How Will Kyrgyzstan Repay Its Huge Debts To China?

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Then-Kyrgyz President Sooronbai Jeenbekov (left) and Chinese President Xi Jinping met on the sidelines of the Shanghai Cooperation Organization summit in Qingdao in June 2018.

Faced with a struggling economy and few financial lifelines, Kyrgyzstan is feeling the weight of its swelling state debt -- a significant proportion of which is owed to China -- and considering some drastic measures to meet its obligations.

Kyrgyzstan’s foreign debt is reportedly as much as $5 billion and more than 40 percent of that ($1.8 billion) is owed to the Export-Import Bank of China for a series of infrastructure projects over the last decade under the guise of the Belt and Road Initiative (BRI), Chinese leader Xi Jinping's signature foreign-policy project.

Bishkek, however, is grappling with a contracting economy whose gross domestic product dropped 8.6 percent in 2020, prompting fears the country will be unable to pay off its loans or even meet interest payments, especially on the Central Asian country’s commitments owed to Beijing.

With deadlines approaching, there has been discussion by Kyrgyz officials of potentially forfeiting assets as a form of repayment.

"If we do not pay some of [the debt] on time we will lose many of our properties," new Kyrgyz President Sadyr Japarov told the state Kabar news agency during an interview on February 13. "Agreements with such conditions were signed by [President Almazbek] Atambaev. But, God willing, we will get rid of all debts in time. There are plans."

What exactly those plans are remains to be seen.

While Japarov's comments refrained from mentioning China directly, the national conversation has since shifted to how the country of 6.4 million people can repay its loans to Beijing, its largest creditor and a major political force in Central Asia.

This debt impasse highlights the difficult bind that many countries -- including Kazakhstan, Tajikistan, and Pakistan -- have with Chinese-owed debts from large BRI infrastructure projects as they deal with the economic crunch caused by the COVID-19 pandemic.

Beijing has so far shown a willingness to defer some loans, but not offer outright relief, pointing toward a difficult negotiating environment for countries like Kyrgyzstan that are under such difficult financial strain.

"China has shown many times in Latin America and Africa that it is not a charity and that it is a very pragmatic partner in terms of getting back its debts," Temur Umarov, an expert on China-Central Asia relations at the Carnegie Moscow Center, told RFE/RL. "For Kyrgyzstan, it's a challenging situation with no clear way out."

Kyrgyzstan has been considering options for the development of its Jetim-Too iron-ore mine in recent months, and some government critics have raised the prospect that the authorities might sell off or surrender mining rights to the lucrative deposit to pay off its loans to Beijing.

As a presidential candidate, Japarov himself floated the idea of using Jetim-Too to pay down state debt owed to China, although Kyrgyzstan's National Bank has said the government planned to retain ownership.

Beyond mineral and mining concessions, some lawmakers have also mentioned the possibility of the government surrendering partial management of the country’s energy sector.

A protest outside the Chinese Embassy in Bishkek over the treatment of the Uyghur minority in China.

This outcome to resolve the country's debts was raised by parliament deputy Akyl Japarov (no relation to the president) on February 22, if Kyrgyzstan could not meet its interest payments on the controversial, Chinese-financed reconstruction of Bishkek's main power plant, the cost of which was grossly inflated before breaking down and continues to have shortfalls in production.

"Kyrgyzstan has no leverage and few ways to manage this crisis," Niva Yau, a researcher at the OSCE Academy in Bishkek, told RFE/RL. "A lot will depend if Japarov is able to follow through on his reforms for the economy and bring in anti-corruption measures."

In Search Of Goodwill

Japarov and Xi had their first phone call on February 22, during which the Kyrgyz president voiced support for more Chinese projects in the country and praised Xi's handling of a range of international issues.

The phone call comes after strained relations between Bishkek and Beijing around the events that brought Japarov to power and plunged Kyrgyzstan into a political crisis in October.

The nationalist Japarov rode into power on protests triggered over parliamentary elections that toppled the government and saw the resignation of President Sooronbai Jeenbekov.

But in the wake of those events, Chinese businesses and citizens in Kyrgyzstan reportedly faced attacks and shakedowns, which led to Kyrgyz Ambassador to China Kanayym Baktygulova being summoned in Beijing as Chinese officials expressed their displeasure and concern for the safety of its citizens.

"Beijing has lots of concerns over a populist leader like Japarov," Yau said. "China has been waiting for the domestic political situation to stabilize and there is still lots of hesitancy."

Anti-China protests have grown across Central Asia in recent years, with many such demonstrations taking place in Kyrgyzstan and Kazakhstan.

Concerns about land ownership, state debt, Chinese labor practices, and the internment camps in the neighboring Chinese province of Xinjiang -- which have also held ethnic Kyrgyz and Kazakhs in addition to Uyghurs -- have been rallying calls in the country. Vandalism and several attacks on Chinese workers have also occurred in recent years in Kyrgyzstan and Kazakhstan.

Japarov -- whose parents lived for many years in China -- must now persuade Beijing that he can be a reliable partner without alienating himself from the nationalist, anti-corruption rhetoric that helped bring him to power.

On both fronts, the Kyrgyz leader faces tremendous obstacles.

Popular anger over corruption remains high in Kyrgyzstan and many details over past loan contracts signed with Chinese entities are unknown, sparking further speculation among the public about how the government will settle its debt with Beijing.

Moreover, Japarov is also dealing with the fallout of revelations around Raimbek Matraimov, the former deputy customs chief and influential power broker who was arrested for a second time on February 18 over suspicion of money-laundering following public backlash over a lenient fine. The allegations against Matraimov were first revealed by a joint RFE/RL investigation.

With limited international experience, Japarov is also looking to shore up Russian support to help navigate his problems, with a visit to Moscow for talks with President Vladimir Putin and other top officials taking place on February 24-25.

Playing The Long Game

Even before the political upheaval that brought Japarov into office, Bishkek had been asking China for debt forgiveness.

Prior to the pandemic, Kyrgyzstan was making progress in paying down its outstanding loans, but the financial problems caused by COVID-19 broke down the country's economy, which remains reliant on cross-border shuttle trade with China, and derailed Bishkek's schedule.

In November 2020, some relief did come from Beijing in the form of debt deferment, allowing $35 million owed for that year to be delayed until 2022-24, at 2 percent interest.

Kyrgyzstan also secured help from international creditors through a Paris Club agreement in June, suspending $11 million worth of debt until the end of the year. Bishkek collectively owes more than $300 million to Denmark, France, Germany, Japan, and South Korea.

But those deals only offer temporary relief and do not address wider structural issues over Kyrgyzstan's inability to service its debt obligations. With Bishkek exploring various drastic options to repay its Chinese loans, what sort of concessions Beijing is willing to offer could be the deciding factor.

"The pattern is that China is willing to defer debt, but only in a handful of cases has it actually written it down," Jonathan Hillman, the director of the Reconnecting Asia Project at the Center for Strategic and International Studies, told RFE/RL. "Examples of asset seizures have been extremely rare."

China holds many of the cards in debt talks, with contracts signed with Kyrgyzstan stipulating that any disputes over repayment are to be settled in Chinese arbitration courts, rather than international ones, and could contain other clauses to Beijing's advantage.

"A lot of the issues facing Kyrgyzstan stem from a lack of due diligence and mismanagement from Kyrgyz officials over the years," Hillman said. "But I think this is a lesson on the risks of doing business with China. This is what happens when you have a lack of transparency around lending."

Still, China remains concerned about its reputation in Kyrgyzstan, and the wider region as a whole, and will likely be mindful of the optics and sensitivities in taking control of any assets in the Central Asian country.

"Taking an asset is not a good political move," Hillman said. "It will confirm everyone's worst fears about China and Belt and Road."

Source: Copyright (c) 2015. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave NW, Ste 400, Washington DC 20036.