Kazakhstan: Economic Crisis, State Companies, and the Nation’s Image

Qishloq Ovozi is pleased to once again introduce an up-and-coming scholar in the field of Central Asian studies, Bradley Jardine, a student at Glasgow University and currently an intern at RFE/RL. Jardine examines Kazakhstan’s efforts to alleviate the effects of a regional economic crisis, while at the same time preserving what could be described as national vanity projects.

As Central Asia’s regional economic crisis deepens, the Kazakh economy has started to crack and it's led the Astana government to take a series of steps designed to mitigate the effects of the crisis.


However, increasingly it is social and infrastructure programs that are bearing the brunt of financial cuts while scarce funding is directed to state-owned energy companies and large-scale projects aimed at boosting Kazakhstan’s international image.


Due to Kazakhstan’s close economic relationship with Russia, and the country’s dependence on oil exports, which accounted for 70 percent of 2014’s exports, Kazakhstan’s economy has been one of the hardest hit in Central Asia. The government has already been forced to revise the budget twice since last year, first to refigure finances based on oil being $80 per barrel, then again early in 2015 to base the budget on the price of oil being $50 per barrel.


In February 2015, the government warned that 120,000 workers could be laid off due to economic difficulties.


The depth of the country’s economic hardships were highlighted in a poll released by Bloomberg on July 2, which placed Kazakhstan in the world’s top-10 worst performing economies as a result of its reduced growth forecasts that plunged to just 1.2 percent. (From 2000 until 2007, Kazakhstan's growth in gross domestic product (GDP) was around 10 percent annually).


Oil Sector Hit Hard


President Nursultan Nazarbaev reacted swiftly to the crisis in 2014, ordering the National Bank to devalue the Kazakh tenge by 19 percent to stay ahead of the Russian ruble’s decline. However, the sudden devaluation hit the population hard, slashing their savings by one-fifth overnight while simultaneously causing food prices to soar. Ultimately, the devaluation failed to keep Kazakhstan’s exports competitive and manufacturing areas along the Russian border are in disarray.


Many analysts believe another devaluation is inevitable though Kazakh officials continue to deny that will be necessary.


The oil sector is now suffering heavily, with KazMunaiGaz (KMG) announcing plans to sell half its 16.8 percent shares in the Kashagan oil field project to Kazakhstan’s sovereign wealth fund Samruk-Kazyna for some $4.7 billion, with the option to repurchase between January 2018 and December 2020.


The project has witnessed numerous setbacks with estimates for Kashagan’s development ballooning from $57 billion to some $136 billion. The deal is itself extremely opaque, with the $4.7 billion to be paid entirely in cash. KMG will reportedly use these funds to lower its debt, which currently stands at $19.7 billion.


The announcement that the sovereign wealth fund would be used to essentially bail out the state oil and gas company came the same day President Nazarbaev announced that Samruk-Kazyna, a joint-stock company whose assets account for 56 percent of the national GDP, will no longer support the economy.


This is a huge shift away from the state policy enacted throughout 2014, in which the fund invested over 1 trillion tenge ($5.4 billion) to stimulate the economy. In a July 2 national teleconference, President Nazarbaev stated, “In difficult times we cannot spend the money of the National Fund. From now on the National Fund will not allocate money to support the economy.”


The government’s program to inject some $9 billion into the economy over the next three years does remain in effect, however. But many programs have already been suspended while the economic problems continue. Parliamentary deputy Tanirbergen Berdongarov from the ruling Nur-Otan party told journalists that the state program for housing construction would be suspended "for this year."


The government announced in May it would stop offering free lunches at secondary schools across the country from September 2015 onwards. The government had been spending 300 tenge ($1.60) per day for each of the country’s 2.6 million children in school.


Expensive Events


Irina Smirnova, the principal of an Almaty high school, told Tengrinews on June 15 that “the provision of healthy food is important. Because of the economic crisis, [government officials] said: ‘let’s cut down on food.’ But probably it's possible to cut down on other events being held in the country.”

Smirnova was likely alluding to two events that loom, or potentially loom, in Kazakhstan’s future.


The first is EXPO-2017, an international exhibition on the future of energy which will take place in the capital Astana. It is expected, according to Kazakh officials, to bring some 5 million local and international visitors.


Kazakh officials said in the early days of the economic crisis that some projects were off limits to cuts. EXPO-2017 was one of them.


On June 19, EXPO-2017 CEO Sulambek Berkinkhoyev was detained. Sulambek was accused of collaborating with others who had previously been arrested in an embezzlement scheme to appropriate 214 million tenge ($1.15 million). Among those others was the former head of the exhibition organizer's construction department, Kazhymurat Usenov, who was detained in May 2014. Talgat Yermegiyaev, the former head of EXPO-2017, was indicted in June 2015.


There is also the matter of funding for EXPO-2017. According to the government’s plan, some 1.2 billion euros (nearly $1.32 billion) is to be spent on EXPO-2017, and of that, some 1 billion euros is to come through investments, though it is not clear from where. Large companies doing business in Kazakhstan are widely reported to be among these investors. In the oil sector, majors such as Chevron, ExxonMobil, LUKoil, the China National Petroleum Corporation, and others are active in Kazakhstan. But it is unclear if all or only some of these companies are expected to pitch in on EXPO-2017 and what they are, or might be, contributing.


(Ironically, the theme of EXPO-2017 is renewable, or clean energy and Kazakhstan has been implementing many projects for solar power, wind power, and small hydropower plant projects. The event aims to promote use of such technologies as a way of countering climate change. )

At the same time, Kazakhstan has seen devastating floods in northern areas of the country. This year, May floods affected over 3,000 homes in five Kazakh regions in the north. Almost 18,000 people were evacuated in advance from the affected regions. Damage in the Karaganda region amounted to 15 billion tenge ($81 million) but only 220 million tenge has been paid out so far.


The other event is Kazakhstan’s bid for the 2022 Winter Olympic Games. Again, the government is pursuing the games as a way to enhance the country’s international image, but considering the current economic situation it is easy to question the expense of the bid -- and even more so, the construction of the facilities should Kazakhstan be awarded the event.


-- Asem Tokayeva of RFE/RL’s Kazakh Service contributed to this report.


A EurasiaNet Partner Post from: RFE/RL, July 14, 2015


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