The rapid growth of Central Asia’s information technology economy may change investment opportunities

Digital technologies are changing the dynamics of competition and the geopolitical balance of power. Even in Central Asia, an IT sector is rapidly developing, says Anatoly Modkin, president of StrategEast, a company promoting Eurasia’s digital economy.

Despite slower progress in Tajikistan and Turkmenistan, IT industries in Kazakhstan, Kyrgyzstan, and Uzbekistan have grown rapidly over the past several years. According to the latest StrategEast, this growth looks set to continue ReportIt describes the first in-depth study examining the export-oriented IT sector of the Central Asian region.

IT exports from the region are increasing. By 2022, Kyrgyzstan will reach $40m, followed by Uzbekistan at $140m and Kazakhstan at $200m. That compares to $25m, $46m and $50m in 2021, respectively. The report says official figures were „nothing” a few years ago. Exports are mostly to the US and Western Europe. For example, Uzbekistan sent 85% of its exports to the US in 2021.

Expertise is the new power

IT exports can compete with goods in scale: Ukraine, for example, exported more IT services in 2021 than Uzbekistan (its main export) in gold (its main export), Ukraine’s $6.9bn, slightly more than Uzbekistan’s $6.5bn.

As the demand for technical talent increases, investors and companies may seek new sources of expertise. Central Asian countries could become new technology hotspots for companies from elsewhere, Mr Modkin says, driving more investment from multilateral banks spread across the Caucasus region.

Cooperation with Gulf countries is also growing. „We want to open a dialogue about the opportunities in Central Asia and the Caucasus,” says Mr Modkin. “That is how we started working with the Gulf countries. It started in Qatar, Emirates and Saudi Arabia.

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Operating in the same time zone and living within similar cultures underlines the opportunity, says Mr Modkin. „And Central Asia offers the same level of distribution as Silicon Valley, but much cheaper,” he added.

Mr Modkin predicts increased Gulf investment in Central Asia and the Caucasus, where 'commodities’ will move from oil to expertise. „[Central Asia and the Caucasus] Offers good scope for venture capital investments [VC] Funding from the Gulf. More than 500 VC investors in the Gulf are keen to find startups worth their investment.

In October 2023, StrategEast organized the Dubai-Eurasia Digital Ecosystem Development Forums, which brought together IT leaders from Kyrgyzstan and Uzbekistan and government officials from Georgia, Azerbaijan, Tajikistan and Kyrgyzstan with digital economy responsibilities. It was in collaboration with Dubai and its Digital Economy and World Trade Center.

The best way to increase capacity in Central Asia and the Caucasus is to let the Gulf market know, says Mr Modkin, adding that „conclusive results” are already emerging in connecting Central Asia with the Gulf countries.

„Companies providing digital services to international routes from Georgia and Kyrgyzstan would be a good fit for Qatar Airways and Emirates, and companies already providing digital services to Shell in Uzbekistan and Kazakhstan could become perfect competition for Aramco,” he says.

Incumbents are vulnerable

The region’s expanding IT sector offers „huge benefits” locally, Mr Modkin says. „The governments of Kazakhstan, Uzbekistan and Georgia perceive IT as the best and fastest way to really generate more revenue for the state budget, but also for the country,” he says.

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„Technology provides a faster way to create equal opportunities for people in rural areas,” she adds, pointing to improvements in gender equality, transparency and accountability.

Within Central Asia, Mr Modkin says, the IT sector is „actively embedding the DNA of all the good values ​​that we’ve been trying to build over the years”.

The technological sphere is rapidly expanding and advancing, and with it, Central Asian countries are increasingly adapting technology embedded in all aspects of their lives. „It could be medtech, agritech or fintech,” says Mr Modkin.

But as Central Asia’s IT economy grows, the region’s traditional banks may become increasingly vulnerable to technology-based alternatives. Mr Modkin says the incumbents will „lose their power very rapidly in emerging markets, particularly in Central Asia”.

A lack of „fundamental trust” in traditional banking institutions across Central Asia allows fintechs even more room to come to the fore, Mr Modkin says, especially in the broader context of the countries’ technological transformation. „Fintech solutions can easily replace traditional banks in this region,” he adds.

The future in Silicon Valley is uncertain

Kazakhstan’s target of $500m in IT exports by 2025 is expected to grow tenfold over four years compared to $50m in 2021, the StrategEast report says. Of the thousands of start-ups covering the IT sector in Central Asia, many are driven by „US accelerators” and a US-led trajectory, says Mr Modkin.

But the landscape for tech expertise is changing, and these companies „don’t necessarily see their future in Silicon Valley,” he adds.

Along with the Gulf states, Southeast Asia also offers mutual interest in Central Asia, with Singapore and South Korea as examples, Mr Modkin points to.

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While US-based accelerators have so far driven technology development, dollars may not emerge as the dominant trading currency for Central Asian countries. Instead the Chinese yuan will still prevail, Mr Modkin says.

„Instead of an iron curtain, we’ll get some sort of 'silicon curtain’: As US-centric and China-centric ecosystems evolve, countries [in central Asia and the Caucuses] They have to decide which organization to associate themselves with,” he says.

„I believe that in many years, countries where the ecosystem will integrate with China will become disconnected from the Western world, and vice versa.”

Regardless of the region’s global partners, Mr Modkin predicts that Central Asia will become one of the most advanced fintech regions. He says a third global leader could emerge alongside the US and China as the Gulf states bring in digital expertise from the Caucasus and Central Asia.

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