How Kazakhstan Is Trying to Reform Itself to Become a Regional Economic Hub

_ Ainur Akhmatova. Astana, 16 April 2018. Published for debate.

Among post-Soviet states, Kazakhstan was on the leading edge of reforms in the late 1990s and early 2000s. Thereafter, the reform process stalled, but with new top-down initiatives announced in 2015, it seems that a new wave of structural reforms is slowly transforming the country. These reforms take into account trans-Eurasian opportunities advanced by China, but also the need to offset the country’s oil dependence with a growing services sector. Several sectors are currently testing modernizing strategies to reduce oil dependence, develop transport hub capacities, increase financial intermediation, and improve the business climate. Can Kazakhstan become the “hub of Eurasian integration” it has long—and loudly—proclaimed itself to be?

Reducing Dependence On Oil

Kazakhstan’s difficult decade that began in 2009 with the abrupt fall of oil prices may well be coming to an end: the government budget projects 4-percent growth in 2018, even with a base oil price of US$55 per barrel.

Reducing Kazakhstan’s financial dependence on oil is a particularly slow process. The country is still reliant on its oil and gas sector but this reliance has somewhat fallen in recent years. In GDP composition, the share occupied by the energy and mining sector has fallen from its peak of 19.5 percent in 2010 to 13.3 percent in 2017 (Committee of Statistics of Kazakhstan).

In a more accurate calculation that estimates the oil and gas sector’s valued added in production, processing, and works and services (primary, secondary, and tertiary sectors), the oil sector’s share of GDP likewise seems to be declining, falling from 26 percent in 2012 to 18.2 percent in 2016 (Committee of Statistics of Kazakhstan).

These economic transformations were made possible, among others, by rapid public investments to support economic diversification, which was rendered in the decade starting 2008. In 2015, Kazakhstani President Nursultan Nazarbayev stated that almost US$20 billion had been allocated to supporting jobs, undertaking repair, and maintaining roads, cities, and rural areas since 2009.

Becoming a Transport Hub

Growing connectivity across the Eurasian continent may present new opportunities for Kazakhstan. As a member of the Eurasian Economic Union, a key partner in China’s Belt and Road Initiative, and a “good neighbor” in a vast region that encompasses India, Iran, Pakistan, and the Middle East, Kazakhstan has been emphasizing large-scale infrastructural development for the past three years.

As a member of the Eurasian Economic Union, a key partner in China’s Belt and Road Initiative, and a “good neighbor” in a vast region that encompasses India, Iran, Pakistan, and the Middle East, Kazakhstan has been emphasizing large-scale infrastructural development for the past three years.

Infrastructure have been taking off. Nearly 3,000 kilometers (1,865 miles) of road have been laid for Kazakhstan’s section of the International Corridor Western Europe-Western China” highway. More than 1,000 kilometers (620 miles) of new railways have been constructed, including the railway corridor “Kazakhstan-Turkmenistan-Iran,” which connects the countries of Central Asia with the Persian Gulf and the Bandar-Abbas port in southern Iran. The land port “Khorgos—Eastern Gate” is being actively developed on the border with China, the port of Aktau on the Caspian Sea has been modernized and expanded, and a new port has been established at Kuryk, further to the south.

All in all, the length of roads in public use increased by over 7,000 km (4,350 miles) between 2003 and 2016.

The length of railways (including the railways of other countries on the territory of Kazakhstan and Kazakhstani railways that pass through the territory of other states) increased by over 1,450 km (900 miles) in the same period:

To reinforce its critical role in the new Eurasian Land Bridge, Kazakhstan has contracted with the Dubai-based logistics group DP World to develop its free economic zone, “Khorgos—Eastern Gate,” which processed 350,500 loads of TEU (twenty-foot equivalent unit) between 2015 and 2017. Kazakhstan offers transport links and logistics support that reduce the cost and time of cargo transportation from north to south and from east to west. Indeed, it now takes just 10 days to transport cargo from the port of Lianyungang in China to St. Petersburg in Russia, according to one estimate.

Increasing Financial Intermediation and Relaunching a Privatization Wave

Although Kazakhstan’s economy is growing steadily, the difficulties facing the country’s banking and financial sectors have not yet been overcome. In the 2000s, the financial sector was successful and banking assets amounted to almost 100 percent of GDP—but these successes were tarnished by the economic crises of 2007-08 and then 2014.

Following the crisis of 2007-08 and reduced foreign demand for Kazakhstan’s assets, stocks, and bonds, the country’s banks and other financial institutions found themselves with reduced access to the global market. To address this issue, the Astana International Financial Center (AIFC) was launched on January 1, 2018, with the goal of stimulating investment in the region, developing regional capital markets, and forging channels of communication with international capital markets.

The AIFC is a unique institution in post-Soviet space in that it offers extremely straightforward tax, visa and labor regimes, including tax exemptions until 2065, free flow of capital, ultra-modern infrastructure, and a special visa regime for foreign citizens. Based on the extraterritoriality principle, the AIFC functions on the norms of British law, with legal proceedings in English. Its International Arbitration Center will operate to resolve the disputes that arise. Located on the territory of the Astana Expo 2017, close to a future Center for Green Technologies which will operate at the Ministry of Energy as well as to the International IT startup hub responsible for the Digital Kazakhstan program, the AIFC will also focus on such promising areas as Islamic finance, green finance, and new financial technologies (bitcoin). There are also plans to create an “Expat Center,” which will ensure favorable conditions for the arrival and integration of foreign employees of the AIFC and their family members.

In the authorities’ vision, the AIFC stock exchange will be the main venue for the “second wave” of privatization. At the end of 2015, Kazakhstan announced a new privatization plan that seeks to reduce state ownership of the national economy from more than 40 percent to around 15 percent, the Organization of Economic Cooperation and Development (OECD) standard. A total of 877 companies are included in the Complex Privatization Plan for 2016-2020 (including 268 assets of the state-owned holdings) and the progress of privatization can be tracked on the register website.

Inspired by the Singaporean example, the government has introduced a so-called “yellow pages” rule, namely the law “On the issues of limitation of government participation in entrepreneurial activity.” Signed in 2015, it forbids the state to set up small enterprises (large companies are outside its remit). The law is designed to accelerate the privatization that began in 2016, giving state-owned companies a maximum of two years to get rid of non-core assets. Samruk-Kazyna, Kazakhstan’s sovereign wealth fund, is planning to sell stakes of up to 25 percent in Kazatomprom and Air Astana in public stock offerings at the newly established Astana Financial Center.

Improving Business Climate

In 2015, Kazakhstan commenced a longer-term transformation intended to have a more lasting effect on local entrepreneurs, industry, and infrastructure. Under the “Nurly Zhol” plan (a state infrastructure development program for 2015-2019 that pledges some US$16 billion from various sources, including the state budget, the National Fund, state-owned companies, and international financial institutes), Astana envisaged more spending to support local entrepreneurs, the banking system, and infrastructure development.

For this to be successful, the Kazakhstani authorities need to find ways to improve the business climate. The conditions for doing business have already improved significantly: in the World Bank “Doing Business” ratings, the country now ranks 36th out of 190 states and, alongside Russia, has the best indicators among post-Soviet states. On some metrics, Kazakhstan outperforms not only post-Soviet countries, but also many developed countries. For instance, Kazakhstan is ranked first in the world for minority investors’ protections and takes sixth place for enforcing contracts.

Yet many enhancements are still needed. In 2017, entrepreneurship and investment legislation evolved, with the reduction of regulation and costs for business. Requirements for the verification of small and medium-size businesses were reduced by almost 60 percent and planned inspections by the tax authorities by 40 percent. The number of licenses and permits necessary to operate a business was reduced by more than three times. Bureaucracy is further being reduced through the E-government web portal, which makes public services available online.

New legal reforms are on their way. A new Tax Code has been drafted to protect the interests of taxpayers and encourage subsoil users. A new Code on subsoil and subsoil use, based on the “first come, first served” principle, will introduce an international system for calculating the reserves and provide free access to geological information. A new Customs Code has been drafted that allows for declarations to be filed electronically. In addition, a bill has been developed to better regulate free economic and industrial zones.

In addition, Kazakhstan is working to develop English-language services for investors. Eventually, the country’s executive bodies should be able to respond to entrepreneurs’ requests in English within ten working days.

What Future for Kazakhstan’s Economic Ambitions?

Can Kazakhstan really become a second Dubai or Singapore? The country has been attempting to play the role of the regional hub since its independence and has always considered itself an actor critical to regional stability. Astana thus hopes that its ongoing efforts to implement structural reforms will not go unnoticed. These reforms are designed to reduce not only Kazakhstan’s dependence on oil, but also the state’s role in the economy—through privatization and deregulation, stimulation of the development of the private sector, technological renewal, and digitization. Along with the Kazakhstan 2050 Strategy, the goal of joining the OECD, and five key institutional reforms, the authorities seek to bring about long-term cultural, institutional, and social transformations. Yet for the moment, while economic changes are indeed in process, political transformations remain a long way down the authorities’ agenda.

*The international presentation of the financial center “Astana” will be held on July 4-5 this year on the Expo 2017 grounds as part of the celebrations of Astana’s 20th year.

Source: http://voicesoncentralasia.org/

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