Kazakhstan - International University of JapanCountry Profile 2006 Kazakhstan This Country Profile is a reference work, analysing the country™s history, politics, infrastructure

Country Profile 2006

Kazakhstan This Country Profile is a reference work, analysing the country�s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit�s Country Reports analyse current trends and provide a two-year forecast.

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ISSN 1364-3541

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Comparative economic indicators, 2005

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

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TajikistanKyrgyz Republic

MoldovaArmenia

MacedoniaGeorgia

TurkmenistanAlbania

Bosnia and HercegovinaUzbekistanAzerbaijan

EstoniaLatvia

LithuaniaSerbia and Montenegro

BulgariaBelarus

SloveniaCroatia

SlovakiaKazakhstan

UkraineRomaniaHungary

Czech RepublicPolandRussia

Gross domestic product(% change, year on year)


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SloveniaMacedonia

RomaniaHungary

CroatiaBosnia and Hercegovina

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TurkmenistanCzech Republic

SlovakiaSerbia and Montenegro

RussiaTajikistan

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Azerbaijan

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Czech RepublicPoland

AlbaniaSloveniaSlovakia

LithuaniaCroatia

HungaryEstonia

Bosnia and HercegovinaBulgaria

Kyrgyz RepublicLatvia

UzbekistanTajikistan

KazakhstanGeorgia

RomaniaAzerbaijan

BelarusTurkmenistan

MoldovaRussia

UkraineSerbia and Montenegro

Consumer prices(% change, year on year)


Gross domestic product per head(US$ '000)


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Kyrgyz RepublicMoldova

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BulgariaKazakhstan

RomaniaRussiaLatvia

LithuaniaPolandCroatia

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HungaryCzech Republic

Slovenia763.6

26.4

303.2

0.0

Kazakhstan 1

© The Economist Intelligence Unit Limited 2006 www.eiu.com Country Profile 2006

Contents

Kazakhstan

3 Basic data

4 Politics 4 Political background 5 Recent political developments 9 Constitution, institutions and administration 10 Political forces 14 International relations and defence

17 Resources and infrastructure 17 Population 18 Education 19 Health 20 Natural resources and the environment 21 Transport, communications and the Internet 22 Energy provision

23 The economy 23 Economic structure 24 Economic policy 26 Economic performance 27 Regional trends

27 Economic sectors 27 Agriculture 28 Mining and semi-processing 31 Manufacturing 31 Construction 32 Financial services 33 Other services

33 The external sector 33 Trade in goods 35 Invisibles and the current account 36 Capital flows and foreign debt 37 Foreign reserves and the exchange rate

39 Regional overview 39 Membership of organisations

43 Appendices 43 Sources of information 44 Reference tables 44 Population 45 Labour force 45 Energy production 46 State budget

2 Kazakhstan


46 Money supply 47 Interest rates 47 Gross domestic product 47 Nominal gross domestic product by expenditure 48 Real gross domestic product by expenditure 48 Prices and earnings 48 Main trading partners 49 Main composition of trade 49 Balance of payments, IMF series 50 External debt, World Bank series 50 Foreign reserves 50 Exchange rates

Kazakhstan 3


Kazakhstan

Basic data

2,717,300 sq km

15,219,300 (January 1st 2006 estimate)

The capital was moved from Almaty to Astana (formerly Akmola) on December 10th 1997

Population in !000 (1999 census)

Almaty 1,129 Karaganda 437 Shymkent 360 Astana 313 Ust-Kamenogorsk 311 Pavlodar 301 Semipalatinsk 270 Petropavlovsk 204

Continental. Average temperature in Astana in winter: -18°C; in summer: 20°C. Average temperature in Almaty in winter: -8°C; in summer: 22°C

Kazakh is the state language. Russian is the most widely spoken language and is the de facto language of administration

Metric system

Tenge. Average exchange rate in 2005: Tenge132.88:US$1; exchange rate on June 29th 2006: Tenge119.21:US$1

Calendar year

6 hours ahead of GMT; 5 hours ahead of GMT in Western Kazakhstan

January 1st (New Year); March 8th (Women!s Day); March 21st-22nd (Novruz); May 1st (Unification holiday); May 9th (Victory Day); August 30th (Constitution Day); October 25th (Republic Day), December 16th (Independence Day)

Total area

Population

Main towns

Climate

Languages

Weights and measures

Currency

Fiscal year

Public holidays

Time

4 Kazakhstan


Politics

Kazakhstan has been ruled by one man since its independence from the Soviet Union in 1991: Nursultan Nazarbayev, the current president and formerly the first secretary of the Communist Party of the Kazakh Soviet Socialist Republic. Kazakhstan has had a series of different parliaments, two constitutions, frequent constitutional amendments and long periods during which Mr Nazarbayev has ruled by decree. Since 1995 Mr Nazarbayev has steadily increased his control over Kazakhstan!s political structures, which has allowed him to secure re-election several times, the most recent presidential election being in December 2005. He has benefited from two flawed referendums, in April and August 1995, that cancelled the presidential election planned for 1996 and introduced a new constitution enhancing his powers. Mr Nazarbayev!s supporters won virtually all of the seats in the new bicameral parliament following the legislative election held in December 1995.

In October 1998 Mr Nazarbayev brought forward the presidential election, originally planned for the end of 2000, to January 10th 1999. Along with constitutional changes introduced at the same time, Mr Nazarbayev in effect became president for life. With his main rival barred from standing, Mr Nazarbayev was comfortably re-elected in January 1999 and his supporters won a flawed parliamentary election in October 1999. On June 27th 2000 he granted himself immunity from prosecution. Mr Nazarbayev has also appointed members of his family to prominent positions.

Political background

Modern Kazakhstan!s history is closely linked to that of Russia. In 1730 a request by one of the three Kazakh tribal confederations for Russian protection from external attack led to the gradual subordination of the Kazakhs to the Russian empire. There was relatively slow Russian immigration into what is now Kazakhstan before the 1930s. However, considerable anti-Russian resentment had built up by the early 20th century"especially following Russia!s violent crushing of Kazakh resistance to conscription into the Tsarist army in 1916. When Tsarist Russia collapsed in 1917, Kazakh nationalists declared an autonomous Kazakh government in the east of the country. Defeat by the Bolsheviks in 1920, however, led to integration into the Russian Federation as an autonomous Kazakh republic, followed by the establishment of the Kazakh Soviet Socialist Republic as a separate and full union republic in 1936.

Communism had a disastrous effect on the mainly nomadic Kazakhs, who were forcibly sedentarised during Soviet rule. During the 1930s the number of Kazakhs dropped from 4m to 3m as a result of starvation, emigration and purges. Throughout the Stalinist era Kazakhstan became a dumping-ground for unwanted ethnic groups, deported en masse to the republic. Russian immigration picked up substantially. Until the 1950s Russians dominated the republic both numerically and politically. However, although they continued to be subservient to Moscow, Kazakhs succeeded in gradually increasing their political power locally, especially under Dinmukhamed Kunayev, the first

Russian protection leads to Russian colonisation

Kazakhstan 5


secretary of the Kazakh Communist Party (1962-86), who was a close friend of Leonid Brezhnev, general secretary of the Communist Party of the Soviet Union (CPSU). At the same time the urban Kazakh population became increasingly Russified.

The rule of Mr Kunayev, who allowed corruption to flourish, ended when he was sacked in December 1986 by the Soviet leader Mikhail Gorbachev. Mr Kunayev was replaced by an ethnic Russian experienced in fighting corruption, Gennady Kolbin. Fearing a return to Russian domination, thousands of young Kazakhs demonstrated on the streets of the then capital, Alma-Ata (now Almaty), provoking a violent crackdown by the Soviet authorities.

Nursultan Nazarbayev, an ethnic Kazakh, replaced Mr Kolbin in 1989. Fearing a backlash from the large Russian minority, and recognising the republic!s economic dependence on Russia, Mr Nazarbayev opposed independence. In a fraudulent referendum in March 1991, the vote came out overwhelmingly in favour of remaining part of the Soviet Union. However, Kazakhstan found itself involuntarily cast adrift when Russia, Belarus and Ukraine left the Soviet Union to form the Commonwealth of Independent States (CIS) on December 8th 1991. On December 16th 1991 Kazakhstan became the last republic to leave the Soviet Union, having been one of the last to make its local language the official state language. Mr Nazarbayev was the only candidate in the first presidential election, held in December 1991, and he won 95% of the vote"a result reminiscent of elections during the Soviet period.

Recent political developments

Since Kazakhstan became independent in 1991 Mr Nazarbayev!s main objective has been to retain power. As part of this strategy he has been careful to distance himself from specific policies, and has used the office of the prime minister as a focus for public discontent. The first prime ministers of independent Kazakhstan were thus blamed for unpopular or unsuccessful policies: Sergei Tereshchenko was removed in October 1994, Akezhan Kazhegeldin in October 1997 and Nurlan Balgimbayev in October 1999. The then foreign minister, Kasymzhomart Tokayev, succeeded Mr Balgimbayev only to be demoted back to foreign minister in January 2002.

While still prime minister, Mr Tokayev had been weakened by a fracturing of the cabinet in November 2001 during which a reformist faction formed a new political party, the Democratic Choice of Kazakhstan (DVK). The ministers who formed the DVK not only wanted a less centralised system of government, but also seem to have wanted to undermine Mr Tokayev, who at the time looked like a possible successor to Mr Nazarbayev. Since then Mr Nazarbayev has appointed prime ministers who have been loyal and whose main task has been to contain conflicts within the elite while repressing the opposition. Mr Tokayev was replaced in January 2002 by Imangali Tasmagambetov, whose administration sent prominent opposition politicians from the DVK to jail, following trials of dubious fairness.

Kazakhstan is at first reluctant to leave the Soviet Union

Prime ministers take the blame for policy failures

6 Kazakhstan


Under Mr Tasmagambetov, the taboo against public discussion of corruption in the elite was enforced with great vigour, and independent journalists were harassed. Mr Tasmagambetov also introduced a highly restrictive law on political parties that aimed to prevent most opposition movements from even registering, let alone competing in elections. The June 2002 law made onerous demands that in order to register a party had to have at least 50,000 members (the previous level required was 3,000), with a minimum of 700 members in each of Kazakhstan!s 14 provinces"including the Astana and Almaty regions. Parties also had to have contested two successive legislative elections.

However, Mr Tasmagambetov!s loyalty did not guarantee effectiveness, and the then prime minister mishandled relations with Kazakhstan!s parliament"despite this body!s being dominated by Nazarbayev supporters. As a result, he was replaced in June 2003 by another Nazarbayev loyalist, Danial Akhmetov. Under Mr Akhmetov the government has rhetorically begun to advocate opening up the political system, but in practice repression of dissent has been stepped up. The main aim of official politics during 2004 was to clamp down on the media and ensure that pro-government parties won the election to the lower house of parliament, the Majilis. Mr Akhmetov!s attempt to bring in a restrictive media code failed following considerable foreign pressure and domestic criticism. The authorities instead resorted to indirect methods, such as libel suits in the government-controlled courts and tax investigations to curb the press.

The election to the Majilis in September and October 2004 was neither free nor fair. In an attempt to create the semblance of a contested election, the authorities formed ten electoral blocs, all of which supported Mr Nazarbayev. The opposition formed two electoral blocs, the Ak Zhol (Bright Path) party, led by moderate former officials, and a bloc that brought together the more radical DVK and the Communist Party of Kazakhstan (KPK). Although the authorities had, under foreign pressure, allowed the DVK and the KPK to contest the election, a government-controlled court banned the DVK in December 2004 after it called for civil disobedience in the event of electoral manipulation. The opposition managed to gain just one seat for the Ak Zhol party. The extent of electoral manipulation proved too much for the outgoing Majilis speaker, Zharmakhan Tuyakbay, a member of the main pro-presidential party, Otan. Mr Tuyakbay resigned all his official positions in protest against the electoral fraud, and joined the opposition.

Politics in 2005 was dominated by the need to secure Mr Nazarbayev!s re-election in an atmosphere of considerable tension. On the external front the changes of leadership in Ukraine in December 2004 and in the Kyrgyz Republic in March 2005 created considerable nervousness in Central Asia. Partly in response to these events, Mr Nazarbayev took steps to buy off any potential popular unrest, most notably through large increases in public-sector wages, student stipends and pensions.

The government resorted to other tried-and-tested tactics to prevent the opposition from mounting a credible challenge and to make the president!s re-election a formality. The authorities co-opted some members of the opposition

Clamping down on opposition is the current priority

Parliamentary election in 2004 is flawed

December 2005 secures another resounding re-election

Kazakhstan 7


into the government and, through a Constitutional Council ruling, brought the presidential election forward from the originally scheduled date of December 2006 to December 2005 on the basis of a constitutional ambiguity. The length of the presidential term is set at seven years by article 41 of the constitution. Article 41 thus meant that Mr Nazarbayev!s term ended in January 2006. However, article 94 of the constitution states that presidential elections are to be held on the first Sunday of December after the expiration of the presidential term. This would have meant December 2006, in effect giving Mr Nazarbayev almost another year in office.

The administration presumably decided that holding the election at the end of 2005 carried fewer risks to Mr Nazarbayev!s position than waiting until the end of 2006. The election was duly brought forward, and Mr Nazarbayev secured an overwhelming victory of 91%, although international observers viewed the election as flawed. His only significant rival, Mr Tuyakbay, suffered considerable personal harassment during his campaign and in the event obtained a marginal share of the vote.

Presidential election results, Dec 4th 2005 (% of total)

Nursultan Nazarbayev 91.15

Zharmakhan Tuyakbay 6.61Alikhan Baymenov 1.61Yerasil Abylkasymov 0.34

Mels Yeleusov 0.28

Source: Central Electoral Commission.

Important recent events

April-August 1995

Two flawed referendums result in the cancellation of the presidential election planned for 1996 (keeping Nursultan Nazarbayev in power until December 2000) and the approval of a new authoritarian constitution, which received 89% of the vote.

October 1998

Parliament moves the presidential election forward by one year, to January 1999, and extends the presidential term from five to seven years.

January 1999

Mr Nazarbayev is re-elected with 80% of the vote.

October 1999

Mr Nazarbayev!s supporters win the parliamentary election, which is heavily criticised by international monitors.

November 2001

The formation of a new political movement within the government, the Democratic Choice of Kazakhstan (DVK), causes a political crisis.

March-May 2002

The government crushes the DVK, arresting its leaders and forcing it to split. Independent media outlets also come under attack. The government is forced to

8 Kazakhstan


admit that Mr Nazarbayev held US$1bn in Swiss bank accounts, although it claims that the money has been repatriated.

July 2002

Mr Nazarbayev signs into effect a new law on political parties that would close down most opposition movements, and the DVK!s two most prominent leaders are sentenced to prison on charges of corruption and abuse of office.

March 2004

During pre-trial hearings in the US concerning a corruption scandal over 1990s oil deals, Mr Nazarbayev is formally named as one of the officials to whom a US businessman, James Giffen, is charged with making illegal payments.

September/October 2004

Kazakhstan holds a flawed parliamentary election in which the opposition manages to win just one out of 77 seats.

November 2005

A prominent opposition figure, Zamanbek Nurkadilov, is found dead in his home in Almaty, the former capital. The official verdict is suicide but his widow and the opposition claim foul play.

December 2005

A flawed presidential election delivers a 91% victory for Mr Nazarbayev.

February 2006

Another opposition leader, Altynbek Sarsenbayev, is found dead. The politician, his bodyguard and his driver had been executed outside Almaty. The deaths were almost immediately blamed on Yerzhan Utembayev, chief of staff of the speaker of the Senate (the upper house of parliament), Nurtay Abykayev.

July 2006

The two main pro-presidential parties, Otan (Fatherland, headed by Mr Nazarbayev) and Asar (All Together; led by the president!s daughter Dariga Nazarbayeva) agree to merge.

Within Kazakhstan, top-level corruption is a taboo issue and the government launched a furious campaign of harassment in response to opposition publications and TV stations reporting foreign coverage of corruption allegations in Kazakhstan during 2002. To an extent the government has been its own worst enemy on the corruption issue, and its attempt to use charges of corruption against its enemies has backfired. In 1997-98 the government claimed that former prime minister Mr Kazhegeldin, who quarrelled with Mr Nazarbayev and went into exile, had property in Belgium and Swiss bank accounts. This prompted an investigation in both countries concerned, contributing to the unfolding of a scandal involving allegations of bribery surrounding several major oil deals between Kazakhstan and US companies in the mid-1990s.

When Mr Tasmagambetov became prime minister one of his main priorities was to deal with the possible effects of the scandal. He oversaw a harsh crackdown on dissent and the harassment of any independent media that discussed the corruption allegations. Despite this, in April 2002 he was forced

Corruption causes unease in government circles

Kazakhstan 9


to admit publicly that the government had indeed kept money in Swiss bank accounts in the mid-1990s, arguing that the accounts had been opened as an emergency fund in case of economic shocks.

"Kazakhgate"

A corruption scandal surrounding oil deals in the mid-1990s, widely referred to as "Kazakhgate", has dogged the government since it began in 1998, and in 2003 it resulted in the jailing of a US businessman, James Giffen, who runs a New York-based firm called Mercator Corporation. Mr Giffen has been indicted under the US Foreign Corrupt Practices Act (FCPA). The US government alleges that in the mid-1990s Mr Giffen paid US$78m in bribes to two high-ranking Kazakh officials in order to secure oil deals in the country. The US has also charged Mr Giffen with tax fraud. The two Kazakh officials in the case were initially only referred to as KO1 and KO2, but in March 2004 they were named as the president of Kazakhstan, Nursultan Nazarbayev, and a former prime minister, Nurlan Balgimbayev. Mr Nazarbayev has denied all connection to the case, describing the bribery allegations as "an insinuation, a provocation and a set-up". One former executive of the US oil company Mobil (now ExxonMobil), J Bryan Williams, pleaded guilty to tax evasion in New York in September 2003 and received a sentence of three years and ten months in prison. He was also ordered to pay a fine of US$25,000 and an additional US$3.5m in tax. Mr Williams had received a US$7m payment for helping to insert Mobil into Tengizchevroil (TCO)"the joint venture led by the US!s Chevron that is exploiting the giant onshore Tengiz and Korolev fields in western Kazakhstan"of which US$2m was reported to have come from the government of Kazakhstan. ExxonMobil has denied knowledge of the illegal payments. Mr Williams first began receiving payments in 1993 and worked for Mobil until 1998.

Mr Nazarbayev has proved relatively tolerant of moderate nationalist groups representing Kazakhstan!s large Russian minority (30% of the population in 2001), despite a programme of "Kazakhisation" that the government launched in the initial post-independence period"which removed Russians from many important posts. Since 1994 this nationalist drive has been curbed, in part because of criticism from both Russia and the US but also because of the loss of skilled workers"most of whom are ethnic Russians. Attempts to encourage learning of the Kazakh language have been consistently scaled back. For instance, whereas Kazakhstan!s 1993 constitution established Kazakh as the official state language, relegated Russian to the status of a "language of inter-ethnic communication""the second official language"and defined Kazakhstan as an ethnic state, the 1995 constitution dropped its predecessor!s definition of the country as a Kazakh state.

Constitution, institutions and administration

Kazakhstan has had two constitutions since independence. The first, approved in January 1993, accorded the president wide-ranging powers. The second constitution, approved in August 1995, entrenched the president!s dominance, notably by abolishing the post of vice-president. In October 1998 parliament further strengthened Mr Nazarbayev!s hold on power. With only one vote

Inter-ethnic relations have been calm

Presidential power is enshrined in the constitution

10 Kazakhstan


against, it abolished the maximum age limit and the two-term limit for the presidency, and extended the presidential term of office from five to seven years. Mr Nazarbayev can now stay in power indefinitely. To deter opposition groups from boycotting elections, parliament also abolished the requirement for a minimum 50% turnout to make elections valid.

On paper, the constitution guarantees full human rights, freedom of conscience and social justice. In practice, however, civil rights remain fragile. Organised opposition groups face constant pressure from the security forces. Both the police and the judiciary are corrupt and subject to political interference. The president has personally appointed a Constitutional Council to replace the more independent Constitutional Court. Corporate law remains poorly developed and enforced.

Four important institutions exist in Kazakhstan: the presidency, the cabinet, the National Bank of Kazakhstan (NBK, the central bank) and the Committee for National Security (KNB, the successor to the KGB). Compared with other institutions, the NBK enjoys a high degree of respect, mainly as a result of its successful fight against inflation and its attempts to stabilise the economy in the aftermath of the August 1998 financial crisis in Russia. The NBK was led by Grigory Marchenko, a well-regarded reformer (see Economic sectors: Financial services), until January 2004, when he was replaced by his deputy, Anvar Saidenov. The security forces, led by the KNB, curb political opposition through legal harassment and occasional violence and imprisonment.

The presidency is the most powerful of these bodies. Mr Nazarbayev dictates policy, even though officially policy implementation is the responsibility of the government and its ministries. They in turn face little opposition in pushing legislation through a parliament lacking any real power. The presidential administration also deals with most major foreign investments and foreign policy issues. Weak administration and corruption have hampered the implementation of reforms. Administrative reform is unlikely because corruption plays an important role in maintaining the cohesion of the political elite in Kazakhstan.

Political forces

The key political force in Kazakhstan is the president, Mr Nazarbayev, and his closest advisors. The president!s inner circle tends to change, but few dare to question his authority or his position. Mr Nazarbayev is treated as being above politics or criticism, and any personal attacks on him or his integrity are generally not tolerated. As most real politics in Kazakhstan occurs behind closed doors, it is hard to delineate who the key forces within Mr Nazarbayev!s circle are. An important figure within the presidential entourage is the speaker of the Senate (the upper house of parliament), Nurtay Abykayev. Mr Abykayev is a vital figure in Kazakhstan!s political arrangement because, as Senate speaker, he is constitutionally next in line to take over the president!s functions in the event that Mr Nazarbayev were suddenly incapacitated. Various members of Mr Nazarbayev!s family also hold positions of great influence.

Policymaking rests with the president

President is the main political force

Kazakhstan 11


The emergence of several pro-presidential parties in recent years nonetheless suggests that conflicts within the elite have increased. Mr Nazarbayev usually attempts to restrain such tensions by ensuring that those who are forced to leave government"whether owing to personality clashes or poor performance"have a continued career in business or as advisors. However, the problem for Mr Nazarbayev is that although none are questioning his position, many are jostling to position themselves for the eventual succession. Furthermore, although the chances of a strictly dynastic succession in Kazakhstan have diminished, such a move cannot be ruled out altogether.

The political fortunes of the president!s eldest daughter, Dariga Nazarbayeva, have waxed and waned in recent years. Ms Nazarbayeva entered politics in October 2003 when she launched the Asar (All Together) party. Despite the considerable restrictions on registering political parties laid out in the 2002 law on political parties, Asar apparently managed to sign up 172,000 members before its founding congress in February 2004. The opposition devoted considerable attention to thwarting Ms Nazarbayeva during the 2004 election to the lower house of parliament, the Majilis. However, Asar proved to have less backing than observers initially thought, obtaining four seats in parliament. Instead, the main pro-presidential party, Otan (Fatherland), increased its representation in the 77-seat Majilis from 24 seats to 42 seats.

Ms Nazarbayeva!s husband, Rakhat Aliyev, has also had mixed fortunes in recent years. In November 2001 he was forced to resign as deputy head of the KNB, after parliament reportedly turned against him. Mr Aliyev was then appointed Kazakhstan!s ambassador to Austria. However, after some three years in Austria, he was brought back to become first deputy foreign minister in July 2005, suggesting he was back in favour.

The fortunes of this faction nonetheless appeared to take another turn for the worse after Ms Nazarbayeva publicly called for Mr Abykayev!s resignation in the wake of the murder of a prominent opposition figure. This attack on a figure so close to the president was indicative of factional jockeying for position within the elite: Mr Abykayev reportedly has links to another powerful faction, centred on Mr Nazarbayev!s other son-in-law, Timur Kulibayev"first vice-president of the state-owned oil and gas company, Kazmunaigaz. Mr Kulibayev!s support in the oil industry gives him considerable leverage over politics, and he is also considered a strong contender for the eventual succession.

Factional in-fighting was also at play in a government campaign to introduce a new media law and strengthen state control over media outlets, which was widely seen as targeting Ms Nazarbayeva!s holding in the Khabar TV and radio agency. Mz Nazarbayeva suffered a further setback in July 2006, when the two main pro-presidential parties, Otan and Asar, agreed to unite. Although the move was portrayed as a merger by both parties"and was ostensibly mooted by Asar"it more closely resembles the absorption by the president!s party of that of his daughter. Although Ms Nazarbayeva will be a deputy leader of the new party, the president will continue to head it and senior Otan figures will retain their prominent roles. In one respect the merger could be seen as Ms Nazarbayeva!s "return to the fold" following her recent criticisms of figures close to the

President's family all seek to succeed him

12 Kazakhstan


president. However, it could also be a blow to her hopes of succeeding her father, as it removes her independent political base.

Kazakhstan!s political parties, whether pro-government or opposition, have little impact on politics and have questionable membership rolls. Pro-Nazarbayev parties claim to have combined memberships of close to 1m members. The main political party, Otan, boasts membership of 300,000; following its absorption of Asar it will claim a membership of over half a million. For comparison, in the UK"a country with a population four times that of Kazakhstan"the two largest political parties have memberships of around 350,000. Other pro-Nazarbayev parties also claim very high membership. The Party of Patriots of Kazakhstan"which won no parliamentary seats"claims 170,000 members. The Aul (Village) Social Democratic Party of Kazakhstan claims 150,000 members, and the Ruhaniyat (Spirituality) Party claims 75,000 members. Yet despite their large claimed membership, neither Aul nor Ruhaniyat won any seats in the Majilis. By contrast, the electoral bloc of the pro-government Agrarian Party and the Civic Party, known as the AIST bloc, won the second-largest number of seats, despite being largely unknown.

Majilis election, Sep 19th and Oct 3rd 2004 (turnout 56.49%)

Party Constituency seats PR seats Total seatsPro-government Otan Party 35 7 42AIST bloc 10 1 11Asar Party 3 1 4Democratic Party 1 0 1Independents 18 0 18

Opposition Ak Zhol 0 1 1

Source: Central Electoral Commission.

The authorities have proved themselves adept at breaking up and neutralising opposition parties. Within months of its formation the DVK split in two, with a less radical faction led by Uraz Dzhandosov"a former first deputy prime minister and noted economic reformer"breaking off to become the Ak Zhol (Bright Path) party. Then, in April 2005, Mr Dzhandosov and others split away from Ak Zhol to form Nagyz Ak Zhol (True Bright Path). Although the opposition now contains a number of talented and highly capable former government officials, it is ineffective, poorly funded and"whenever it coalesces"subject to legal pressure and occasional physical harassment. Previous opposition parties formed by disgruntled officials, such as Azamat (Citizenship), have split and failed in the past.

The longest-standing opposition party is the Communist Party of Kazakhstan (KPK). The government encouraged a split in the KPK during 2004 to prevent the party from becoming a viable opposition force. Partly as a result of this, the KPK"in principle a long-standing opponent of a liberal reform agenda"formed an electoral alliance with the DVK. This bloc was subject to considerable official harassment and failed to gain a single seat.

Party membership rolls are suspect

Opposition has lacked cohesiveness

Kazakhstan 13


Attempts to create a broad opposition front have repeatedly failed. The opposition!s most recent attempt to coalesce was in forming an umbrella movement under the name "For a Fair Kazakhstan""bringing together Nagyz Ak Zhol, the now banned DVK and the KPK"in order to support Mr Tuyakbay as its candidate against Mr Nazarbayev in the 2005 presidential election. A new party, Alga! (Forward!), was founded in August 2005 by former members of the DVK, but this party was denied formal registration in 2006.

Two prominent opposition leaders, Zamanbek Nurkadilov and Altynbek Sarsenbayev, died violently shortly after one another, fuelling speculation that the deaths were organised by state officials at the highest level. In November 2005 Mr Nurkadilov was found dead from gunshot wounds in his home in Almaty, the former capital, and the official verdict was suicide. Mr Sarsenbayev, however, was clearly murdered, together with his driver and bodyguard"in February 2006 the bodies were found shot dead outside Almaty with their hands tied behind their backs. The official investigation concluded that Mr Abykayev!s chief of staff, Yerzhan Utembayev, had ordered the killing as a personal revenge over an insult. The official explanation that Mr Sarsenbayev was killed by rogue officials for personal reasons failed to satisfy the opposition, which found the authorities overly keen to wrap up the Sarsenbayev case.

There are small numbers of extremists, Russian nationalists, Kazakh nationalists and Islamic fundamentalists. These groups are marginal and are under government surveillance. A small number of Kazakh citizens have joined al-Qaida, and have been involved in terrorist attacks in neighbouring Uzbekistan and fought with al-Qaida in Afghanistan. There is no popular basis for Islamic fundamentalism outside of the small, poor, rural ethnic Kazakh communities in southern Kazakhstan.

Main political figures

Nursultan Nazarbayev

The president, Mr Nazarbayev, originally came to power in 1989 as the first secretary of the Communist Party of the Kazakh Soviet Socialist Republic. He is adept at keeping disparate ethnic groups in balance, and has allowed a measure of economic reform, as well as considerable foreign investment. However, corrupt practices have flourished under his administration. In 1999 it was revealed that Mr Nazarbayev had a Swiss bank account, and in 2000 a series of offshore companies were also discovered to be under his control. Mr Nazarbayev is an erratic administrator who has failed to implement a number of structural economic changes. Although there is evidence of elite discontent with his rule, Mr Nazarbayev remains in command.

Dariga Nazarbayeva

Ms Nazarbayeva is the eldest of the president!s three daughters. With a background in the media since 1994, she has a significant holding in the principal TV and radio agency in Kazakhstan, Khabar, and is president of the Eurasian Centre for Strategic Research. These media connections, and extensive charity work, have given her a high public profile and a political influence disproportionate to her official

Radical parties are small and weak

Opposition suffers major blows

14 Kazakhstan


responsibilities. Ms Nazarbayeva made a late entry into active politics in October 2003, when she formed a pro-presidential party, Asar. The party performed worse than expected in the election to the Majilis (the lower house of parliament) in 2004, and in 2006 it was merged into the president!s party, Otan. Her husband, Rakhat Aliyev, fell from favour in November 2001 and was appointed ambassador to Austria, although in July 2005 he was brought back to Kazakhstan and given a new post in the government.

Danial Akhmetov

Mr Akhmetov was appointed prime minister in June 2003. Originally from Pavlodar, he is a long-standing ally of Mr Nazarbayev. Mr Akhmetov was governor of Pavlodar province in 1993-97, after which he was transferred to the governorship of the Northern Kazakhstan province. He was then deputy prime minister until 2001, when he was sent back to Pavlodar to tighten control over the region, which had become a focus of dissent against the government. Following Mr Akhmetov!s appointment there were few signs of further unrest in the region.

Nurtay Abykayev

Mr Abykayev has been Mr Nazarbayev!s right-hand man since the latter came to power in 1989. He was chief of Mr Nazarbayev!s staff from 1989 to 1995, and was appointed as Kazakhstan!s first ambassador to the UK in 1995. In 1996 he returned to the presidential administration, and was head of the National Security Committee (KNB) in 1998-2000. In 2000 he became deputy foreign minister, before being made speaker of the Senate (the upper house of parliament) in 2004. He is widely considered to be Mr Nazarbayev!s closest ally, and according to the constitution he would take over in the event of the president!s sudden incapacity.

Galymzhan Zhakiyanov

Governor of Pavlodar region until Mr Nazarbayev dismissed him in November 2001 after he helped to found the Democratic Choice of Kazakhstan (DVK), Mr Zhakiyanov is currently serving a seven-year prison term following a flawed trial in July-August 2002. In August 2004 he was moved from prison into house arrest, after repeated domestic and international demands for his release"particularly in view of the fact that he has a long-standing heart condition and suffered a heart attack while in prison. He was released in January 2006, after the presidential election, and could play a key role in keeping the increasingly besieged opposition parties together. However, it remains to be seen whether his time in prison has weakened him personally or diminished his leadership skills

International relations and defence

Mr Nazarbayev makes the key decisions over foreign policy, and the rhetorical priority in foreign relations is regional co-operation schemes. Mr Nazarbayev has ceaselessly championed integration of the former Soviet republics as well as regional co-operation and free trade in Central Asia. In reality, however, such schemes have proved ineffective, serving only to divert some categories of trade through tariff distortions. Similarly, Mr Nazarbayev!s desire to reconstruct the economic space of the former Soviet Union has also failed.

Regional co-operation plans have largely failed

Kazakhstan 15


The Commonwealth of Independent States (CIS) customs union (comprising Kazakhstan, the Kyrgyz Republic, Tajikistan, Belarus and Russia) was renamed the Eurasian Economic Community (Eurasec) in October 2000, with the aim of creating a more formal economic bloc between some former Soviet republics. In reality, Eurasec is not proving any more effective than its predecessor, which served only to insulate exporters from tackling hard-currency markets and encourage them to buy some inputs at higher prices than might be available without the customs union!s external tariff. Indeed, the new grouping gives more weight to Russia"with four votes out of ten, compared with its equal footing in the customs union. For Kazakhstan, which is now largely a crude oil exporter, Eurasec is of little relevance, as most Kazakh oil is sold to hard-currency markets.

Kazakhstan is also a member of the Central Asian Economic Community, which was renamed the Central Asian Co-operation Organisation (CACO) in January 2002, in an attempt to give the grouping renewed impetus. However, in reality it scarcely functions. The CACO is the latest in a line of failed attempts at regional co-operation in Central Asia. The fundamental sticking-points are the lack of complementarity between the Central Asian economies and Uzbekistan!s desire to be the regional leader"which Kazakhstan has consistently resisted. Bilateral tensions over the poorly demarcated border with Uzbekistan flared in 2000 but have broadly been resolved, and the two sides are now working jointly to delineate the border. Suspicions between the two countries, however, remain.

Kazakhstan!s main external ally and security guarantor is Russia. Despite some early tensions over the treatment of the Russian minority in Kazakhstan, relations are good"and to an extent facilitated Kazakhstan!s decision to assist the US in the counter-terrorism operations that followed the attacks on the US in September 2001. Kazakhstan has offered the US overflight rights and the right to land aircraft in Kazakhstan for counter-terrorism operations. The US is giving Kazakhstan increased military assistance"although the amount is insignificant. Kazakhstan was quick to co-operate in part to avoid being upstaged by Uzbekistan, which is strategically better placed. Kazakhstan has hinted that it might withdraw its support in the light of ongoing corruption investigations in the US, but this appears unlikely. Kazakhstan, like Russia, has been a substantial beneficiary of the US defeat of the Taliban in Afghanistan in late 2001, and has an interest in maintaining good relations with the US.

After independence the government had been initially uneasy about China!s long-term intentions in Central Asia, but in 1995 Kazakhstan joined a regional anti-terrorism grouping including Russia and China"that has since been renamed the Shanghai Co-operation Organisation (SCO)"to co-ordinate anti-Islamist and anti-separatist activities. The government is now actively encouraging Chinese investment in the oil sector, in part to decrease its dependence on large Western oil firms. In May 2004 Mr Nazarbayev and his Chinese counterpart, Hu Jintao, signed an agreement on the construction of a 1,240-km pipeline from Atasu in central Kazakhstan to Xinjiang, the Chinese

Relations with Russia are far closer than ties to the US

Relations with China improve

16 Kazakhstan


region that lies on Kazakhstan!s eastern border. China!s role in the Kazakh oil sector has since expanded slowly but steadily.

Kazakhstan inherited a large but crumbling Soviet arsenal and considerable armed forces, including nuclear weapons. However, Kazakhstan was a nuclear power in name only. These nuclear weapons were in practice under full Russian control and by April 1995 were withdrawn from the country, with Kazakhstan co-operating fully in its own disarmament. The army is poorly organised, badly equipped and inefficiently led. Few Kazakhs held commissions in the Soviet armed forces, being instead mostly assigned to unarmed construction battalions. Recognising the state of its defences, the government wants to increase defence spending, and in both 2001 and 2002 defence expenditure was raised to 1% of GDP. Spending on public order is around twice this level.

The Soviet government had moved many of its weapons to Kazakhstan to avoid the limits imposed by the 1990 Conventional Forces in Europe (CFE) treaty. In particular, Kazakhstan inherited a well-equipped air force. Kazakhstan!s air force has 164 combat aircraft, including 43 MiG-31s and 40 MiG-29s. Average annual flying time is 100 hours, half of the NATO minimum, compared with just 25 hours a year in 1999. Another 75 combat aircraft are in storage. According to the International Institute for Strategic Studies (IISS), Kazakhstan also has 650 T-72 tanks and 280 T-62s. The navy has 15 fighting vessels in the Caspian Sea.

Defence forces, 2006 (no of troops)

Total military 65,800 Army 46,800 Air force 19,000Paramilitary 34,500 Internal Security Troops (under interior ministry control) 20,000 Border Guards (under Interior Ministry control) 12,000 Marine Border Guards 3,000 Presidential Guard 2,000 Government Guard 500

Source: International Institute for Strategic Studies, The Military Balance, 2005/2006.

Security risk

Armed conflict

After independence, Kazakhstan moved quickly to settle the border dispute with China and has sought to demarcate its borders with its former Soviet neighbours (Russia, the Kyrgyz Republic, Turkmenistan and Uzbekistan). There was some tension in relations with Uzbekistan following Uzbek attempts to mark the frontier unilaterally, but in September 2002 a final delimitation deal was signed between the two countries. Nevertheless, there could be some skirmishes along the Uzbek-Kazakh border, where local inhabitants disagree with the official partition. The dispute over the legal status of the Caspian Sea is unlikely to lead to armed conflict involving Kazakhstan, given that the country has settled its claims on the Caspian with Russia and Azerbaijan. Iran has threatened the use of force against Azerbaijan to assert its claims in the Caspian, but any such conflict is unlikely to draw in Kazakhstan.

Armed forces are under-resourced

Kazakhstan 17


Terrorism

There is little risk of domestic terrorism. Although there has been some Islamist activity in southern Kazakhstan, there is little threat of local Islamists turning violent. The majority of Kazakhs are secular, and opposition to the government is mostly peaceful. The rapid US and Afghan defeat of the Taliban regime in Afghanistan and the weakening of the Islamic Movement of Uzbekistan (IMU)"the main insurgent group in former Soviet Central Asia"have reduced the danger of Islamist terrorism in Kazakhstan and the region. The government presents the spread of Islamic extremism as the main security threat in the region, but this is largely a justification for increasingly harsh measures against domestic political dissent.

Civil unrest

There is little serious civil unrest, largely because of the effectiveness of the secret police and the government!s success in keeping the vast majority of the population isolated from the political process. As a consequence, although demonstrations sometimes take place in protest against specific issues"such as pension arrears, for example"they tend to be localised and short-lived. The government does not hesitate to use the police against dissenters, and is generally quite effective in its harassment of opposition figures and activists who are deemed to be too prominent.

Crime

Although there are no reliable statistics on petty crime, foreign visitors have often been the victims of robberies, especially on road and rail transport. However, in the large urban centres, Astana and Almaty, rising economic prosperity appears to have lessened the risks specific to foreigners. Some precautions are still advisable: there have been several instances where foreigners have been met at the airport by someone purporting to have been sent to meet them and subsequently robbed"showing that passenger lists are not always kept confidential. The police are ineffective and in some cases involved with the criminals. The extortion of bribes from motorists is commonplace.

Drug smuggling and organised crime

Kazakhstan!s location as a transit point from Central Asia to Russia, as well as its long and often open borders, make it an ideal transit point for drug smugglers and people traffickers. The ineffectiveness of the police and customs service at preventing the abuse of Kazakh territory for such criminal enterprises contrasts with their zealous application of trade regulations and surveillance"and the regular stopping of vehicles carrying legitimate goods. The security services have ensured that organised crime has steered well clear of attempting to gain a foothold in the oil and gas sector, which is the domain of the ruling elite.

Resources and infrastructure

Population

Kazakhstan had a population density of just 5.6 inhabitants per sq km at the beginning of 2006. Most of the population lives in the north-east and south-east, whereas the central and western provinces"the latter being where most oilfields are located"are sparsely populated. According to the 1999 census, Kazakhstan!s population was 14.9m, and had fallen by around 1% annually since the previous census in 1989. However, after two more years of decline, the

Population is on a trend of decline

18 Kazakhstan


population started to grow again as of 2002, reaching 15.2m at the start of 2006, 1% higher than a year earlier.

One principal reason for the decline in population that Kazakhstan experienced over the 1990s was emigration. Between 1989 and 1999 the ethnic Russian population fell by 1.5m, and 500,000 ethnic Germans"more than half of the ethnic German population"also left Kazakhstan. As a result of their higher birth rate and the mass emigration of minorities, by 1999 ethnic Kazakhs had become a majority in the country for the first time since the 1920s. Years of strong economic growth since 2000 have reversed migratory trends in Kazakhstan, and net migration turned positive for the first time in 2004. Kazakhstan is attracting migrants from its poorer neighbours in Central Asia and from China. Net migration has turned strongly positive in 2005, thanks to large scale immigration from Uzbekistan. Departures for Russia have slowed considerably.

Net migration (no. of people, year-end)

1999 -8,3002000 -7,3002001 -5,900

2002 -4,2002003 -8,300

2004 2,8002005 22,668

Source: Statistics Agency of the Republic of Kazakhstan.

Also as a result of past emigration, the overall proportion of the population aged over 60 is relatively low, at around 10%, since the average age of ethnic Kazakhs is much younger than that of other nationalities in the republic. Consequently, roughly three times as many ethnic Kazakhs are entering the workforce as are leaving it. Nevertheless, ethnic Kazakhs"with larger and younger families"are the most likely to suffer from poverty in Kazakhstan. This is partly because ethnic Kazakhs often live in rural areas, predominantly in the south, whereas ethnic Russians prevail in the industrialised north. The poorest area is the mainly ethnic Kazakh province of southern Kazakhstan, with the lowest per-capita income in 2005"half that of the national average and one-fifth that of the wealthiest province, oil-rich Atyrau. Poverty has nevertheless declined fairly rapidly in recent years, owing to rapid real GDP growth. According to the Statistics Agency of the Republic of Kazakhstan (SARK), the share of the population living below the poverty line (US$35/month) has fallen from over 28% in 2001 to below 10% in 2005.

Education

Russians and other ethnic minorities in Kazakhstan dominated science and technology studies during the Soviet period, and since independence their mass emigration has depleted Kazakhstan!s skills base. Literacy remains high, at 97.5%, according to the 1999 census (the latest available data), with the World Bank putting the literacy rate among the population aged over 15 at 99.5%. The number of students enrolled in higher education has risen steadily from

Post-Soviet educational system is in decline

Kazakh population is young

Kazakhstan 19


440,700 in 2000/01 to 747,100 in 2004/05. However, in primary education the situation appears to be deteriorating, with the number of pupils enrolled in day schools falling from 3.2m in 2000/01 to just under 3m in 2004/05. Moreover, educational standards are declining, owing in part to a lack of resources. Spending on education was 3.5% of GDP in 2005, compared with 3.9% of GDP in 1999. The president, Nursultan Nazarbayev, has made repeated calls in recent years for increased state investment in education.

Some private educational establishments have been set up, to an extent filling the gaps created by the deterioration in the public system. However, even though private education has seen a steady increase"growing from 137 establishments in 1996 to 521 in 2004"the sector is still insignificant, accounting for only just over 5% of all educational establishments in 2004, and taking in less than 10% of all students. Nevertheless, the higher quality of private-sector secondary education compared with the state system is clear from the fact that enrolment in private institutions increases with the level of education. Whereas private primary schools take in only around 7% of all schoolchildren, private higher education establishments account for 46% of the student population at that level.

Health

As with education, the quality of healthcare provision declined sharply after independence, owing to a reduction in funding and the emigration of many doctors and specialists. However, Kazakhstan!s main health indicators appear to suggest that the sector turned the corner in 2000, and have shown small but steady improvements since then. The number of doctors per 10,000 inhabitants recovered from 49 in 2000 to nearly 55 in 2004, and the number of hospital beds per 10,000 inhabitants has been stable at 77 in 2004-05 after falling to 72 in 2000. That the health sector is still underfunded is nevertheless evident in the fact that the government spent around 2.5% of GDP on healthcare in 2005, compared with an OECD average of over 7%. The effects of the oil boom have yet to be felt in the healthcare sector.

Officially, healthcare is provided free of charge and on the basis of need. However, given the shortage of resources, in practice"as elsewhere in Central Asia"a bribe helps to jump the queue and secure better treatment. Financial constraints are also causing a shift away from expensive in-patient care in hospitals towards out-patient care. The government is trying to bring in a system of compulsory health insurance, but this will only have an effect in the medium term. In the meantime the state-run health service is struggling to afford imported medical supplies. Money in the healthcare system tends to be spent on wages, at the expense of new equipment.

Some aspects of public health provision have collapsed, resulting in small outbreaks of typhoid, cholera and diphtheria. The situation is particularly worrying in the south of the country, where poor living conditions and the lack of funding for rural healthcare have led to a spread of tuberculosis. This disease is also a severe problem in Kazakhstan!s prisons. A serious public health issue concerns the environmentally degraded region surrounding the shrinking Aral

Health provision is improving slowly

Diseases and radiation are serious health risks

20 Kazakhstan


Sea, where the life expectancy of the population is lower than in most other areas of Kazakhstan and where pulmonary problems are widespread. There are, however, indications that the sea level in the Aral is slowly rising again thanks to a dam construction project funded by the World Bank, which was completed in August 2005. Although it is impossible to revive the sea fully, a higher sea level should reverse part of the environmental damage. The effects of radiation from years of Soviet nuclear testing in the north of the country at Semipalatinsk"underground as of the 1960s but atmospheric until then"are potentially serious but their extent is as yet unclear.

In July 2005 the Kazakh authorities reported outbreaks of avian influenza (or bird flu) among poultry in Pavlodar region, and other reports from the Russian authorities confirmed that bird flu is spreading from its original location in South-east Asia north- and westwards into Mongolia and Siberia. The outbreaks in Kazakhstan and Russia have been attributed to contact between domestic birds and wild waterfowl via shared water resources. There have been reports of the virus in East Kazakhstan, Akmola and Northern Kazakhstan. Kazakhstan!s large geographical size and small population have led officials to remain sanguine about the possibility of an epidemic among humans. However, the rapid spread of the virus in Russia could help bird flu to spread to more of Kazakhstan!s border regions.

Natural resources and the environment

Kazakhstan has a large endowment of oil, and to a lesser extent gas reserves. The Statistical Review of World Energy, published by BP (UK), estimates total Kazakh proven reserves at the end of 2005 at 79.6bn barrels of oil, or 3.3% of world reserves. By comparison, Saudi Arabia possessed 264.2bn barrels in proven reserves at the end of 2005, equivalent to 22% of the world total. At the end of 2005 Kazakhstan had 1.7% of world gas reserves, totalling 3trn cu metres, as well as large deposits of coal"31.3bn tonnes in reserves, equal to 3.4% of world reserves. It also has deposits of chrome, lead, tungsten, copper, zinc and iron ore, as well as several large gold deposits, including the Vasilkovskoye mine with around 7m oz of gold.

In addition to the damage caused by Soviet-era heavy industry, Kazakhstan has inherited two grave environmental problems. First, the area around Semipalatinsk (near the eastern border of the country) acted as the Soviet Union!s nuclear test site for many years, and has been heavily contaminated by radioactivity, the long-term impact of which remains unclear"in part because the Soviet authorities covered the issue up and suppressed data. Second, the Aral Sea, whose shoreline Kazakhstan shares with Uzbekistan, is drying up rapidly because of the excessive and inefficient use of the two rivers that feed it, the Syrdarya and the Amudarya (Oxus and Jaxartes), for cotton production in Central Asia. The remainder of the Aral Sea is contaminated by the overuse of fertilisers and pesticides, and the exposed bed of the former sea is a dustbowl affecting the health of those living near it. The desiccation of the Aral Sea has also caused the former island of Vozrozhdensky to become a peninsula"although sea levels are now reportedly rising after the construction of a dam

Kazakhstan is rich in mineral resources

Radiation and drought are the main environmental problems

Avian influenza could pose new health threat

Kazakhstan 21


funded by the World Bank. This island was a Soviet-era biological testing site. These problems have caused major water supply shortages and precipitated the near-collapse of the Kazakh fishing industry.

Transport, communications and the Internet

Kazakhstan faces two key infrastructure challenges. First, the country needs to plan decades ahead for oil and gas export pipelines and seek the necessary foreign investment to fund these pipelines. In addition, as Kazakhstan has no access to the high seas, the government needs the political consent of other states for the construction of these pipelines. Moreover, two of Kazakhstan!s possible future pipeline routes, Russia and Iran, are potential competitors in global energy markets. Both countries are likely to question the legality and environmental wisdom of proposals to build an oil export pipeline under the Caspian Sea from Aktau in western Kazakhstan to Baku, the capital of Azerbaijan. The purpose of this pipeline would be to allow Kazakhstan to pump oil directly into the newly opened oil pipeline that takes oil from Baku to the Turkish Mediterranean oil terminal of Ceyhan. Second, Kazakhstan!s size"five times that of France"and population distribution mean that maintaining an integrated national communications infrastructure is costly. The main economic activity, oil, is in the west of the country, close to the Caspian Sea, whereas the bulk of the population lives in the central, southern and eastern provinces.

Rail is a vital form of freight transport in Kazakhstan. The state-owned railway monopoly, Kazakhstan Temir Zholy (Kazakhstan Railways), is currently engaged in a three-year, US$1bn upgrade programme funded by foreign lending. Passenger rail services are loss-making but are being spun off into a separate corporate entity from the more viable cargo transport business. The railway infrastructure is poor. Kazakhstan has a railway density of only 5.5 km per 1,000 sq km, compared with 50-100 km in advanced European economies. Even in the Commonwealth of Independent States (CIS) railway density tends to be in the range of 23-37 km per 1,000 sq km.

Kazakhstan has 14,203 km of 1.52m-gauge railway lines, of which 4,802 km are double-track lines but only 3,997 km are electrified. New lines are planned to shorten the journey between western China and central Russia, a journey that has to cross Kazakhstan, which would therefore bring higher invisibles earnings on the balance of payments. Reform and restructuring of the railways is, however, a slow process and is not expected to be completed until towards the end of the decade at the earliest.

The road infrastructure is also in need of rehabilitation. Kazakhstan has 90,018 km of roads, of which 84,112 km (93%) are paved. Ownership of passenger cars is rising rapidly thanks to the oil boom, but remains low at less than 10 per 100 inhabitants. Illicit imports of second-hand or stolen cars make up a significant part of the market.

Given Kazakhstan!s size and population distribution, the development of civil aviation could be expected to have been a policy priority. Instead, commercial

Size poses a significant transport problem

Transport links need massive investment

Aviation has suffered from political in-fighting

22 Kazakhstan


aviation became mired in a political battle for control of the sector. The state-owned airline"known first as Kazakhstan Airlines and then as Air Kazakhstan"suffered as a result, and was eventually declared bankrupt in 2004. Its rival, Air Astana, then took over all the former national carrier!s most profitable routes and is now the country!s main operator. Deputies in the previous parliament accused the government of forcing Air Kazakhstan!s bankruptcy in order to favour Air Astana.

The new national carrier is benefiting from the authorities! determination to promote the new capital, Astana. In early 2005 the government announced that foreign carriers would be forced to switch all of their flights from the former capital, Almaty, to Astana. This caused an outcry among international airline operators, and the government offered a compromise in July. Airlines will be allowed to continue to serve Almaty if at least one flight from each foreign destination flies into Astana. Almaty remains Kazakhstan!s commercial capital and its population is more than twice that of Astana.

As tends to be the case in emerging markets, mobile telephony has grown rapidly despite its relatively high cost, whereas fixed-line telephony has languished. According to the World Bank, there were 35.1 fixed-line and mobile telephone subscribers per 100 inhabitants in 2004, up from 13.7 per 100 inhabitants in 2000. According to government figures, mobile subscribers in 2004 numbered 18 per 100 inhabitants"up by 200% from 2001"and there were 15 landlines per 100 inhabitants. In developed countries landline penetration is usually at least 40 per 100 inhabitants, and in the western countries of the former Soviet Union it is over 20 per 100 inhabitants. Internet use in Kazakhstan was 26.7 per 1,000 inhabitants in 2004 according to the World Bank, up from 6.7 per 1,000 inhabitants in 2000. Although this is a reasonable level of Internet usage by Central Asian standards, access to the Internet in Kazakhstan remains a minority privilege"often of those working for the government, who have access at work. Limited salaries make the cost of computers and Internet connections prohibitive for most people.

Energy provision

Kazakhstan is in the early stages of becoming a substantial energy producer, but for the moment the country still imports a portion of its energy requirement. Over time, much of this is likely to be produced domestically, thereby obviating the need for imports. Domestic oil consumption is around 260,000 barrels/day. Under half of Kazakhstan!s electricity requirement comes from importing electricity from Russia. Given that 83% of all associated gas in Kazakhstan from oil production is still flared off"despite government regulations banning flaring"there is ample feedstock for gas-fired power stations. For the moment, Kazakhstan still buys gas from Uzbekistan for southern Kazakhstan. However, the government is now developing small local fields in southern Kazakhstan to eliminate the need for imported gas from Uzbekistan.

Kazakhstan!s energy transmission and distribution systems are being rehabilitated after years of Soviet-era neglect. The electricity grid is receiving assistance from the World Bank and the European Bank for Reconstruction and

Kazakhstan still imports electricity and gas

Mobile telephony is growing rapidly

Kazakhstan 23


Development (EBRD). Regional electricity companies are scheduled for privatisation. However, past experience suggests that the likely success of these utilities! privatisation is questionable. For instance, in 2000 the government in effect forced Tractebel (Belgium)"which ran the Almaty electricity utility"to leave the country. Tractebel had successfully turned the Almaty electricity company around by slashing delinquency rates of over 75% to around 13%. However, following the April 1999 devaluation the government froze electricity prices to control inflation, and the ensuing dispute with Tractebel led the Belgian company to leave Kazakhstan.

The economy

Economic structure Main economic indicators, 2005 (Actual unless otherwise indicated)

Real GDP growth (%) 9.4

Consumer price inflation (av; %) 7.6

Current-account balance (US$ m) -485.7

Exchange rate (av; Tenge:US$) 132.9

Population (m) 15.2

External debt (year-end; US$ m) 41,541a

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Before independence in 1991 Kazakhstan!s specialised role in the Soviet economy was focused on wheat production, metallurgy and mineral extraction. In turn, Kazakhstan could count on a captive market for its goods"regardless of their quality"and on a steady supply of underpriced energy and other cheap inputs. With the break-up of the Soviet Union, this centrally planned system collapsed, causing a steep fall in output in Kazakhstan"the Central Asian economy most closely linked to Russia. The post-independence recession thus wiped out a number of industrial subsectors, such as consumer goods. Industry shrank from over 31% of GDP in 1992 to just 21% of GDP in 1996. By 2000 industry had become the main sector again, with a 33% share of GDP, almost exclusively attributable to an investment-led oil boom, as a result of which oil now accounts for over half of industrial output. The only other significant sector in the Kazakh economy is the semi-processing of metals and steel production, both of which are relatively labour-intensive but which are concentrated in a handful of firms. This sector also recovered rapidly from the post-Soviet collapse thanks to foreign investment.

The construction sector is very dependent on the oil sector, and has expanded gradually as a share of GDP in tandem with investment in oil. The rest of the economy comprises a small-scale but rapidly growing services sector, and a large, inefficient and labour-intensive agricultural sector"the largest employer but an increasingly irrelevant exporter. In 2005 agriculture!s share of GDP was less than 7%"down from 23% in 1992"and food products accounted for less than 3% of exports. Because of the growth of the oil sector and the likely real

Soviet collapse severs chains of production

Other sectors are weak, and subordinate to oil

24 Kazakhstan


appreciation of the currency, in the long term the agricultural sector will need to be subsidised heavily if it is to survive.

Thanks to foreign participation, the quality of investment in the economy is far superior to that of the Soviet era and has recovered following a post-independence collapse. However, the vast majority of foreign investment is destined to the extraction of mineral resources, with other sectors suffering from under-investment. Foreign investment into oil extraction accounted for around one-quarter of total investment inflows in 2005.

Data collection still suffers from methodological shortcomings, in part owing to a lack of resources. The statistics agency no longer has the influence over enterprises and ministries that it enjoyed in the Soviet period, making data collection difficult. Its problems are particularly evident in the lack of consistent expenditure data on the national accounts. The data are incomplete and difficult to obtain, and their release is far from timely.

Comparative economic indicators, 2005 Kazakhstana Russiaa Uzbekistan b Chinaa Ukrainea

GDP (US$ bn) 56.1 763.6 10.8 2,224.9 82.9

GDP per head (US$) 3,685 5,324 416 1,702b 1,771b

GDP per head (US$ at PPP) 8,149a 10,823 1,982 6,292b 6,777b

Consumer price inflation (av; %) 7.6 12.7 6.9 a 1.8 13.5

Current-account balance (US$ bn) -0.5 84.2 1.1 160.8 2.5

Current-account balance (% of GDP) -0.9 11.0 10.0 7.2 3.1

Exports of goods fob (US$ bn) 28.3 243.6 4.9 762.5 35.0

Imports of goods fob (US$ bn) -18.0 -125.3 -3.5 -628.3 -36.2

External debt (US$ bn) 41.5a 216.0b 5.0 252.8b 23.9b

Debt-service ratio, paid (%) 26.4a 15.7b 23.5 5.2b 12.5b

a Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Economic policy

Following the economic shock of independence, Kazakhstan was initially forced to adopt an inflationary policy mix, with loose fiscal and monetary stances. The chain of command on economic policymaking was also unclear, leading in 1994 to near-hyperinflation when the president, Nursultan Nazarbayev, cancelled agricultural sector debt without consulting the government. Following the appointment of Akezhan Kazhegeldin as prime minister in October 1994, the fiscal stance was tightened. Additional deficit finance also emerged in the shape of privatisation revenue, mostly from the sale of equity in the oil sector to foreign companies.

The success of the Kazhegeldin government in stabilising the economy"year-on-year consumer price inflation by the end of 1998 was less than 2%"was followed by a period of looser fiscal policies under his successor, Nurlan Balgimbayev. Following the devaluation of the tenge in April 1999 Mr Balgimbayev lost his job, and his successor, Kasymzhomart Tokayev, began to tighten the fiscal stance. A key element in tighter fiscal policies was a determined attempt to raise revenue by encouraging tax compliance. In

Macroeconomic policy has not always been consistent

Data quality is still unsatisfactory

Kazakhstan 25


addition, the government began reducing the size of the bureaucracy. Fiscal transparency also improved, with the windfall from the oil sector paid into a special account, the National Fund of the Republic of Kazakhstan (NFRK).

The fiscal deficit has broadly remained close to balance since 2000. The tighter fiscal stance has been accompanied by a more favourable external environment. Kazakhstan has been well placed to take advantage of higher oil prices since 2000 thanks to rising oil exports financed by foreign direct investment (FDI), and the government is now in a position to spend more and widen the deficit a little. As a result, the 2005 budget was amended to raise spending by 12%"largely to fund a 32% rise in state-sector wages ordered by Mr Nazarbayev. The authorities were keen to prevent the kind of unrest that led to the ouster of the government in the neighbouring Kyrgyz Republic in March 2005. This loosening trend remained in evidence in 2006, as expenditure for the year was also revised upwards in May.

Monetary policy in Kazakhstan has tended to be tight since the start of stabilisation in 1994, and has indeed tightened significantly in 2005-06 against a backdrop of fiscal loosening. One of the country!s most effective institutions has been the National Bank of Kazakhstan (NBK, the central bank). Grigory Marchenko, deputy head and later head of the NBK, was largely responsible for developing the policy instruments of monetary policy and also for reforming the banking sector. The NBK successfully brought inflation down over the period 1994-99, but inflation accelerated once more after the April 1999 devaluation of the tenge. Annual inflation reached 20.4% in March 2000 before being brought permanently down below 10% by 2001.

A key aim of monetary policy in recent years had been to maintain a balance between the need for consumer price disinflation and the prevention of rapid real appreciation. The NBK also sought to maintain a supply of liquidity to the non-oil sector in order to foster its development. This last aim led the NBK steadily to cut the refinancing rate from November 1998 to February 2005. In 2005, however, mounting foreign-exchange inflows and other inflationary pressures"not least of which was a fiscal relaxation"prompted a tightening monetary stance. After raising the refinancing rate to 7.5% in February, the NBK raised it again to 8% in July, and again to 8.5% in April 2006. The danger is that higher interest rates could attract speculative capital into local assets. As the government has managed to avoid large fiscal deficits in recent years, the market for government paper is quite small. As a result, the main form of official paper on offer is short-term NBK notes, which account for over half of all government securities sold.

The government has been inconsistent about structural reform, particularly as its attitude to Western investors has gone from welcoming to hostile over the past few years. Two factors have shaped the formulation of structural policies: the external economic environment and vested interests. In the early 1990s the collapse of Soviet-era economic links and an adverse external environment forced the government to sell state assets on terms favourable to investors. As oil prices have surged since 2000, however, domestic interests have sought to

Structural reform has been inconsistently pursued

High oil prices bring fiscal stability

Monetary policy struggles to bring down inflation

26 Kazakhstan


maximise economic rents from these investments, leading to a worsening of the business environment. Privatisation has nonetheless been successful overall, and a considerable proportion of the state sector is now in private hands"although the transactions involved have often been non-transparent. For instance, many small and medium-sized firms have been sold to politically well-connected business interests.

Structural reform has also been hindered by a tendency in the government to avoid difficult policy choices, since these could lead to social unrest. Instead, the government opted for subsidising some sectors in the hope of keeping a lid on discontent. To an extent this policy, along with targeted use of state repression, has been successful. However, long-term unemployment remains high"particu-larly in the former heavy industrial areas of northern Kazakhstan"and poverty in the south, among the largely rural, ethnic Kazakh population, is severe.

Economic performance

Kazakhstan experienced one of the worst economic contractions in the former Soviet bloc. Real GDP fell by 36% between 1990 and 1995 (an average annual decrease of 7%). The banking sector shrank and there were few sources to finance domestic investment"especially given the need to restrain government spending. As a result, fixed investment contracted from 30% of GDP in 1992 to 16% of GDP in 1999. Growth resumed in 1996, but the weakness of the recovery was shown when the economy slipped back into recession in 1998 as a result of the Asian and Russian financial crises, falling export prices and poor economic policy management. Policy had little effect on growth, and the turnaround in 1999 was a result of higher world oil prices and better weather, which benefited the agricultural sector. Oil-sector investment by foreign firms helped to increase oil production capacity and caused significant export volume growth, resulting in annual average real GDP growth of over 9% in 2000-04. In 2005, however, the pace of economic expansion remained at 9.4% despite steadily rising international oil prices. This hinted at capacity constraints in the oil sector, and also at the adverse effect of increasing state interventionism on investor sentiment.

Not all sections of the population have shared in the benefits of economic growth or foreign investment, but poverty is on the decline. Rural poverty is nonetheless deeply entrenched, with ethnic Kazakhs in the south among the poorest. There is also considerable hardship in the largely ethnic Russian industrial cities in northern Kazakhstan, a result of slow structural reform. Many firms have workers on unpaid leave or on a part-time basis, but provide them with benefits that would be lost if the firm closed. The fact that a substantial number of such workers also have unofficial jobs, together with the extensive informal economic activity in rural areas, means that the shadow economy in Kazakhstan is estimated to be as high as 30% of GDP.

However, rapid economic growth in 1999-2005 has stimulated employment growth and pushed up living standards. Annual average unemployment was 639,300 (8.1% of the workforce) in 2005, compared with 950,000 in 1999 (13.5% of the workforce). At the same time, the benefits of rising real wages are starting

Economic performance since 1991 has been uneven

Average living standards are very low, but rising

Kazakhstan 27


to have an effect, and consumer goods imports are on the increase. The stability of the tenge has been an important factor in raising living standards, with per-capita GDP and monthly wages the highest in the Commonwealth of Independent States (CIS) outside Russia in US dollar terms. One indication of relative prosperity is the large number of illegal immigrants into Kazakhstan from neighbouring Central Asian republics, especially Uzbekistan. Uzbek workers man the building sites of Almaty and Astana, and every summer cross illegally into southern Kazakhstan to pick cotton. Jobs in Kazakhstan pay salaries some five times higher than those in Uzbekistan, and these salaries are paid in a freely convertible currency.

Regional trends

Most value added comes from the oil sector, which is largely in western Kazakhstan close to the Caspian Sea. The declining heavy industrial sector tends to be based in northern Kazakhstan, a region that is mainly populated by ethnic Russians. Most grain production, which comes from the former collective farms, is also from northern Kazakhstan. Southern Kazakhstan has some oil, but is also a large agricultural employer of mostly ethnic Kazakhs producing cotton. The area has suffered from the drying-up of the Aral Sea and is probably the poorest region in Kazakhstan. The small financial sector is based in the former capital, Almaty, in the far east of the country. The new capital, Astana, is in a northern central region, which is ethnically mixed but which also has little to offer economically, aside from hosting a costly new capital and the government bureaucracy.

Economic sectors

Agriculture

The expanding oil economy is marginalising the agricultural sector, which a decade ago was still an important exporter. Although there has been some change"land reform, for instance, was introduced in 2003"the sector is finding itself struggling against cheap imports and needs government assistance to survive. Grain production, mainly in northern Kazakhstan, dominates the sector, followed by meat and wool. Although agricultural land is generally of good quality, Kazakhstan!s climate is unpredictable and suffers from extreme continental conditions"very hot summers and almost arctic winters. Moreover, farmers often find it difficult to obtain equipment and inputs. The gradual shift away from grain, a Soviet-era priority, towards legumes has now ended and grain production remains at 12m-15m tonnes per annum. Despite these difficulties, farmers earn more for their produce than in any other Central Asian republic.

Kazakhstan has the most reformed agricultural sector in Central Asia. Although procurement prices are low by international standards, they are the highest in the region. The extent of reform in Kazakhstan, however, is still insufficient. A doomed rescue effort for the sector in 1994 resulted in near-hyperinflation. An attempt to requisition oil for agriculture in 1997 was successfully resisted by the

Regional disparities are very wide

Agricultural performance has been mixed

Successive governments have shied away from reforms

28 Kazakhstan


country!s major oil companies. Poorly implemented privatisation has aggravated the scarcity of fuel, fertilisers and spare parts for agricultural machinery, and export bans on fuel and diesel encourage smuggling. The government has tended to adopt a defensive attitude towards liberalisation of land markets and ownership, assuming that its immediate effects will prove damaging. Fearing that reform would lead to lower yields and increased bread shortages, the government sold the large state and collective farms to their Soviet-era managers, with little incentive to improve productivity. The slow pace of land reform has also meant that private small farms have failed to prosper.

A major stumbling-block to improved agricultural output is the absence of proper freehold rights for land, which has hampered the emergence of a functioning land market. Although a new Land Code was adopted in June 2003, it has not led to a substantial liberalisation of the land market, and instead risks cementing the existing large agricultural holdings controlled by powerful elites. As a result, the government may have to amend legislation in coming years if it wants land to be more easily owned and traded.

Mining and semi-processing

Oil production has grown rapidly to a post-independence peak of liquids output (crude oil and gas condensate) of 61.9m tonnes (1.2m barrels/day) in 2005, thanks to foreign direct investment (FDI). Around 85% of oil production is from foreign investors, with the rest from the state-owned oil company, Kazmunaigaz"formed in February 2002 through the merger of Kazakhoil and TransNefteGaz (although Kazmunaigaz participates in all joint ventures). After oil prices started rising in 1999, Kazakhstan began to revise its contracts with foreign investors, claiming that the conditions of previously signed contracts were too favourable to foreign partners. Many firms were too far into their projects to be able to pull out, and had to comply with the revisions. Over the longer term, however, the fact that the government does not respect the terms of its contracts could discourage foreign investment. In addition, the government has used tax investigations of foreign firms to put pressure on them and has also enforced informal local content requirements.

Investment by foreign oil companies has been the principal motor of Kazakhstan!s recent rapid economic growth. By contrast, the government!s handling of the state-owned oil and gas sector has at times lacked a clear sense of direction. In recent years, however, the government!s approach to the oil sector has been centred on the establishment of a "national champion""albeit after several less than successful attempts. In 1997 the government set up a state-owned oil and gas company, Kazakhoil, to act as the national champion in the sector. The company was supposed to seek a significant foreign partner to become its strategic ally"but this never transpired. Less than three years later, and following repeated asset-stripping"such as the sale of its share in the exploration of the offshore Kashagan block, as well as its oil and gas pipelines"at the end of 2000 Kazakhoil lost its status as the main state-owned oil company. Instead, the oil and gas pipeline company that had been separated from it, KazTransOil (later renamed TransNefteGaz), headed by Timur

Oil sector depends on foreign investment

National oil company loses out to pipeline monopoly

Kazakhstan 29


Kulibayev"a son-in-law of the president, Nursultan Nazarbayev"became the main state representative in the oil sector.

An attempt to force TransNefteGaz on to the oil sector as a state-owned monopoly, through which all companies would have to export their oil at fees set by the state, failed. Major foreign companies in Kazakhstan refused to use TransNefteGaz, but the new strategy reflected an acceptance on the government!s part that no Kazakh company"in other words, Kazakhoil"could compete with foreign investors when it came to oil production and exploration. Instead, the government sought, through TransNefteGaz, to pursue a rentier strategy by collecting export fees.

The lack of direction in the state-owned oil sector continued, and in February 2002 Mr Nazarbayev decreed that Kazakhoil would be merged with TransNefteGaz into a new state-owned company, Kazmunaigaz. In reality, TransNefteGaz took over Kazakhoil, the merger being intended to strengthen Mr Nazarbayev!s control over the oil sector. New laws on production-sharing agreements (PSAs) and subsoil use, passed in 2004, stipulated that the state oil company is to have mandatory participation of 50% in new projects. The new laws also set onerous local content requirements for foreign investors, the terms of which are concluded in unpublished contracts. The explicit goal is to develop domestic industry, but in practice the local firms involved are usually well connected to the government, suggesting that the content requirement is yet another symptom of creeping control over foreign investors. Mr Nazarbayev has stated openly that he wants to build up local firms that will in time replace foreign investors in the sector. The problem for Kazakhstan is that local firms lack the knowledge and capital to be able to oust the oil majors. It is perhaps because of this that, over the course of 2005, the authorities began to treat Chinese oil and gas investors favourably.

Key oil consortia in Kazakhstan

Tengizchevroil (TCO)

This consortium, led by Chevron (US), is developing the giant Tengiz field in western Kazakhstan. Also in the consortium are ExxonMobil (US), Lukoil (Russia) and Kazmunaigaz. The Tengiz field has an estimated 6bn-9bn barrels in recoverable reserves and was producing over 300,000 barrels/day in 2006, making it the largest single oil producer in the country.

Karachaganak Petroleum Operating (KPO)

Led by BG (UK) and ENI (previously Agip; Italy)"with Chevron and Lukoil"to develop the giant Karachaganak field in north-western Kazakhstan. The project originally began as a gasfield venture, with BG and Agip forced to accept Gazprom, the Russian state-owned gas monopoly, as a partner. Gazprom, which attempted to hold up exports from the field, then left the venture, selling its share to Lukoil. The project is now concentrating on liquids production, with output of over 200,000 b/d in 2006. Total reserves in Karachaganak are estimated at 1.2bn tonnes (8.8bn barrels) of liquids and 1.3trn cu metres of gas. KPO investment in the field to date has been over US$1bn.

30 Kazakhstan


Agip Kazakhstan North Caspian Operating Company (Agip KCO)

Previously the Offshore Kazakhstan International Operating Company (OKIOC), Agip KCO operates on behalf of a consortium comprising ENI, ExxonMobil, Inpex (Japan), Phillips Petroleum (US), Shell (UK) and Total (France). Agip KCO is developing the newly discovered Kashagan field in the Caspian Sea. The consortium has put recoverable reserves at 7bn-9bn barrels. Full production will not start until after 2010, although first oil should be available in 2008. Initial exploration work began in 1993.

The Caspian Pipeline Consortium (CPC) was formed in 1993 with Russian participation, but a restructuring brought in private oil companies and reduced the share of the three governments involved"Kazakhstan, Oman and Russia"to 50% (previously they had full ownership). The involvement of Western oil companies, particularly Chevron (US), provided vital financing. Initially due for completion by the end of 1996, construction only began in 1999, but proceeded speedily after that. The CPC pipeline was filled over the first half of 2001 and became operational later that year. The CPC has generated considerable export savings, as the transit fee is just US$4.43/barrel, compared with up to US$7/b for rail transport. The CPC pipeline had an initial capacity of 28m tonnes/year (565,000 b/d). In 2005 there was oil throughput of 30.5m tonnes, up by 36% on 2004. The CPC will now add ten new pumping stations to move it closer to its eventual full capacity of 67 t/y, following Russian government approval in April 2006. The expansion will cost US$1.8bn. A potential source of problems for the consortium is Russian interference. Russia has insisted that the new general director of CPC be a Russian national, Vladimir Razdukhov, who was previously the deputy director of Zarubezhneft, a Russian state-owned oil company.

Kazakhstan accounted for 90% of the former Soviet Union!s chrome reserves and half of its lead, tungsten, copper and zinc. In addition, it also held one-fifth of its coal reserves. The ferrous metallurgy industry gets its iron ore from mines in Karaganda province. The main steelmaker is Ispat Karmet, a subsidiary of the Netherlands-based Mittal Steel, which owns and runs the former Karaganda Mining and Metallurgical Kombinat. Kazakhstan produced 4.5m tonnes of raw steel in 2005, down by 17% from 2004, and 3.2m tonnes of flat-rolled products, down by 21%. In October 1999 Ispat Karmet started to manage the Lisakovsk mining and concentrating plant, which supplies the plant!s iron ore. Lisakovsk had been forced into bankruptcy by the government and Ispat Karmet was its only customer. Ispat Karmet exports almost all of its steel.

Dzhezkazgan province is the centre for copper mining. Its main processor, Dzhezkazgantsvetmet, is owned by the UK-registered Kazakhmys. Kazakhmys was formerly majority-owned by South Korea!s Samsung, which invested over US$250m in the company. Refined copper output in 2005 was 418,833 tonnes, down by 6%. Phosphates are mined and processed in Dzhambul and Shymkent provinces in southern Kazakhstan. Most of Kazakhstan!s coalfields are uncompetitive. Thanks to foreign investment, coal production finally recovered in 2000, although it remains below its 1990 level. Production of coal in 2005 was 81.9m tonnes, down by 1.3% on 2004. Although Kazakhstan possesses reasonable gold deposits, foreign companies have not fared well in forming the partnerships needed to exploit them.

Kazakhstan is rich in minerals

Good relations with Russia are crucial for export capacity

Kazakhstan 31


Manufacturing

Following the post-independence collapse, in which total industrial production fell by a cumulative 52% between 1990 and 1995, the sector made a faltering recovery, fuelled by foreign investment in oil and metals. There was a marginal 0.3% increase in 1996 and a stronger 4% recovery in 1997. The recovery was short-lived, however, as industrial production shrank by 2% in 1998 as a result of falling demand in the Russian export market, and low metals and oil prices. Industrial output in 1999 grew by 2.7%, mainly as a result of increased metals and oil production"spurred by the recovery of global prices. In 2000 industrial production leapt ahead by 15.5%, primarily thanks to a 17% increase in oil output and a 28% rise in coal production. Industrial output growth has slowed since then, dipping to 10.4% in 2004 and 4.6% in 2005.

In the past most metals enterprises were grossly inefficient, benefiting from subsidised energy and captive Soviet markets. However, foreign investors are now gradually turning the industry around. Metallurgy is the second most important recipient of foreign direct investment (FDI). Much of this investment has come through management contract schemes, whereby foreign firms lease local companies for a given period, with the foreign investor taking on all the assets and liabilities of the local enterprise. At the end of the lease period, having paid royalties to the government, the foreign manager has first refusal when the state divests itself of its remaining stake.

Despite some success, controversy and corruption have plagued the scheme. Poor accounting practices and the lack of independent audits have resulted in some investors receiving larger than expected bills from unpaid suppliers and workers after taking over the plants. Higher domestic energy prices have also affected the sector, although these are still below export prices and world prices. In January 1996 crude oil cost just US$7/b, compared with a dated Brent Blend price of US$17/b. By December 2002 crude was selling for US$13.9/b domestically, compared with a Brent price of US$28.52/b. Local oil prices have since risen and the discount of Kazakh oil exports to Brent was just 14.5% during the first quarter of 2006, a discount largely explained by transport costs. The domestic price of gas is even lower. Kazakh gas exports earned just US$28.5 per 1,000 cu metres during the first quarter of 2006, just over 10% of the equivalent Russian gas export price. As Kazakhstan!s cost-recovery level is around US$20 per 1,000 cu metres, this implies that gas export margins are thin.

Construction

Construction shrank from more than 12% of GDP in 1990 to 4% in 1997, recovering to around 6% of GDP in 2003-04. Thanks to the oil boom, however, construction then performed extremely well and was the fastest-growing sector in 2005, expanding by nearly 38%"although this is in part a result of base effects and some erosion of the shadow economy in this sector. The surface area of completed dwellings grew by 84% during 2005, of which the number of dwellings financed by households expanded by 40%.

Industrial output recovers, driven by raw materials

Investment is concentrated in heavy industry

Large-scale projects boost the sector

32 Kazakhstan


Employment in construction has more than halved since 1990, and was reported at 381,000 in 2004. The official data are misleading, however, the reason being that informal employment in the sector"particularly in residential construction"predominates. The government!s decision to spend over US$1bn on buildings in the new capital city, Astana, together with an ongoing expansion in oil pipeline capacity, has also provided an important boost to construction. Local production of cement, steel and pre-fabricated buildings has risen in the past couple of years, reversing a trend of falling materials output at a time of rising construction activity, which had forced Kazakhstan to resort to imports.

Financial services

Kazakhstan!s banking sector is undergoing its third transformation since independence. The sector went through a period of rapid growth in the immediate aftermath of the collapse of the Soviet Union, followed by one of reform and consolidation. Since 2001, however, the sector has once again been expanding rapidly and"although the sector has avoided the financial crises seen in other former Soviet republics"new risks are accumulating.

The immediate post-1991 expansion of the banking sector gave Kazakhstan a large number of poorly regulated and fundamentally unsound banks. The initial period of almost reckless expansion lasted until 1995, when Grigory Marchenko, then deputy chairman of the National Bank of Kazakhstan (NBK, the central bank), introduced a consolidation programme. All banks had to adopt international banking standards, including the risk-weighted 8% capital-adequacy ratio set by the Bank for International Settlements (BIS). The scheme has cut the number of banks in Kazakhstan from 130 at the end of 1995 to 34 banks operating with licences issued by the Financial Supervision Agency (FSA) on January 1st 2006. Three domestic banks now dominate the sector: Kazkommertsbank, a privately owned commercial bank, Turan-Alem Bank, a merger of failed state-owned banks dominating foreign exchange, and Halyk Bank, the state-owned savings bank that is being gradually privatised.

The rapid acceleration in real GDP growth from 2000 onwards has fuelled a credit boom, with second-tier banks! claims on the private sector nearly doubling in 2000 and 2001. Credit growth slowed somewhat in 2002 before accelerating again from 2003. By the end of May 2006 commercial bank lending to the non-state sector was just over Tenge3trn (US$25.4bn), up from just Tenge99bn in May 1998"which was a ratio of just 6% of GDP. In the past banks lent mostly to the oil and gas sector, but in 2004-05 consumer credit took off, as did mortgage lending. The rapid growth in credit has been financed with a sharp increase in banks! external borrowing and given rise to additional concerns over a possible deterioration in the quality of banks! loan portfolios.

Both the NBK and the FSA have therefore stepped in to impose some restraint on the banking sector. The NBK increased the reserve requirement for commercial banks as of July 1st 2006, and the FSA is restricting the ability of banks to take out short-term foreign-currency loans from abroad, as well as placing limits on the size of open foreign-exchange positions. At the end of 2005 commercial banks! external debt stock was US$14bn (25% of GDP), compared

Bank reforms induce sector consolidation

Rapid economic growth revitalises banking sector

Kazakhstan 33


with government and government-guaranteed external debt of just US$1.8bn (3.2% of GDP). The maturity structure of this debt was also worryingly short-term. Commercial banks had US$5.3bn in short-term external debt at the end of 2005, amounting to 38% of their external debt and to 76% of national short-term external debt.

One of the reasons for the need to borrow so heavily abroad is the lack of a deep deposit base that would allow the banks to expand their loan portfolios to take advantage of the growing economy. Although the deposit base is rising rapidly, it remains relatively small at around one-quarter of GDP. Total deposits, corporate and household, were worth under Tenge2trn by the end of April 2006"although this was rapid growth from Tenge834bn (US$6bn) two years earlier. Although the money supply is heavily dollarised, the population is putting more and more of its savings into local currency, an indication of growing confidence in the tenge. The proportion of corporate and household deposits in foreign currency at the end of April 2006 was 36%, down from 46% two years earlier. Nevertheless, households also probably have considerable amounts of US dollars in cash "under the mattress"; this is indirectly suggested by the fact that nearly two-thirds of deposits are still held by enterprises.

Other services

The services sector was neglected during the Soviet era and has grown rapidly from a low base. Much of the services sector is very small-scale, often one-person operations. Retail trade, for example, is largely made up of open markets and kiosks. One of the fastest-growing other services sectors is real estate, thanks to the oil-funded construction boom. As a largely cash sector, services tends to be understated by official statistics. In terms of financing, the move to a free market has not made conditions for the development of the sector much easier. Most financing for small-scale services comes from personal savings. Obtaining finance from banks is almost impossible. The services sector is particularly vulnerable to predatory officials, such as the police, the tax police and the traffic police. Lorry drivers often have to make numerous "road tax" payments when driving through Kazakhstan. Criminal gangs also frequently extort money from services companies. There is very little tourism, since the main cultural sights of Central Asia are found in Uzbekistan. Hotels cater mainly for business travellers, infrastructure is inadequate and travelling to Kazakhstan is very expensive.

The external sector

Trade in goods

For the foreseeable future Kazakhstan is set to run a large, structural trade surplus because of the expansion of the oil and gas sector. The reliance on one commodity, oil, does nevertheless mean that Kazakhstan!s balance of payments is vulnerable to commodity price fluctuations. Moreover, as Kazakhstan!s main exports are US dollar-denominated commodities, there is no significant

Services sector is largely informal

External sector is vulnerable to commodity prices

34 Kazakhstan


competitiveness gain from a devaluation. In 2005 crude oil and gas condensate accounted for 62% of export earnings, a ratio that is set to rise. However, for the moment the rate of oil production and exports is steadily rising and this will ensure a continued surplus unless there is a substantial correction in world oil prices. When oil export volumes were lower, Kazakhstan was much more vulnerable to price fluctuations. Indeed, before the oil boom, Kazakhstan also relied on base metals for a substantial amount of export earnings. When the prices of these commodities fell"as they did significantly in 1998 following the Asian financial crisis"export earnings declined by 15%.

The economy is highly import-intensive, as domestic manufacturers, crowded out by the oil and gas sector, cannot meet local demand for either capital or consumer goods. In many cases domestic producers cannot compete with imports on either price or quality. Owing to the country!s long, open borders, smuggled goods are widely available. Growing oil-sector investment and exploration is another significant factor in capital goods imports, although these costs are covered by foreign direct investment (FDI).

Developments since 1997 illustrate the volatility of Kazakhstan!s trade balance. In 1998 the trade deficit (fob-fob) nearly trebled, to US$801m (3.6% of GDP), from US$276m (1.2% of GDP) in 1997. The size of the trade deficit ballooned towards the end of 1998, as cheap Russian goods flooded the Kazakh market following the large devaluation of the Russian rouble in August, and the deficit reached 8% of GDP in the fourth quarter of 1998 alone. The government responded in April 1999 with a 30% nominal devaluation of the tenge, immediately slicing back the trade deficit. Rising global oil prices from the second quarter of 1999 and increased production by Western oil companies also helped to boost export revenue, leading to a 2% of GDP trade surplus for the year as a whole. As oil exports more than doubled in 2000 on the back of rising oil prices, the trade surplus rose sharply to 15% of GDP. After narrowing in 2001 to 3.6% of GDP, it widened again in 2002 to 10% of GDP. Thanks to increasing oil export volumes"and, since 2003, rising export prices"the trade surplus was 14% of GDP in 2003, and widened further to a post-independence record of over 18% of GDP in 2005, more than US$10bn in absolute terms.

Kazakhstan!s long and porous borders with Russia, the Kyrgyz Republic and Uzbekistan facilitate small-scale crossborder trade not captured by customs data. Most unrecorded imports are of non-food consumer goods, as well as second-hand cars. However, the proportion of unrecorded trade is becoming less significant in the overall trade figures as a result of the predominance of oil. In 2005, balance-of-payments adjustments for personal shopping were equal to just 1.2% of the value of exports basis, but in 2000 they had been equivalent to 5% of exports. Similarly, on the import side, the value of the net adjustment, taking into account personal shopping and valuation problems, was 3.2% of total imports, compared with 28% of imports in 2000.

Kazakhstan!s foreign investors are responsible for most export earnings. Foreign investors tend to earn higher prices for their oil exports than the state-owned oil company. As a result, although most exports still flow to former Soviet markets, their share is being eroded by increased oil exports to Western markets.

Oil revenue is lost to offshore havens

Unreported crossborder trade is extensive

Kazakhstan 35


Moreover, oil exports have been used as a channel for capital flight and tax evasion through transfer pricing"the practice of selling oil to "front" companies in Caribbean tax havens at below market prices. These front companies then sell the Kazakh oil to the end-consumer for a much higher price. The result is that Kazakhstan loses out on export earnings and tax revenue. To address this problem, Kazakh legislation allows the government to impose fines on exporters if their export prices are more than 10% below the world market price. Despite these measures"and despite the imposition of export quotas"Kazakhstan regularly has to import oil products to prevent domestic shortages, and until recently ran a deficit on refined products transactions.

A key problem facing Kazakhstan is that it is landlocked, leading to high export and import costs. In addition, important potential oil and gas export routes traverse the territory of two of Kazakhstan!s competitors in the global energy markets, Russia and Iran. The closest ports on the high seas are on the Russian and Georgian Black Sea coasts. Kazakh barges can enter the Black Sea through the Volga-Don canal, but this is a Russian sovereign waterway. Until 1997 there were persistent difficulties in negotiating oil transit through Russia, leading Kazakhstan to consider costly alternatives through Azerbaijan and Turkey, China, and Turkmenistan and Iran. Since then"even though minor disputes still occur"Russia appears to have decided to gain influence in Kazakhstan by facilitating the transit of oil and encouraging Russian firms to become involved in the Kazakh oil sector, rather than continuing to disrupt its exports.

In an attempt to establish solid trade relations with more promising partners, Kazakhstan aims to become a member of the World Trade Organisation (WTO) at the same time as Russia"in late 2006 or, more likely, in early 2007. Although Kazakhstan presses its case for WTO membership by claiming to adhere to the principles of an open market economy, the WTO has done no more than confirm its readiness to increase technical assistance to Kazakhstan. The caution of the WTO!s position reflects its view that the Kazakh government is disingenuous in claiming that the EU has recognised Kazakhstan as a country with a market economy"the EU in fact conferred the status of an open market economy on Kazakhstan exclusively within the framework of the US law on anti-dumping.

Invisibles and the current account

Kazakhstan!s current account is as volatile as its visible trade accounts. Between 1995 and 1998 Kazakhstan!s current-account deficit rose from 1.3% of GDP to 5.5% of GDP, at first because of the economic recovery and then as a result of a collapse in export commodity prices. The devaluation of the Russian rouble in August 1998 pushed the current-account deficit to nearly 11% of GDP in the fourth quarter of 1998 alone. The bulk of the current-account deficit in 1998 was made up of the deficit on visible trade. The devaluation caused a 14% year-on-year fall in imports of goods and services costs in 1999.

In 2000 exports of goods and services climbed by 51%, mostly owing to higher oil prices and export volumes, leading to a current-account surplus"the first

Oil export capacity increases

WTO membership could be distant

Current account swings back into deficit

36 Kazakhstan


since independence in 1991"equivalent to 3.7% of GDP. In 2001 the current account returned to deficit, as a small (2%) contraction in goods and services exports was compounded by an 18% increase in goods and services imports"attributable to the cost of construction work on major oilfield installations and oil-related services. In 2001-02 continuing high oil prices and rising export volumes led to a steady narrowing of the current-account deficit, and the persistence of these trends in subsequent years resulted in a current-account deficit of only 0.6% of GDP in 2003 and a surplus of 1.3% in 2004"only the second annual surplus since independence.

In 2005 the current-account balance swung back into deficit, driven by a sharp rise in invisibles debits. Several factors contributed to this increase, coinciding to push debits up on both the services and income accounts. Oil-sector projects are at a stage of intensive demand for services imports"to assist with construction, consultancy and geology"and at the same time several projects are now mature enough to reap dividends for their foreign investors, leading to a substantial increase in profit repatriation. Repatriated dividends and branch profits were worth US$3.6bn in 2005, more than double their level in 2004. Moreover, rapid growth in Kazakhstan!s private-sector external debt in 2005 also drove up the interest payable.

Capital flows and foreign debt

With the break-up of the Soviet Union, independent Kazakhstan was allocated US$2.6bn (3.9%) of Soviet debt under the debt allocation treaty signed in December 1991. Shortly thereafter, however, Kazakhstan accepted a "zero option", under which Russia accepted responsibility for Kazakhstan!s share of former Soviet debt, in return for which Kazakhstan relinquished all claims to former Soviet assets. Kazakhstan quickly acquired a significant external debt burden; however, Kazakhstan!s debt ratio of over 100% of total exports since 2000 is somewhat misleading, given that the country!s foreign debt consists mostly of intra-company loans from foreign oil companies to their subsidiaries. Any failure to repay such loans would result in debt write-offs by parent companies to their subsidiaries rather than arrears. Public-sector debt is also not currently a cause for concern. In 2000 Kazakhstan cleared its remaining US$407m in IMF debt, and the government has been increasingly reluctant to issue government guarantees. As a result, public-sector debt has fallen steadily since then.

Kazakhstan was the first former Soviet republic to tap international capital markets. Its first offering was a US$200m Eurobond in December 1996, with a three-year maturity offering and a 9.25% coupon"a 350-basis-point spread over US Treasury notes with a similar maturity. In September and November 1999 Kazakhstan was the first former Soviet republic to return to the capital markets following the Asian and Russian financial crises, with a US$275m five-year maturity Eurobond, with a 13.625% coupon"a costly 825 basis points over five-year US Treasury notes.

Portfolio inflows remain small, with Kazakhstan!s Eurobonds accounting for most of the country!s total external portfolio investment. Conversely,

Direct investment inflows are the highest in the CIS

Early years of independence bring new liabilities

Kazakhstan 37


Kazakhstan has attracted well over 80% of all FDI into Central Asia and about one-tenth of all FDI into the former communist bloc. According to the National Bank of Kazakhstan (NBK, the central bank), cumulative gross inflows of FDI up to end-2005 amounted to US$53.8bn, the largest in the Commonwealth of Independent States (CIS). At US$1,537, Kazakhstan!s FDI stock per head is the second-highest in the CIS, having been overtaken in 2004 by Azerbaijan (where FDI stock per head was US$1,892 in 2005). However, intra-company loans are not classified as FDI in Kazakhstan!s balance of payments, but as external debt. Their inclusion in the FDI stock numbers would make Kazakhstan the largest recipient of FDI according to all measures, given that the stock of intra-company loans has risen by nearly US$8bn since 2002"including an increase of US$5bn in 2004 alone.

Kazakhstan!s main foreign investors are oil companies, willing to brave difficult economic and political conditions because of Kazakhstan!s enormous natural resource wealth. FDI growth has been fuelled by the ongoing development of major hydrocarbons fields"most notably at the Kashagan offshore deposit. FDI rose sharply during 2001 because of the completion of the Caspian Pipeline Consortium (CPC) oil export pipeline, increased work at Karachaganak and Kashagan in the Caspian, investment by Hurricane Hydrocarbons (now PetroKazakhstan; Canada) at Kumkol, and China National Petroleum Company (CNPC) investment in Aktyubinskneftegaz"as well as the US$450m payment by Chevron (US) for 5% of Tengizchevroil (TCO) that had been agreed during 2000. In 2002 and 2003 annual FDI remained above US$2bn, and doubled in 2004 to over US$4bn. In 2005, however, FDI inflows fell sharply, to US$1.7bn. It is too early to tell whether this was the result of cyclical factors"oil investment tends to be "lumpy""or whether it marked a more permanent downturn in investor sentiment after repeated conflicts with the government in recent years.

Foreign reserves and the exchange rate

Kazakhstan!s liquidity position has strengthened markedly since independence, when the country had almost no foreign-exchange reserves. At the end of 1997 foreign-exchange reserves reached US$1.7bn, equivalent to 2.5 months of import cover of goods and services. The economic crisis in the second half of 1998, however, forced the NBK to sell foreign exchange, pushing reserves down to just over two months of import cover. Growing oil export volumes and improvements in the oil export price have allowed reserves to recover since their most recent low of US$1bn at the end of June 1999. By May 2006 foreign-exchange reserves were worth US$12.3bn, equal to nearly nine months of goods and services imports at January-April 2006 levels. The government also set up an oil windfall fund in 2000, the National Fund of the Republic of Kazakhstan (NFRK), to receive the large amount of hard-currency income stemming from higher oil exports; by end-May 2006 it held US$8.7bn. However, this cannot be used for import cover, only for budget support. The fund is supposed both to insulate the economy from a large and destabilising hard-currency inflow and also to act as a cushion for the future when oil revenue falls or stops.

Reserves position improves, but only gradually

38 Kazakhstan


By the standards of the former Soviet Union, the tenge has been a remarkably stable currency. It was introduced in November 1993 and appreciated in real terms until 1998. The maxi-devaluation of the Russian rouble in August 1998 and lower oil prices put the tenge under pressure and the authorities stopped supporting the currency in April 1999. The result was an immediate 30% nominal depreciation in the exchange rate, followed by further sharp falls in May and September. However, the appointment of a new government in November 1999, increased oil export earnings and a renewed IMF programme in December all helped to stabilise the nominal exchange rate. The currency underwent a modest nominal depreciation in 2001 and 2002 (by 3% and 4%, respectively), but sustained foreign-currency inflows and a weak US dollar have since led the tenge to appreciate steadily against that currency: by around 2.5% in both 2003 and 2005, and by a substantial 10% in 2004.

The tenge became fully convertible for current-account transactions when Kazakhstan accepted IMF Article VIII in July 1996. In practice, few problems had existed with convertibility since mid-1995. By 2007 the NBK plans to introduce full capital-account convertibility.

Tenge stabilisation masks beginnings of real appreciation

Kazakhstan 39


Regional overview

Membership of organisations

The CIS was established on December 8th 1991 by the Minsk Agreement signed by the heads of state of the Republic of Belarus, the Russian Federation and the Republic of Ukraine. The Agreement between the three republics sealed the end of the Soviet Union. The formal clause stating the dissolution of the Soviet Union was included in the subsequent treaty signed in Almaty, Kazakhstan, by all former Soviet republics except the Baltic states and Georgia. Azerbaijan initially refused to ratify the treaty, but by December 1993 both Georgia and Azerbaijan had joined the commonwealth. The CIS therefore includes all the former Soviet republics except the Baltic states.

The CIS sought to fill the institutional vacuum resulting from the disintegration of the Soviet Union. The main organ of the CIS is the Council of the Heads of State, the supreme body of the organisation; it is convened no less than twice a year. The Council co-ordinates the co-operation of the executive authorities of the states in economic, social and other spheres. The activities of the CIS are logistically supported by the Executive Committee, which acts as a secretariat and has its seat in Minsk, Belarus. The organisation also has an Inter-parliamentary Assembly. The perception of the CIS and its role varies considerably among the participating states. Those that have an alternative to Russian leadership and prospects for economic independence tend to favour a loose framework. States that are reliant on Russia are more inclined to want the CIS to be a close alliance. Belarus, as an exceptional case, follows a policy of closer integration with Russia.

The CIS introduced a certain order into post-Soviet affairs, and has served as a useful forum for discussion and "networking" of the former Soviet elites. However, the overall record of the CIS has been disappointing. Integration and levels of co-operation have lagged behind some initial expectations. Many members remain wary that a closer union could become the instrument of Russia!s post-imperial ambitions. Moreover, Russia has been reluctant"or unable"to bear the costs of a more ambitious reintegration process. The CIS has also been unable either to prevent or resolve numerous regional conflicts. On the economic front, the CIS has fallen short of the expectations of many of its members. After ten years of existence, the CIS has not implemented a functioning customs union or a free-trade area covering all member states.

In 1995 Belarus, Kazakhstan, the Kyrgyz Republic and Russia formed a Customs Union, which was joined by Tajikistan in 1999 and became the Eurasian Economic Community (Eurasec) in May 2001. Eurasec absorbed the Central Asian Co-operation Organisation (CACO) in January 2006. Both groupings had been mostly ineffective in promoting greater regional integration.

CACO dates back, in inception, to June 1990, when the five Central Asian Soviet Socialist Republics signed a treaty designed to regulate economic integration between themselves. Although by 1993 Turkmenistan was forging its

Commonwealth of Independent States

Central Asian Co-operation Organisation and Eurasec

40 Kazakhstan


own independent and neutral policy and Tajikistan was mired in civil war, the remaining republics formed a Central Asian Regional Union (CARU) in January 1994, designed to establish a common market and regional structures. Tajikistan joined at the beginning of 1998, and in July 1998 the name of the union was changed to the Central Asian Economic Community (CAEC). The terrorist bombings in Tashkent in February 1999, and incursions by radical Islamic groups into the region in 1999 and 2000, boosted security co-operation among the four member countries. This aspect was further emphasised in January 2002, when the union was renamed the Central Asian Co-operation Organisation (CACO). In May 2004, at Uzbekistan!s request, Russia was invited, and accepted, to join as a full member of the organisation.

With Russia!s inclusion, all the members of CACO except Uzbekistan were also members of Eurasec, the successor to the CIS customs union. This overlap was formally acknowledged in October 2005 when Uzbekistan applied to join Eurasec; simultaneously, the two organisations began a merger process that was completed in January 2006"at which point Uzbekistan was accepted into Eurasec, the merged body having retained this name. Armenia, Moldova and Ukraine have observer status.

The European Bank for Reconstruction and Development (EBRD) was set up in 1991 to help finance the development of central and eastern Europe after the fall of communism. By contrast with most other multilateral organisations involved in the region, the EBRD!s mandate compelled it to focus on the private sector, as it was allowed to commit no more than 40% of its funds to public-sector projects. It received an initial capital of Ecu10bn (US$12bn at 1991 average exchange rates), which was doubled in 1997. The EBRD initially found it difficult to carve out a niche for itself, and was in its early years beset by scandals and a leadership crisis. Although it recovered from these, in 1998 the Russian financial crisis resulted in heavy losses for the Bank. Russia has been the EBRD!s largest client, accounting for just over one-fifth of all funding in 1991-2002.

Over the past decade the EBRD has invested substantial sums in the region and has helped to encourage private-sector investors. The EBRD!s clientele has grown from just a handful of transition countries in the early 1990s to 27 countries today, with Yugoslavia (now Serbia and Montenegro) being added to the list of potential beneficiaries in January 2001. The EBRD has funded hundreds of projects, ranging from bank privatisation to road-building. By 2000 it had recovered from its 1998 losses, and by the end of that year had disbursed #12.1bn (US$11.5bn). Disbursements rose strongly in 2001-02, at an annual average of #2.4bn. The bank!s commitments have also risen robustly over the past three years, up from #2.67bn in 2000 to #3.89bn in 2002. This reflects the increase in the number of viable investments across the transition region, as well as the bank!s efforts to develop new business. If co-financing from other lenders and the private sector is added, in 1991-2002 the EBRD was involved in projects worth a total of #69bn.

The US has long wanted the EBRD to shift its focus further east from the more advanced countries of east-central Europe to the CIS and the Balkans. The east-central European countries are seen to have "graduated", to be able to rely on

European Bank for Reconstruction and

Development

Kazakhstan 41


private-sector finance and no longer to need the EBRD!s support. However, west European governments want the EBRD to stay engaged in central Europe and help these countries to prepare for EU accession. Whereas funding of the advanced EU accession candidates is to remain constant, at around #1bn per year, most new business will be directed to the CIS and the Balkans.

Initially a non-institutionalised multilateral forum for cold war East-West dialogue, the Conference for Security and Co-operation in Europe (CSCE) gradually expanded in aim and strengthened its organisational structure in the 1990s. Established in 1972, the CSCE served for almost 20 years as a convenient and flexible arrangement for easing cold war tensions. After the end of the cold war the role of the CSCE started to change quickly, and in December 1994 the conference was officially renamed the Organisation for Security and Co-operation in Europe (OSCE). With 55 member states, the OSCE is the only inclusive pan-European security organisation. Canada and the US are also members of the organisation.

The OSCE has played a key role in conflict prevention and resolution, as well as post-conflict reconstruction in Europe. Its activities embrace three dimensions: security, economy, and human rights. The OSCE is engaged in preventive diplomacy, arms control and confidence-building activities. It undertakes fact-finding and conciliation missions, and crisis management. The OSCE is a component of the European security architecture. It is a "regional arrangement" in the sense of Chapter VIII of the UN Charter, which gives it authority to try to resolve a conflict in the region before referring it to the UN Security Council. Since the early 1990s the OSCE has been heavily involved in the Balkans and the Transcaucasus.

The activities of the OSCE are performed by a web of specialised agencies. The High Commissioner on National Minorities, based in The Hague, is the primary source of "early warning", with responsibility for identifying ethnic tensions that might endanger peace. The Office for Democratic Institutions and Human Rights (ODIHR), based in Warsaw, focuses on promoting human rights, democracy and the rule of law. It monitors elections, assists at developing national electoral and legal institutions, promotes the development of non-governmental organisations (NGOs) and civil society, conducts meetings, seminars and special projects. The Office of the Representative on Freedom of the Media, based in Vienna, assesses the implementation of the member states! commitments concerning freedom of journalism, broadcasting and access to information.

The Shanghai Co-operation Organisation (SCO) was founded in April 1996 by China, Russia, Kazakhstan, the Kyrgyz Republic and Tajikistan as a forum for settling border disputes and boosting regional trade. Known then as the Shanghai Five, the group broadened its remit in 1999 after the incursions into Central Asia by the Islamic Movement of Uzbekistan (IMU). The five nations pledged to enhance security co-operation, and to work together in fighting international terrorism, the drugs trade, arms trafficking, illegal migration, separatism and religious extremism. Uzbekistan was given observer status at the group!s summit in 2000, when the members agreed to set up an anti-terrorism centre to counter the threat from the IMU and the Taliban. Uzbekistan

Organisation for Security and Co-operation in Europe

Shanghai Co-operation Organisation

42 Kazakhstan


became a full member at a summit in June 2001, when the forum changed its name to the SCO and approved a 26-point charter. Mongolia, Iran, Pakistan and India have observer status.

The SCO Council of Heads of State, chaired by a rotating presidency, meets annually to determine the priority areas and basic direction of the organisation!s activities. Other executive organs of the SCO include the Council of Heads of Government and the Council of Foreign Ministers. The SCO Secretariat was officially opened in 2004, and is based in Beijing, China. The anti-terrorism centre was originally due to be established in Bishkek (Kyrgyz Republic), but in 2003 the SCO decided to relocate this to Tashkent (Uzbekistan), where it opened in 2004.

Kazakhstan 43


Appendices

Sources of information

Kazakh statistical data are published predominantly in Russian, with English data tending to be less detailed and less timely. The Statistics Agency of the Republic of Kazakhstan (SARK) has increased the coverage of data available on its website, and publishes a monthly bulletin with leading macroeconomic indicators. However, as with the agency!s annual Statistical Yearbook of Kazakhstan, there is little in the way of explanation accompanying the data. The National Bank of Kazakhstan (NBK, the central bank) also has a monthly bulletin, giving a detailed account of monetary indicators.

The other main source of data on Kazakhstan is the IMF!s International Financial Statistics and its annual economic review of the country, although these data are sometimes inconsistent and often out-of-date. World Bank data are reliable, but generally rather dated. The data published by SARK are also distributed by the Interstate Statistical Committee of the Commonwealth of Independent States (CIS) in Minsk. The European Bank for Reconstruction and Development (EBRD) also publishes some Kazakh data, but at irregular intervals and usually with some time-lag. Few of the above data sources match each other, probably because although they begin with SARK and NBK figures, they rework them in different ways.

EBRD, Transition Report (annual)

IMF, Kazakhstan (various annual reviews); International Financial Statistics

UN Development Programme, Human Development Report

World Bank, World Tables; Trends in Developing Economies; Global Development Finance; Statistical Handbook: States of the Former USSR (now no longer published)

The London-based Royal Institute of International Affairs (RIIA) has several publications relating to Kazakhstan and Central Asia as part of its Russia and Eurasia programme. A growing body of work exists on oil-related issues, including reports from the James A Baker III Institute for Public Policy Research at Rice University. The US-based organisation Human Rights Watch also monitors developments in Central Asia.

Robert Legvold (ed), Thinking Strategically : The Major Powers, Kazakhstan, and the Central Asian Nexus, MIT Press, 2003

Sally N Cummings, Kazakhstan: Power and the Elite, I B Tauris, 2002

Sally N Cummings, Kazakhstan: Centre-Periphery Relations, Royal Institute of International Affairs, 2001

Alexandra George, Journey into Kazakhstan: The True Face of the Nazarbayev Regime, University Press of America, 2001

National statistical sources

International statistical sources

Selected bibliography

44 Kazakhstan


Michael Glantz (ed), Creeping Environmental Problems and Sustainable Development in the Aral Sea Basin, Cambridge University Press, 1999

Karen Dawisha and Bruce Parrott (eds), Conflict, Cleavage and Change in Central Asia and the Caucasus, Cambridge University Press, 1997

Richard Pomfret, The Economies of Central Asia, Princeton, New Jersey, 1995

Martha Brill Olcott, The Kazakhs, Hoover Institution Press, Stanford, 1987

Statistics Agency of the Republic of Kazakhstan (SARK), http://www.stat.kz/

National Bank of Kazakhstan, http://www.nationalbank.kz/

Ministry of Finance of the Republic of Kazakhstan, http://mf.minfin.kz/

US Department of Commerce Business Information Service for the Newly Independent States (BISNIS), http://www.bisnis.doc.gov/bisnis/country/Kazakhstan.htm

Official homepage of Kazakhstan, http://www.president.kz

United Nations Development Programme (UNDP), http://www.undp.kz/

Foreign Investors! Council, http://www.fic.kz/index.php

Energy Information Administration, http://www.eia.doe.gov/cabs/kazak.html

Reference tables Population (Jan 1st)

2001 2002 2003 2004 2005Total population (�000) 14,851 14,867 14,951 15,075 15,219 Urban 8,390 8,418 8,479 8,615 8,697 Rural 6,461 6,449 6,473 6,460 6,523

Age ('000) 0-15 3,609 3,499 4,065 4,013 �15-65 9,476 9,604 9,318 9,489 �65+ 1,766 1,763 1,568 1,573 �Life expectancy at birth (years) 66 66 66 66 � Males 61 61 61 61 � Females 71 72 72 72 �Births & deaths (per 1,000 population) Births 14.8 15.3 16.3 18.2 18.4Deaths 10.0 10.0 10.4 10.1 10.4 Infant mortality rate (per 1,000 births) 19.3 17.0 15.7 14.5 15.2

Net migration (% change) -5.9 -4.2 -8.3 2.8 22.7


Selected websites

Kazakhstan 45


Labour force (�000 unless otherwise indicated)

2001 2002 2003 2004 2005Total employment incl others 6,699 6,709 6,985 7,182 7,244 Self-employed 2,836 2,679 2,756 2,712 2,614Agriculture 2,366 2,367 2,447 2,388 n/aIndustry 830 824 855 870 n/aConstruction 264 268 330 381 n/aTransport & communications 506 504 504 520 n/aTrade & catering 1,061 1,064 1,085 1,141 n/aTotal unemployment (ILO methodology) 780 691 672 659 639 % of labour force 10.4 9.3 8.8 8.4 8.1Registered unemployed 216 194 143 118 94Total labour force 7,479 7,400 7,657 7,841 7,884

Note: Sectoral data for 2001 do not adequately capture the self-employed or workers in small enterprises.

Sources: IMF, Republic of Kazakhstan: Selected Issues and Statistical Appendix, 2001; International Financial Statistics; Statistics Agency of the Republic of Kazakhstan.

Energy production 2001 2002 2003 2004 2005Oil (m t/y) 39.7 47.2 51.4 59.4 61.9 Oil (�000 b/d)a 797 949 1,032 1,193 1,243

Gas (bn cu metres) 11.6 13.1 16.2 21.9 25.2Electricity (bn kwh) 55.3 58.5 63.7 66.8 67.8

Coal (bn tonnes) 73.3 70.6 80.5 82.9 81.9

Note. Oil includes gas condensate. Gas includes associated gas from 2003.

a Economist Intelligence Unit calculation.


46 Kazakhstan


State budget (Tenge m unless otherwise indicated)

2001 2002 2003 2004 2005Revenue 733,660 807,852 1,004,566 1,286,734 2,098,511Tax revenue 635,792 752,785 947,251 1,186,137 1,998,314 Corporate tax 169,048 209,054 272,632 382,814 834,332 Income tax 68,574 77,381 93,281 98,535 122,999 Social tax 124,284 133,852 157,676 165,995 197,300 Value-added tax 159,913 175,936 231,338 242,955 343,926 Excises 21,830 25,443 26,986 29,913 33,416Non-tax revenue 72,505 45,572 44,813 81,500 66,016Other revenue 25,363 9,495 12,502 19,096 34,182Grants 234 � � � �Expenditure 726,016 788,403 971,959 1,240,186 1,946,128 General government services 50,772 45,566 63,958 83,315 103,786 Defence 32,481 37,710 47,463 58,011 78,663 Law & order 64,319 77,742 91,550 118,564 152,904 Education 106,419 121,145 148,941 190,748 256,935 Health 62,323 71,119 89,757 131,184 185,456 Social welfare 186,715 201,415 239,230 272,333 345,356 Housing 30,454 24,728 33,986 67,558 118,326 Culture, sport & leisure 18,076 22,831 33,788 43,948 57,076 Utilities 5,500 7,419 8,486 21,319 24,839 Agriculture & the environment 23,168 28,769 45,490 64,520 64,560 Industry 4,771 5,463 3,865 1,567 5,215 Transport & communications 44,212 57,425 81,235 101,588 119,476 Other expenditure 59,042 48,135 48,773 50,561 403,192Debt-servicing 37,764 38,936 35,437 34,970 30,344Net financial operations � 13,234 55,034 48,024 98,481

Net lending 20,875 19,220 23,757 17,221 7,239Balance -12,997 -13,006 -46,183 -18,697 46,662 % of GDP -0.4 0.2 -0.9 -0.2 0.6

Note. Some totals may not sum owing to rounding.

Source: Ministry of Finance.

Money supply (Tenge bn unless otherwise indicated; end-period)

2001 2002 2003 2004 2005

Money (M1) incl others 270.0 382.0 479.0 755.3 942.8

% change, year on year 14.3 41.5 25.4 57.7 24.8

Quasi-money 286.6 341.9 458.8 832.8 1,038.4

Money (M2) 556.6 723.9 937.8 1,588.1 1,981.2



Kazakhstan 47


Interest rates (%; period averages unless otherwise indicated)

2001 2002 2003 2004 2005

Lending interest rate (%) 5.6 5.3 5.3 5.6 5.6

Deposit interest rate (%) 5.6 5.2 3.9 2.7 2.5

Money-market interest rate (%) 5.8 5.9 5.2 4.0 2.2

Source: IMF, International Financial Statistics.

Gross domestic product (market prices)

2001 2002 2003 2004 2005

Total (US$ bn) At current prices 22.2 24.6 30.8 43.2 56.1

Total (Tenge bn) At current prices 3,251 3,776 4,612 5,870 7,453

At constant (1994) prices 503 551 601 657 719


Per head At current prices (US$) 1,492 1,657 2,062 2,862 3,685

At constant (1994) prices (Tenge) 33,843 37,082 40,171 43,583 47,227



Nominal gross domestic product by expenditure (Tenge bn at current prices where series are indicated; otherwise % of total)

2000 2001 2002 2003 2004

Private consumption 1,609.0 1,882.5 2,061.8 2,512.8 3,142.5

61.9 57.9 54.6 54.5 53.5

Government consumption 314.0 436.0 438.4 519.2 681.8

12.1 13.4 11.6 11.3 11.6

Gross fixed investment 450.3 771.4 907.1 1,062.7 1,472.4

17.3 23.7 24.0 23.0 25.1

Stockbuilding 31.5 195.1 370.8 269.6 60.6

1.2 6.0 9.8 5.8 1.0

Exports of goods & services 1,471.6 1,491.9 1,774.5 2,233.0 3,065.8

56.6 45.9 47.0 48.4 52.2

Imports of goods & services 1,276.5 1,526.3 1,776.4 1,985.3 2,553.0

49.1 47.0 47.0 43.0 43.5

GDP 2,599.9 3,250.6 3,776.3 4,612.0 5,870.1


48 Kazakhstan


Real gross domestic product by expenditure (Tenge bn at constant 1994 prices where series are indicated; otherwise % change year on year)

2000 2001 2002 2003 2004

Private consumption 258.2 278.3 293.8 329.0 374.6

1.3 7.8 5.6 12.0 13.9

Government consumption 34.4 40.3 38.4 42.0 47.2

14.7 17.2 -4.7 9.4 12.4

Gross fixed investment 58.6 73.4 80.8 88.1 107.8

16.0 25.3 10.1 9.0 22.4

Stockbuilding 59.4 84.0 94.2 67.0 51.5

3.7a 5.6a 2.0 a -4.9a -2.6a

Exports of goods & services 198.7 195.2 229.8 246.3 273.0

28.7 -1.8 17.7 7.2 10.8

Imports of goods & services 167.6 168.6 185.7 171.7 197.1

26.1 0.6 10.1 -7.5 14.8

GDP 441.6 502.6 551.3 600.6 657.0

10.0 13.8 9.7 8.9 9.4

a Change as a percentage of GDP in the previous year.


Prices and earnings (% change, year on year)

2001 2002 2003 2004 2005

Consumer prices (av) 8.6 6.0 6.5 6.9 7.6

Average nominal wages 37.3 17.7 8.8 21.7 20.5

Average real wages 26.5 11.0 2.2 13.9 12.0


Main trading partners (% of total)

2001 2002 2003 2004 2005

Exports fob to: Switzerland 4.7 8.2 7.4 18.7 19.8

Italy 20.3 15.4 18.2 15.5 15.0

Russia 7.6 10.5 12.1 14.1 10.5

France 0.1 0.3 3.6 7.3 9.6

Imports cif from: Russia 45.4 39.3 39.2 37.7 38.0

Germany 7.7 9.0 10.1 8.2 7.5

China 2.7 4.8 20.7 5.9 7.2

US 5.5 7.1 5.7 4.4 6.9


Kazakhstan 49


Main composition of trade (US$ m; fob-cif)

2001 2002 2003 2004 2005

Exports fob Mineral products 5,015 5,923 8,386 13,663 20,553

Metals 2,075 2,233 2,580 3,818 4,428

Chemicals 432 485 774 804 919

Food products 432 388 516 603 668

Total exports incl others 8,647 9,709 12,901 20,093 27,849

Imports cif Machinery & equipment 2,609 2,791 3,581 5,496 7,600

Metals 891 974 1,249 1,917 2,551

Mineral products 891 844 999 1,662 2,325

Chemicals 891 714 999 1,662 1,996

Total imports incl others 6,363 6,491 8,327 12,781 17,353


Balance of payments, IMF series (US$ m)

2001 2002 2003 2004 2005

Goods: exports fob 8,928 10,027 13,233 20,603 28,301

Goods: imports fob -7,945 -8,040 -9,554 -13,818 -17,979

Trade balance 983 1,987 3,679 6,785 10,322

Services: credit 1,260 1,540 1,712 1,999 2,251

Services: debit -2,635 -3,538 -3,753 -5,026 -7,466

Income: credit 225 234 255 423 681

Income: debit -1,462 -1,361 -2,002 -3,238 -5,860

Current transfers: credit 394 426 279 353 809

Current transfers: debit -156 -312 -443 -841 -1,222

Current-account balance -1,390 -1,024 -273 455 -486

Capital-account balance -291 -185 -120 -28 -20

Direct investment in Kazakhstan 2,835 2,590 2,092 4,113 1,738

Direct investment abroad 26 -426 121 1,279 -17

Inward portfolio investment (incl bonds) 32 -183 182 674 1,108

Outward portfolio investment -1,349 -1,064 -2,073 -1,092 -1,000

Other investment assets 465 -1,117 -977 -4,462 -4,249

Other investment liabilities 606 1,559 3,405 4,043 7,202

Financial balance 2,614 1,359 2,750 4,556 4,782

Net errors & omissions -654 320 -932 -945 -1,991

Overall balance 385 535 1,534 3,999 -1,945

Financing (� indicates inflow)

Movement of reserves -412 -633 -1,821 -4,315 2,207


50 Kazakhstan


External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end)

1999 2000 2001 2002 2003

Public medium- & long-term 3,360 3,623 3,450 3,210 3,464

Private medium- & long-term 1,835 7,849 10,095 12,238 16,457

Total medium- & long-term debt 5,195 11,472 13,545 15,448 19,921

Official creditors 2,330 2,239 2,156 2,300 2,615

Bilateral 850 757 644 653 845

Multilateral 1,480 1,482 1,512 1,647 1,770

Private creditors 2,865 9,233 11,389 13,148 17,306

Short-term debt 474 961 1,342 1,842 2,833

Interest arrears 108 0 0 0 0

Use of IMF credit 460 0 0 0 0

Total external debt 6,129 12,433 14,887 17,290 22,754

Principal repayments 1,079 2,595 2,623 3,388 4,509

Interest payments 284 775 731 719 794

Short-term debt 19 51 46 53 70

Total debt service 1,363 3,370 3,354 4,107 5,302

Ratios (%) Total external debt/GDP 36.3 68.0 67.2 70.2 73.8

Debt-service ratio, paida 19.2 31.8 31.7 34.2 34.5

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves (US$ m; end-period)

2001 2002 2003 2004 2005

Total reserves incl gold 2,507.9 3,140.8 4,962.1 9,276.7 7,069.7

Total international reserves excl gold 1,997.2 2,555.3 4,236.2 8,473.1 6,084.2

Gold, national valuation 510.7 585.6 725.9 803.6 985.5


Exchange rates (Tenge per unit of currency unless otherwise indicated; annual averages)

2001 2002 2003 2004 2005

US$ 146.7 153.3 149.6 136.0 132.9

£ 211.2 229.7 244.2 249.1 241.6

� 131.4 144.8 169.4 169.2 165.4

Rb 5.03 4.89 4.87 4.72 4.70

Rmb 17.7 18.5 18.1 16.4 16.2

¥ 1.21 1.22 1.29 1.26 1.21


Editors: Dafne Ter-Sakarian (editor); Stuart Hensel (consulting editor) Editorial closing date: July 4th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

Documents

Kazakhstan - International University of JapanCountry Profile 2006 Kazakhstan This Country Profile is a reference work, analysing the country™s history, politics, infrastructure