Turkey's potential interest in Central Asian mineral riches unlikely to rival China's expanding economic influence

On 27–30 January, Istanbul hosted its first investment summit showcasing mining opportunities in Turkey and Central Asia. Organised by the global mining event series Mines and Money, the summit featured a keynote address by the Turkish Deputy Minister of Energy and Natural Resources Hasan Murat Mercan and included presentations by officials from Kazakh, Kyrgyz and Tajik governments as well as sessions and workshops with participation of representatives of international financial organisations and mining companies focused on key issues affecting mining industry in the region.

For Turkey, which shares the membership of the Cooperation Council of Turkic-Speaking States (CCTSS) with Kyrgyzstan and Kazakhstan, the conference was an opportunity to present itself as an attractive destination for investment in mining as well as an economic model and leader for the region. Turkey has made a number of multilateral overtures to the post-Soviet states of Central Asia since their independence in 1991, particularly the Turkic-speaking quartet of Kazakhstan, Kyrgyzstan, Uzbekistan and Turkmenistan. However, Turkish business interests in Central Asia have been focused primarily on construction and retail sectors, while mining and heavy industry have been generally avoided. In 2013 in Turkmenistan alone, Turkish construction companies secured more than 100 government contracts worth USD10.2 billion. According to Turkey's former minister of economy Zafer Çaglayan, this amounts to 44% of all construction projects carried out by Turkish companies globally in 2013. This is unlikely to change, even as Turkey commits to an ambitious plan to more than triple its mining exports to USD15 billion by 2023, an objective that envisages both a massive increase in foreign investment and the maturing of relatively new domestic mining companies.

Central Asia – replete with risk

While the Turkish mining industry, which produced a record 29.5 tonnes of gold in 2012, has often complained of restrictive bureaucracy and several Turkish businessmen at the Istanbul summit used the coffee breaks to complain of "election year bureaucracy," there was little appetite for swapping their domestic investment climate for that of the riskier frontier economies of Central Asia. Almaz Alimbekov, Head of the Mining Department under the Ministry of Economy of Kyrgyzstan, was asked by Turkish delegates to reconcile his promotion of the country's ostensibly pro-investment policy stance with the ongoing struggle with Canadian firm Centerra Gold for control of the Kumtor Gold deposit. Similarly, a number of summit attendees were concerned by the protracted negotiations between the Mongolian government and the mining giant Rio Tinto over one of the region's biggest finds to date, copper-gold deposit Oyu Tolgoi (see Mongolia: 21 January 2014: Probable resolution of Oyu Tolgoi dispute in H1 2014 highly likely to increase foreign investment in Mongolia).

No official delegate from Uzbekistan, which produces more gold than any post-Soviet country other than Russia, attended the summit, although one delegate recalled the case studies of Oxus Gold and Newmont, companies that ended up leaving Uzbekistan because of regulatory pressure and state interference. Of all Central Asian states, noted Jean-Christophe Lermusiaux, Head of Research for the Almaty-based investment fund Visor Capital, only Kazakhstan has levels of risk "approaching those of emerging economies." (Visor Capital is currently in USD400-million arbitration with the Kyrgyz government over the ownership of the Jerooy gold deposit).

Nevertheless, Central Asia's vast mineral wealth is likely to continue to attract sufficient foreign interest, despite the fact that the only countries from the region listed in the Fraser Institute's 2013 Survey of Mining Companies are all firmly in the bottom quarter of the institute's "policy potential" rankings. The Fraser Institute is an independent Canadian public policy research organisation that, among other topics, focuses on economic analysis of mining sector worldwide. Geologically, Central Asia offers an appealing combination of the thoroughly researched – Soviet-era deposits such as Jerooy in Kyrgyzstan and Big Koni Mansur (silver) in Tajikistan – as well as the possibility for new finds such as Oyu Tolgoi, discovered in 2001. Operating costs in the region are generally low, although regulatory uncertainty fuelled by resource nationalism in addition to localised social unrest, particularly in Kyrgyzstan and Mongolia, present risks to investors and require patience and financial flexibility.

Dealing with China

China has been a long-term investor in minerals in both Central Asia and Turkey, and its demand for metals is already changing mining in the region. At the summit, Lermusiaux (Visor Capital) noted that five years ago Kazakhstan's leading copper producer Kazakhmys sent its output to Western markets. Now more than half of its production is destined for China, which is also a major consumer of Kazakh uranium. Chinese demand has also been fuelling the boom in Turkish mining exports. According to the Istanbul Minerals and Metals Exporters' Association, in January-August 2013, mining exports (mainly consisting of copper, chrome and precious metals) reached USD3.3 billion, which was an increase of 26.5% compared to the same period in 2012. China accounted for USD1.66 billion or 50.3% of this total. Chinese mining interests in Tajikistan and Kyrgyzstan, ranging from coal to gold, have increased substantially over the last five years.

China's geographic proximity and commitment to major infrastructure projects in the region creates opportunities for foreign investors in Central Asia seeking to access the second largest economy in the world. However, mining chiefs cited a parallel concern that Chinese mining companies, who benefit from low costs and close relationships with regional governments, have an unfair advantage in access to Central Asian mineral wealth and are poised to dominate the region's mining in the next five to 10 years. Speaking on the closing panel centred on the perspectives of development of the Central Asian and Turkish mining industry, Han Ilhan, Country Manager for Alamo Resources, said China had become "the elephant in the room" and suggested that Turkey could partner strategically with India to counterbalance Chinese demand in the region in the future. Although bilateral trade has been increasing and is set to reach USD15 billion by 2015, making India Turkey's second largest trading partner in Asia, neither country has made forays into mining in Central Asia. India's Oil and Natural Gas Corporation's (ONGC) failed attempt to acquire the share of ConocoPhillips in Kazakhstan's giant Kashagan oil field in 2013, which went to China National Petroleum Corporation instead, demonstrates China's clout in Central Asia's extractive sector. In such context, Ilhan's suggestion is unlikely to materialise.

Outlook and implications

In reality, Turkish mining companies are unlikely to threaten their Chinese counterparts in the Central Asian extractive sector over the next five years. Chinese mining companies in the region can generally rely on long lines of cheap credit from state banks and an extremely low cost workforce to offset risks, as well as the technological and labour advantages expectable in a country that has regularly topped global production tables across a range of metals including zinc, rare earths, graphite and gold. Turkish companies, meanwhile, have yet to emerge as an international mining force, and despite the ambitions of wholly Turkish capital-owned outfits like Koza Gold Operating Company, these companies are highly likely to partner international mining majors over the next five to ten years to exploit the relative abundance of mineral deposits in Turkey itself. Prior to the passage of the 1985 mining law, mining progress in the Turkish extractive sector was hampered by state control, with little exposure to modern technology and management, while major production only began in the country after 2000. For any mining companies still finding their feet, Central Asia is a particularly hostile environment in which to operate.