2024 in Central Asia and the Caucasus: At The Crossroads

With the year coming to an end, we are looking at the key trends that have shaped the region's policies and politics in 2024 and continue to do so in 2025.

2024 continues to be the year of economic growth predicted to continue in 2025. The GDP is boosted by governmental spending and growing domestic consumption. Yet, in the coming years this growth will face natural constraints of the current economic models. Investment into human capital, and improvements in education and social services, especially for Central Asia’s growing young population are considered essential precursors to economic diversification.

Moving forward, the countries will need to balance their budgets and attract foreign investments, while continuing to invest in infrastructure development. One particlular area of concern is the state of communal infrastructure that is in dire need of modernization. With gradual revision of the tariff subsidies to the populations, CAA countries will need to find a model that would simultaneously allow uninterrupted provision of communal services, attract investments through sector privatization and manage inflationary pressure such a move will inevitably lead to.

The region's digitalization is now firmly tied to the countries’ strategic economic and governance objectives. On the economic front, the countries continue to invest in nurturing their local tech industries through direct funding, tax reliefs, and regulatory sandboxes. The success of the region’s tech unicorns - such as Kazakhstan’s Kaspi pivoting to Turkey with the purchase of the local e-commerce champion, Uzbekistan acquiring its first tech unicorn Uzum, and Armenia’s ServiceTitan going to the country’s first tech IPO on NASDAQ - tech business will continue to be at the forefront of economic diversification efforts.

Digitalization is also seen as the solution to effective governance, and is a critical factor of healthcare reforms, consumer protection, tax and customs duties collection, and provision of government services. E-government advancement in Kazakhstan, in particular, placed the country in the top 10 in the Online Services Index and allowed state-owned enterprises to expand its eGov services exports to the neighboring countries and even Africa. Kazakhstan and Uzbekistan are also preparing to benefit from the AI developments with the release of their ambitious National AI Strategies, and the entire region makes steps to develop AI competencies from school to workplace. The efforts at digitalization in most countries will however continue to be hampered by the governments’ reluctance to cloud adoption and entrenched SOE monopolies in providing internet access and data processing capacities.

Continuous disruptions to energy supply and electricity deficits pose critical challenge to the national economies and constitute one of the major sources of popular discontent. Beyond delivering on Paris Agreement commitments, the rapid expansion of renewable energy projects aims to close the gap between electricity production and consumption. Baku's hosting of COP29 became a testament to the region's ambitions to transition to renewable energy, however, most utility-scale solar and wind sites are currently developed in just one country - Uzbekistan.

The green energy challenge is paradoxically even more pronounced in the region’s renewable energy champions - Georgia, Tajikistan and Kyrgyzstan - where hydropower accounts for over 90% of the energy generation. Expanding the hydropower will require major infrastructural investments and in Central Asia, in particular, entails complex coordination mechanisms between the upstream and downstream countries. Larger industrialized economies of Kazakhstan and Uzbekistan committing to nuclear power plants construction this year, despite the region’s deep-rooted aversion to nuclear energy, illustrates both the sheer scale of energy deficit and the ambtious plans to harness green energy export potential.

Even the choice of NPP construction partners - a decision unavoidably tangled with complex geopolitical considerations - highlights that multipolarity remains the critical feature of Central Asian politics. Kazakhstan clearly stated its intention to build NPP with an international consortium. Uzbekistan, having signed an agreement with Russia’s Rosatom on the construction of the country's first NPP, also expands cooperation with Chinese CNNC and French Assystems.

The same approach continues to be evident on the economic front, with CCA countries being part of multiple economic and security organizations - OTS, EAEU, CSTO and SCO - often with conflicting and overlapping agendas. For instance, economic self-interest arguably drives cooperation within the Organization of Turkic States to a greater extent than shared linguistic or cultural roots. In the same vein, Kazakhstan and Armenia remain members of the EAEU trade block, despite the tensions within the overlapping security arrangements of CSTO that resulting in Armenia’s de-facto withdrawal. Additionally, the regional dialogue platforms, such as the US-driven C5+1, Chinese C+C5, and Gulf Countries’ GCC-Central Asia Summits continue to expand and at some point may acquire a more institutionalized shape.

2024 became a pivotal year in resolving the long-term border disputes in the region. The peace talks between Azerbaijan and Armenia remain tense, fragile, and fraught with political difficulties for both sides, but with the issue of Karabakh being off the table, resolution of the region’s most bitter conflict may be finally within reach. In Central Asia, Kyrgyzstan and Tajikistan reached an in-principle agreement on the description of their 970-km long border, greatly reducing the decades-long tensions, occasinally flaring into violent confrontations.

In the meantime, Afghanistan continues to present a fundamental security challenge. Central Asian countries are taking steps at normalization of their relations with the governing Taliban regime - from Kazakhstan removing it from the list of terrorist organizations to Uzbekistan announcing major infrastructure projects. The region at large, however, lacks a security arrangement that would guarantee its long-term security and broder stability. The ongoing tensions around Koshtepa channel construction threatening water supply to Uzbekistan and attacks of militant groups operating at the Tajik-Afghan border are all signs of persistent complexity of Central Asia’s relations with its turbulent neighbor.

The disruptions to the traditional land and maritime routes brought the region back to the center stage of international trade. The landlocked Central Asia now has a historical chance to reconnect with the rest of the world through the new Silk Route, transforming the Caspian basin into a key international trade artery. The Trans-Caspian International Trade Route (TITR) forming the multimodal backbone of the Middle Corridor received the most attention with EUR 10bln investments pledged by international and European investors and container shipments skyrocketing 14-fold in just the first seven months of 2024.

While the launch of the long-awaited China-Kyrgyzstan-Uzbekistan (CKU) railway will further boost intra-regional connectivity and unlock trade opportunities, some question its long-term financial sustainability and others warn of potential competition with existing routes through Kazakhstan. The resurgence of the Trans-Afghan Railway project, predominantly driven by Uzbekistan, may bring immediate economic benefits to both countries, and its future potential as an alternative southbound link is studied by the Gulf countries and Pakistan. The fate of other southward corridors, such as INSTC, will continue to depend on the complex power interplay, involving Iran, Turkey, Russia, and India, among others.

The events beyond the CAA countries' borders will continue to have a direct and tangible impact on the region's politics and economics. The continuing conflict in Ukraine affects the countries’ relations with Russia, one of the region's largest trade partners, main energy supplier and security guarantor, as well as the primary source of remittances from migrant workers. The potential of alternative trade routes shall be measured against China-EU tariff war escalation and China’s own slowing economic growth. The expanding conflict in the Middle East and escalating hostilities between Iran and Israel may put the use of Iranian ports and railways at risk, reversing the hard-won bilateral progress between Iran and several Central Asian and Caucasus countries. The fall of the Asad regime in Syria to the Turkey-backed rebel forces heightens the risk of foreign fighters returning to their home countries, spreading extremist ideologies.

Finally, the region is preparing to deal with the Trump Factor in foreign policy as the famously unpredictable President-elect is about to take office for the second term, which could be as consequential for international order as the first one. Coupled with the changing relations between the EU and Caucasus countries, and the delicate domestic process of power rearrangement in Central Asia, the region enters a year of uncertainty and change.