Alongside partners east and west, Kazakhstan has learned how to play a quiet balancing act—with lessons for the Kremlin.
With a ‘president for life’, poor human rights record and hydrocarbon-dependent economy, Kazakstan often appears a mirror image of its northern neighbour, Russia.
Scratch beneath the surface, and you find a post-Soviet state, which, though similar in behaviour to its Russian counterpart, is making its own path.
Temporary free fall
Over the past ten days, the business world has overwhelmingly been focused on Kazakhstan’s record 23 per cent currency plunge, which followed Astana’s decision to float the tenge. The situation recalls the fate of the rouble after the Russian Central Bank allowed it to float in November 2014.
By that time, the Russian currency had already fallen 50 per cent against the dollar. But the once-maligned 45.6 rouble-dollar exchange rate would soon seem a dream. On December 16, 2014, Russia was hit with its own ‘Black Tuesday,’ when the rouble dropped by 20 per cent —hitting almost 80 to the dollar and inciting panic among a populace no stranger to economic collapse.
Perhaps used to the shocks, perhaps fatigued with bad news, the Russian public has been less swift to react as the rouble hit a seven-month-low last Monday, reaching 71 to the dollar. Some analysts believe the Russian currency could hit 85 by year’s end. Having less and expecting less is perhaps the new norm.
In contrast, the tenge has begun a slow, though turbulent recovery. Kazakhstan has no plans to intervene to prop up the currency should the situation deteriorate. The central bank claims there is no specific devaluation target they are aiming for.
As Bloomberg reports, Kazakhstan’s Prime Minister Karim Massimov claims the free float ‘will create the necessary conditions for a recovery of economic growth, increased lending and investment activity, creation of new jobs and a decrease in the inflation rate to between three per cent and four per cent in the medium term.’ Such high hopes, however, may be wishful thinking.
Stability pegged to the price of oil?
With roughly 8.3 times fewer people and an economy 8.5 times smaller ($1.861 trillion versus $212.2 billion according to 2014 World Bank data), Kazakhstan is often thought of as a scaled down version of Russia.
According to the Observatory of Economic Complexity, crude petroleum accounts for over 55 per cent of Kazakhstan’s $83.9 billion in annual exports, with petroleum gas and refined petroleum accounting for another 4.9 percent and 4.2 percent respectively.
Technically, the EU is Kazakhstan’s number one destination for goods and services, accounting for nearly 40 per cent of total exports. Italy (8.7 per cent), The Netherlands (7.4 per cent), and France (6.9 per cent) lead the pack, with imports dominated by oil and gas.
But when it comes to individual countries, China is Kazakhstan’s number one export partner, purchasing some $16.4 billion (or 20 per cent) of Kazakhstani goods sold abroad. Russia, meanwhile, comes in second place with nine per cent.
In total, Kazakhstan is the second largest exporter of crude oil in the region after Russia, whose $470 billion in annual exports are also dominated by crude petroleum (39 per cent) refined petroleum (15 per cent) and petroleum gas (9.1 per cent.) Russia also counts the EU among its largest trading partner, though political tensions have seen Moscow attempt an eastward pivot (which have thus far come with limited results).
With oil accounting for 25 percent of Kazakshtan’s GDP and 60 per cent of its balance of payments, the Central Asian state has seen its fortunes rise and fall on the price of oil. It is only natural that its currency would reflect such fluctuations.
During the boom years when the price of oil rose significantly between 1999 to mid-2008, Kazakhstan experienced an average annual GDP growth of eight per cent.
After slowing down during the 2009 financial crisis (crude oil plummeted to $30.28 a barrel in December 2008), the Kazakh economy bounced back with the price of oil, hitting a robust 4.6 per cent growth in 2014.
On the back of falling oil prices growth is expected to cool to 1.5 percent for 2015. That modest figure, however, stands in sharp contrast to Russia, which is set to see GDP fall by 3.4 percent this year, partly due to the price of oil, partly due to western sanctions over its role in the Ukrainian crisis.
Following a nuclear deal with Kazakhstan’s Iranian neighbour across the Caspian Sea, the US Energy Information Administration (EIA) now predicts crude will trade at around $49 per barrel throughout 2015, with a modest recovery to $54 in 2016.
Nonetheless, Kazakstan may yet face instability, and this could be anathema for a society that is governed by a ‘president for life’ in exchange for prosperity.
Better days have seen harsh repressions in the country, such as the December 2011 massacre in the western oil town of Zhanaozen. Shortly before that tragedy, the town’s main company UzenMunayGas, a subsidiary of state-owned KazMunayGas, had fired 1,000 employers who had gone on strike demanding higher wages, better working conditions and undelivered hazard pay. When the striking workers failed to desist, the police opened fire, killing at least 15 people.
Considering the legacy of Zhanaozen and the fact that oil accounts for a quarter of Kazakhstan’s economy, Astana is understandably nervous. So far, the Kazakh government is attempting to engage unions through negotiations amidst fears that collective bargaining rights could take a further blow, though the drop in oil prices will give them little leverage to placate workers’ demands.
The writing, in fact, may already be on the wall. Earlier this month, Eurasianet.org reported that the Kazakhstan drilling company Velikaya Stena (Great Wall) had fired 203 staff, with another 200 layoffs expected in the autumn. Further layoffs, pay cuts and shift reductions could bring an already tense situation to a head.
‘Kazakhstan was never a state’
Viewed in this light, one could easily begin to write Kazakhstan off as another resource-cursed Eurasian state with a Soviet-style leader and a ‘foot-first’ retirement plan.
President Nursultan Nazarbayev, after all, announced a ‘holy war’ against corruption while allegedly stealing billions for himself and enriching his friends and family along the way (both his daughter and son-in-law have been counted among the country’s top ten richest people.)
But there are indicators that Kazakhstan’s future may not be so bleak. Kazakhstan, while courting economic integration with Russia via the Eurasian Economic Union (EEU), also hopes to blaze its own path.
As Daniyar Kosnazarov told Russia Direct earlier this year, despite the EEU, Russia’s actions in Ukraine and ‘anti-Russian sanctions’ have ‘strengthened Kazakhstan’s sense of sovereignty.’
Putin himself likely bolstered that sense of sovereignty during the Seliger August 2014 National Youth Forum. After a young woman (an alleged plant) asked the Russian president if the Ukrainian scenario could be repeated in Kazakhstan following Navarbayev’s departure, Putin replied that Nazarbayev had “accomplished a unique thing’ in creating a state on a territory ‘where there had never been one.”
Putin’s answer came as a clear warning for a country with a minority ethnic Russian population and a history of separatist rumblings, including an alleged 1999 plot to establish an independent state in the country’s east.
And while some among Russia’s irredentist Eurasianist movement have called for Kazakhstan in part or in whole to join the Russian Federation, disaffection with the post-Soviet policy of ‘Kazakhization’, which saw hundreds of thousands of Russians immigrate to Russia in the 1990s, has abated among the country’s estimated four million-strong Russian population.
As Igor Strelkov, a former commander of Russian-backed separatists in eastern Ukraine admitted, the ‘flywheel’ for war can come from outside if domestic support is lacking. That Astana has considered criminalising calls for separatism speaks to a sense of insecurity in the country following the crisis in eastern Ukraine.
Beyond the Kremlin’s PR techniques, Moscow might want to keep an eye on Kazakhstan for far more benign reasons. In a recent article for Russian business daily Vedomosti ‘New Singapore next door’, Vladislav Inozmetsev argues there are seven lessons Russia could take from its southern neighbor.
The first five points are purely economic. In brief, Kazakhstan is actively courting foreign direct investment, attempting to streamline governance and raise its standing, attempting to develop small and medium-sized business rather than ‘national champions’, investing in science and technology until it can one day build a western-style ‘knowledge economy’ and has taken the step of reducing the tax burden in light of the country’s current dependence on primary commodities.
The data does in many cases demonstrate Inozmetsev’s argument. From 2009-2013, accumulated Chinese foreign direct investment (FDI) in Russia, Kazakhstan and Belarus increased from $11 billion to $24 billion. Approximately 91.5 per cent of that sum ($22 billion) went into Kazakhstan.
In July, the World Economic Forum also ranked Kazakhstan 50th of out 144 countries on its Government Efficiency Index, exceeding not only Russia, but several EU states, including Italy, France, Spain, Belgium and Portugal.
As for small and medium sized businesses, Kazakh Minister of Finance Bakhyt Sultanov announced in February that between 2015-2019, they would be able to apply for $13 billion to implement projects in seven ‘priority’ sectors. Russia, by contrast, bled 300,000 jobs between 2008 and 2012, while adding 1.1 million state employees.
This all fits within Astana’s 2010 industrial policy to gradually move the country away from oil and other natural resources, and begin producing more value-added goods.
In point number seven, Inozmetsev argues that Kazakhstan is willing to ‘leverage its geopolitical opportunities’ to maximise its position on the world stage. With roads and pipelines already criss-crossing through central Asia, Kazakhstan has been actively developing transportation infrastructure projects with its neighbours to make itself a ‘transit bridge’ (quite literally in some cases) between Asia and Europe. Astana and Beijing alone have already signed 33 deals worth $23 billion.
But it is Inozemtsev’s penultimate point that is particularly resonant given recent events. And this time, the argument is far more political in nature.
In short, while Moscow has reactively switched back and forth between partners, at times hysterically ranting against America’s leading role in the global system, Astana has accepted its position of relative weakness and actively courted Beijing, Brussels, Moscow and Washington in equal measure.
In Russia’s near-pathological need to be viewed as a great power, it resists the very system that could make it one. Like Kazakhstan, Moscow could have learned the lesson of China, which embraced the system and subsequently became the world’s largest economy this past December.
Unlike Soviet times, Russia isn’t even opposing the global system on ideological grounds. One only need look at the house Putin has built to realise that his answer to the US-led international order is a distinctly more opaque system, which rests on raw power projection rather than institutions.
Writing for the Intersection Project, Ulrich Speck says it is no accident that those countries that spent decades under ‘Russian [read: Soviet] domination’ have sought closer ties with the west. ‘For them, being part of the western order means not only to enjoy higher levels of prosperity, it means as well that their independence and territorial integrity is secured,’ Speck argues.
It’s worth pointing out that a willingness to embrace the current global economic order can only take Kazakhstan so far. While rapid economic growth is possible within non-democratic societies (as evidenced by the Soviet Union, where national income grew on average six percent between 1928 and 1960), such systems inevitably hit a wall.
As Daron Acemoglu and James Robin argue in Why Nations Fail, extractive forms of government are inherently worse at providing incentives for technological change than inclusive ones. They are also less adept at overcoming resistance from elites when it comes to the forces of ‘creative destruction’, which are necessary for economic diversification and growth. At a certain point, democratic institutions and civil society are not merely luxuries; they are a necessity to achieve maximum levels of development and prosperity.
How far Kazakhstan can go towards building a more inclusive, knowledge-based economy where small and medium-sized business are secure in their property rights and free to compete with traditional elites remains to be seen. While the ability to court FDI rather than drive it away due to the current investment climate will most certainly give Kazakhstan a relative advantage over Russia, any system that puts the interests of a small group of elites first, and the interests of the nation second, is severely limiting its potential.
In light of its current resource dependency and devalued currency, what Kazakhstan best provides is a potential model for how an authoritarian state can manage better economic outcomes by embracing the world as it is, rather than harkening back for a time of spheres of influence and other antiquated modes of geopolitical thinking. Any attempts by Astana to differentiate itself from Russia by loosening its grip on the political system could further shed light on the relationship between economic growth and political inclusivity.
As it stands, Kazakhstan is one of Russia’s closest allies, though, for Astana, their alliance is laced with an undercurrent of existential insecurity: in the world order Putin envisions, crossing Moscow risks inciting a history lesson which may undermine one’s very claim to statehood. The lessons of Georgia and Ukraine are all too plain to see.
Kazakstan currently has no choice but to maintain its proximity to Russia due to their shared history and geography. That relationship, for all its faults, does have its benefits, economic and otherwise.
But those at the helm in Astana also recognise a simple reality: while Kazakhstan’s relationship with Russia is a fait accompli, a brighter future lies both east and west of the Kremlin.