Central Asia evokes vivid imagery: Tajikistan’s wild mountain ranges, Uzbekistan’s ancient Silk Road cities, and Kazakhstan’s vast deserts. Despite their differences, all three countries share a common story of emerging from the Soviet Union to forge their own identities. It was a pleasure to explore this region on a recent research trip, and learn more about these countries’ economic prospects, political direction, and capital market development.
Tajikistan: It’s All About the Dam
Tajikistan is the least developed of the countries I visited. Although the country is commodity-rich, with an economy driven by agriculture and cotton, both sectors have experienced declining profitability in recent years—a trend that needs to be addressed.
The dominant topic on my visit was the ongoing development of the Roghun Dam, whose construction started in 1977 during the Soviet Union era and is nearing completion.
Once finished, Roghun will be the tallest dam in the world, crucial to fulfilling Tajikistan’s energy needs and generating significant export revenue (about $10 billion, according to the International Monetary Fund). The project is set to account for half of the country’s economy and revive flagging government revenues. I spent an afternoon checking on the progress of the dam and noted the president’s frequent presence at the site, symbolizing its importance to the nation.
Despite this enthusiasm, there are questions about funding. About half of the dam’s funding comes from the national budget, with contributions from multilateral agencies and a $500 million Eurobond amortizing in 2025 (the country’s sole bond issuance). However, some pledged funds, such as the World Bank’s $650 million, are contingent on conditions being met. An additional $500 million may be needed, potentially through a 2025 Eurobond issuance.
There are also questions about the dam’s completion date, though after speaking with various interested parties, I believe that the project will be self-sufficient by 2029, with completion likely in 2032. Until the dam is completed, persistent electricity shortages affecting economic growth in Tajikistan will likely continue.
Despite an overreliance on the dam project, Tajikistan benefits from low debt, rising foreign exchange reserves, a stable currency, and improved economic prospects.
In addition to the dam project, remittances continue to be an important economic driver, with 40% of the economy estimated to come from money sent home from workers abroad, particularly in Russia.
The underdeveloped banking sector remains a major challenge, with public mistrust lingering after the 2021 collapse of two public banks, causing deposit losses. The absence of electronic payment systems hampers tax collection, fueling a large grey market. Additionally, 70% of the population lives in rural areas, and 80% of transactions are still cash-based.
However, the country’s “Strategy 2030” aims to build an investment-driven economy, with plenty of low-hanging fruit to achieve this goal. Many current ministers, educated abroad, bring fresh ideas about attracting private investment and improving public efficiency. Their broader focus suggests that key sectors may open up for private ownership in the coming years.
Upon leaving Dushanbe, my conclusion was that Tajikistan is on a positive trajectory. Despite an over-reliance on the dam project, the country benefits from low debt, rising foreign exchange reserves, a stable currency, and improved economic prospects. International Monetary Fund support exists (though I’d prefer a funded program). And recently, Moody’s and S&P rewarded Tajikistan with well-deserved upgrades, so in 2025 the country can further establish itself as a reliable financial partner when its Eurobond begins to amortize.
Uzbekistan: Opening Up to the World
Since 2016, President Shavkat Mirziyoyev has led Uzbekistan on a transformative reform path, rebuilding international relationships, opening the economy to global trade, reducing administrative barriers, and minimizing the state’s role. These efforts have significantly boosted the country’s wealth. After securing a new seven-year term in 2023, Mirziyoyev has the opportunity to sustain this impressive turnaround. The question for investors is whether reform momentum has stalled, signaling a period of slower change.
Driving through the streets of Tashkent, the youth of the population stands out, and this is a key factor behind the optimism for sustained growth in the coming decades. About a third of the population is under 14, and many will soon join the workforce, bringing an entrepreneurial energy that aligns with the country’s new ambitions. And with 88% of the population under 55, pent-up consumer demand is palpable. Buying a car, for example, has become difficult due to long waiting lists, highlighting the economy’s transition and its high growth potential.
As one of the later countries in the region to open up to the rest of the world, Uzbekistan learned lessons from other countries transitioning after the fall of the Soviet Union. However, there is still plenty of room for reform, in part because privatization has been slow, with state-owned enterprises still contributing more than half of gross domestic product (GDP).
In the banking sector, policy lending (the issuance of loans based on government policies or directives rather than purely commercial considerations) dropped from 60% in 2018 to 29% today, and the government plans to exit the banking sector, except for a few social projects. Still, state influence remains significant. The speed of upcoming banking privatizations will be a key indicator of the pace of further reforms.
In the energy sector, there is strong support for private-sector involvement, with significant funds allocated to public-private partnerships. This is crucial, as a survey of more than 2,000 domestic companies identified frequent power outages as the biggest barrier to growth. While gas was once a key export, declining production and aging infrastructure now force Uzbekistan to import to meet rising demand.
The continuation of Uzbekistan’s reform process will be key to sustaining investor confidence and determining the cost of future debt issuance.
Uzbekistan has maintained a strong fiscal track record in recent years, with low debt levels on a sustainable path. While there was some slippage before last year’s elections, an ambitious 4% deficit target is expected to be met this year, aided by domestic electricity price increases and strong gold prices. Additionally, Uzbekistan has significant natural resources, and commodities like coal, cotton, and gold continue to play a significant role in the economy.
The finance ministry has made developing Uzbekistan’s local capital market a priority, implementing several initiatives to attract foreign investors. These efforts aim to connect international investors to the country’s growth story directly.
The central bank has also made progress in bringing the institution closer to international standards. It recently adopted an inflation-targeting framework that should bolster its credibility with overseas investors.
One potential weakness is Uzbekistan’s current account deficit. Although this stems, in part, from the country’s need to import infrastructure-related goods and services to support its ongoing development, the deficit is still too large. To address this, the government launched Vision 2030, which aims to attract $250 billion in overseas investments. Free economic zones have been established across the country and are mostly operational.
Uzbekistan’s story has become familiar to bond investors. It issued its first U.S.-dollar-denominated debt in 2019, and corporate debt has also been issued in sectors from banking to automobiles. Moreover, with domestic interest rates remaining high, further issuance is likely in the coming years. But the continuation of the reform process, which has helped keep spreads at historically low levels, will be key to sustaining investor confidence and determining the cost of future debt issuance.
Kazakhstan: A Familiar Market With Sound Fundamentals
Kazakhstan is the richest and most developed of the countries I visited, having leveraged its vast oil, gas, chemical, and metal resources to develop strong international trade relationships, a growing local capital market, and an abundance of international foreign exchange reserves.
Visiting Kazakhstan, the country’s rapid transformation is evident, with 19th-century architecture standing alongside modern skyscrapers, showcasing the country’s energy wealth and modernization. Despite these visible signs of progress, GDP per capita—though nearly doubled since 2016—is only now returning to pre-crisis levels from a decade ago.
Still, fundamentals are strong. Debt levels are exceptionally low by international standards, oil production remains stable, and revenues from energy exports have been effectively used to diversify the economy away from oil dependence. These strengths have been recognized by credit rating upgrades, including Moody’s upgrade of the country’s external debt to Baa1 this year, and low credit spreads.
Although in 2024 Kazakhstan issued its first international sovereign Eurobond for the first time in seven years, it is familiar to international bond investors, having issued Eurobonds as early as 2000 and facilitating settlement through the Clearstream system since 2018.
The key question for investors is whether the positive trend is sustainable. The answer is mixed, with significant challenges ahead to maintain economic growth.
The first challenge is balancing populism with productivity. The political unrest in 2022 serves as a reminder to the president of the risks of social disruption. This is compounded by the projected 2 million young people entering the workforce in the next three to five years. While this demographic could boost the economy, it poses a political risk if career opportunities don’t materialize quickly enough.
Adding to the challenge, the number of Russian-owned businesses has surged in recent years. While many are profitable, integrating them into the broader economic plan is crucial. The upcoming tax code, set to be announced next year, will be closely watched.
Global energy prices and fiscal policy pose key risks to Kazakhstan’s economic stability.
It’s unclear how the goal of growing the economy to $450 billion by 2029 aligns with a 5% inflation target, given that inflation is currently over 8% and interest rates stand at 14.25%. While growth is expected to remain strong, it is still below the 6% to 7% needed to meet the economic target. Closer coordination between the finance ministry and central bank will be crucial to prevent either objective from drifting off course.
Kazakhstan’s fiscal policy has been more expansionary in recent years, driven by infrastructure spending to diversify the economy and supported by low debt levels. However, funding some of this through transfers from the wealth fund has raised concerns. While high oil prices and near-peak wealth fund assets have minimized these worries, falling oil prices, as seen in 2024, could force the government to reconsider this approach.
Local currency investors have concerns about the strength of the tenge. The central bank is effectively maintaining high real interest rates to control inflation and remains committed to its 5% inflation target and a floating exchange rate. These attractive real yields, along with wealth fund transfers to the budget, should help keep the tenge relatively stable. Communication has also improved, with currency interventions now shared more transparently and accurately.
Geopolitical risks remain contained. While Kazakhstan maintains strong trade ties with Russia, it operates independently, enjoys positive relations with major economic players, and continues to diversify its exports to maximize profitability.
Kazakhstan’s issuance of a sovereign Eurobond in 2024 is likely to keep borrowing costs low relative to other countries in Central Asia, thanks to strong fundamentals and the scarcity of dollar-denominated debt. However, global energy prices and fiscal policy pose key risks to the country’s economic stability. While current spending levels are affordable, we will want to keep an eye on the fiscal trajectory, particularly as the current debt ceiling may face pressure in the coming years.
Investment Insights
Each country I visited on this research trip retains, to some extent, strong trade and economic links with Russia. However, all want to develop and maintain broader international relationships.
To that end, meetings were largely conducted in an extremely open way, at odds with the perception of a region shrouded in mystery and chained to its Soviet past. I sensed a strong willingness to develop domestic capital markets, to participate more widely in global productivity, and to leverage international excellence across a wide range of sectors.
As such, this trip was invaluable in better understanding Kazakhstan, Tajikistan, and Uzbekistan and developing closer relationships with key decision-makers as we continue to build out our network of contacts in these frontier markets.
Daniel Wood is a portfolio manager on William Blair’s emerging markets debt team.
