Bakhyt Sultanov
As was the case with other oil producers around the world, Kazakhstan – central Asia’s largest economy – was badly hit by the fall in prices from mid-2014. Even as diversification has become the government’s watchword as it implements a dizzying set of reforms, rebounding oil prices still accounted for 15% of the country’s export revenues by the first half of 2016, according to Energyprom.
Bakhyt Sultanov, the country’s deputy prime minister and minister of finance since 2012, wants to change that. “In 2014-15, when the oil price dropped, this caused difficulties in the economy, so we developed a crisis response agenda to invest more into infrastructure,” he tells The Banker on the sidelines of the European Bank of Reconstruction and Development’s (EBRD's) annual meetings in Jordan.
That investment strategy seeks to remake Kazakhstan into the crossroads of the so-called New Silk Road, in line with China’s push to revive the old trade route linking Asia to Europe and beyond. “As recognised by our Chinese partners, it connects neatly with the Belt and Road Initiative,” says Mr Sultanov.
Bouncing back
A recovery is now under way after a difficult period that saw Kazakhstan go from being central Asia’s best-performing economy – averaging 8% to 9% annual growth in the early 2000s – to one of the world’s worst performers. “The crises of 2008-10 and 2013-15 were quite painful for us,” says Mr Sultanov.
The Kazakh economy is expected to grow at 3.8% through 2018, up from 0.1% in the latter half of 2016. The currency has stabilised and inflation has started to go down. And while still small as a share of the total economy compared with oil and mining, manufacturing growth outpaced extractives in 2017.
However, much of Kazakhstan's recovery is still tied to the oil price. Output increased by 53% in 2017 as prices rebounded. The Ministry of Oil expects output from the giant Khargas field to increase 33% in 2018. This is good news over the short term, but still leaves the country vulnerable to turns in the market.
Carrying on regardless
Mr Sultanov does not believe the motivation to change the economy’s structure will fade away as headline conditions improve, as the shocks have come in quick succession in recent years. “Yes, there is less propensity to reform when oil prices are high but Kazakhstan realizes that this period of lower oil prices – lower that is relative to previous times when the oil price exceeded $100 a barrel – we understand that this period is here for a long time.”
Overall I think our export mix is quite diversified. Fifty percent of our exports are with the EU
The Nurly Zhol (Bright Path) infrastructure scheme is one part of the government’s response. Positioning itself as a trade and transport hub would appear to make sense based upon growing trade in the region. According to the UN Conference on Trade and Development, trade volume between Eurasian markets will reach $1200bn by 2020, an increase from $800bn in 2014.
Central Asia also has an estimated infrastructure funding deficit of $21bn. In order to keep the economy afloat and create jobs as commodity prices fell, Kazakhstan drew on national reserves, as well as earmarking $9bn from its sovereign wealth fund for infrastructure spending. Five international financial institutions have signed framework agreements to provide a matching envelope.
“In our crisis response we had to resort to our national funds… [but] by investing in infrastructure in both 2009 and 2016 we sought to soft-land our economy and to keep it growing at 1% per annum,” says Mr Sultanov.
Going private
The flurry of reforms in Kazakhstan is not restricted to hard infrastructure. Another top-down blueprint for development is a five-pillar institutional reform plan, laid out in 100 steps. Strengthening the rule of law, improving government administration and regulation and boosting industrialisation are all targets.
Reducing the state’s ownership of the economy to 15% by 2021 is also a key objective. “The way we will change the governance of these companies is through initial public offerings [IPOs] and bringing in more investors. The success of those transactions will play an important role in the diversification of the economy,” says Mr Sultanov.
The government’s pledge to sell off more than 800 companies has been greeted with some scepticism. Previous talk of privatising Kazakhstan’s economy in the post-Soviet period yielded little change. However, so far officials at sovereign wealth fund Samruk-Kazyna say they have sold off or liquidated more than 120 small and mid-sized companies of the 225 in its portfolio earmarked for privatisation.
The next test will be selling stakes in large state-owned entities such as Air Astana, uranium producer Kazatomprom, Samruk Energy and KazMunayGaz. The largest by valuation (KazMunayGas, Kazakhstan Temir Zholy and Kazatomprom) will list through IPOs. “We expect a wave of sales of shares in big national companies to the rough amount of liquidity required of $20bn to $25bn,” says Mr Sultanov.
Kazakhstan has been promising these big sales for seven years. So far this has not happened. Nevertheless, Mr Sultanov expects the transactions will be routed through the newly built Astana Financial Centre – a free zone in the capital that will operate under UK law that is set to be inaugurated in July.
Yes, there is less propensity to reform when oil prices are high but Kazakhstan realizes that this period of lower oil prices is here for a long time
An official from the sovereign wealth fund also told the South China Morning Post in 2017 that Hong Kong was also being considered as a venue for IPOs on the back of interest from Chinese state-owned investors. “The game will not stop there. These companies will become public and they will improve the quality of their governance,” says Mr Sultanov.
The government sees the financial centre as key to Kazakhstan’s Belt and Road Initiative positioning, as well as to attracting outside investors. “It's a unique project for the former Soviet Union, [and] to implement the project we went as far as changing our constitution,” says Mr Sultanov. “The court has already been sworn in, the regulator is in place, the trade is in place."
Balancing act
Challenges remain, however. Household income in Kazakhstan remains stagnant, and wages fell by 2.4% in 2017. Opponents of the three-decade authoritarian rule of president Nursultan Nazarbayev have been dealt with heavy handedly.
Kazakhstan also has to navigate a difficult global environment as it seeks to open up its economy. It has to balance its relationships with its two most powerful neighbours, China and Russia, with a warming relationship with the administration of US president Donald Trump, whom Mr Nazarbayev met in January.
Antagonism between these powerful players is already on the rise. “Some problems with the global financial architecture have not been resolved, and we think they will only become worse under the impact of economic sanctions [upon Russia] and sanction response as well as with the resurgence of protectionism and trade wars,” says Mr Sultanov.
A business forum with executives at the US Chamber of Commerce resulted in bilateral 20 agreements between Kazakhstan and the US worth some $7.5bn. These benefits could be undercut if a trade war between the US and China heats up. “It will not be a direct impact, but in general it will play very negatively on global trade,” says Mr Sultanov.
Chinese partnerships
Even as Kazakhstan is securing deals with the US, it is also looking to China. Today 51 projects in the country totalling some $27bn to develop manufacturing are under way, mostly in partnership with Chinese investors. Agricultural product exports to its eastern neighbour are also important. “China is opening up very quickly, and we already export grain and meat to China as well as crops,” says Mr Sultanov.
Still, Kazakhstan is wary of becoming over reliant on any single partner. “Overall I think our export mix is quite diversified. Fifty percent of our exports are with the EU,” says Mr Sultanov.
Clearly, ensuring diversity in its global linkages will be as important as the country’s internal diversification as Kazakhstan looks to remake its economy.
