Foreign investment into central Asian countries, the so-called 'Stans' (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan), decreased by almost 20% in 2013, as the investment cycles of a number of flagship projects reached a natural end and the business climate across the region wavered.

Kazakhstan, central Asia's largest economy and FDI recipient, saw net inflows of foreign investment fall to $7.79bn in 2013, down 34% from 2012, according to figures from the country's central bank. Foreign investment into Turkmenistan dropped by 5% to about $3bn, the Asian Development Bank estimated. The only positive news came from Uzbekistan, where the government reported an increase in FDI in 2012 to $3bn, from $2.5bn a year earlier.

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“Most of the foreign investment coming into these countries is either going to extractive sectors [oil, gas and metals] or non-tradable sectors [construction, finance, real estate, communications, etc...],” says Pradeep Srivastava, principal economist and head of the Asian Development Bank's central Asia regional economic co-operation unit.

Pit stop

Although investments into central Asia have been steadily increasing over the past decade – the region's average 2000 to 2005 inflows did not exceed $3bn, according to figures from the UN Conference on Trade and Development – Mr Srivastava notes: “FDI into these countries tends to be volatile, reflecting the fact that the numbers are generated by investment projects that can be very large."

Central Asia has seen a number of world-class developments, mostly in the oil, gas and mining fields, in the past few years. But, as some of these projects come online, the FDI inflows that they generate decrease accordingly. Kazakhstan's 2013 FDI figures were impacted by the end of the investment cycle for the iconic $50bn Kashagan Field project, which officially came online in September 2013. Operations suffered an early setback the following October though, and have not resumed since then.

A similar trend was witnessed in nearby Mongolia, culturally closer to central Asia, though geographically belonging to east Asia – where construction of the $4.6bn Oyu Tolgoi open-pit mine, the country's flagship copper and gold development, which is a joint venture between mining powerhouse Rio Tinto and the government – wrapped up in July 2013, leading to a 52% drop in FDI into the country.

At the same time, domestic factors across the region have made foreign investors more cautious. “If we look at Kazakhstan's overall business climate and some specific sectors of its economy such as the financial sector, certainly more work has to be done,” says Agris Preimanis, the European Bank for Reconstruction and Development's lead economist for central Asia. “The business environment is not good enough at the moment, but there are positive changes coming. There is an urgency among authorities to improve the business climate, and the appointment of a new prime minister [will help to move things] in this direction.”

New directions

Kazakhstan's new government has already announced bold steps to shore up foreign investment, including a new investment law and a plan to make investors exempt from corporate income tax for 10 years. Prime minister Karim Masimov, who took office in April 2014, is now responsible for carrying out these reforms and luring investors back to the country.

Kyrgyzstan is also trying to improve its business climate. Its economy is heavily reliant on the ebb and flow of the output at the Kumtor gold mine, which is wholly owned by Canadian mining company Centerra Gold, but there are plans to diversify the economy and attract new investors by establishing 'investment zones' in the cities Naryn and Osh.

Neighbouring Uzbekistan is looking to south-east Asia, and is hoping to enhance its commercial ties with partner countries such as Bangladesh and Malaysia in a bid to strengthen its textile industry. Meanwhile, Mongolia approved a new foreign investment law in October 2013, and hopes to resume a multi-billion-dollar expansion planned at Oyu Tolgoi in a matter of months.