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The spillover effects of Western sanctions, in Kazakhstan

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There is anxiety in Kazakhstan about the spillover effects of Western sanctions

 

As the cycle of economic retaliation between Russia and the West seems to spiral ever more out of control, anxiety is increasing about the possible spillover effects, in Kazakhstan’s capital Astana. Already facing homegrown problems, the largest Central Asia country is now taking reactive and preventive measures. But its alignment with Russia is threatening ambitious growth plans.

Slowdown

The intensified antagonism between the EU and Russia could not have happened at a worse time for Kazakhstan. Central Asia’s biggest economy is already experiencing a slowdown following disruptions in the oil industry, and pressure on the national currency. In October 2013, operations at the country’s largest oilfield, Kashagan, were suspended after only having commenced one month before. It is thus questionable if oil production can be kept at the 2013 level of 81.7m tones. Then, after emerging market indices showed signs of volatility in early 2014, Kazakhstan’s Central Bank devalued the tenge currency by 19% in an attempt to support commodity exports. As recently announced, the state oil company KazMunaiGas was indeed able to raise profits but consumer product prices also experienced a strong hike. Originally, President Nazarbayev had set a GDP growth target of 6% to 7% for this year but the first two quarters only yielded an expansion of the domestic economy of 3.8% in Q1, and 4.8 in Q2 year-on-year.

Most recently, President Nazarbayev decided to shake up Kazakhstan’s executive structure. On 6 August, he declared a far-reaching reorganisation of the country’s ministerial landscape, decreasing the total number of ministries from 17 to 12, and creating a powerful energy ministry, which absorbs the functions and powers of the Ministry of Oil and Gas, Ministry of Industry and New Technologies, and the Ministry of Environment and Water Resources. But what looks like a welcome effort to increase governmental efficiency and to streamline bureaucratic processes can rather be regarded as a way of indicating change to the outside world while in reality preserving the status quo. Heads of the abolished ministries were either moved into similar positions or offered leadership roles in state companies; and some officials were even instructed to maintain their responsibilities.

Astana is unable to launch reforms powerful enough to generate even short-term effects.

The Russian connection

It thus appears that Astana is unable to launch reforms powerful enough to generate even short-term effects. To make matters worse, the linking of the tenge with the rouble puts pressure on Kazakhstan’s policy-makers to think about additional devaluations in the light of Russia tightening its monetary policy. Morepver, disturbances in Russia’s financial sector, with banks like VTB and Bank of Moscow having restricted access to funding, are likely to have knock-on effects on Kazakhstan’s financial institutions as well; and a hike of inflation and interest rates in Russia, one of Kazakhstan’s largest trade partners, would again challenge price stability. Even though the Kazakhstani government has declared that it is working on a plan to protect the economy against external effects, there is little to be done should the Russian economy show serious signs of stagnation.

There is little to be done should the Russian economy show serious signs of stagnation.

Despite the potential financial instability, Kazakhstan can yet hope to benefit from the declared import ban of food products from the US, Europe and others into Russia. The steppe of Kazakhstan is ideal for cattle growing, and could thus compensate for the reduced supply of Western dairy products. The Central Asian country is already a net exporter of prepared foods, and could seize the momentum of reduced competition from Europe. Export possibilities to Russia are further facilitated by the treaty framework of the Customs Union, now transformed into the Eurasian Economic Union, which sets standard external tariffs between the three members, Russia, Belarus and Kazakhstan.

However, it is precisely Astana’s close alignment with Moscow, which prohibits a more extensive exploitation of opportunistic trade prospects. In theory, banned goods from Europe could be shipped to Russia via Kazakhstan. The onward export of Western products could expand economic activity in the Central Asian country, supporting the long-needed diversification of its so far energy-centric trade structure. But that causes its own problems: while there is officially no indication yet that Kazakhstan is or will be supporting Russia’s import ban, President Putin conducted talks with President Lukashenka of Belarus, and President Nazarbayev shortly after the embargo was announced. It can certainly be assumed that he requested the Kazakhstani government to at least closely monitor the influx of banned products into its market. The potential to profit from the on-going trade skirmish between Russia and the West remains therefore rather limited; and with Kazakhstan having committed to Putin’s project of Eurasian Integration, there is little room for the country’s leadership to create its own independent economic policy.

Given Kazakhstan’s current healthy GDP development, the imminent possibility of an economic recession seems as yet ungrounded; and provided that geopolitical tensions around Ukraine diminish, market confidence could quickly be restored. But the current crisis has already severely compromised President Nazarbayev’s ambitious long-term vision entitled ‘Kazakhstan 2050,’ which demands annual economic growth of not less than 4% and a stable inflation rate of 3-4% in order to significantly improve living standards. His decision to reorganise the country’s ministries was therefore above all a message intended to demonstrate authority and determination to his domestic audience. Given the apparent lack of influence on Putin’s geopolitical manoeuvres, limiting the damage at home might currently be all that Nazarbayev can do.      

About the author

Simon Schmidt is a researcher specialising in economic trends in post-Soviet Eurasia and currently runs the student think tank EURASIAN IDEAS. Follow him on Twitter at SimonPSchmidt


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