changes in Kyrgyz mining regulations are aimed at transparency of its mining sector and the removal of corruption, so the companies would do well in adhering to them. Third, the mining projects are vital to local populations, and so companies have to recognize the need to create jobs around the mining areas and of the contribution to the local economy. Fourth, companies need to respect Kyrgyz sensitivity to environmental pollution and thus must heed relevant environmental regulations. Fifth, Korean companies need to recognize the strategy of the foreign mining companies. Foreign mining companies are perfectly willing to accept the Kyrgyz government's demand for contribution to the local economy, in order to participate in the mining industry in the Kyrgyz Republic.

The strategy for the mining companies are as follows: First, the companies must focus on the development of prospective mineral resources such as gold and rare earth elements. Second, they must meet demands for contribution to the local economy, meaning mining companies need to plan together in advance with agricultural products-processing companies or infrastructure construction companies, as local communities need to develop agricultural business networks and build infrastructure. Third, companies should try to invest in the mining sector with local companies in joint ventures because joint ventures with local companies will allow them to avoid political controversies. To support the mining companies, the Korean government is able to utilize Official Development Aid especially for job education and training programs, construction of healthcare infrastructure and cleanup of environmental pollution caused by mining. These ODAs will help create a qualified local labor force in the mining sector and contribute to the health of locals and the local economy. In the end, this would lead to increased competitiveness for Korean companies in the Kyrgyz mining sector.