Kazakhstan has used the crisis to push forward ambitious reforms in banking and investments in infrastructure, writes Anthony Robinson
KAZAKHSTAN HAS EMERGED from the global financial crisis leaner, wiser and significantly better-placed to exploit both its natural resource wealth and its rising geo-political status.
As one of the first countries to be knocked sideways by the global financial crisis, Kazakhstan has had longer than most to grapple with a grossly over-borrowed and under-regulated banking system suddenly unable to refinance $45 billion of foreign borrowing. Time has not been wasted. The crisis has been used to push forward with structural reforms and ambitious investment programs. Banks have been recapitalized and their debts restructured.
Heavy investment in giant oil and gas projects continued throughout the crisis. So did the building of roads, railways, power lines, ports and new pipelines from the oil-rich West to energy-hungry China. Continuing growth in China helped offset the steep decline in demand from elsewhere for energy and metals, which still form more than 75 percent of exports. Economic growth resumed in the last quarter of 2009 and has strengthened since with the recovery of oil and commodity prices and the global economy generally.
Kazakhstan’s technocratic government, headed by Prime Minister Karim Massimov, who speaks Mandarin and Arabic, as well as fluent English and Russian, responded to the crisis by devaluing the tenge in February 2009, drawing $19 billion from central bank reserves and the National (oil) Fund to finance stimulus spending – and turning to China, South Korea and the Gulf states for investment funding.
President Nursultan Nazarbayev brought back Grigori Marchenko, one of the main architects of banking and pension fund reforms, to head the central bank and push through a tough bank restructuring. Free-lending foreign creditors were told that the state had no intention of bailing them out. Debt restructuring imposed substantial “haircuts” on creditors while locally-owned “systemic” banks have been recapitalized with state funds. Two restructured banks kept alive through partial recapitalization by the state, BTA and Alliance, are now for sale, while Samruk-Kazyna, the state holding company charged with funding the banks, expects to be repaid before long by the other two big private banks, Halyk and Kazkommertz.
The tough line with creditors reflects underlying confidence that the combination of mineral wealth, a developed financial system, and a relatively stable political system committed to economic, social and institutional reform will continue to attract foreign
investment – and permit restrained resumption of international borrowing.
Troika Dialog, a Moscow-based Investment Bank, puts Kazakhstan in the same potential wealth bracket as two other vast mineral and resource-rich countries with small populations and severe climates: Australia and Canada. Given the pace of change since Kazakhstan gained independence 20 years ago next year, and a geopolitical revolution that has transformed this Eurasian heartland from Soviet backwater into strategic transit link between China, Europe and the Middle East, it is no longer fanciful to imagine Kazakhstan as one of the main gainers of the 21st century shift in global power.
“The greatest risks remain the oil price, the long-term pressure of its geopolitical location, and the threat of instability from the south,” Troika noted, along with what it termed “the single-man risk.” President Nazarbayevhas ruled since morphing seamlessly from communist party boss of Soviet Kazakhstan to president in 1991. Whether the country can ensure a well-managed transition to a new political generation, as in Singapore and other states seen as models, or lapse into the sort of political and ethnic conflicts experienced by other former Soviet states such as Ukraine and Kyrgyzstan, is an obvious concern.
Political power is wielded by President Nazarbayev, and backed by his administration and national welfare fund Samruk-Kazyna, run by Kairat Kelimbetov, a former head of the presidential administration. The Parliament, or Majilis, is essentially decorative, as in Soviet times. In this multi-ethnic state where nominally Muslim ethnic Kazakhs are barely a majority, the president rules by balancing and mediating between political clans, competing regions, and economic and financial groups and the individuals behind them.
The president demonstrates continuing energy and curiosity and travels widely to cement a wide range of international alliances. All new deals with China, South Korea, the Gulf States, and others were personally supervised by him, and often signed and sealed during state visits. Recent trips have taken the president to Washington, Beijing, Seoul, and Brasilia, to name but a few. And in January, Kazakhstan took over the annual chairmanship of the Organization for Security and Co-operation in Europe (OSCE).
For his many supporters, the president, who celebrates his 70th birthday in July and faces presidential elections in 2012, is transforming Kazakhstan into an economically dynamic, domestically stable and internationally respected sovereign state. They point to the 91 percent of the votes he won at the last elections in 2005, and support for presidential party Nur Otan, which won every seat in the last parliamentary elections in 2008, as evidence of genuine support. The electoral system may not be perfect, they concede, but Kazakhs are more prosperous and enjoy more civil liberties than their neighbors and can look forward to an even more prosperous future.
The president’s critics, who struggle to make their voices heard or put forward coherent alternative policies, accuse him of acting like a Khan (the former autocratic rulers of the ancient Silk Road city-states), of amassing great wealth for his family and trusted allies, of suppressing internal dissent, and of exercising undue influence over the judiciary. Other criticisms include harassment of the media, and generally stunting the growth of civil society and a more open, democratic political system.
Some of the measures taken to restore confidence in the banks and the economy have further weakened potential political rivals. The former head of BTA bank, Mukhtar Ablyazov, was one of the leaders of the Democratic Choice movement a decade ago. Although he pledged to keep out of politics in return for early release from jail, he helped finance several opposition publications and movements. He is now in exile, fighting through the English courts against the state takeover of his bank. In Kazakhstan he is accused of money laundering, embezzlement of billions of depositors’ funds, and fraud. Less fortunate is Mukhtar Dzhakishev, the former head of Kazatomprom, who has just begun a 14-year jail sentence after a secret trial for allegedly stealing assets from the company. The two men were friends.
During his recent visit to Washington to attend the global nuclear summit, President Nazarbayev was also asked by President Obama about the fate of Yevgeni Zhovtis, Kazakhstan’s leading civil rights lawyer. He was jailed for four years after a contested trial following a fatal traffic accident.
Foreign investors – including international oil companies and U.S. corporations such as AES – have also felt the iron fist beneath the velvet glove to remind them about their investment obligations. When the government decided that it wanted a bigger stake in power generation in order to stimulate development in this sector, AES was obliged to sell half of its Ekibastuz power plants.
When authorities decided that KazMunaiGas (KMG), the state oil company, should have an equal stake in the giant off-shore Kashagan field, international companies had to concede, as ENI and BG, who are facing similar pressures now, are well aware. However, in all cases the assets were bought at market-linked prices, not confiscated. Big foreign investors have direct access to the president and government to
voice any concerns at the twice-yearly meetings of the Foreign Investors Council.
Oil companies are also well aware that, despite KMG’s privileges and higher taxes on extractive industries, Kazakhstan remains one of a dwindling number of countries where even smaller foreign energy companies can still develop fields and book reserves.
Meanwhile, the Australian government’s recent decision to levy a swingeing excess profits tax on mining companies, and the U.S. government’s stated intention to hold BP accountable as the oil spill drama unfolds in the Gulf of Mexico are useful reminders that all governments seek to ensure that rents from mining natural resources accrue as far as possible to the host country and its voters.
What is incontrovertible is that Kazakhstan is now firmly anchored on the map. Some 20 years ago it was not clear whether ethnically diverse and economically dependent Kazakhstan could survive as a sovereign state. In Czarist times, largely ethnic Russian populated northern Kazakhstan was part of southern Siberia. Chinese imperial maps show no borders between Xinjiang province and the steppe beyond. A carve up into old spheres of influence was not inconceivable. Today, however, the new capital of Astana is a thriving steppe city of 600,000.
The president has ensured that closer ties with China are counter-balanced by entry into a new Customs Union with Russia and Belarus. This transforms Kazakhstan’s small domestic market of 16 million people into 170 million – with the possibility of Ukraine joining at some point.
Active membership in the Shanghai Cooperation Organization alongside China and Russia and other former Soviet states reflects the desire to maintain close relations with powerful neighbors – while being beholden to none. President Nazarbayev refused to endorse Russia’s de facto annexation of South Ossetia and Abkhazia, for example. But he is a strong supporter of President Barack Obama’s nuclear non-proliferation policies and has opened up Kazakh airspace, roads and railways for U.S. transit to Afghanistan.
Like Switzerland, which remained prosperous and peaceful through countless European wars by being useful and accommodating to powerful neighbors on all sides, Kazakhstan sees itself as an “honest broker” – both in its own right and, on a wider scale. An independent, sovereign Kazakhstan looks here to stay – and the $100 billion of foreign investment it has attracted thus far looks like a vote of confidence.
Anthony Robinson is a former Financial Times Moscow correspondent, and East Europe editor and originator of the Russian business newspaper Vedomosti.
SOURCE: Invest in Kazakhstan, 2010