3. Political economy
Kazakhstan’s economy has largely outperformed those of other post-Soviet resource producers, but it needs to diversify and reform if it is to meet the challenges ahead.
The economy is never just an economic matter. How wealth is created and distributed, and the interests it serves, always has systemic significance. The post-Soviet states illustrate this vividly. Across the region over the past three decades, different forms and degrees of transition from command system to market have shaped not only the economic performance of each country but the way power works, the state’s relationship to society, and each country’s relationship to the outside world.
Kazakhstan is no exception. Its economic achievements and prospects hold major implications for domestic cohesion and stability; they influence foreign policy choices; and they help to define the stakes of the ongoing leadership transition. In short, the political economy is intertwined with every other dimension of Kazakhstan’s development and outlook.
This chapter begins by outlining the context of Kazakhstan’s economic development since independence, and notes the difficult hand the country was dealt. It assesses how Kazakhstan has played this hand through its policy choices, noting its record in outperforming its peers. It then draws attention to the limits of these achievements, identifying the growing problems that have taken root. Finally, it examines the challenges that lie ahead and the reforms that will be needed if the country is to meet these effectively. It concludes that Kazakhstan must begin to manage its economy differently from the ways that have brought it success until now.
Curses and legacies
Any assessment of Kazakhstan’s economic development and future prospects must be measured against the formidable challenges of geography, nature and legacy that it has faced. These can be summarized as follows:
- Geography: An extreme continental climate afflicts the economy with a ‘Siberian curse’ of deadweight costs even more onerous than in Russia.58 The growth of Nur-Sultan (previously Astana), the second-coldest capital city in the world, means that Kazakhstan is one of the few countries whose ‘temperature per capita’ is not only very low but may be falling. As a landlocked country, Kazakhstan faces inherently higher costs, and is prone to lower GDP growth, than those with natural access to maritime trade routes.59 But geography is a political as well as a natural fact. Kazakhstan’s two giant neighbours, Russia and China, harbour great-power agendas that pose foreign economic policy challenges for Kazakhstan. Until recently, the most sensitive issues have arisen from the country’s close ties with Russia, inherited from the Soviet past. These encompass currency management, trading arrangements and hydrocarbon exports (revenues from which are the lifeblood of Kazakhstan’s economy).60 Russia’s interests, ambitions and resurgence make this a challenging neighbourhood. At the same time, China’s rise presents a new, and increasingly powerful, set of challenges to negotiate.
- Nature: Global experience shows that great resource wealth can be a curse as well as a blessing. An economy dependent on resource exports tends to produce patterns of governance dominated by elite struggle for title or rents. This leads to lower GDP growth, high corruption, stunted institutions, weak rule of law and little popular accountability.61
- Legacy: Kazakhstan inherited a system of laws, institutions and bureaucratic culture that were designed to manage a planned economy, not regulate a market one. In addition, Soviet-era industrialization and planning entrenched numerous economic distortions and inefficiencies, which in many cases have proven hard to eradicate.
Cold and distance, the pitfalls of resource wealth and a legacy of failed institutions all dealt the newly independent Kazakhstan a difficult hand. Critics have since taken the country to task for its ‘unfulfilled promise’ and ‘missed opportunities’ in economic development, and laid these failings at the door of elite greed, corruption and indiscipline.62 But a more comparative perspective suggests that many of Kazakhstan’s difficulties are at least partly rooted in historical and systemic factors, which have incentivized elite behaviour and relationships that hinder full transition to an efficient and dynamic market economy.
Cold and distance, the pitfalls of resource wealth and a legacy of failed institutions all dealt the newly independent Kazakhstan a difficult hand
The countries that most resemble Kazakhstan are the other major post-Soviet resource producers: Azerbaijan, Russia, Turkmenistan and Uzbekistan. These provide a natural yardstick with which to evaluate the successes and failures of Kazakhstan’s policy choices since independence. Comparing Kazakhstan with its peers does not absolve it from failings or mistakes. But it does provide a more realistic basis on which to assess the path it has taken. It also helps to formulate feasible solutions for the future.
Kazakhstan the outperformer
Kazakhstan has achieved the highest level of GDP per capita of all post-Soviet countries apart from the Baltic states. Table 1 shows how Kazakhstan and its closest comparators, the major natural resource producers in the region, have fared. With the doubtful exception of Turkmenistan (given problems of data reliability), Kazakhstan has enjoyed the biggest absolute and percentage increases in GDP per capita since 1991. Per capita GDP has more than trebled, propelling Kazakhstan to upper-middle-income status. From 2000 to 2011, it enjoyed one of the highest growth rates in the world.63
This growth has been broadly inclusive. Kazakhstan’s poverty rate has fallen to 6.5 per cent.64 It ranks 58th out of 189 countries in the UN’s Human Development Index, qualifying as a ‘very high human development’ country. Among post-Soviet states, only the Baltic states, Belarus and Russia rank higher.65 According to UN Development Programme (UNDP) data, Kazakhstan is among the very few countries in the world with a Gender Development Index greater than one, indicating that women on average achieve slightly better human development outcomes than men – though this does not mean they enjoy de facto equal access to all economic opportunities.66
Table 1: GDP per capita ($PPP) of major post-Soviet resource producers
|
Country |
1991 |
2018 |
change |
% change |
|---|---|---|---|---|
|
Kazakhstan |
7,744 |
27,831 |
20,087 |
259 |
|
Russia |
7,846 |
27,147 |
19,301 |
246 |
|
Uzbekistan |
2,019 |
7,020 |
5,001 |
247 |
|
Azerbaijan |
5,765 |
18,012 |
12,247 |
212 |
|
Turkmenistan |
5,174 |
19,270 |
14,096 |
272 |
Notes: Purchasing-power-parity (PPP) figures are used due to the exchange rate fluctuations of major oil exporters and their emerging-market status. Turkmenistan’s performance is questionable given the difficulty of ensuring reliability of data. See European Bank for Reconstruction and Development (EBRD) (2019), ‘Turkmenistan overview’, (accessed 22 Aug. 2019).
Source: Calculated from World Bank Open Data, World Bank (2019), ‘GDP per capita, PPP (current international $) - Kazakhstan, Russian Federation, Uzbekistan, Azerbaijan, Turkmenistan’, (accessed 14 Oct. 2019).
Of the four other major post-Soviet resource producers, only Russia has made greater progress in transition since 1991
What has driven this growth? As in other post-communist countries, progress in market transition has freed the economy from many of the distortions and inefficiencies of central planning. Of the four other major post-Soviet resource producers, only Russia has made greater progress in transition since 1991 (see Table 2). Kazakhstan’s rate of reforms in its first decade following independence was especially impressive. It not only undertook the fastest transition within its peer group, but it reformed further than any post-Soviet states except the Baltic states and Georgia.
Table 2: Aggregate European Bank for Reconstruction and Development (EBRD) transition scores of post-Soviet resource exporters
|
Country |
1991 |
1999 |
2014* |
% change 1991–99 |
% change 1999–2014 |
|---|---|---|---|---|---|
|
Russia |
7.0 |
16.6 |
19.7 |
137 |
18.7 |
|
Kazakhstan |
6.0 |
18.3 |
18.4 |
205 |
0.5 |
|
Azerbaijan |
6.0 |
16.0 |
17.4 |
167 |
8.8 |
|
Uzbekistan |
6.0 |
13.4 |
13.8 |
123 |
3.0 |
|
Turkmenistan |
6.0 |
10.1 |
10.6 |
68 |
5.0 |
* Latest data available.
Source: Calculated from EBRD ‘transition indicators’. The EBRD assessed transition indicators for each country annually from 1989 to 2014. See EBRD (2019), ‘Forecasts, macro data, transition indicators’, (accessed 22 Aug. 2019). In 2017, the EBRD introduced a new set of ‘transition qualities’. These are broader, more political and social in nature, and not directly comparable with the earlier indicators. The ranking of the five post-Soviet resource producers listed here is the same, however. The main difference relevant to this chapter is that, according to the new indicator, Kazakhstan performs relatively better than the next-best-performing country, Azerbaijan. Details of the new transition qualities can be found at Bennett, V. (2016), ‘EBRD updates transition concept’, EBRD, 2 November 2016, (accessed 22 Aug. 2019). The latest country scores can be found at EBRD (2019), ‘Transition Report 2018–19’, (accessed 22 Aug. 2019).
In its second decade of independence, the major source of Kazakhstan’s exceptional performance was oil exports. This was due not only to the five-fold increase in the oil price from 1999 to 2008, but to the quadrupling of oil production from 1995 to 2015. About 60 per cent of Kazakhstan’s oil output is produced by its three supergiant fields: Tengiz, Karachaganak and Kashagan. These projects have overcome formidable technical and geological challenges – including, in the case of Kashagan, the building of artificial islands in the Caspian Sea where oil rigs are unfeasible due to winter pack ice. New technologies have also been developed to meet field-specific challenges. From 2000 to 2018, Kazakhstan’s oil production increased by an average of 2.7 per cent a year, comfortably the highest rate in the post-Soviet region and the ninth-highest rate in the world.67 Kashagan, the biggest oil discovery in a generation, began sustained production in 2016. It is a game-changer that will significantly add to Kazakhstan’s output in coming decades. In June 2019, output from Kashagan reached 400,000 barrels/day, and is expected to achieve a peak run-rate of 450,000 barrels/day (61,400 tonnes/day). This one field was largely responsible for the 10.8 per cent jump in Kazakhstan’s oil output in 2017, effectively the highest rate of increase of any producer worldwide.68
Kazakhstan’s oil reserves are a gift of nature, but monetizing them – getting them out of the ground and to market – is a policy outcome. Kazakhstan’s production growth is largely a consequence of decisions taken in its first decade of independence to invite international oil companies (IOCs) to invest in its three biggest fields on attractive terms. Production-sharing agreements (PSAs) are at the heart of this relationship. PSAs include stabilization clauses that protect the projects from significant revisions to national law and regulations. This helps account for Kazakhstan’s success in attracting higher foreign direct investment (FDI) per capita than any other post-Soviet country: more than 75 per cent of this FDI has flowed into the extractives sector.
Importantly, the PSAs remain in force. Unlike Russia, where state companies have taken majority control over a number of major projects, Kazakhstan has not fundamentally revised the terms on which the three PSA-stabilized projects operate. When the national oil company, KazMunaiGaz (KMG), entered the Karachaganak consortium in 2012 as part of a dispute resolution agreement, it acquired a modest 10 per cent stake. This relative contractual security has allowed project shareholders to commit recently to further major investments. These include the $37 billion Tengiz Future Growth Project, approved in 2016; the next-phase field development of Karachaganak; and continued investment in Kashagan, which, with $50 billion now committed, is the most expensive energy project in the world.
Thus, Kazakhstan’s strong economic record since the turn of the millennium has relied disproportionately not just on a single sector, but on three majority foreign-owned projects within it. Oil and gas production accounts for 17 per cent of Kazakhstan’s GDP and almost 60 per cent of its exports.69
Kazakhstan’s strong economic record since the turn of the millennium has relied disproportionately not just on a single sector, but on three majority foreign-owned projects within it
In fiscal terms, Kazakhstan has managed its oil windfall responsibly – especially during the oil boom of 2000–08 when the non-oil fiscal deficit remained broadly stable and a National Fund was set up to save a proportion of oil revenues. Fiscal stimulus equivalent to around 15 per cent of GDP was used to mitigate the shock of the 2008 global financial crisis, ensuring that Kazakhstan, unlike Russia, did not fall into recession. But this crisis, and the later fall in the oil price in 2014 (which led to a 70 per cent drop in revenues), weakened Kazakhstan’s fiscal position, pushing the non-oil deficit up to 12.7 per cent of GDP in 2017. The public finances require consolidation if they are to be sustainable in the longer term.70
In sum, in its first decade of independence Kazakhstan navigated the disruption of Soviet break-up and systemic transition, dismantled much of its planned economy, and reached landmark agreements with international oil companies. This laid the foundations for strong economic performance in its second decade. Kazakhstan played its opening hand well, especially in comparison to its peers.
The limits of progress
However, in the country’s third decade since independence, the political economy has begun to accumulate new problems. These must be addressed if Kazakhstan is to meet the fresh challenges that lie ahead. Three issues are of particular concern.
First, while oil production is set to continue rising, conditions in the oil and gas sector are beginning to shift. Though still strong, the state’s relationship with the three supergiant oil projects is changing. The familiar model of the ‘obsolescing bargain’ between state and foreign investors in capital-intensive, long-term projects predicts that a host government is likely to seek to revise contract terms as a project matures. As noted above, Kazakhstan has wisely avoided forcing fundamental changes in ownership structure on investors and partners. But in other respects, the operating environment is becoming more difficult for IOCs. They report that challenges and objections by the authorities even to minor decisions and requests for approval are growing. These are creating delays and slowing project development.
Furthermore, both the national government and regional authorities have for some time been seeking to expand the range of obligations imposed on, or expected from, the major projects. Pollution charges and taxes on the oil and gas industry, disproportionately levied on major projects, are very high and continue to rise.71 Draft regulations can also contain unpleasant surprises, requiring foreign investors and their governments to mobilize in pushing back. A good example is the Code on Subsoil and Subsoil Use that came into force in June 2018. Earlier drafts had included adverse provisions for major investors. Concerted corporate and diplomatic engagement succeeded in moderating these provisions, and the version eventually adopted improves the regulatory framework, especially in the mining sector.72
The authorities also seem intent on making the three major oil projects drivers of broader modernization beyond the energy sector, through local-content and labour requirements, domestic market obligations and other regulations. Local commercial interests, sometimes politically connected, can play a role in such demands. Beyond these projects, the picture in the oil sector is also mixed. In 2012 Kazakhstan signalled that it would sign no new PSAs, a decision that led to the exodus from potential projects of major investors – among them Norway’s Statoil, which in 2013 withdrew from Kazakhstan after seven years of inconclusive negotiation.
The second area of concern is that the wider resources sector remains beset by challenges. Mining is a case in point. Kazakhstan is the world’s largest producer of uranium, and possesses enormous deposits of a wide range of metals, including gold, iron, chrome, copper, zinc, vanadium and rare earths. But since 1991 almost no new exploration has taken place, few new mines have opened, and relatively little foreign investment has been attracted into the sector. As a result, less than 15 per cent of known reserves are in production, and current projects face depletion without new ones to replace them. Furthermore, in a pattern seen in other sectors, smaller foreign companies that lack protection face difficulties in entering the market; they may suffer adverse bureaucratic treatment if they succeed, and are sometimes forced out.
Third, Kazakhstan has done little recently to modernize the overall economy. Kazakhstan’s economic geography presents severe challenges for efforts to diversify away from dependence on natural resource exports. Creating new, competitive, high-productivity sectors is intrinsically difficult in countries, such as Kazakhstan, that have a low population density and are far from large export markets.73 In the post-Cold War world, Halford Mackinder’s Edwardian conception of Central Asia as a geopolitical ‘heartland’ has received much – perhaps too much – attention.74 Economically, the region runs the risk of being more a remote periphery than a vital core.
Progress in diversification and modernization has been limited. Despite significant depreciation of the tenge, non-oil exports have barely grown over the past decade. Trend growth has fallen, especially in the non-oil sector, and in fact the economy has become more reliant on the oil sector.75 Various indicators of market conditions continue to lag. Kazakhstan scores poorly for innovation, business sophistication, financial market development, local supplier quality and the breadth of its value chain.76 As the World Bank notes, ‘indicators of economic complexity have trended downward, suggesting that the country has been adding less rather than more value … in both resource-based sectors and other sectors’.77 Kazakhstan ranks 124th out of 180 countries in Transparency International’s Corruption Perceptions Index.78 Though better than the rankings of other direct comparators, this is still a poor score. Kazakhstan is in the bottom fifth of all countries for control of corruption, far lower than the average for upper-middle-income countries.79
Roots of current problems
This chapter began by discussing the natural conditions and systemic legacies that Kazakhstan inherited as a newly independent country. Despite impressive progress in overcoming some of them, new hindrances have emerged for Kazakhstan’s post-Soviet political economy. Three stand out: extensive involvement of the state in the economy, weak regulatory and judicial structures, and inadequate administration of trade.
The state’s economic role is too large. State-owned enterprises (SOEs) are dominant, accounting for some two-thirds of all assets – nearly all concentrated in three holding companies: Samruk-Kazyna, Baiterek and KazAgro.80 For an upper-middle-income economy, this share remains exceptionally high, and has even grown in recent years.
The state’s size brings problems familiar to global experience: economic inefficiency, political rather than market-based decision-making, insider interests and corruption. It also has adverse implications for state finances. While Kazakhstan’s sovereign debt is equivalent to only 20 per cent of GDP, the debts of SOEs far exceed this, accounting for a further 29 per cent of GDP. Since most of these liabilities are foreign currency-denominated, this adds to fiscal risk.81 The state’s presence in the economy beyond formal asset ownership also remains significant, with widespread subsidies and price controls creating inefficiencies and distorted incentives. Significant tax incentives and exemptions, subsidized lending and implicit debt guarantees disproportionately benefit large state companies.
The corollary of an excessive state role is an underdeveloped private sector. The small and medium-sized enterprise (SME) sector, a driver of growth in the most successful transition economies, contributes less than a fifth of GDP. Many SMEs deliberately stay small and limit their growth. If they become too successful, they risk attracting hostile attention from powerful interests that might seek to engineer a hostile takeover (reiderstvo) through access to administrative and legal systems.
Neither domestic nor foreign companies can be confident that the judicial system will protect their legitimate interests
At the same time, though its companies are dominant, the state’s institutions remain weak. Too often, administration and the rule of law are applied in discretionary ways that favour privileged interests, rather than functioning impartially. Neither domestic nor foreign companies can be confident that the judicial system will protect their legitimate interests. While, as noted above, Kazakhstan has higher transition scores than natural comparators (with the exception of Russia), it has shown the least improvement since 1999. Virtually all its transition progress was achieved in the most challenging early years; progress has essentially halted since then (see Table 2). Plans to resume structural reforms, for example by floating minority stakes in major state companies such as KMG, have been repeatedly deferred.82 A notable exception was the November 2018 floating of 15 per cent of Kazatomprom, the world’s biggest uranium producer.
The banking sector epitomizes the country’s transition problems in an especially acute form. Despite several rounds of consolidation, culminating in the merger of the country’s two largest banks in 2017, and repeated large bailouts, the sector remains weak and excessively dependent on political connections.83 In 2017 alone, bank bailouts totalled 3 trillion tenge ($9.1 billion), accounting for more than a quarter of the 11 trillion tenge ($33.7 billion) state budget. Bailout funds are also taken from the National Fund, the official purpose of which is to save oil and gas revenues for use when oil prices fall. The travails of Tsesnabank exemplify this chronic problem: it was given a $1.3 billion bailout in September 2018, and a further $3.4 billion in February 2019. Until the latter bailout, the bank had been controlled by the family of Nazarbayev’s ex-chief of staff, Adilbek Zhaksybekov.84
A decade on from the global financial crisis, and with national income now growing at more than 3 per cent a year, such problems can no longer be attributed to ‘fallout’ from that crisis. Rather, they reflect systemic patterns of connected lending that arise from entrenched and opaque state–SOE–bank relationships and the moral hazard associated with those relationships. In effect, repeated banking failures are a systemic feature, serving to recycle a portion of oil revenues into profits for the biggest banks and their most powerful clients. Meanwhile, SMEs are poorly served by the financial system, especially outside Nur-Sultan and Almaty.
In the World Bank’s ‘Doing Business’ rankings, Kazakhstan’s sub-score for trading across borders is by far the weakest component in its overall rating
A further hindrance to growth and modernization is Kazakhstan’s poor performance in respect of its trading arrangements. In the World Bank’s ‘Doing Business’ rankings, Kazakhstan’s sub-score for trading across borders is by far the weakest component in its overall rating. It ranks 102nd out of 190 in this category, bringing down an otherwise impressive overall ranking of 28th.85 Customs clearance, documentary and inspection procedures still lag badly. These problems compound the inherent difficulties, noted earlier, for any landlocked country in accessing international markets for goods. Building new ‘dry ports’, better transport links and other hardware will achieve little unless the ‘soft infrastructure’ of regulatory systems is not significantly reformed.
In sum, the dysfunctions of Kazakhstan’s political economy risk undermining its longer-term performance. Significantly, its greatest successes are specially created exceptions to, not exemplars of, its system. The Tengiz, Karachaganak and Kashagan oil fields are world-class operations that have surmounted formidable technical and geological challenges. But their success arises partly from being managed, operated and majority-owned by Western companies, and from enjoying legal stability and relative freedom from political and bureaucratic influence. They are, in effect, enclaves in Kazakhstan’s system and not subject to most of the regulatory and institutional challenges that beset the rest of that system. Despite growing pressures, these projects work quite differently from other parts of the economy.
This is not the only such case. The flagship Nazarbayev University in Nur-Sultan, which has attracted international leadership and faculty to design and deliver a 21st-century education, is exempt from normal Ministry of Education oversight. A more recent example is the Astana International Financial Centre (AIFC), launched in July 2018. Intended to become a financial hub for Central Asia, the AIFC establishes an independent court system and jurisdiction based on English law, an international arbitration centre and a new stock exchange.
Although these are valuable initiatives, such centres of excellence in diverse sectors are an implicit admission of the limitations of the wider system. The ideal solution would be to reform the institutions that administer and regulate the whole country, rather than create enclaves of exemption. The need to do so is made more urgent by the fact that significant new challenges await.
Looming challenges
Four major economic challenges, two domestic and two external, lie ahead for Kazakhstan. These make it more important than ever that the authorities address the weaknesses of the political economy.
The first challenge is demographic. Fuelled by a baby boom that took off a decade ago, Kazakhstan’s population is forecast to rise by 15 per cent between 2020 and 2040.86 Handled well, this expanding labour force can fuel growth. But if good jobs are not available, discontent and social tensions will rise. Kazakhstan must therefore develop more labour-intensive, higher-value-added sectors, rather than relying primarily on oil and gas.
The second is technological. The emergence over the coming decades of artificial intelligence, robots and other aspects of a data-driven economy have profound implications for all countries. Investing in human capital through education is the best hedge against disruption and mass unemployment.
The third challenge comes from global energy markets. Kazakhstan remains highly dependent on a single variable, the price of oil. The emergence of the US as the world’s swing producer is likely to keep this price lower than it has been for much of the past decade. A new global recession would drive the oil price down, with adverse growth and fiscal consequences for Kazakhstan. In the more distant future, transition to a post-carbon world will have profound implications for all hydrocarbon exporters. Astana’s EXPO-2017 exhibition, themed around ‘future energy’ from sustainable sources, was a commendably far-sighted initiative for a major oil producer. But there is clearly much more to do to prepare for this eventual scenario. Green growth is also needed to tackle the pressing problem of Kazakhstan’s energy intensity – among the highest in the world.
The fourth challenge is presented by Kazakhstan’s giant neighbours. Russia faces bleak economic prospects and escalating Western sanctions, the effects of which already spill over into Kazakhstan. Rouble depreciation has hit local producers by making Russian goods relatively cheaper. It has also compounded the challenges of managing an oil-dependent currency. As a consequence, in recent years the tenge has been one of the world’s most volatile currencies. This volatility has several harmful effects. It fuels inflation, hinders inward investment by exacerbating currency risk, increases the exposure of citizens and companies holding dollar-denominated liabilities, and undermines confidence in the currency.87
Russian moves to increase regional economic connectivity have also brought problems. Since 2015, the Eurasian Economic Union (EAEU) has in principle established a mutually beneficial single market among Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. In practice, this project is laden with political uncertainties. Russia’s sheer size means it dominates the EAEU. Moscow has sought to ensure the harmonization of member states’ trade and regulatory practices on its terms, and has pressed for further integration, such as a common currency, that would weaken member-state sovereignty. Some of its actions have harmed member states’ interests, such as by hindering the transit of Ukrainian goods and banning Western food imports. In 2014 Nazarbayev went so far as to suggest that Kazakhstan could leave the EAEU if membership threatened its sovereignty. Kazakhstan’s accession to the World Trade Organization (WTO) in 2015, on more liberal terms than Russia, has led to new complications for intra-EAEU trade.88
Russia is still Kazakhstan’s largest single-country trade partner (though barely: in 2018, Italy and China followed close behind).89 Russia is also a vital long-term transit route for energy exports. Kazakhstan has managed this relationship deftly. But doing so will become harder if Russia, facing poor economic prospects and troubled relations with the West (including the continued imposition of sanctions), becomes more crisis-prone, assertive and unpredictable.
China’s rise presents a broader mix of opportunities as well as challenges. China’s Belt and Road Initiative (BRI), first announced by President Xi Jinping in Astana in 2013, offers the prospect of infrastructure funding on a scale that no other country can match, as well as revenue flows from transit services associated with the transportation of cargo to Europe. In the best case, and with effective domestic reforms, BRI connectivity could ease Kazakhstan’s isolation from major markets and spur economic development.
China’s Belt and Road Initiative offers the prospect of infrastructure funding on a scale that no other country can match
Set against this are the severe problems with customs and border practices noted earlier, the uncertain economics of continental land routes, the risk that cheaper Chinese goods could hinder Kazakhstan’s economic diversification, and the possibility that closer economic ties could boost Chinese influence in Kazakhstan in unwelcome ways. China’s growing investments are already viewed with popular apprehension, especially when its companies bring labour to Kazakhstan. In 2016, rare public demonstrations broke out against land reforms, driven by fears this would lead to land being leased to the Chinese. This forced the government to delay the reforms, and the economy minister to resign.90
In sum, demographic trends will create a need for new jobs. Technological adaptation will demand a market environment in which innovators and entrepreneurs can thrive, as well as a high-quality education system. Spending on both education (less than 3 per cent of GDP) and research and development (0.17 per cent of GDP) is low by international standards. Responding to global market uncertainties will require greater economic and institutional resilience and a lower dependence on oil exports. Handling giant neighbours will require a stronger, more efficient economy.
Kazakhstan’s current system does not equip it to achieve these goals. If the status quo endures, Kazakhstan will depend on, and likely squeeze, a few key oil projects even more; the rent-seeking positions of insiders will remain entrenched; and the state will continue to dominate the private sector. Growth, jobs and resilience will suffer. The resource curse may tighten its grip.
A better approach would be to use the cushion of rising oil production to push through structural reforms rather than to defer them, and to improve the quality of institutions and human capital. If Kazakhstan can reduce the state’s role in the economy, reform its institutions and tackle corruption, it can not only raise living standards but become more resilient and better prepared for the challenges associated with future trends, connectivity with international markets, and assertive neighbours.
Even in the best-case scenario, reform will not be easy. It will require disrupting arrangements that are profitable for vested interests. Some policy changes may be especially difficult to implement in Kazakhstan. The goal of privatization, for example, is to create private owners that respond efficiently to market incentives. But in any privatization process, major bidders for stakes in state companies would likely include parastatal companies that are owned partly or wholly by the state, or that are otherwise politically connected. If foreign bids were allowed, they would probably include Russian and Chinese firms. It will be a major challenge to transfer state assets into genuinely private hands without exacerbating the oligarchic concentration of power created by earlier privatizations in the 1990s.91
Technocratic experts in Kazakhstan can be realistic and frank about both the scale of the reform challenges and the strength of the vested interests resisting change
What are the prospects for driving through structural reforms? Interestingly, Kazakhstan appears to have suffered from less complacency at the highest level than might be expected from a regional outperformer. Nazarbayev frequently criticized aspects of the very system that had become established during his leadership. On occasion he expressed stern and public dissatisfaction with the failure to resolve chronic problems, especially in the banking system. His January 2019 comments to the government in connection with banking failures were especially striking: ‘You are simply cowards, not a government, not ministers.’92 Nazarbayev also set out ambitious reform proposals to address such issues, notably in his May 2015 ‘100 concrete steps’ programme. International institutions find that technocratic experts in Kazakhstan can be realistic and frank about both the scale of the reform challenges and the strength of the vested interests resisting change. It is too early to know whether the leadership style of the new president, Kassym-Jomart Tokayev, will extend to exhibiting overt dissatisfaction with the status quo as his predecessor did, and, if so, how he will seek to change it.
Kazakhstan is also sensitive to its position in global indices and benchmarks, and maintains an active dialogue with major international institutions.93 WTO accession was a significant step, and its commitments – when fully implemented – will reduce barriers to trade and investment, especially in the services sector.94 The country also aspires to join the OECD and become one of the 30 most advanced economies by 2050. This openness to international comparisons and standards is encouraging. But it is important that Kazakhstan follow such standards in spirit as well as letter, and that it internalize the norms and values behind them. The primary goal should be for Kazakhstan to improve the underlying systemic features measured by benchmarks, rather than simply seek to raise the country’s position in a ranking. Consistent implementation of laws and regulations is as important as their formal adoption.
Furthermore, many reform impulses are directed at state-led, rather than market- facilitating, development. They create new spending projects that increase the state’s role and replicate the problems they are designed to address. As one veteran country head of an international institution put it, the most important thing is for ‘the state to get out of the way’, rather than try to fix problems of its own making.
In other ways, too, state-led initiatives reproduce the problems they are intended to solve. Top-down demands to fulfil directives and meet targets encourage a ‘storming’ approach to achieving outcomes – or the appearance of doing so – among officials. This premium on demonstrating quick results encourages shortcuts and quick fixes, in particular through imported technology or physical capacity rather than the slower, less tangible but essential work of building enabling systems and institutions.
The agriculture sector illustrates this. To develop its beef industry, Kazakhstan has imported cattle from North America. However, it has not put in place the necessary supporting infrastructure of veterinary care, feed production, transportation and other management policies. This has sometimes led to predictably unhappy results. Despite active state support, Kazakhstan’s wheat yields also remain low by international standards and of poor quality.95 In this, as in other areas of economic policy, Kazakhstan’s priority should be not more strategies, initiatives and targets, but more consistent and effective delivery.
Conclusions
Judged against its inheritance of geographical challenges and systemic legacies, and against the performance of other post-Soviet natural resource producers, Kazakhstan’s economic record since independence can be characterized more as one of ‘outperformance’ than one of ‘unfulfilled promise’. There was nothing inevitable about this success: it was a consequence of policy choices that might have been different – and that, in peer countries, have been different. Post-independence Kazakhstan has played its difficult hand well.
But this overall picture masks growing problems. While Kazakhstan was the fastest reformer in its peer group during its first decade of independence, it became the slowest in its second. In the early 2000s, reform progress fell away as economic growth picked up. This growth was driven primarily by oil and gas revenues, above all from three big majority foreign-owned projects. The latter have worked well not because of a strong local business environment, but because they enjoy the special, protected status of PSAs. The contrasting fortunes of the energy and mining sectors vividly illustrate how the normal rules of the system can lead to failure to realize great natural potential.
During the years of buoyant GDP growth, new political-economic dysfunctions accumulated. The state’s role in the economy remains far too large. State institutions that regulate the economy are too weak, partial and penetrated by vested interests, especially in the financial sector. The management of trade remains costly, corrupt and inefficient. The system that delivered past success must now evolve if Kazakhstan is to meet the challenges of demography, technology and the transformation of global energy markets, and address the dual risks of a rising China and a declining but geopolitically resurgent Russia.
There is no room for complacency. ‘More of the same’ is not a recipe for further success. In principle, the top leadership appears to recognize this, and engages closely with international institutions to work towards its declared goal of ranking among the most developed countries. The danger is that special interests will confine reform largely to technical measures and frustrate implementation of more substantial changes.96 Without deeper structural reforms to support a more diverse and competitive market economy, rising oil production will likely mask declining relative performance. In the worst-case scenario, the ‘resource curse’, which has so far afflicted Kazakhstan less than might have been expected, will gain a stronger grip.
In its first decade of independence, Kazakhstan demonstrated to itself and others that bold policies can deliver major benefits for the country and its people. Nearing the end of its third decade, the country needs to take up this challenge again. It would be helpful for Kazakhstan’s leadership to think in terms of a new phase of reform that challenges the post-Soviet legacies that have built up. This will not be easy, just as past successes were hard-won. But it will be central to Kazakhstan’s prospects. For, as noted at the start of this chapter, Kazakhstan’s economic choices will shape its political future too.
The author would like to thank Bill Tompson, Mike Gifford, anonymous reviewers and the authors of other chapters in this collection for their valuable comments; and numerous interlocutors in Kazakhstan for helpful discussions.
58 For the impact of climate on Russia’s economy, see Hill, F. and Gaddy, C. G. (2003), The Siberian Curse: How Communist Planners Left Russia Out in the Cold, Washington, DC: Brookings.
59 For a comprehensive analysis, see Arvis, J.-F., Raballand, G. and Marteau, J.-F. (2010), The Cost of Being Landlocked: Logistics Costs and Supply Chain Reliability, Washington, DC: World Bank.
60 The last of these issues includes oil transit through the Caspian Pipeline Consortium (CPC) to Western markets via the Russian port of Novorossiisk, and gas offtake from the Karachaganak condensate field to Orenburg (not a major revenue earner, but key to maintaining production levels at the field).
61 See, for example, Ross, M. L. (2013), The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, Princeton: Princeton University Press.
62 See, for example, Olcott, M. B. (2002), Kazakhstan: Unfulfilled Promise, Washington, DC: Carnegie Endowment for International Peace.
63 OECD (2017), OECD Investment Policy Reviews: Kazakhstan 2017, Paris: OECD Publishing, p. 15, Paris: OECD, https://read.oecd-ilibrary.org/finance-and-investment/oecd-investment-policy-reviews-kazakhstan-2017_97892 64269606-en#page1 (accessed 22 Aug. 2019).
64 World Bank (2017), The Economy is Rising: It is Still All About Oil, Kazakhstan Country Economic Update (Fall 2017), Washington, DC: World Bank Group, p. 14, http://documents.worldbank.org/curated/en/563451512743145143/Kazakhstan-The-economy-is-rising-it-is-still-all-about-oil-country-economic-update-Fall-2017 (accessed 6 Nov. 2019). The United Nations Development Programme (UNDP) calculates Kazakhstan’s rate of ‘multidimensional poverty’ at only 1.1 per cent. See UNDP (2016), Human Development Report 2016, Table 6, p. 218, http://www.hdr.undp.org/en/content/human-development-report-2016-human-development-everyone (accessed 6 Nov. 2019).
65 UNDP (2018), Human Development Indices and Indicators: 2018 Statistical Update, New York: UNDP, Table 1, p. 22, http://www.hdr.undp.org/en/2018-update/download (accessed 14 Oct. 2019).
66 Ibid. Table 4, p. 34 (accessed 22 Aug. 2019). See also Asian Development Bank (2018), Kazakhstan: Country Gender Assessment, Mandaluyong: Asian Development Bank, https://www.adb.org/sites/default/files/institutional-document/479136/kazakhstan-country-gender-assessment.pdf (accessed 22 Aug. 2019); and UNDP (2018), Briefing note for countries on the 2018 Statistical Update: Kazakhstan, New York: UNDP, http://hdr.undp.org/sites/all/themes/hdr_theme/country-notes/KAZ.pdf (accessed 22 Aug. 2019). On continued de facto gender inequality of economic opportunity despite legal equality, see OECD (2019), Social Institutions and Gender Index 2019: Kazakhstan, Paris: OECD, https://www.genderindex.org/wp-content/uploads/files/datasheets/2019/KZ.pdf (accessed 22 Aug. 2019).
67 BP (2019), BP Statistical Review of World Energy 2019, 68th edition, London: BP, especially p. 16, https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-full-report.pdf (accessed 23 Aug. 2019).
68 Kazakhstan’s 2017 growth represents new production. The Republic of the Congo, Libya and Yemen recorded higher rates, but all, to varying degrees, did so by restoring larger, earlier, conflict-related cuts.
69 Samruk-Kazyna (2017), Kazakhstan: Economic and Sector Dynamics 2017, Astana: Samruk-Kazyna, https://www.sk.kz/upload/iblock/68a/68af5cb26899f47572cf176a5565642d.pdf (accessed 23 Aug. 2019). See also World Bank (2017), The Economy is Rising, Table 3, p. 9. Given oil price volatility, these figures vary significantly across years. For example, in 2013 oil revenues contributed 45 per cent of total revenues, but in 2017 only 27 per cent. Nonetheless, the economy is clearly dependent on the sector.
70 For the fiscal situation and measures to address it, see International Monetary Fund (2017), Republic of Kazakhstan: Selected Issues, Country Report 17/109, Washington, DC: International Monetary Fund, https://www.imf.org/en/Publications/CR/Issues/2017/05/09/Republic-of-Kazakhstan-Selected-Issues-44885 (accessed 23 Aug. 2019); and World Bank Group (2017), Kazakhstan: Enhancing the Fiscal Framework to Support Economic Transformation, Washington, DC: World Bank Group, http://documents.worldbank.org/curated/en/406131511790097777/pdf/121677-REPLACEMENT-PUBLIC-KAZPFR-ENG-A4-complete.pdf (accessed 23 Aug. 2019).
71 Environmental taxes and penalties are outlined in OECD (2019), Multi-dimensional Review of Kazakhstan – Volume 2: In-depth Analysis and Recommendations, https://www.oecd-ilibrary.org/development/multi-dimensional-review-of-kazakhstan_9789264269200-en (accessed 23 Aug. 2019). As a result of Tax Code amendments in 2017, ‘the oil and gas industry will pay 67 times more per unit of emission than the heating and power plants’.
72 See OECD (2018), Reform of the Mining Sector in Kazakhstan: Investment, Sustainability, Competitiveness, Paris: Global Relations: Eurasia Competitiveness Programme, http://www.oecd.org/eurasia/countries/Kazakhstan_Mining_report_ENG.pdf (accessed 23 Aug. 2019).
73 For a discussion of the effects of low population density and distance from export markets on economic diversification and development, see OECD (2015), ‘Understanding the Krasnoyarsk Agglomeration’, in OECD (2015), OECD Territorial Reviews: The Krasnoyarsk Agglomeration, Russian Federation, Paris: OECD Publishing, pp. 25–84.
74 For a good discussion of Mackinder’s thought and its relevance today, see Megoran, N. and Sharapova, S. (eds) (2014), Central Asia in International Relations: The Legacies of Halford Mackinder, Oxford: Oxford University Press.
75 International Monetary Fund (2017), Republic of Kazakhstan: Selected Issues, pp. 51–57; and World Bank Group (2017), Kazakhstan: Enhancing the Fiscal Framework, pp. 11–13.
76 Schwab, K. (ed) (2019), The Global Competitiveness Report, Geneva: World Economic Forum, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf (accessed 6 Nov. 2019).
77 World Bank Group (2018), A New Growth Model for Building a Secure Middle Class. Kazakhstan Systematic Country Diagnostic, Washington, DC: World Bank Group, p. 8, https://elibrary.worldbank.org/doi/abs/10.1596/29792 (accessed 23 Aug. 2019).
78 Transparency International (2019), ‘Corruption Perceptions Index 2018’, https://www.transparency.org/cpi2018 (accessed 27 Oct. 2019).
79 Kazakhstan is in the 21st percentile, while the average for upper-middle-income countries is 48. See World Bank (2019), ‘Worldwide Governance Indicators’, http://info.worldbank.org/governance/wgi/#reports (accessed 23 Aug. 2019). For corruption scores, see Transparency International (2019), ‘Corruption Perceptions Index 2018’.
80 World Bank Group, The Economy is Rising, drawing on OECD research, p. 15. For a good discussion of SOEs, see OECD (2018), Reforming Kazakhstan: Progress, Challenges and Opportunities, Paris: OECD, pp. 70–76, https://www.oecd.org/eurasia/countries/OECD-Eurasia-Reforming-Kazakhstan-EN.pdf (accessed 23 Aug. 2019).
81 World Bank Group (2017), Kazakhstan: Enhancing the Fiscal Framework, p. 74.
82 Denina, C. (2019), ‘Kazakhstan delays flotation of national oil champion as IPO market stalls – sources’, Reuters, 8 February 2019, https://www.reuters.com/article/kazmunaygaz-ipo/kazakhstan-delays-flotation-of-national-oil-champion-as-ipo-market-stalls-sources-idUSL5N1ZZ5CF (accessed 23 Aug. 2019),
83 For a notable recent case, see Patrucic, M., Lavrov, V. and Lozovsky, I. (2017), ‘Kazakhstan’s Secret Billionaires’, OCCRP, 5 November 2017, https://www.occrp.org/en/paradisepapers/kazakhstans-secret-billionaires (accessed 23 Aug. 2019).
84 Zhaksybekov was appointed CEO of Tsesnabank on 10 September 2018, the same day that he was removed as chief of staff. He had previously held a series of senior positions, including mayor of Astana (now Nur-Sultan) and defence minister. See Kazakhstan 2.0 (2018), ‘The backstory of Dzhaksybekov’s resignation’, 21 September 2018, https://kz.expert/en/news/analitika/1011_the_backstory_of_dzhaksybekovs_resignation (accessed 23 Aug. 2019).
85 World Bank (2019), Doing Business 2019: Training for Reform, Volume 2, http://documents.worldbank.org/curated/en/975621541012231575/Doing-Business-2019-Training-for-Reform (accessed 23 Aug. 2019).
86 Calculated from United Nations (2019), ‘2019 Revision of World Population Prospects’, https://population.un.org/wpp/ (accessed 23 Aug. 2019).
87 For example, after the near-halving of the tenge’s value against the dollar between August 2015 and January 2016, consumer prices rose by 14.4 per cent in 2016.
88 These issues are well discussed in Dragneva, R. and Wolzcuk, K. (2017), The Eurasian Economic Union: Deals, Rules and the Exercise of Power, Research Paper, London: Royal Institute of International Affairs, https://www.chathamhouse.org/sites/default/files/publications/research/2017-05-02-eurasian-economic-union-dragneva-wolczuk.pdf (accessed 23 Aug. 2019).
89 Ministry of National Economy of the Republic of Kazakhstan – Committee on Statistics (2019), Внешняя торговля Республики Казахстан 2014–2018 [Foreign Trade of the Republic of Kazakhstan 2014–2018], Nur-Sultan: 2019.
90 For further details, see Chapter 7.
91 On 1990s privatizations, see Peyrouse, S. (2012) ‘The Kazakh neopatrimonial regime: balancing uncertainties among the “Family”, oligarchs and technocrats’, Demokratizatsiya, 20(4): pp. 345–70.
92 Nur.kz (2019), ‘Назарбаев – правительству: Вы просто трусы’ [Nazarbayev – to the government: you are just cowards], 30 January 2019, https://www.nur.kz/1775877-nazarbaev-pravitelstvu-vy-prosto-trusy.html (accessed 23 Aug. 2019).
93 After Kazakhstan fell one place in the World Bank’s ease-of-doing-business rankings in 2017, a delegation reportedly visited Washington to determine why.
94 OECD (2017), OECD Investment Policy Reviews, Chapter 6.
95 Index Mundi (2019), ‘Wheat Yield by Country in MT/HA’, https://www.indexmundi.com/agriculture/?commodity=wheat&graph=yield (accessed 23 Aug. 2019).
96 OECD (2018), Reforming Kazakhstan provides an excellent overview.