Protracted Crisis or Managed Transformation?

Current geopolitical events and, in particular, ongoing sanctions against the Russian Federation in connection with the military conflict in Ukraine are in general not having a serious impact on the economy of Kazakhstan and the population’s living standards. Of course, there are certain negative effects in some sectors of the economy, but they are insignificant and not systemic.

At the same time, we can talk about the positive impact of sanctions on Kazakhstan’s economy, at least in the short term. This effect is due to the structural features of the country’s economy, its geographic location, as well as its membership in the Eurasian Economic Union.

Kazakhstan’s economic model of exchanging oil and raw materials for consumer goods and foodstuffs is fairly primitive. The government of the country is aware of this problem and has been trying to solve it for several decades — unsuccessfully. Numerous state programmes to diversify the economy, reduce dependence on oil, undertake import substitution, as well as support industrial and innovative development were ultimately not successful despite swallowing huge amounts of oil money from the National Fund.

Over the past ten years, 70 percent of Kazakhstan’s exports have been oil, gas, coal, and related products, 17 percent metal ores, metals, and uranium, and 4 percent wheat exports. Thus, 90 percent of Kazakhstan’s exports are minerals that require minimal primary processing, or are raw materials. Ninety percent of imports consist of consumer, interim, and investment goods — that are, in fact, finished goods. Interim and investment goods are mainly machinery, equipment, and spare parts.

It should be noted that statistics on Kazakhstan’s investment goods include mobile phones and other electronics, passenger vehicles, and spare parts for them — imported items are among the top five most popular consumer goods in the country. Additionally included in the top five are medicines, clothing and knitwear, hygiene products, and cosmetics. An honest look at the structure of foreign trade shows that natural resources are being exchanged for manufactured goods.

A Sanctions-Fuelled Export Boom

Geopolitical upheavals and the sanctions against Russia have increased the prices of oil, gas, food, and metals, as a result of which Kazakhstan has significantly increased its export volumes — indicators have reached record levels over the past decade. Logistical problems did not have a significant impact on imports — the volume of imported goods also increased greatly in 2022.

By itself, the logistics factor is critical for countries included in chains that create value in complex economies. For example, if the production and export of a product depends on imported components, then in the event of logistical problems, production will require significant time to switch to a new supplier and adapt to new supply conditions.

We are seeing today how painful it is for European countries to abandon Russian gas — switching to much more expensive liquefied natural gas requires significant resources and long-term economic adaptation. Kazakhstan, on the other hand, imports finished goods for final consumption, which means that changing suppliers is not a problem — the market for finished goods is very competitive. Against the background of a decrease of Russia’s share of Kazakhstan’s imports from 45 to 30 percent, there is a gradual substitution of Russian goods for Turkish and Chinese goods, the share of which has increased accordingly.

Such a primitively structured economy in which minerals are exchanged for manufactured goods, turned out to be extremely stable in 2022. In a sense, the failure of state policy to economically diversify and avoid dependence on exports of raw materials situationally benefitted the country.

The primitiveness of the Kazakhstani economy, which was a factor of relative success in 2022, may become a cruel joke in 2023.

Undoubtedly, Kazakhstan’s dependence on oil, as well as its geographic location in the centre of Eurasia, without access to major seas or oceans, makes the country’s economy vulnerable to disruptions in the physical supply of oil. Today, about 90 percent of Kazakhstani oil is supplied through a pipeline owned by the Caspian Pipeline Consortium (CPC), which is managed by Russia, Kazakhstan, and the world’s leading oil companies. Transportation of hydrocarbon raw materials is carried out from the west of Kazakhstan to the seaport in the Russian city of Novorossiysk and further by tankers to the world oil markets.

In 2022, certain difficulties arose in the work of the CPC. For quite a long time, the pipeline did not operate at full capacity due to repair work that was delayed due to sanctions. However, rising oil prices more than offset the decline in pipeline supplies. It should be noted that this pipeline is predominantly filled by the oil from the Tengiz and Kashagan oilfields in Kazakhstan. The key shareholder of the Tengiz field is the American company Chevron, and at Kashagan it is ExxonMobil (US), Total (France), Agip (Italy), Shell (Netherlands) — 16.8 percent each, as well as the Chinese company CNPC and the Japanese INPEX (8 percent each). This structure provides some protection from harsh sanctions against the Caspian pipeline.

Nevertheless, in the current situation, Kazakhstan intends to diversify export corridors for its hydrocarbon materials by intensifying oil shipments along the trans-Caspian route (through Azerbaijan to Turkey and further to the member countries of the European Union) and is considering other alternatives. The remaining 10 percent goes via the Chinese pipeline directly to China.

Thus, sanctions did not affect the physical supply of Kazakhstani oil and the country’s income in any way, and, apparently, Kazakhstani exports have some protection from secondary sanctions. As mentioned above, a significant part of Kazakhstan’s oil does not belong to the country, but is controlled by American and European companies.

Exaggerated In-Flows

Similarly, the impact of migration flows from Russia is extremely small. In March 2022, an increase in Russians who arrived in Kazakhstan was recorded, and there was another surge in October in connection with the partial mobilization announcement in Russia. However, these bursts of migratory influx were extremely small and artificially inflated and exaggerated in the media.

According to official data, for ten months of 2022, 1.66 million Russians entered the country, and 1.64 million left. At the same time, during the same period, 4.3 million foreign citizens entered Kazakhstan, and 4.1 million people left. Obviously, the net migration flow of Russians is insignificant when compared to migration numbers in total. With a population of 20 million in Kazakhstan, the flow of migrants, even if it has grown, is extremely insignificant and amounts to fractions of a percent.

It is also important to note that the Russian citizens coming to Kazakhstan are quite wealthy people, many of them continue to work remotely, or are successfully integrating into the Kazakhstani economy. From this point of view, the migration flow positively contributes to the economy, although it is not statistically significant.

The Pitfalls of a Strong Currency

The primitiveness of the Kazakhstani economy, which was a factor of relative success in 2022, may become a cruel joke in 2023. Today, Kazakhstan enters 2023 in a very stable and confident state. The country is stable in terms of energy, food, and social security, although social stratification is increasing internally and the population is enduring a significant decrease in income. These negative processes are primarily the result of erroneous economic and monetary policy decisions made by the government and the National Bank of the Republic of Kazakhstan.

The economic policy of the last decade consisted of attempts to actively use the funds of the National Fund (that is the money accumulated from the sale of hydrocarbon materials) for the development of non-primary sectors of the economy. As mentioned above, the state, within the framework of state programmes, actively subsidized business through the provision of soft loans, the distribution of tax benefits and preferences, and simply direct subsidies to business.

Kazakhstan’s economy is stricken with the “Dutch disease”, also known as being afflicted with the “commodity curse” — the influx of money from raw materials leads to an excessive strengthening of the national currency, which makes domestic production uncompetitive and destroys it. The problem is well-studied in real-world practice and one of the solutions is the creation of national oil funds. The purpose of such funds is the sterilization of raw material income — that is, the withdrawal of the “commodity currency” from the domestic market in order to prevent the excessive strengthening of one’s own currency.

Stabilization measures maintain the country’s dependence on oil and simply transfer the inevitable problems of transformation and crisis to the future.

Instead of solving this systemic problem of the resource curse, when domestic business loses its competitiveness, the government of Kazakhstan has taken the path of subsidizing this non-competitive business using oil money. That is, the National Fund not only ceased to perform the function of sterilizing the “commodity currency”, but began to supply it even more than the country earned. Over the past eight years, the Oil Fund has decreased by 31 percent from 77 billion (August 2014) to 53.3 billion US dollars (July 2022).

The result of such a policy was a sharp increase in inequality and monopolization of the economy. In a situation where the very existence of any significant business depends on receiving benefits, subsidies, or participation in one or another state programme, the value of proximity to power and political lobbying has risen sharply. As a result, significant prospects for establishing control over business have opened up for politically important people. At the same time, the benefits and subsidies allocated to Kazakhstani businesses did not affect the labour market and incomes of citizens in any way. These funds settled mainly in the profits of companies, without having a positive effect on the growth of wages of ordinary employees.

The policy of the second President of Kazakhstan, Kassym-Jomart Tokayev, elected in 2019, was aimed at increasing social support for citizens in order to reduce the population’s desire to protest. As a result, the expenses of the National Fund increased even more, because now the money was spent not only on supporting businesses, but also on the population.

Such a policy of sharply expanding social spending while maintaining and expanding soft loans for businesses and the lowest possible interest rates on loans resulted in rising inflation. Inflation began to grow back in 2019, and the government tried to fight it administratively. For example, utility tariffs were reduced or frozen by direct orders of the President in 2018, 2020, and 2022. However, administrative measures cannot work with such a systemically incorrect policy. All administrative increases in wages, pensions, social benefits, as well as the moderation of utility bills were actively destroyed by growing inflation.

Managing the Transition

The events of January 2022 in Kazakhstan are an example of how certain forces tried to take advantage of the population’s discontent with growing inflation for political purposes. In January, residents of Zhanaozen, an oil town in western Kazakhstan, protested against the increase in prices for liquefied gas starting on 1 January 2022. It is important to note here that the price of liquefied gas in Kazakhstan, even after this increase, was several times lower than in other countries of the post-Soviet space. The protest, which formally began in Zhanaozen, 3,500 kilometres from Almaty over gas prices, turned into organized, well-coordinated, and armed riots in the southern capital.

Obviously, and as the investigation showed, the events of January were an attempt to destabilize the country and organize a coup, the formal reason for which was not important and situational. On the other hand, it became obvious that demands for social justice, dissatisfaction with growing inequality, and the monopolization of the economy by a narrow circle of people, as well as pressure on business from people close to power, were all growing in Kazakhstani society.

The resolute position of President Tokayev in matters of de-oligarchization of the economy, the active prosecution of former top officials of the country, and the de facto nationalization of a number of large companies, with the state accepting large blocks of shares “as a gift”, defused social tensions to a large extent. The political rhetoric of the President of Kazakhstan regarding further democratization and political reforms and the strengthening of the social role of the state ensured Tokayev’s convincing victory in the early presidential elections in November 2022.

At the same time, those political changes that were made in the country during Tokayev’s presidency have yet to drastically affect changes in economic policy. In this regard, the stabilization of society’s feelings in 2022 does not cancel and cannot cancel the rise in inflation and the fall in incomes of the population, which, apparently, will continue in 2023.

An additional problem will be the fall in oil prices, which is likely to occur due to a sharp slowdown in the global economy, associated with, among other things, the sanctions against Russia. Therefore, the main difficulties for Kazakhstan are still ahead, and they will begin to appear by the spring or summer of 2023. At the same time, the remaining significant reserves of the National Fund make it possible to stop the fall in oil prices, as well as maintain macroeconomic and social stability through the expansion of government spending.

Of course, such stabilization measures maintain the country’s dependence on oil and simply transfer the inevitable problems of transformation and crisis to the future. On the other hand, the reserves of the National Fund make it possible to begin the transformation of the economy now, making the passing of the crisis more manageable. For such transformations, only the political will of the country’s leadership is required.