Either/ Ore: Gold, Uranium and the Prospects for the Kyrgyz Economy

Is Kyrgyzstan the new El Dorado? photo from CA Newswire.

by Ryan Weber

In an October 21 article for CA Newswire, analyst Martin Sieff looks into the possibility that new deposits of gold and uranium could bolster the Kyrgyz economy and perhaps even remove the "resource-poor" moniker from the isolated, mountainous Central Asian country.

"Kyrgyzstan is usually described as resource-poor. But if the country can achieve political stability after its confusing and splintered parliamentary elections on October 10, it may have a far brighter future in the mining of precious minerals."

Sieff intelligently points out the while the global recession is hitting many sectors of the Russian and Kyrgyz economy hard, it also presents an opportunity in rare minerals:

"the weakness of the dollar and the euro on world markets has led to dramatic rises in the value of gold [and uranium], and consequently international mining corporations are showing a new eagerness in prospecting for gold in the remote Central Asian state."

Currently, Kyrgyzstan is ranked 22nd in gold-producing nations, putting out 18 tons of gold each year, but Seiff - working from reports by News Agency 24.kg - predicts that could rise as high as #15, up to 44 tons, with adequate international investment. Uranian, which is found in much smaller quantities in Kyrgyzstan, especially in comparison to the large fields in neighboring Kazakhstan, is also attracting some new attention.

According to Seiff, "In terms of known resources and the possibilities of un-surveyed or under-surveyed areas, Kyrgyzstan in fact shows great promise for finding significant new deposits of gold and uranium."

This is all fine and good, but Seiff continues with a line of logic often employed by regional economists and proponents of major investment:

"Since the entire country only has a total population of only 5.3 million people, even the discovery of relatively modest deposits in gross terms could have a disproportionately strong positive impact on the country’s macroeconomic condition. It would not take a great deal of investment to dramatically raise the standard of living of the Kyrgyz people. However, the real underlying problem in Kyrgyzstan is not its lack of resources and certainly not any lack of prospects of finding new ones. The problem, observers note, is the country’s continuing political instability."

This is where some context and exceptions must be stated. The revelation that there may be more valuable minerals in "them thar' hills" is certainly good news for the long-term economic well-being of Kyrgyzstan, but I take several exceptions to the conclusions and assumptions of Seiff and his compatriots.

First, the increase in the value of gold, when rated against inflation, has only been marginal, and while this does drive some incentive for non-US companies to invest in gold mining, the largest current gold company in the country - Kumtor - is a Canadian country, closely linked to the fortunes of the US dollar. Also, the current price inflation is unlikely to be permanent, and while gold will always be valuable, no company is looking to setup major operations in an otherwise remote industrial zone without guarantees of long-term production. The profit in gold mining is made incrementally, so while the current economic climate may create a "bonus effect," it is a very small, perhaps even negligible element.

Second, to date, mineral wealth has been of little, if any, benefit to the average Kyrgyz citizen, or even the official state coffers. The redrafted Kumtor agreement in summer 2009 raised the concession to just 33% (from 15.6%). International companies are carrying this wealth out of the country, and what they pay in return has historically gone to corrupt Kyrgyz politicians or local business leaders (often inter-linked). While the new administration seems intent on honoring their commitments to reduce such corruption, evidence of responsible state financial management will be necessary before anyone should accept the old "trickle down economics" myth.

Third, while political instability is certainly a major inhibitor of industrial international investment, the dynamic of mineral extraction and forms of governance are much more complex. For example, mineral wealth in places like Nigeria, Saudi Arabia, or Uzbekistan - where the regimes are extremely "stable" - directly and indirectly contribute to the continuing repression of the population, what many have famously called the "Resource Curse." While this always seems amenable to profit-minded corporations, there is clearly a long-term cost associated with such arrangements, which on a long enough timeline could even be seen as (historically) unsustainable. In other words, a government that provides "stability" at any cost may actually be detrimental to foreign investment depending on how it achieves that. The nationalization of the Anglo-Iranian Oil Company in 1951 is the classic example. However, the flip argument - that "instable" countries might be more amenable to business investment, is ridiculous. No one wants to invest millions unless they're certain of achieving a return.

But in the middle - in countries that demonstrate a mixture of social stability and political openness - intelligent multi-national firms will find the prospects alluring. These are unlikely to be the most lucrative targets in the short-term, as transparency and equitable practices will eat into the potential profit margin, but for corporations with a long view, the opportunity to establish respectful, friendly relationships with countries in desperate need of outside financing should prove mutually beneficial.

Is Kyrgyzstan such a situation? That is still hard to say, but evidence since April 2010 - despite all the turmoil - still suggests an answer of "maybe." That makes it too early for cautious corporations to make big plans, but we should all expect to see some moves by international financiers in the next 6-9 months looking to capitalize on the chance that Kyrgyzstan represents a political bull market.

Editor's Note: in deference to Mr. Seiff, it should be noted that he wrote his piece just 11 days after the Kyrgyz Parliamentary Election, and while no government has yet formed a month later, regional histrionics about the impossibility of a stable Parliamentary Democracy in Central Asia do seem to be on the decline.