Central Asia & The Role in International Commodity Markets
Today we are talking about countries that many people forget exist and commodity markets in general
I spoke to my friend who was from Kazakhstan and he gave me a run down of Central Asian history. After our conversation, I got into a research rabbit hole. It was interesting to see Central Asia’s similarities and differences with other parts of the globe, so I thought I’d write about it.
Central Asia, comprising Kazakhstan, Uzbekistan, Kyrgyzstan, Turkmenistan and Tajikistan, is larger than India but has less than 80M people, primarily due to significant desert terrain. Kazakhstan itself is larger than all of Western Europe with only 20M people.
In medieval times, during Chinese economic dominance of silk textiles, Central Asia was a crucial route of the “Silk Road”. Central Asia is off referred to as the region of the “Stan States”, with “Stan” meaning “Land of” in Persian/Farsi.
These Central Asian countries, squeezed between Iran, China, and Russia, historically fell under the spheres of influence of these nations. Formerly part of the Tsarist Russian Empire and later the Soviet Union until 1990, they gained independence, becoming some of the world's youngest sovereign nations.
As of January 2024, these Central Asian countries, all have passports that are as old as someone in their early 30s, ranking among the world's youngest, with only South Sudan, Eritrea, and a few other states being younger than these Central Asian countries. By the West’s perspective, these nations are very authoritarian and notorious for corruption.
Since 1990, Central Asia has had varying degrees of success. Some of them (Tajikistan, Kyrgyzstan, Uzbekistan) are just as poor as they were under Moscow’s control when you adjust for inflation. Kyrgyzstan has undergone three revolutions since independence. These three countries are lower-middle income countries with incomes comparable to African countries like Cameroon, Kenya, and Zimbabwe. If you adjust incomes for purchasing power, Uzbeks living standards are closer to a more developed lower-middle income country like Morocco.
Conversely, oil-rich Kazakhstan and gas-rich Turkmenistan have become much wealthier and are now upper-middle income countries. Turkmen are ,on average, richer than South Africans, and Kazaks are, on average, richer than Brazilians.
The Soviet days
Under Soviet rule, Stalin's farming policies, including compulsory collective farms and fixed pricing regardless of effort, resulted in reduced farming productivity. This lead to a devastating famine in Kazakhstan, accidently killing a third of the Kazakh population (~2M people).
On the plus side, the Soviets massively improved Central Asian literacy rates, started industrialization programs there, and promoted Central Asians to the highest seats of government. Before the Soviet period, only ethnic Slavs (Ukrainians, Poles, Belarussians, and Russians) were allowed to hold high positions in the Russian Empire.
The Soviet Union's control over Central Asia also illustrates that environmental damage is not exclusive to capitalism. Marxist Leninist Socialism can lead to environmental disasters too. The Soviet Union drained the Aral Sea, which was one of biggest environmental catastrophes of the 20th century. The draining of the Aral Sea was part of Stalin’s Great Plan for the Transformation of Nature.
It’s clear that industrialization, which can occur in any economic system- market economy capitalism or command economy socialism, is the cause of environmental damage. The Soviet Union diverted rivers for their massive irrigation project which shrunk the Aral Sea, obliterating the local ecosystems and communities that depended on it.
The Aral Sea used to be the fourth largest body of inland water on earth. Look below to see the drainage on a satellite image.
In addition, Kazakhstan was basically used a nuclear test site where over 450 nuclear tests were done on the “Semipalatinsk Test Site”. Over 1.5M people were accidently exposed to nuclear fallout over the years Kazakhstan was part of the Soviet Union.
What was their economic policy pre & post independence?
In varying degrees, all of these countries, except for Uzbekistan engaged in a policy called “Shock Therapy” after independence. These newly independent countries lived under the failures of communism and were eager to transition to a market economy.
Under the Soviet Union they had these polices:
1. Command Economy: Businesses couldn’t set their prices, bureaucrats controlled the prices of all goods. They were command economies instead of market economies.
In market economies, prices serve as signals to scale up or roll back production since market prices are functions of scarcity or excess. When Central Asia was part of the Soviet Union, prices for all goods were set by bureaucrats. Many prices set by government officials were so absurd that there was a clandestine black market where people would sell their goods for profit.
Also, the government set production quotas which were a “meet the bull’s eye or miss board” proposition. The result was massive shortages of many consumer goods (since they were priced below market price) and humongous stockpiles of industrial goods (weapons). Food shortages were common in the Soviet Union and so were long lines for cars since cars were priced so cheaply. The average wait time for a car was 7 to 10 years.
At the same time, Soviet weapons were so abundant that Russia and Ukraine still have a vast supply of Soviet weapons that they are using against each other. When Kazakhstan received independence, they still had an ample amount of Soviet nukes. They were the 4th largest nuclear power at independence. In the Budapest Memorandum in December 5th, 1994, Kazakhstan gave up their nukes in return for security guarantees from Russia, U.S., and UK. Under shock therapy, these nations removed regulations on prices controls.
2. Government control of the means of production: Enterprise was owned by a government owned enterprise or a cooperative. There was almost no private business to speak of. The vast majority of enterprise was state-owned instead of privately owned by an entrepreneur. Under shock therapy, government monopolies were sold at auctions or to managers… The auction system was very corrupt.
3. Non Convertible Currency: These countries didn’t have convertible currencies to other currencies at market rates. The Soviet ruble, was not convertible to other currencies on the global market. Whenever the Soviet Union engaged in trade with its allies like the former communist Poland, Hungary, East Germany, Cuba, Guinea or Czechoslovakia, trade was done by bartering. Or there would be a trade agreement for specific types of goods. During shock therapy, these nations liberalized their currencies and trade.
The shock therapy reforms included privatizing some government owned firms to investors, allowing firms to set their own prices, and liberalizing currency and trade.
The execution was terrible. Without Russia subsidizing their incomes, it was difficult to manage initially. The result was a long protracted, recession with increased entrenched poverty. 90% of people lived in poverty after shock therapy in Kyrgyzstan, and people who suffered from Tuberculosis nearly doubled in Turkmenistan. Unemployment tripled in Kazakhstan and there was a 40% increase in male deaths from 1991 to 1994. Inflation was rampant, even after all Stan countries left the Ruble by 1995. The new currencies of Kazakhstani Tenge, Uzbekistani & Kyrgystani Som, Tajikistani Somoni, and Turkemnistani Manat were so useless on the international markets that their exchange rates were horrible and imports for food, medicine, and fuel were horrifically expensive. Government monopolies were privatized leading to the enrichment of a few. Some of these newly private enterprises went bankrupt after a few years due to not being able to survive without subsidies, corruption, and mismanagement.
Within a few years after independence, Uzbekistan, Tajikistan, Kyrgyzstan, and Kazakhstan went nearly bankrupt and borrowed from the IMF, the lender of last resort. The only country that avoided an IMF bailout loan, was Turkmenistan.
Things didn’t turn better until the late 90s, when commodity trading firms like Glencore, Vitrol, and etc. rushed in the Kazakhstan & Turkmenistan for oil & gas projects, sugar in Kyrgyzstan, and Tajikistan’s aluminum. Cargill rushed in for Uzbek cotton.
By the 2000s, thanks to Chinese hyper fast growth and rush for commodities, China was trading and investing in Africa and Central Asia. In fact, China’s trade with the Stan countries became so important that in 2001, China made the Shanghai Cooperation Organization, a security & economic group, initially between China, Kazakhstan, Kyrgyzstan, Tajikistan, and Russia. Uzbekistan, India, Iran, and Pakistan joined the Shanghai Cooperation Organization later. The 2000s-2014 era, was a massive growth period for the Central Asian & Africa region. China flooded Kazakhstan with capital to develop pipelines to transmit crude oil to China.
All of these nations are mainly commodity exporters since they are all loaded with natural resources. Kazakhstan mainly sells crude oil, gold and copper, Tajikistan sells gold, aluminum, and raw cotton, Turkmenistan sells mainly natural gas, refined petrol, & crude oil, Kyrgyzstan sells mainly gold, glass, and precious metal ores, and Uzbekistan has some manufacturing in yarn but also sells mainly gold and copper.
Kazakhstan has the 2nd largest reserves on Uranium, 6th largest zinc reserves on earth, 9th largest reserves of coal, 10th largest copper reserves, 12th largest reserves of crude oil, and 15th largest reserves of natural gas. In fact, because of its large oil & gas reserves, Kazakhstan made a government owned oil &gas firm named KazMunaiGas. As of November 2023, the Kazakhstan sovereign wealth fund has ~$70B assets under management.
Uzbekistan has 10th largest reserves of gold mines on earth, 13th largest reserves of uranium, and 19th largest reserves of natural gas.
Kyrgyzstan has the 4th largest reserves of antimony.
Turkmenistan has the 6th largest reserves of natural gas.
Adjusted for inflation, Tajikistan and Kyrgyzstan are poorer than they were during the Soviet era.
Uzbekistan, as of 2022, has barely surpassed its Soviet performance.
Only Turkmenistan and Kazakhstan have become significantly richer, due to the oil & gas on the Caspian sea, they are both upper middle income countries.
Basically the “Stan” countries are similar to African countries. Their economies depend on selling raw materials - cotton, mining ores or fossil fuels. This works great when global demand rises but is terrible when global demand falls.
The 2000-2014 era was amazing for Central Asia & Africa, but post 2014, only countries that don’t depend on commodities to grow were able to withstand the commodity crunch. Central Asia and most of Africa are largely un-diversified besides commodities, post 2014 was a lost decade to raise living standards for Central Asia & most of Africa.
Lessons for African Countries
I wrote about Central Asia mainly because Central Asia and Sub-Saharan Africa are very similar. Both regions are full of young countries that aren’t even 70 years old (except Liberia, South Africa, & Ethiopia). Both regions mainly export commodities and little of anything else. Moreover, with the exception of Uzbekistan, the Central Asian Stans are similar to most of Sub-Saharan Africa,with being terrible growing food.
Commodities don’t matter unless you have oil & gas, which are the actual lucrative commodity markets. The reason why the middle east benefits so much from natural resources is because they are loaded with oil & gas and they have relatively low populations to distribute the resource between.
In Central Asia, the main difference between the richer “Stans”(Turkmenistan & Kazakhstan) vs. the poorer “Stans”(Uzbekistan, Tajikistan, and Kyrgyzstan). Is the type of natural resource they have.
Oil and gas are among the top five traded commodities on earth. Their markets are much larger than copper, zinc, cotton, cobalt, or any other commodity market you can think of.
To highlight the significance of oil and gas compared to other raw materials, consider Tajikistan, Zambia, and Qatar in 2021 as examples. Tajikistan sold 30% of the world’s antimony, amounting to $150M in revenue. Zambia, primarily exporting copper and sold 3.5% of world’s copper to the globe, amounting to $3 billion in sales. In contrast, Qatar sold 1.6% of the world’s oil to the globe, amounting to $15B in revenue. Why is it that Qatar sells half the proportion of its natural resource than Zambia, yet Qatar nets 5x the money that Zambia gets from its resource? Why is it that Zambia makes $3B selling copper while Tajikistan made $150M selling antimony despite Tajikistan having a near monopoly of the resource? That’s because the Oil trade is 10x the copper market, and the copper market is roughly 200x larger the antimony market.
This has to do with demand elasticity - how responsive a good is to a change in price. Antimony isn’t a lucrative resource because it is vulnerable to substitutes. If prices go up for antinomy, then lead acid battery makers will use calcium instead. Material Scientists & engineers work in R&D labs to make and discover chemical compounds or synthetic polymers that can replace natural resources or introduce new functionalities & applications to existing materials. Material science & engineering can make or more break the usage of a commodity. Copper is significantly more valuable than antinomy, but it also has its fair share of substitutes compared to oil, which is a must have to fabricate many forms of transportation fuel.
The antimony market is roughly half a billion as of 2021. Antimony has very limited applications in combustion inhibitors, lead-acid batteries, plastics, and not much else. There so many substitutes for antimony. Aluminum & magnesium hydroxide can be used instead for combustion inhibitors, tin is used as a substitute in lead alloys instead of antinomy, and etc.
The Copper market is ~$90B. It has way more industrial cases than antinomy, especially in roofing, plumbing and industrial machines. However, copper has significantly more substitutes than oil. Copper can be substituted for aluminum in electrical wiring and transmission lines, fiber optics for telecommunications, plastic for plumbing pipes, composite materials for industrial processes, and alloys for manufacturing applications.
The Oil market is nearly ~$1T. Oil has significantly fewer substitutes especially for its primary uses (transportation fuel, petrochemicals). We are only starting to see oil being substituted for energy, which has brought down oil demand from a $1.6T market in 2012 to a $1T market in 2021…. Regardless, it is still 10x the copper market.
Kazakhstan and Turkmenistan are richer than the other Stans and African countries precisely because they have much higher levels of reserves of lucrative natural resources, aka oil & gas, relative to their population. Kazakhstan has 20M people and Turkmenistan has 6M people.
Nigeria has ~6B cubic meters of crude oil reserves while Kazakhstan has ~5B cubic meters. They also produce roughly the same amount of oil at 100M cubic meters per year. Since Kazakhstan’s population is a tenth of Nigeria, the average Kazakh receives 10x the amount of oil wealth Nigerians do. The same issue exists for natural gas, Nigeria exports 2x the natural gas than Kazakhstan does (~50B to ~25B), but again, since Kazakhstan has a tenth of the population of Nigeria, the average Kazakh receives over 5 fold benefit per cubic meter of oil sold.
For natural gas, Turkmenistan has over double the natural gas reserves Nigeria has and produces nearly double the amount of gas Nigeria does. Turkmenistan has 3% of Nigeria’s population, giving Turkmenistan ~70x the reserves per capita and 61x the gas dollars produced per Turkmen compared to Nigeria.
For African countries, any commodity that isn’t oil or gas is relatively useless when it comes to quick economic growth. Democratic Republic of Congo is about to make less money selling cobalt because Chinese firm CATL made a groundbreaking technology advancement in making lithium ion batteries that has zero cobalt. That’s precisely why African countries are quickly bringing multinational firms from the West and Qatar to drill for oil & gas.
Senegal started selling natural gas in 2023 and is projected to grow 9% in 2024 because of oil & gas. Tanzania is projected to grow 6% from selling liquidified natural gas for the first time. Guyana literally went from a poor country similar to Haiti in the early 2000s to a high-income country in 2022 because of its oil discovery. Namibia will be selling oil & gas around 2030.
If Nigeria’s population didn’t explode due to improved health measures, post independence, the oil exports per capita would have made the country much wealthier. Nigeria’s oil & gas exports per person is $236 (Calculation: Nigeria’s oil exports per person is $270. Nigeria’s crude oil & gas make up 87.3% of all exports. 87.3% of $270 is $235.71). In comparison, Kuwait’s crude oil & gas exports per person is slightly over $10K. The average Kuwaiti gets 37x more richer from selling oil & gas than the average Nigerian.
The moral of the story of central Asia, is that all them are loaded with tons of natural resources, but fossil fuel resources are more lucrative, which is why the petrostates are richer than the non-petrostates.
Next time you are in a conversation with someone and they say “How could X country be so poor with so many natural resources?” ask them the following: 1- “Which resources does that country have?”
2- “Which resources do they have that actually get off the ground?”
3- “Do you know the export market size for that resource?”
4- “Are there existing substitute applications for that resource market?”.
5- “Does that country have high export revenue per capita? (Over $1.5K)
Once you dig deeper, chances are that market isn’t as lucrative compared to oil and gas. Yes Congo sells cobalt, but that market is small ($8B) and will increasingly become irrelevant once cobalt free batteries are mass adopted.
Of course, corruption, bad leadership, and etc. explain things too, but chances are that person has never thought about the fact that all natural resources are not all equally valuable and that they are just uncritically reciting a meme. Many African countries are poor for similar reasons why non-petrostate Central Asia is poor - they sell mainly non-lucrative commodities which are priced better during commodity rushes and are priced terribly in commodity gluts. The only way to grow without commodities is to learn how to boost agricultural productivity, extract new forms of foreign currency (like tourism & airlines), and quickly gain technological know-how to compete and develop in other industries. Ethiopia, Rwanda, Bangladesh, Vietnam, and the OG, Japan in the late 1800s, are countries that have managed to grow fast without much natural resource endowment. Central Asia & Africa can learn from these countries. Rid yourself of the meme that natural resource possession makes a country grow.
Cool article, very informative read. Feel there’s not enough coverage on Central Asia!
Interesting article. The graphic showing the difference in the size of energy markets compared to metals markets is eye-opening.