Boom. To understand how a country like Kyrgyzstan can emerge as a significant player in the trade war, you must look back to the beginning of the Russia-Ukraine war. Kyrgyzstan’s economic landscape dramatically changed in March 2022. Within months, the country’s imports from traditional trading partners surged, especially from China, whose exports to Kyrgyzstan nearly tripled.
Notably, trade with countries where Kyrgyzstan had hardly any prior economic ties suddenly increased. A surge of goods began flowing in from several parts of the European Union, including Poland, the Czech Republic, and the Baltic states. Data from the Institute of International Finance revealed that between March 2022 and October 2023, German exports of automobiles and parts to Kyrgyzstan skyrocketed by 5,500%. What exactly had happened?
The war in Ukraine. Despite notable growth in certain trade statistics, the origin and destination of many goods remain unclear. Numerous shipments were classified as coming from an “unknown” country and destined for an equally “unknown” destination, resulting in substantial opacity in trade data. However, researchers and analysts are convinced that the true destination of these goods is Russia.
This phenomenon doesn’t represent a genuine boom in the Kyrgyz economy. Instead, it serves as evidence of the Kremlin’s effectiveness in circumventing international sanctions imposed after its full-scale invasion of Ukraine. Experts say these trade flows are part of a mechanism allowing Moscow to evade sanctions. Russia has skillfully adopted the same strategy throughout the region.
Parallel imports. In May 2022, Russia enacted legislation institutionalizing what it calls “parallel imports.” This regulation permits the entry of sanctioned products through third countries without the need for approval from brand owners. All Russia needs is to import these products into a third country (like Kyrgyzstan) and then redirect them to Russian lands.
Both Russian and foreign companies quickly embraced this system. In addition to conventional goods, it also included “dual-use” products: household appliances, electronic components, and other civilian items that can be disassembled and repurposed for military use. Between May and December 2022, Russia reported importing 2.4 million tons of goods valued at $20 billion through this scheme.
Kyrgyzstan’s role. The country’s exports to Russia surged from $393 million in 2021 to more than $1.07 billion in 2022. These figures may actually be underestimated, as many countries, including Kyrgyzstan, categorize large volumes of trade as going to or coming from “unknown” destinations. This practice serves as a legal loophole that allows goods to be channeled to Russia without attracting formal scrutiny. According to experts, this method isn’t deemed illegal, so authorities are content to overlook it while benefiting economically.
Kyrgyzstan isn’t the only nation facilitating sanctions evasion. However, it possesses unique characteristics that make it an ideal transit point. Kyrgyzstan is a member of the Eurasian Economic Union, a bloc established in 2015 alongside Armenia, Belarus, Kazakhstan, and Russia. As such, it enjoys the free movement of goods and services among these member states. This significantly eases the bureaucratic processes involved in trade within the bloc.
What about China? In the context of a globalized market and ongoing trade tensions marked by U.S. tariffs, China has increasingly focused on Kyrgyzstan, although from a different perspective. The Economist recently reported that while Beijing maintains a cooperative relationship with Russia, it’s taking steps to safeguard its export routes to Europe.
Despite its geopolitical alliance with Moscow, China prefers not to rely on Russia for the flow of its goods to the European market, especially amid ongoing conflicts and sanctions. As a solution, China officially launched an ambitious railway project in December that will connect Kyrgyzstan and Uzbekistan, creating a direct route to Europe that bypasses Russian territory. This new connection is becoming increasingly essential, especially given the potential escalation of the trade war with the U.S. and the growing significance of the European market. China now exports more to Europe than it does to America.
A push. The rail project had been under discussion for nearly three decades, but it only came to fruition after the Russian invasion of Ukraine in February 2022. Before this conflict, the primary rail routes to Europe passed through Russia, often via Kazakhstan. However, the war raised security risks and drove insurance costs sky-high. It also weakened Russian rail infrastructure due to sanctions, forcing transport companies to seek alternatives.
As a result, these companies began to shift to the so-called “Trans-Caspian Route” or “Middle Corridor,” which travels through Kazakhstan and across the Caspian Sea. Connecting this route to the Chinese rail network via Kyrgyzstan and Uzbekistan will create an even shorter path within the Middle Corridor. Additionally, in June 2024, China reached agreements with both countries to construct a 320-mile railway line that will enhance this strategic option.
Commercial resilience. This development doesn’t signify an end to the relationship between China and Russia. According to The Economist, China still views Russia as a crucial component of its ambitious global infrastructure initiative, the Belt and Road Initiative. However, China’s current support for the Middle Corridor is mainly driven by economic interests. With its growth increasingly dependent on exports, China is keen to establish stable routes to Europe to revitalize its economy.
Moreover, Russian routes remain vital for specific goods like machinery used in the Russian military industry. Following the invasion of Ukraine, rail trade between China and Europe saw a decline, while trade with Russia increased significantly. However, Beijing understands that alternative connections to Europe allow for quicker access to time-sensitive markets. They’re also a better option to strengthen China’s influence in transit countries and create more resilient logistical networks in the face of crises.
Project status. The railway line connecting China, Kyrgyzstan, and Uzbekistan is expected to take several years to complete. Kyrgyzstan has announced that China will finance the project with a loan of $2.35 billion. Simultaneously, China and several other countries (excluding Russia) are working to upgrade different sections of the Middle Corridor.
While this route offers a shorter connection to Europe compared to the Russian route, it’s more complex. It crosses multiple borders and requires crossing the Caspian Sea (and eventually the Black Sea) through additional shipments. This results in more transshipments and higher logistical costs. Since the Russian invasion, China has intensified efforts to modernize the Corridor.
Friends of friends. Moves similar to Kyrgyzstan’s actions with Russia in 2022 may become increasingly common if tariff escalations continue. In this scenario, China might seek to “place” its products in the U.S. more effectively.
In addition, the Kyrgyz-Russian model has shown that it’s possible to bypass sanctions or tariffs relatively easily. This is as long as products change their country of origin on paper and undergo some degree of transformation or repackaging. Loopholes or weak oversight in many intermediary countries make this possible. Additionally, many of these countries have free trade agreements or face less scrutiny from the U.S., creating a twofold incentive: maintaining trade access and reducing costs.
Meanwhile, China has already secured essential supplies, particularly oil and gas, from Russia and Central Asia. This will bolster its energy autonomy in the event of potential conflicts or an escalation in the tariff war, which currently shows no signs of resolution.
Image | EJ Wolfson
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