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Country Report April 2003

Kazakhstan

April 2003

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Kazakhstan at a glance: 2003-04

OVERVIEWThe president, Nursultan Nazarbayev, will remain in power over the forecastperiod, but his position is not unassailable. Unlike elsewhere in Central Asia,there is a visible undercurrent of elite dissatisfaction in Kazakhstan, in additionto which a re-emerging corruption scandal has the potential to underminepopular support for Mr Nazarbayev. In order to address these challenges,Mr Nazarbayev and his government will seek to ensure that the opposition ismarginalised in the 2004 parliamentary election, and will tighten mediacontrols to prevent further damaging disclosures. The government’s positionwill be strengthened by strong fiscal revenue from the oil sector, in particular,which will allow it to run slight fiscal deficits over the forecast period. Strongprivate consumption growth will sustain annual real GDP growth rates atabove 7% and 8% in 2003 and 2004, respectively, and average annual inflationabove 6.5%. Although oil prices will remain relatively high in 2003, strongimport demand will keep the current-account in deficit, widening in 2004 asoil prices fall to around US$20/barrel (Dated Brent blend).

Key changes from last month

Political outlook• The arrest of James Giffen, a businessman, in the US could spark yet

another round of political instability as the corruption scandal resurfaces.

Economic policy outlook• A small budget surplus in 2002 was evidence of strong tax revenue

performance. However, the tax base remains small and over-reliant on oil.Given that the government will seek to bolster popular support bymaintaining current expenditure levels, the Economist Intelligence Unitenvisages continued small deficits over the forecast period.

Economic forecast• Industrial output data show strong growth in consumer goods sectors,

leading us to revise upwards our forecast for private consumption growth inboth years of the forecast period. As a result, we now expect year-on-yearreal GDP growth to exceed 7% in 2003 and 8% in 2004.

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Kazakhstan 1

Country Report April 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Contents3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2003-047 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

15 Economic policy

20 The domestic economy22 Mining23 Agriculture23 Oil and gas28 Financial and other services

30 Foreign trade and payments

List of tables9 International assumptions summary11 Forecast summary16 State and republican budget targets, 200317 NBK refinancing rate18 Treasury-bill yields at auction19 Main economic policy indicators20 Sectoral growth22 Metals production, Jan-Feb 200323 Grain production and yields24 Oil and gas production29 Main macroeconomic indicators31 Commodity composition of exports, 200232 Current account33 Main external indicators

List of figures12 Gross domestic product12 Consumer price inflation19 Monetisation20 Industrial output, Jan-Feb22 Exchange-rate movements24 Tengizchevroil (TCO) production

Kazakhstan 3


Summary April 2003

The president, Nursultan Nazarbayev, will remain in power over the forecastperiod, but his position is not unassailable. Unlike elsewhere in Central Asia,there is a visible undercurrent of elite dissatisfaction in Kazakhstan, in additionto which a corruption scandal has the potential to undermine popular supportfor Mr Nazarbayev. In order to address these challenges, Mr Nazarbayev and hisgovernment will seek to ensure that the opposition is marginalised in the 2004parliamentary election, and will tighten media controls to prevent furtherdamaging disclosures. The government’s position will be strengthened bystrong fiscal revenue from the oil sector, in particular, which will allow it to runslight fiscal deficits over the forecast period. Strong private consumption growthwill sustain annual real GDP growth rates at above 7% and 8% in 2003 and2004, respectively, although this will also keep average annual inflation above6.5%. Although oil prices will remain relatively high in 2003, strong importdemand will keep the current-account in deficit, widening in 2004 as oil pricesfall to an average of around US$20/barrel for Dated Brent blend.

A US businessman, James Giffen, has been arrested in connection with aUS State Department investigation into oil deals made in the 1990s. SergeiDuvanov, a Kazakh journalist critical of Mr Nazarbayev’s administration, wassentenced to three and a half years for the rape of a minor, despite substantialinternational criticism of the trial. Mr Nazarbayev has been successful inco-opting the leadership of the Ak Zhol (Bright Path) opposition party.

The state budget posted a small surplus of 0.03% of GDP in 2002, largely owingto a significant improvement in tax collection. In particular, rising domesticdemand pushed up value-added tax (VAT) revenue. The IMF has announcedthat it will not be appointing a new resident representative, given Kazakhstan’smacroeconomic stability. Privatisation remains minimal, with the only sale ofnote being that of a 24.65% stake in Kazakhmys, a copper producer.

Real GDP grew by 9.5% in 2002, with industrial output growth of 9.8% andconstruction growth of 19.3%—chiefly a result of large-scale developmentprojects in the oil sector. Unemployment remains high, but the data present anincomplete picture of the labour market. End-year inflation was higher than thegovernment had anticipated, at 6.6%. Oil output was close to 1m barrels/day in2002, a target the government hopes to achieve in 2003.

The current-account deficit narrowed to 2.4% of GDP in 2002 on the back of astrong trade surplus. Foreign direct investment (FDI) fell compared to 2001, butremained above US$2bn. The structure and direction of trade in 2002 remainedlargely unchanged from the previous year.

Editors: Dafne Ter-Sakarian (editor); Stuart Hensel (consulting editor)Editorial closing date: April 4th 2003

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2003-04

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Kazakhstan


Political structure

Republic of Kazakhstan

On December 16th 1991 the Republic of Kazakhstan became the last of the former Sovietrepublics to declare its independence following the collapse of the Soviet Union. OnAugust 30th 1995 a new constitution was approved in a nationwide referendum. Thisgreatly increased the powers of the presidency and largely sidelined the legislature

Bicameral: 77-seat lower house (Majlis), 39-seat upper house (Senate)

Universal suffrage over the age of 18 for the presidential and Majlis elections; senators arepartly elected by the regions and partly appointed by the president

January 10th 1999 (presidential), October 8th 2002 (one-half of Senate), October 10th and26th 1999 (Majlis). Next elections: 2005 (one-half of Senate) 2004 (Majlis),2006 (presidential)

The president, Nursultan Nazarbayev, first elected in December 1991 and re-elected inJanuary 1999

Council of Ministers, headed by a prime minister, who is appointed by the president. Inpractice, Mr Nazarbayev exercises total control

Otan (Fatherland; pro-president party); the Kazakhstan Civic Party and the KazakhstanAgrarian Party (pro-president parties); Forum of Democratic Forces (main oppositionumbrella group), led by the United Democratic Party (UNP), which includes theRepublican People’s Party of Kazakhstan (RPPK, centrist; vehicle of opposition figureAkezhan Kazhegeldin); Democratic Choice of Kazakhstan (DCK, centrist; emerged in 2002from within the state apparatus); Ak Zhol (centrist; splinter group of the DCK);Communist Party of Kazakhstan (mainstream Soviet communists, somewhat reformed);Azat Republican Party (Kazakh nationalists); Lad (ethnic Russians)

Prime minister Imangaly TasmagambetovFirst deputy prime minister Aleksandr PavlovDeputy prime minister Baurzhan MukhamedzhanovDeputy prime minister Karim Masimov

Agriculture Akhmetzhan YesimovCulture & information Mukhtar Qul-MuhammedDefence Mukhtar AltynbayevEconomy & budget planning Kairat KelimbetovEducation & science Shamsha BerkimbayevaEnergy & mineral resources Vladimir ShkolnikEnvironmental protection Aitkul SamakovaFinance Zeinulla KakimzhanovForeign affairs Kasymzhomart TokayevIndustry & trade Mazhit YesenbayevInterior Kairbek SuleymenovJustice Georgy KimLabour & social protection Gulzhana KaragusovaTransport & communications Kazhmurat Nagmanov

Grigory Marchenko

Official name

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political parties

Council of Ministers

Central bank chairman

Kazakhstan 5


Economic structure

Annual indicators1998 a 1999 a 2000a 2001 a 2002 a

GDP at market prices (Tenge bn) 1,748 2,016 2,600 3,285 3,747GDP (US$ bn) 22.3 16.9 18.3 22.4 24.4

Real GDP growth (%) -1.9 2.7 9.8 13.2 9.5Consumer price inflation (av; %) 7.3 8.4 13.4 8.4 6.0Population (m) 15.0 14.9 14.8 14.8 14.8

Exports of goods fob (US$ m) 5,871 5,989 9,288 9,025 10,066Imports of goods fob (US$ m) -6,672 -5,645 -6,848 -7,850 -7,646

Current-account balance (US$ m) -1,225 -171 676 -1,240 -596Foreign-exchange reserves excl gold (US$ m) 1,461 1,479 1,594 1,997 2,551Total external debt (US$ bn) 6.1 6.1 6.7 6.9 b 6.4 b

Debt-service ratio, paid (%) 14.4 19.3 17.4 13.5 b 14.8 b

Exchange rate (av) Tenge:US$ 78.30 119.52 142.13 146.74 153.28

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002 % of total Components of gross domestic product 2000 % of totalAgriculture 7.9 Private consumption 64.0Industry 29.3 Public consumption 11.2

Construction 6.1 Gross fixed investment 13.6Trade 12.0 Change in stocks -0.2

Transport & communications 11.5 Net exports 11.5

Principal exports 2002 % of total Principal imports 2002 % of totalMineral products 61.0 Machinery & equipment 43.0Metals 23.0 Mineral products 13.0

Food products 5.0 Chemicals 15.0Chemicals 4.0 Metals 11.0Machinery 2.0 Food products 8.0

Main destinations of exports 2002 % of total Main origins of imports 2002 % of totalBermuda Islands 20.7 Russia 39.1Russia 15.7 Germany 8.7China 10.5 US 7.0

Commonwealth of Independent States 22.9 Commonwealth of Independent States 46.7EU 14.0 EU 17.0

6 Kazakhstan


Quarterly indicators2001 20021 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

General government finance (Tenge bn)Revenue 208 162 166 198 172 200 220 216Expenditure 125 198 175 250 144 212 202 249Balance 83 -36 -9 -51 29 -12 18 -33OutputGDP at current prices (US$ m) 4,553 5,404 6,622 5,795 5,087 5,888 7,028 6,425GDP at constant 1993 prices (Tenge bn) 107 121 139 130 118 130 153 143GDP at constant 1993 prices (% change, year on

year) 11.3 16.6 13.4 11.5 10.7 7.7 9.9 9.4Industrial production index (1997=100) 109 118 123 136 134 131 139 154Industrial production index (% change, year on

year) 17.5 22.0 23.3 23.5 22.9 11.0 12.5 12.9Employment, wages and pricesEmployment (‘000) 2,039 3,550 3,863 3,989 3,928 4,021 4,095 4,122Unemployment rate (% of the labour force) 3.4 3.3 2.9 2.9 10.8 9.0 8.2 2.0Monthly earnings (Tenge) 16,027 17,393 18,301 19,141 18,817 19,981 20,525 20,768Monthly earnings (% change, year on year) 17.9 19.7 30.4 25.2 17.4 14.9 12.2 8.5Consumer prices (1995=100) 107 108 109 111 113 114 116 118Consumer prices (% change, year on year) 9.1 9.7 8.3 7.0 5.7 5.5 6.4 6.3Producer prices (1995=100) 103 101 100 98 92 99 105 108Producer prices (% change, year on year) 7.9 5.7 -0.6 -9.4 -10.7 -1.9 4.5 10.2Financial indicatorsExchange rate Tenge:US$ (av) 145.2 146.0 147.1 148.7 151.7 152.8 154.0 154.6Exchange rate Tenge:US$ (end-period) 145.4 146.5 147.7 150.2 152.2 153.1 154.6 154.63-month money market rate (%; av) 5.5 4.9 5.0 5.3 5.2 - - -M1 (end-period; Tenge m) 250,231 265,654 284,285 270,009 244,108 262,332 297,722 381,935M1 (% change, year on year) 48.1 29.5 21.7 14.3 -2.4 -1.3 4.7 41.5M2 (end-period; Tenge m) 418,733 468,079 533,823 556,626 538,615 591,588 646,693 723,884M2 (% change, year on year) 60.8 47.1 48.4 40.2 28.6 26.4 21.1 30.0Sectoral trendsProductionCoal (m tonnes) 121.7 90.9 102.5 121.4 100.9 69.5 109.3 122.8Natural gas (bn cu metres) 154.6 150.5 122.5 142.9 152.1 155.2 125.5 181.0Crude petroleum (‘000 tonnes) 143.4 152.5 153.0 160.8 166.6 170.9 186.9 192.8Electricity (m kwh) 15,655 12,448 11,342 15,836 16,060 13,379 12,634 16,397Foreign trade (US$ m)Exports fob 2,105 2,356 2,112 2,075 1,987 2,068 2,765 2,891 CIS 632 750 652 - - - - -Imports cif 1,421 1,776 1,536 1,630 1,420 1,679 1,700 1,692 CIS 781 1,011 741 - - - - -Trade balance 684 580 576 445 567 390 1,065 1,199Foreign payments (US$ m)Merchandise trade balance (fob) 571 296 275 34 410 220 772 1,018Services balance -213 -374 -498 -446 -262 -519 -695 -671Income balance -218 -305 -274 -318 -156 -222 -277 -327Current-account balance 210 -306 -445 -699 32 -477 -168 17Reserves excl gold (end-period) 1,978 1,801 1,921 1,997 2,095 2,281 2,571 2,551

Sources: Kazakh Economic Trends; Agency of the Republic of Kazakhstan for Statistics (ARKS); IMF, International Financial Statistics; National Bank of Kazakhstan.

Kazakhstan 7


Outlook for 2003-04

Political outlook

The ongoing curtailment of civil and political liberties in Kazakhstan stronglysupports the Economist Intelligence Unit’s view that Nursultan Nazarbayev, thepresident, will become increasingly authoritarian over the forecast period andbeyond. Mr Nazarbayev and his government appear determined not merely toneutralise potential opposition, but to eliminate even those limitedopportunities for dissent that have been available until now. Harsh measuresagainst political activists will nevertheless be tempered by attempts to co-optany moderate political organisations that are prepared to work within theconfines of the current political framework—a calculated move that willhighlight and perpetuate divisions within the opposition camp.

The main risk to Mr Nazarbayev’s strong position is the resurfacing of a high-level corruption scandal. A US businessman, James Giffen, was arrested inMarch in connection to an investigation into alleged bribes to high-rankingKazakh officials in the 1990s, an event that could trigger another round ofpolitical unrest such as that seen in November 2001, when the government wasforced to disclose the existence of secret Swiss bank accounts. In order to preventthe scandal from gaining a high profile domestically, the government will tightenits grip on the media further. The fact that Sergei Duvanov—a journalist wellknown for his persistent investigations into corruption—has been charged withrape and imprisoned, suggests that the government is likely to take increasinglydrastic measures to deal with vocal critics.

The government seeks to prevent democratic forces from mounting a realchallenge in the 2004 parliamentary election. The government’s determinationto eradicate the Republican People’s Party of Kazakhstan (RPPK) and theDemocratic Choice of Kazakhstan (DCK) was evident in the electoralcommission’s numerous attempts to frustrate the participation of the twoparties’ candidates in recent by-elections in the regions of Pavlodar, Karagandaand Western Atyrau (in each case, the government’s preferred candidate won),and in further moves to embroil yet more of their leaders in corruptionscandals. Questions raised over possible ballot-rigging at the regional electionshave negative implications for the conduct of the 2004 parliamentary election.

The new law on political parties, introduced in July 2002, sets prohibitiveconditions for the registration and regional representation of political parties. Itwas designed to prevent the weaker and poorly funded opposition parties frombeing eligible to participate in the election to the Majlis (the lower house ofparliament) in 2004. The main elements of the legislation are a significantincrease, to 50,000, in the minimum party membership, and the requirementthat a party should have at least 7,000 affiliates in each of Kazakhstan’s14 regions and two main cities. The law has helped the government to weakenthe DCK and the RPPK. Despite the fragile alliance concluded in late 2002between the DCK and the RPPK, the latest political developments do notappear to have pushed them into closer co-operation. The divisions between

Domestic politics

Election watch

8 Kazakhstan


them will contribute to the government’s ability to sow discord among theopposition, and thus indirectly strengthen Mr Nazarbayev’s position.

Kazakhstan’s concerns about the possibility of international terrorism triggeringanother period of instability in Central Asia will remain the focus of itsstrategic priorities over the forecast period. To an extent the official focus onterrorism is a convenient way of deflecting attention away from thegovernment’s repression of political dissent. Despite considerable discontentwith the government and official corruption, radical Islam has little resonancein Kazakhstan, given the shallow roots of Kazakh Islam. Nonetheless, there isreal concern about the potential for regional instability arising from Islamistextremism. Kazakhstan has porous borders and radical groups are present inparts of Central Asia, including southern Kazakhstan. Although these groupshave found Kazakhstan to be a poor recruiting ground, strengthening domesticsecurity has become a policy priority—especially as it ties in with thegovernment’s increasingly illiberal political agenda. The government istherefore pursuing domestic military reform—which involves the formation ofspecialised anti-terrorist forces—as well as the intensification of bilateralmilitary and intelligence co-operation with the major powers, which involvestaking part in the anti-terrorist programmes of regional security organisations.

Economic policy outlook

The government’s tendency towards economic nationalism—mainly carried outthrough policies of import substitution—will intensify in 2003-04. This objectiveis being pursued through new legislation, such as the requirement that foreigninvestors put out to tender even small requests for goods and services—arequirement that was, even before the law came into force, implementedthrough various forms of indirect pressure on foreign investors. The governmentalso seeks to ensure that Kazakh citizens gradually replace the foreign personnelemployed by Western companies. In effect, the process of market liberalisationis on hold while the government attempts to build up local firms—particularlystate-owned firms and enterprises that are close to the government. Thesepolicies will ensure that there continue to be tensions with foreign investors asthe government seeks to improve the terms of Kazakhstan’s contracts.

A striking illustration of the deterioration of the investor climate is the new lawon foreign investment, signed by Mr Nazarbayev in January 2003, which is toreplace the 1994 law on the subject. The 2003 law denies new investorscontractual immunity against possible future changes in the republic’slegislation (the “grandfather clause”), thus removing the protection enshrined inthe earlier law. Foreign investors who signed their contracts before the newinvestment law comes into force will retain their immunity, but the legislationhas nonetheless been criticised by existing investors, who are already uneasyabout the worsening investment climate in Kazakhstan. Of particular concern isthe abrogation of foreign companies’ automatic right of appeal to internationalarbitration courts. The new law implies that, from now on, governmentapproval could be needed before such an appeal.

Policy trends

International relations

Kazakhstan 9


The consolidated state budget posted a small surplus of 0.03% of GDP in 2002.Tax collection was 7.2% above target in nominal terms, at Tenge565bn. This waslargely because revenue from value-added tax (VAT) was 19% over budget,which in turn can be attributed to the fact that real GDP growth was strongerthan envisaged in the budget plan. Moreover, the good performance on revenuewas accompanied by spending discipline, with expenditure (including lending)at 93% of the target for the year. We expect a continuation of the fiscal trendsseen in 2002, and envisage budget deficits for 2003-04 of below 1% of GDP.

Budgetary weaknesses nonetheless remain, most conspicuously in thegovernment’s reliance on receipts related to oil and on the continued use of off-budget spending. Although the fiscal tightening of 2001-02 was to an extentimpressive—particularly in view of a 14% year-on-year fall in average oil prices in2001—Kazakhstan’s strong revenue performance was in part attributable to thefact that lower oil prices were offset by higher oil export volumes. Low fiscaldeficits, moreover, carry a degree of long-term risk for Kazakhstan, as thestrength of government finances will reduce even further any incentive toreform or to conduct a more liberal economic policy. The failure to widen the taxbase is also a worry, since it perpetuates the budget’s reliance on the oil sector.

The National Bank of Kazakhstan (NBK, the central bank) has managed to keepthe tenge relatively stable and inflation on a general trend of slow decline. Thishas paved the way for a loosening of monetary policy, with the benchmarkinterest rate, the NBK’s refinancing rate, falling by 650 basis points over thecourse of 2001-02, to 7.5%. This monetary loosening contributed to a slightresurgence in inflation in late 2002, and we therefore expect the refinancingrate to come down only to 6.5% by the end of the forecast period.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004Real GDP growthWorld 2.1 2.9 3.1 3.9Russia 5.0 4.3 3.8 4.0EU 1.4 0.9 1.2 2.1Exchange rates¥:US$ 121.5 125.3 120.3 121.5US$:€ 0.896 0.946 1.115 1.105SDR:US$ 0.785 0.772 0.720 0.724

Financial indicators€ 3-month interbank rate 4.26 3.33 2.42 2.94US$ 3-month commercial paper rate 3.61 1.70 1.25 3.08

Commodity pricesOil (Brent; US$/b) 24.5 25.0 25.3 19.5Gold (US$/troy oz) 271.1 309.8 325.5 290.0Food, feedstuffs & beverages (% change in US$

terms) -1.9 12.7 5.8 3.0Industrial raw materials (% change in US$ terms) -9.7 2.2 11.7 3.2

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

International assumptions

Monetary policy

Fiscal policy

10 Kazakhstan


Many of the world’s largest economies have slowed sharply or even ground toa halt in recent months, and world demand is therefore likely to remainsluggish until the second half of 2003. From then onwards we expecteconomic conditions to improve, although the pace of improvement will begradual. By mid-2004 most major economies are forecast to return to a trendpace of economic growth. One factor contributing to this expectedimprovement in economic conditions is the removal of uncertainty caused bywar in Iraq and the consequent sharp decline in oil prices. In addition, weexpect further policy easing in some countries, and a gradual erosion of thecorporate and personal debt overhang that has been restricting consumptionand investment spending in much of the OECD. However, the recovery willtake far longer to materialise in some regions than in others. This weak paceof recovery in the OECD is expected to hold many emerging markets backuntil mid-2004.

Kazakhstan will be shielded from the effects of the global cooling in themedium term by relatively high oil prices and steady growth rates in theRussian economy—a key external driver of growth in Kazakhstan. The main riskto this outlook stems from the possibility that, once the Iraqi conflict is over, oilprices may fall back more rapidly than we currently expect. The high oil pricesof recent years have led to significant ramp-ups in investment and productionaround the world, significantly raising the risk of an oil supply glut beyond theforecast period.

Average annual real GDP growth remained high in 2002, at 9.5%, driven byyear-on-year industrial output growth of 9.8% and construction growth of19.3%. Industrial output data, moreover, shows that production in consumergoods sectors is experiencing strong growth, and this has led us to revise ourgrowth projections for private consumption over the forecast period. As aresult, we now expect real GDP growth of around 7% in 2003, rising to over 8%in 2004 as the global economy picks up and several major oil sector projectsbear fruit. The Caspian Pipeline Consortium (CPC) will be nearing completionof its first phase of expansion, design to push the pipeline’s capacity to anannual 38m tonnes. The massive Kashagan offshore field is also expected tocome on stream in 2004, pushing Kazakhstan’s oil production volumes up toaround 1.2m barrels/day. This will offset a substantial fall in world oil prices,mitigating the loss in export revenue. Furthermore, metals exports—with thesector’s productivity spurred by sales of state-owned stakes in various plants—will benefit from more favourable world price trends, thus helping to sustainnet exports’ contribution to GDP growth.

The end-year inflation rate in 2002 was within the government’s targetrange of 5-7%, but was nonetheless higher than the authorities had anticipated,and exceeded its level in 2001. The NBK had expected a rate in the order of6%, or even 5.8%, but in fact end-year inflation rose to 6.6%, from 6.4% in 2001.This makes the NBK’s inflation forecast of 5.9% in 2003 look overlyoptimistic. Large-scale hard-currency inflows into Kazakhstan have stalled therate of disinflation; continued strong economic growth, driven by foreign

Inflation

Economic growth

Kazakhstan 11


investment, will therefore keep average annual inflation above 6.5% over theforecast period.

The real effective exchange rate of the tenge weakened slightly in 2002,largely owing to an acceleration in the rate of nominal tenge depreciationagainst the US dollar to 4%, compared with a 3% depreciation in 2001. TheNBK plans to shift gradually to inflation-targeting, but with persistently highforeign-currency inflows the exchange rate will continue to be the main focusof the bank’s policies in 2003-04. With limited sterilisation instrumentsavailable, the central bank will continue to pursue a steady nominaldepreciation to cushion the real exchange rate against rising inflation andhard-currency inflows.

The current-account deficit halved in 2002, narrowing to US$596, or 2.4% ofGDP. High oil prices in 2003 will help to narrow the deficit further, but risingimport prices and our expectation of strong domestic demand have led us torevise our current-account projections for 2003-04 from a return to surplus tocontinued deficits of just under 2% of GDP. Kazakhstan’s current-accountsurplus will nonetheless be vulnerable to the risk of an oil price collapse, giventhat the large-scale development projects in the oil sector limit the scope forimport contraction in the event of a significant fall in export revenue.Moreover, the government’s economic policies—which are predicated onextensive state intervention—are also likely to add to Kazakhstan’s investmentrequirements, despite its attempts to encourage import substitution. The impactof investment on imports will be particularly evident in invisibles imports,since economic development is likely to draw in foreign contractors.

Forecast summary(% unless otherwise indicated)

2001a 2002 a 2003b 2004b

Real GDP growth 13.2 9.5 7.2 8.3

Industrial production growth 13.5 9.8 c 14.2 15.7Gross agricultural production growth 16.9 2.7 5.0 1.5

Unemployment rate (av) 2.9 8.8 c 8.6 8.5Consumer price inflation (av) 8.4 6.0 6.8 6.8

Consumer price inflation (year-end) 6.4 6.6 6.9 5.8Government balance (% of GDP) -0.4 0.0 -0.6 -0.3Exports of goods fob (US$ bn) 9.0 10.1 11.3 11.3

Imports of goods fob (US$ bn) 7.8 7.6 8.5 8.8Current-account balance (US$ bn) -1.2 -0.6 -0.5 -0.6

Current-account balance (% of GDP) -5.5 -2.4 -1.8 -1.9External debt (year-end; US$ bn) 6.9c 6.4 c 6.3 6.6Exchange rate Tenge:US$ (av) 146.7 153.3 154.6 156.3

Exchange rate Tenge:US$ (year-end) 150.2 154.6 154.9 157.6Exchange rate Tenge:Rb (av) 5.03 4.89 4.69 4.47

Exchange rate Tenge:Rb (year-end) 4.98 4.86 4.56 4.44

a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

Exchange rates

External sector

12 Kazakhstan


The political scene

A US businessman, James Giffen, who is accused of diverting over US$20m tooffshore bank accounts in the name of high-ranking Kazakh officials, wasarrested by the US authorities in March. This was the latest development in ascandal surrounding the 1996 sale of the state’s share in Tengizchevroil to a USoil company, Mobil (now part of ExxonMobil). The scandal is unlikely to haveserious repercussions for Kazakhstan’s relations with the US, given that theKazakh president, Nursultan Nazarbayev, has positioned himself as a supporterof the US-led “war on terror”, and has not been overly critical of the Iraqoffensive. Nonetheless, the persistence of this scandal is a concern, sincerepeated allegations of high-level corruption could gradually undermineMr Nazarbayev’s popular support. Mr Giffen’s arrest comes at a time when thegovernment has stepped up its efforts to silence public criticism, and istherefore likely to provoke the government into enforcing yet tighter controlsover the media.

The crackdown on dissent that began in November 2001 has continued withthe imprisonment of the dissident journalist Sergei Duvanov on January 28thon charges of rape (January 2003, pages 12-13). Despite official commitment togradual democratisation, the government has long made it clear that there arestrict limits to political debate in Kazakhstan. Mr Duvanov has been a vocalcritic of the government and its policies, and had repeatedly discussed high-level corruption in his articles.

Following months of well-publicised official harassment, the police arrestedMr Duvanov in October 2002, just before he was to travel to the US to give apresentation on the lack of media freedom in Kazakhstan. Even beforeproceedings had begun, Mr Nazarbayev made public comments aboutMr Duvanov that seemed to suggest a presumption of guilt. The authoritiesalso used the fact that the alleged victim was a minor to ensure that the trialwas largely held in private. The proceedings proved to be so heavily biasedagainst Mr Duvanov that he eventually abandoned his defence, dismissing hislawyers on January 23rd.

Sergei Duvanov is found guiltydespite international criticism

Corruption scandal couldresurface

Kazakhstan 13


Mr Duvanov was sentenced to just three and a half years in jail for raping aminor—a crime that in Kazakhstan carries a maximum term of 10 years. Sincethose found guilty of abusing minors normally receive much harsherpunishment, the reduced sentence could be seen as an attempt to minimiseforeign criticism of the affair, given that Mr Duvanov could be released rathersooner as a result either of good behaviour or of the annual presidentialamnesty. Such an interpretation further adds to the evidence suggesting that thecase was politically motivated. The US State Department criticised the Duvanovverdict, highlighting the lack of due process, and the Organisation for Securityand Co-operation in Europe (OSCE) called the trial seriously flawed.

The European Commission was also critical of the process, but the strongestreaction came from the European Parliament. On February 13th its deputiespassed a resolution denouncing the sentence against Mr Duvanov and recallingKazakhstan’s commitments on human rights made as part of its Partnershipand Co-operation Agreement (PCA) with the EU, signed in 1995. The EuropeanParliament asked that Mr Duvanov be released and that his case beindependently investigated. The resolution also called for investigations intothe cases of Mukhtar Ablyazov and Galymzhan Zhakiyanov, foundingmembers of the opposition Democratic Choice of Kazakhstan (DCK) who wereimprisoned in 2002. In addition, the European Parliament criticised the fact thattorture is widespread and not specifically defined as a crime in Kazakhstan’slegal code.

Kazakhstan’s Ministry of Foreign Affairs condemned the European Parliamentresolution as being inconsistent with the PCA—even though the EU has clearlystates that the PCA “provides a framework for broad-based relations withKazakhstan, based on democratic values, including political dialogue and therule of law”. Although the PCA is supposed to act as a “road map” forKazakhstan’s gradual convergence with the EU’s political and economic system,the agreement does not act as a strong enough incentive for reform. In thecontext of rising oil export revenue, Kazakhstan does not need the—in any case,very limited—financial assistance provided through the PCA. Nevertheless, thePCA remains of interest to Kazakhstan because it provides preferential access tothe EU market, which is the destination for most of Kazakhstan’s oil exports.

The international protests concerning the Duvanov case appear to havenonetheless led the Kazakh government to take some measures to quell itscritics. The government is officially engaged in a process of dialogue with theopposition, and Mr Nazarbayev has convened a session of the StandingCouncil for Democratisation and Civic Society—also known as the “permanentacting council”—which was founded in November 2002. The Standing Councilis chaired by a deputy prime minister, Baurzhan Mukhamedzhanov, andrepresents the opposition’s only official channel of expression, given thatopposition parties are poorly represented in parliament and that severalopposition groups—such as the DCK—are relatively new and therefore have noparliamentary representation at all.

Until February the Standing Council had had little visibility as a forum fordialogue between the government and the opposition. The harsh international

European Parliament asks forMr Duvanov’s release

External criticism has hadsome minor effect

14 Kazakhstan


criticism of the Duvanov trial, however, seemed to persuade the government tomake a conciliatory move towards the Council. As a result, the meeting onFebruary 28th resulted in an agreed statement of principles that Kazakhstanwill be a secular, law-governed democracy, and that the electoral system needsto be improved. Although the statement, which the veteran Kazakh humanrights activist Yevgeny Zhovtis helped to draft, will probably be of limitedvalue, it may nonetheless herald renewed efforts by the government to co-optmembers of the opposition.

Mr Nazarbayev has demonstrated a consistent ability to outmanoeuvre hisopponents and in particular to recover rapidly from setbacks. In JanuaryMr Nazarbayev appointed Uraz Dzhandosov—one of the founders of theopposition DCK movement, and a key member of the opposition—to become apresidential aide. Mr Dzhandosov has been the highest-ranking and mostsuccessful minister, after the former prime minister and exiled oppositionactivist Akezhan Kazhegeldin, to join the opposition. Mr Dzhandosov was apotentially dangerous defector, given his extensive government experience andinsider knowledge of the administration. He had been the head of the NationalBank of Kazakhstan (NBK, the central bank), a first deputy prime minister, thehead of the national grid company and a deputy prime minister before helpingto set up the DCK in November 2001 (January 2002, page 14). Mr Dzhandosovwas dismissed from the government immediately after forming the DCK, andsoon began to soften his opposition stance, leaving the DCK to set up the lessconfrontational Ak Zhol (Bright Path) party. Consequently, although his decisionto return to an official position is therefore a blow to the opposition, it will nothave come as a surprise.

The government campaign of harassment against the independent mediaduring 2002 drew considerable criticism, forcing the authorities to investigatesome of the cases involved (January 2003, page 13). In one case a televisionpresenter, Artur Platonov, was assaulted by three men in August after hecriticised the Almaty police on television. The three men were eventuallyarrested and turned out to be former policemen. They were given one-yearprison sentences by an Almaty court on November 27th.

In another case, the Kazakh authorities allowed two Canadian coroners to lookinto the death of Leila Baiseitova—the daughter of Lira Baiseitova, an employeeof the now closed opposition publication Delovoye Obozreniye Respublika(Republican Business Review). Ms Baiseitova died in suspicious circumstanceswhile in police custody in June, reportedly hanging herself with her owntrousers after being arrested for allegedly possessing drugs. The Canadiancoroners supported the official verdict of suicide, and also upheld officialreports that—contrary to claims by her family—she was a heroin user.

The Canadian coroners’ report has been criticised for relying on evidence andtestimony from the Kazakh authorities and for failing to exhumeMs Baiseitova’s body, as suggested by her mother. The widespread beliefamong opposition activists is that Ms Baiseitova was killed to punish hermother for her opposition to the government. Although there is no evidence tosupport such a claim—there have been no proven political killings in

Mr Nazarbayev retains theupper hand

Steps are taken to investigatemedia harassment

Kazakhstan 15


Kazakhstan since independence—it is nevertheless indicative of a worseningclimate of fear among opposition activists.

Although Kazakhstan has not voiced strong criticism of US operations in Iraq,the country has for the most part backed the Russian view on the crisis, andwould have preferred a second UN resolution authorising the use of forceagainst Iraq. Kazakhstan is in part following national interest on this matter,since the advent of war opens up the possibility that, if Saddam Hussein isspeedily removed from power, Iraq could become a serious competitor forWestern oil markets. In recent years Iraq has been formally producing1.5-2m barrels/day, yet with sanctions lifted and a stable situation this could riseto 3m b/d by 2005 and 6m b/d by 2012—compared with Kazakhstan’sexpectations for its own output of 3m b/d by 2015.

Kazakhstan has also supported Russia’s position on the division of theCaspian Sea, a strategy that has enabled the two countries to reach anagreement on dividing the northern offshore fields between them. Russiareached a similar agreement with Azerbaijan, and this progress may havespurred the two remaining states concerned, Iran and Turkmenistan, toconsider a more flexible approach. A working group of the five deputy foreignministers of the littoral states agreed a joint declaration about a possible newlegal convention for the sea on February 28th—the statement is rather vaguebut was the first hint of progress in the negotiations for some years. However,Kazakhstan and Russia may yet come into conflict over the issue as a result ofRussian statements to the effect that—whatever agreement is reached to dividethe sea—it opposes the construction of any oil and gas pipelines runningacross it. The Russian position would prevent Kazakhstan from building apipeline to Azerbaijan, and although such a project is not yet actively beingconsidered, Kazakhstan regards the Russian position as an unacceptable vetoon potential export routes.

Economic policy

The surge in world oil prices resulting from market apprehension over the Iraqcrisis has meant that Kazakhstan is unlikely to have any difficulty in meeting itsconsolidated state budget deficit target of Tenge80.2bn (US$518.5m; 2% of GDP)for 2003. In 2002, according to data from the Ministry of Finance, the statebudget posted a small surplus of 0.03% of GDP, compared with a deficit of0.4% of GDP in 2001. Excluding net lending, state revenue in 2003 is forecast atTenge855.9bn (20.8% of GDP), and spending is set at Tenge909.6bn (22.1% ofGDP). Revenue in 2003 could be far higher than expected, given that thegovernment’s budget projections are based on an oil price assumption of anaverage US$19/barrel for Dated Brent blend, and an average export price forKazakh crude of US$15.6/b. The Economist Intelligence Unit forecasts anaverage price for Brent of US$25.3/b in 2003—which assumes a sharp decline inprices in the aftermath of a swift US victory in Iraq, as prices are currently wellover US$30/b.

Kazakhstan supports Russianpositions, but with caveats

Budget deficit may come inlower than forecast

16 Kazakhstan


State and republican budget targets, 2003(Tenge m)

State (general) budget Republican (central) budgetRevenue & transfers 855,939 620,467 Tax revenue 793,873 506,721 Non-tax revenue 52,760 49,661 Income on capital assets 9,306 6,455 Transfers n/a 57,630

Expenditure & net lending 936,107 703,306 Net lending 26,489 24,770 Non-interest expenditure 909,618 678,536Balance -80,167 -82,840

Source: Ministry of Finance, Statistical Bulletin.

An IMF team visited Kazakhstan from February 20th to March 9th, andexpressed its approval of the government and the National Bank of Kazakhstan(NBK, the central bank) for conducting what has been the most sustained econ-omic reform programme in the Commonwealth of Independent States (CIS). Asa result of Kazakhstan’s policy advances, and of the low likelihood that thecountry will need to borrow from the IMF in the near future—even if there werea sudden downturn in oil prices—the Fund also announced that it would notsend a new resident representative to Kazakhstan in August when the currentone leaves. Instead, the IMF will continue to respond to requests for technicalassistance, and to maintain an office in the country manned by local staff.

Despite the praise bestowed on the authorities, the IMF nonetheless implicitlyhighlighted the dangers of “Dutch disease”, whereby oil-derived hard-currencyinflows lead to real exchange-rate appreciation, thus undermining the non-oilsector’s external competitiveness. Managing Kazakhstan’s growing oil wealthwas thus identified as the authorities’ primary task over the coming years, andthe IMF praised the role played by the National Fund of the Republic ofKazakhstan (NFRK) in mitigating exchange-rate pressures.

The IMF mission also stressed that, in order to ensure the competitiveness ofthe non-oil sector, the government would have to allow greater tradeliberalisation, accelerate structural reform and pursue further improvements inthe business climate—a conclusion that could be interpreted as tacit criticism ofthe stalling pace of reform in recent years. The government is reported to beworking on an industrial policy designed to ensure that Kazakhstan hasalternative sources of growth in place by 2015, when oil reserves are projectedto run out. However, so far there is little evidence of a consistent strategy. Thegovernment has not taken significant legislative measures to improve thebusiness environment—for example, by increasing bureaucratic transparencyand rationalising administrative procedures. In March the finance policeproposed several new business registration requirements—designed to helpthem to identify and eliminate fraudulent companies—that are at odds with thegovernment’s stated aim of simplifying the registration process.

The conflicting aims of state agencies are one symptom of Kazakhstan’s pooradministrative capacity, which is a major obstacle to reform and to an improvedbusiness environment for investors. Yet instead of pursuing deep-reaching

Policy advances remove theneed for an IMF representative

State intervention mayweaken domestic industry

Kazakhstan 17


administrative reform, the government has chosen to develop domesticindustries on the back of foreign investors—a strategy that is easier in the shortterm, but that carries long-term risks. The government is putting pressure on largeforeign investors to source more of their content locally, the aim being to makelocal companies strong enough to replace foreign investors. However, investorsare also under pressure to award contracts to favoured local firms, whether theyare genuinely able to compete with foreign rivals or not. This degree of stateintervention is unlikely to foster genuine competition among local firms, therebyraising doubts as to the domestic sector’s chances of development.

A further failure in terms of structural reform has been the lack of determinedoil sector privatisation—with the result that the Kazakhstan Stock Exchange(KSE) lacks liquidity largely because so few major oil stocks are traded. Instead,the most important recent privatisation was the sale of the remainingstate-owned stake in the copper producer Kazakhmys (see The domesticeconomy: mining). There appears to be little or no chance that the state-ownedoil company, Kazmunaigaz, will be even part-privatised. Furthermore, the draftland code is so restrictive that it does not truly introduce the concept offreehold into Kazakh law. As a result, there will be no functioning real estatemarket for some years to come. Not only can the state rescind the sale of land,it can do so at a confiscatory price. The maximum length of a lease is 49 yearsfor Kazakhs and ten years for foreigners.

The NBK’s sound monetary policy stance has successfully restrained inflationand encouraged the growth of the financial sector. However, the problem forthe NBK at present is that sustained strong economic growth is fuelling inflation(which would normally demand a tighter monetary stance) just when there aresignificant hard-currency inflows derived from oil revenue (which implies aneed to loosen monetary policy to prevent an over-appreciation of the tenge).A similar policy choice is faced in Russia, where the authorities have opted toprevent inflation rather than the real appreciation of the rouble—a choicedictated partly by the electoral cycle. The NBK, however, appears willing toallow inflation to accelerate to some extent, in order to erode real interest ratesslightly and thereby encourage domestic investment. As part of this strategy, theNBK is unlikely to raise its benchmark refinancing rate, currently at 7.5%, unlessthere is a marked rise in inflation.

NBK refinancing rate(%; end-period; 3-month maturity)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2001Annual rate 14.0 12.5 12.5 12.5 12.5 12.0 12.0 12.0 11.0 11.0 9.0 9.0Monthly rate 1.2 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9 0.9 0.8 0.8Real monthly rate 0.1 0.3 0.4 0.3 0.7 0.9 1.1 1.0 0.7 0.2 -0.2 -0.2Real annual ratea 6.5 4.1 3.4 3.0 3.4 3.5 4.1 4.3 3.5 4.0 2.4 3.02002Annual rate 9.0 9.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 7.5 7.5Monthly rate 0.8 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.6 0.6Real monthly rate 0.0 0.5 0.5 0.1 -0.2 0.1 0.1 1.0 0.6 0.1 -0.4 -0.7Real annual ratea 3.1 3.7 3.1 3.3 2.8 2.3 1.6 1.9 2.0 2.2 1.5 1.1

Privatisation still minimal, andland ownership limited

Monetary policy faces an oilproducer’s dilemma

18 Kazakhstan


NBK refinancing rate(%; end-period; 3-month maturity)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2003Annual rate 7.5 7.5 7.5 – – - - - - - - -Monthly rate 0.6 – – – – – – – – – – –Real monthly rate -0.4 – – – – – – – – – – –Real annual ratea 0.8 - - - - - - - - - - -

a Refinancing rate on a compound annual basis.

Sources: National Bank of Kazakhstan; Economist Intelligence Unit.

In order to sterilise rising hard-currency inflows, the NBK is increasing the issueof short-term notes. In 2002 the NBK nearly doubled the volume of short-termnotes issued to Tenge433.7bn (11.6% of GDP), compared with Tenge223.5bn (6.8%of GDP) in 2001. Although there has been a marked rise in credit to theenterprise sector, most issuances reflect the strong appetite of Kazakh banksand pension funds for low-risk government debt. The government aims toincrease the ratio of domestic to external debt, and as a result—despite a lowerthan expected budget deficit and healthy fiscal revenue—the overall issue oflonger-term government paper rose to Tenge1,107bn (29.6% of GDP) in 2002, upby 34.5% from Tenge823bn (25.1% of GDP) in 2001. However, most governmentpaper is generally of one year’s maturity.

Treasury-bill yields at auction(%)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2001All bonds & bills yield (annualised) 10.5 10.6 10.7 10.5 10.4 10.4 10.4 10.3 10.4 10.4 10.4 10.3Annual inflation 8.4 9.0 9.8 10.1 9.8 9.2 8.6 8.4 8.1 7.5 6.9 6.4Annualised real yield 2.1 1.6 0.9 0.4 0.6 1.2 1.8 1.9 2.3 2.9 3.5 3.9

2002All bonds & bills yield (annualised) 10.3 10.3 10.2 10.2 10.1 10.1 10.1 9.9 9.9 9.8 9.7 9.7Annual inflation 6.2 5.7 5.2 5.0 5.5 6.0 6.7 6.4 6.3 6.1 6.2 6.6Annualised real yield 4.1 4.6 5.0 5.2 4.6 4.1 3.3 3.6 3.6 3.7 3.4 3.02003All bonds & bills yield (annualised) 9.6 - - - - - - - - - - -Annual inflation 6.9 - - - - - - - - - - -Annualised real yield 2.7 - - - - - - - - - - -

Note. MEKKAM, short-term bills with maturities of three, six or 12 months; MEOKAM, medium-term bonds with a maturity of two years; MEIKAM,indexed bills with maturities of three, six, nine and 12 months.

Sources: Kazakhstan Economic Trends; National Bank of Kazakhstan.

The fast pace of economic growth and the accommodating monetary stance hashelped to cause significant growth in monetary aggregates. The monetary basegrew by 18.9% over the twelve months to end-2002, but still amounted to just5.6% of GDP. Growth in M3 (according to the NBK definition, which includescash in circulation, commercial banks’ cash and reserves, plus all deposits inlocal and convertible currency) was even stronger, at 32.8% year on year. M3 isthe broadest monetary aggregate and grew sharply because of rising hard-currency inflows.

Domestic debt is on the rise,but maturities remain short

Money supply is growing, butis still highly dollarised

Kazakhstan 19


Main economic policy indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

General budget revenue (Tenge m)2001 94,095 58,832 54,891 67,301 50,701 44,015 63,131 56,567 46,023 62,739 72,261 63,3372002 53,385 57,605 61,173 69,730 74,803 55,508 68,920 90,130 60,509 63,777 87,366 64,9402003 122,341 79,507 – – – – – – – – – –General budget expenditure (Tenge m)2001 22,687 48,217 53,790 50,939 62,910 83,789 61,971 54,729 58,136 59,691 73,544 116,4882002 27,417 47,488 68,729 67,135 66,567 78,603 66,224 63,559 72,128 69,101 71,917 107,9862003 46,130 76,314 – – – – – – – – – –General budget balance (Tenge m)2001 71,408 10,615 1,101 16,362 -12,209 -39,774 1,160 1,838 -12,113 3,048 -1,283 -53,1512002 25,968 10,117 -7,556 2,595 8,236 -23,095 2,696 26,571 -11,619 -5,324 15,449 -43,0462003 76,211 3,193 – – – – – – – – – –Exchange rate (Tenge:US$; av)2001 145.1 145.2 145.4 145.5 145.9 146.4 146.7 147.1 147.5 147.9 148.4 149.62002 151.1 151.8 152.1 152.5 152.9 153.1 153.5 154.1 154.4 154.4 154.3 155.12003 155.5 154.0 – – – – – – – – – –Real effective exchange-rate index (CPI-based; 1997=100)2000 69.8 70.2 70.6 71.0 71.0 71.1 70.9 70.2 69.7 70.2 71.0 71.22001 71.0 70.8 70.3 70.0 69.9 69.6 69.3 68.8 68.5 68.8 69.4 69.72002 69.4 – – – – – – – – – – –

Real effective exchange-rate index (PPI-based; 1997=100)2000 83.2 86.2 88.1 85.0 84.9 86.6 87.1 84.5 84.5 86.0 85.0 82.22001 77.6 78.0 78.6 80.7 82.8 82.2 83.2 84.4 85.6 87.1 85.6 83.82002 – – – – – – – – – – – –M2 (Tenge bn)2000 381 401 419 408 412 468 507 508 534 524 522 5572001 519 520 539 561 579 592 604 612 647 678 665 7242002 686 – – – – – – – – – – –

M2 (% change, year on year)2000 48.8 53.4 60.8 51.1 44.9 47.1 48.2 46.3 48.4 35.5 35.9 40.22001 36.4 29.7 28.6 37.4 40.5 26.4 19.2 20.5 21.1 29.4 27.3 30.02002 32.0 – – – – – – – – – – –

Notes. General budget expenditure data include net lending; data for 2000-01 include privatisation revenue. M2 is cash in circulation plusdeposits in tenge and convertible currency.

Sources: Kazakh Economic Trends; IMF, International Financial Statistics; National Bank of Kazakhstan; Economist Intelligence Unit.

20 Kazakhstan


The domestic economy

Annual real GDP growth exceeded government expectations in 2002 at 9.5%,compared to the official forecast of 6%. Nominal GDP was Tenge3,747bn(US$24.4bn), equal to Tenge252,820 (US$1,649) per capita. In gross value-addedterms, GDP grew by 9.7%, as output growth exceeded that of net taxes.Industrial output growth slowed from 13.5% in 2001 to 9.8%, and economicexpansion in 2002 was boosted instead by the construction sector, whichgrew by 19.3%. This was largely attributable to increased work on oil facilitiesand pipelines in western Kazakhstan, in preparation for an expected surge inoil output over the forecast period. Another indicator of rising economicactivity was growing electricity output, which reached 58.7bn kwh in 2002,up by 5.6%, and electricity consumption of 58.1bn kwh, an increase of 2.6%compared with 2001.

Sectoral growth(% change year on year)

2001 2002Gross value added 15.0 9.7Agriculture 16.9 2.7Industry 19.2 46.3Construction 21.8 19.3Transport & communications 9.5 9.9Trade & public catering 13.0 8.5Services 12.0 10.3

Source: Agency of the Republic of Kazakhstan for Statistics.

The prime minister, Imangaly Tasmagambetov, was confident at the end ofMarch that Kazakh average annual real GDP growth in 2003 may exceed 8%,with average growth in the first quarter of around 9% year on year.Mr Tasmagambetov nonetheless implicitly acknowledged the slow progressmade in terms of economic diversification, since he remarked that economicgrowth in 2003 would be export-driven, largely on the back of sales of oil andmetals. However, despite Kazakhstan’s continued reliance on raw materialsexports—and especially those of hydrocarbons—industrial output data forJanuary-February 2003 hint at a “trickle down” effect derived from years ofsustained oil-driven growth.

Many different sectors of industry experienced double-digit year-on-yeargrowth in the first two months of 2003—in particular construction materials,output of which grew by 25% year on year. National accounts data for 2002 hadalready shown the sector to be booming, largely owing to the implementationof large-scale projects in the oil sector. Nevertheless, strong growth in otherindustrial sectors, such as textiles and food, suggests that Kazakhstan’sproductivity base is showing signs of becoming broader.

The number of unemployed (according to International Labour Organisation—ILO—methodology) dropped to 707,000, or 9.8% of the workforce, in February.Although this figure is more realistic than the Soviet-era definition—used inKazakhstan until 2001—according to which unemployment would be running

The economy grew at a fasterthan expected rate

Good economic prospects stilldepend on raw materials

Labour data hideunderemployment

Kazakhstan 21


at below 3% of the workforce, the new methodology still fails to capture thetrue state of the Kazakh labour market, since it hides substantialunderemployment. Many firms continue to hoard labour, since the low level ofwages in several sectors leads many workers to remain on payrolls withoutreceiving salaries in order to obtain other in-work benefits, such as nursery carefor their children or access to health clinics.

The high level of unemployment also means that, although incomes are rising,there are substantial areas of severe hardship. Poverty is widespread,particularly among ethnic Kazakhs in rural areas. Infrastructure continues todeteriorate. Around 26% of the population still does not have access to tapwater, according to official figures. Conversely, many of those deemed to be ineffect unemployed may also be working in the shadow economy. Thesubstantial size of the shadow economy—estimates range between 16% and40% of GDP—complicates any assessment of living standards, since there is asizeable proportion of undeclared income in the country.

The output data suggesting a rising standard of living in Kazakhstan weresupported by steady growth in real wages. Average monthly wages in 2002were Tenge20,305 (US$132.5)—a nominal increase of some 17%, and a realincrease above 10%. Kazakhstan has the second highest monthly wages inUS dollar terms in the Commonwealth of Independent States (CIS) after Russia,where the average monthly wage in US dollar terms was US$141 in 2002. Thetrend of robust growth in wages continued in January 2003, with wages risingby 16% in nominal terms and 8.5% in real terms.

Strong hard-currency inflows are making it difficult for the National Bank ofKazakhstan (NBK, the central bank) to meet its consumer price inflation targets.The official end-year target for 2002 was 6%, but inflation came in at 6.6%—faster than the 6.4% end-year rate in 2001. Nevertheless, the overall trend is adeclining one, since annual average inflation in 2002 was 6%, down from 8.4%in 2001. The NBK inflation target range for 2003 end-year inflation is between4% and 6%, with an official forecast of 5.9%. However, unless there is a sharpslowdown in price rises in mid-year, this will be hard to meet—annual inflationis currently running at above 7%.

The trading volume of foreign currency on the Kazakhstan Stock Exchange(KSE) almost doubled in February, to US$606m, compared with US$306mtraded in January, and was the KSE’s highest monthly turnover to date by far.Foreign-exchange turnover on the KSE had already risen by half in 2002when compared with 2001. There was a nominal appreciation of around 1%(0.5% in real terms) in the average exchange rate against the US dollar inFebruary—the result of higher than expected oil revenue. The exchange ratestarted to fall back in March but the danger remains that the tenge couldover-appreciate.

Inflation was above target in2002 and is now accelerating

Real wages are rising rapidly

Tenge appreciates in nominaland real terms

22 Kazakhstan


Mining

The metals sector is the second largest recipient of FDI, the second largestindustrial subsector after oil and the second largest exporter. Output of mostmetals rose during 2002, although gold production had a poor year, falling by28% to 10.964 tonnes. One of the most important metals produced is copper,mined almost exclusively by the Kazakhmys group. Kazakhmys, controlled bySamsung (South Korea) has two large smelters and is one of the largest non-oilrecipients of FDI. The firm invested US$162m in 2002 but will cut investmentduring 2003 to US$67m. Copper output is expected to remain unchanged, at432,000 tonnes, although data for the first two months of 2003 raise thepossibility that full-year output will fall short of the target. The government hasmoved to privatise Kazakhmys fully, disposing of its final 24.65% share in thefirm on the stock exchange for US$184m in December. This values thecompany overall at US$746.5m.

Metals output in the first two months of the year reflected earlier trends, withyear-on-year growth rates varying considerably by subsector. Copperproduction, in particular, experienced a sharp contraction of 7.5%, comparedwith double-digit increases in the output of iron ore and alumina. Worldaluminium output is on the rise, driven largely by emerging-market producerssuch as Kazakhstan and Russia; the Kazakh sector in particular is attractingconsiderable interest from international lenders and investors.

Metals production, Jan-Feb 2003Tonnes % change, year on year

Copper 70,408 -7.5

Zinc 44,834 -2.2Steel 810,494 3.2

Iron ore 3,007,700 17.9Alumina 228,734 12.9

Source: Agency of the Republic of Kazakhstan for Statistics

A mixed performance

Kazakhstan 23


Agriculture

The agricultural sector is probably still the largest employer but is starved ofboth foreign and domestic investment. In turn, the lack of technologicaldevelopment in the sector has kept it extremely sensitive to climactic andenvironmental conditions, resulting in extremely volatile growth rates in recentyears. The sector grew by just 2.7% in 2002, far slower than the overall pace ofeconomic growth. Kazakhstan’s main crop is grain, a legacy of the Sovietperiod, when the republic used to be one of the Soviet Union’s key domesticsuppliers. The 2003 grain harvest is expected to be 13.8m tonnes, lower thanthe 16.2m tonnes harvested in 2002. In part this reflects the hope that reducedyields will lead to a higher quality of grain, thereby allowing for higherexports. At the moment the quality of Kazakh grain is insufficient to competein any but the least developed markets—which means mainly the neighbouringCentral Asian republics.

The social importance of the agricultural sector has made addressing itscontinuing weakness a persistent concern for the government. The most recentmeasure in this respect is the passage of a new land code—following theexample of Russia, where a new land code was passed in 2002—designed toestablish the right to private ownership and thus free up the social andeconomic capital in the countryside. However, the issue of land ownership is ahighly contentious one in Kazakhstan, and the code contains severalrestrictions on ownership, in particular where foreigners are concerned.Together with the endemic corruption existing at local and regional level, thereis therefore a danger that the new land code will fail to achieve the desiredactive market in land.

Grain production and yields1995 1996 1997 1998 1999 2000 2001 2002

Grain production (‘000 tonnes) 9,500 11,600 12,300 6,400 14,200 11,600 15,900 16,200Yield (tonnes/ha) 0.507 0.682 0.849 0.478 1.257 0.943 1.216 1.157


Oil and gas

Oil production is now close to 1m barrels/day thanks to massive FDI inflows,mostly related to the Tengizchevroil (TCO) joint venture, led by ChevronTexaco(US), at the Tengiz oilfield. In 2002 production of liquids—crude oil and gascondensate—reached 47.24m tonnes (948,578 b/d), a 19% rise on 2001 and abovethe government’s target of 45m tonnes. The national oil production target for2003 is 52.7m tonnes (1m b/d), an increase of 11.6% on 2002. Oil production hasmore than doubled since 1996, and the government plans to increase oilproduction to 150m tonnes by 2015—inclusive of 100m tonnes from the Kazakhsector of the Caspian Sea. Domestic consumption is low, at around 8m tonnes—some 83% of total production is exported—but the government expects it togrow to around 9m tonnes.

TCO remains Kazakhstan’s largest oil producer, and accounted for around 28%of national production in 2002—a total 13.4m tonnes. An important

A new land code could spuragricultural growth

Oil remains the fastestgrowing industrial subsector

24 Kazakhstan


contribution came from the Karachaganak natural gas and gas condensate fieldin north-western Kazakhstan. Karachaganak—which is being developed by BG(UK), Agip (Italy), ChevronTexaco and LUKoil (Russia)—helped to push gascondensate production to 5.2m tonnes in 2002, up by 29.1%. The state-ownedoil and gas company, Kazmunaigaz, produced just 7.4m tonnes of oil during2002, most of which came from its Uzenmunaigaz and Kazakhoil-Embasubsidiaries. Kazmunaigaz also has a 20% share of TCO production.

Karachaganak was also a key factor behind the 13.5% year-on-year increase innatural gas production, to 13.14bn cu metres, in 2002. Although slightly short ofthe government’s target of 14bn cu metres, gas production has doubled since1996. A key problem for Kazakhstan is that it has two domestic pipelinenetworks that are not connected to each other, so that some regions are short ofgas whereas others have too much. Surplus gas in north-western Kazakhstan isto be sold to Russia under an agreement to sell 5bn cu metres annually to theRussian state-controlled gas monopoly, Gazprom, as of 2003.

Oil and gas production1998 1999 2000 2001 2002

Oila

m tonnes 26.0 30.0 35.3 39.7 47.2‘000 b/d 521 602 708 797 949% change, year on year 0.7 15.6 17.5 12.6 19.0

Gasbn cu metres 8.24 9.80 11.54 11.57 13.14% change, year on year -4.0 18.9 17.7 0.3 13.5

a Oil production includes gas condensate.

Sources: IMF, Republic of Kazakhstan: Selected Issues and Statistical Appendix, January 2001; Agency of the Republic of Kazakhstan

for Statistics.

One way of getting around the fact that the largest gas deposits cannot supplydomestic gas needs is to develop small local fields, such as the Amangeldyblock in southern Kazakhstan, a region that to date has had to import gas fromUzbekistan. The fields reportedly contain reserves of 50bn cu metres, and canproduce 700m cu metres of gas annually in the short term. The state-owned oiland gas company, Kazmunaigaz, has invested US$51m into developing the

Gas production is also rising ata steady pace

Kazakhstan 25


Amangeldy fields but cannot afford to continue alone. As a result, Kazmunaigazhas signed up Repsol YPF (Spain) to add a further US$80m. Final developmentcosts, however, are estimated at up to US$750m, illustrating the need for furtherforeign investment in the sector.

Kazakhstan’s oil refining industry continues to operate below capacity and isnow, in effect, run by the government. To ensure no shortage of refinedproducts in the agricultural sector, the government is intervening in thedownstream sector, organising the timing of crude oil deliveries to refineries. Anew law on the production and distribution of oil products will subject a widevariety of downstream activities to mandatory state licences, set minimumproduction quotas for refineries, and ban oil-processing enterprises from sellingcrude oil or gas condensate. In addition, according to the terms of the law,refineries will have to ask for the government’s permission before suspendingoperations for routine maintenance procedures.

The government also keeps close control over exports of refined products, witha view to ensuring that exports do not lead to shortages in the domesticmarket. The government has prevented reform of the downstream sector andbeen involved in repeated disputes with its foreign investors; it has also failedto privatise the Atyrau refinery. However, undermining the government’s effortsto ensure a steady stream of oil for domestic refining is the fact that thedomestic price of oil is so low that it is unprofitable for foreign investors tosupply Kazakh refineries.

Despite these difficulties, Kazakhstan’s refineries processed 7.8m tonnes ofcrude in 2002—up by 2.5% compared with 2001, although still well below thecombined 18.5m tonnes/year nameplate capacity of the country’s threerefineries. Kazakhstan thus produced 1.7m tonnes of petrol, an increase of 6.9%on the previous year, and 2.3m tonnes of diesel, up by just 2.5%. Production offuel oil also rose modestly, by 2.1% to 2.8m tonnes. The government is hopingthat refineries will take in 9m tonnes of crude in 2003.

According to government figures for oil exports—figures that exclude gascondensate—the recently opened Caspian Pipeline Consortium (CPC) pipelinewill soon be Kazakhstan’s largest single export route. The CPC runs from Tengizin western Kazakhstan to the Russian Black Sea port of Novorossisk. Crude oilexports in 2002 were 36m tonnes, of which 15.2m tonnes went through theRussian pipeline system operated by the Russian state-owned operator,Transneft. The oil is sent to Transneft by Kazmunaigaz’s pipeline subsidiary,KazTransOil. A further 11.8m tonnes was shipped through the CPC, well belowinitial expectations that the pipeline would transport 20m tonnes in 2002, itsfirst full year of operation. Oil exports by rail and ship across the Caspian werejust 9m tonnes (180,000 b/d).

Exports through the CPC should reach 15-16m tonnes in 2003. TheKarachaganak consortium will also start exporting 120,000 b/d of gascondensate through the CPC from July, when the pipeline linking the field toCPC is completed. The CPC will still be operating below its 560,000-b/dcapacity, because Russia has yet to use its 160,000-b/d allocation in the

Downstream sector is closelysupervised by government

CPC is becoming the dominantexport pipeline

26 Kazakhstan


pipeline, but the future of the CPC is secure thanks to growing interest byWestern oil majors in what was previously considered a risky project. RoyalDutch/Shell (Netherlands/UK) is to increase its share in the consortium from7.5% to 9.25% by buying up the 1.75% share mostly owned by Kerr-McGee Oryx(US). The deal also involves taking on a share in the Arman field, operating as a50:50 joint venture with Kazmunaigaz, and a share in exploration rights atMertvy Kultuk.

The government remains wary of committing Kazakh oil to the Baku-Tbilisi-Ceyhan (BTC) pipeline that is to be built between the Azerbaijani capital ofBaku and the Turkish Mediterranean oil terminal of Ceyhan. The official viewis that the rationale for the 1m-b/d capacity pipeline—which has had verystrong support from the US government—is largely political. Nonetheless, theconstruction of the pipeline has begun even if the full financing package hasbeen delayed. Keen to keep Kazakhstan’s options open but still avoiding anyfirm commitments, Kairgeldy Kabyldin, the managing director of the transportand infrastructure department of Kazmunaigaz, met Natiq Aliyev, the head ofthe State Oil Company of the Azerbaijan Republic (SOCAR) in London onDecember 12th. Mr Aliyev emerged from the meeting to state that Kazakhstannow backed the BTC, a statement that has been repeatedly made byAzerbaijani officials over the years. Mr Kabyldin, however, was more careful inhis statements, which suggests that Kazakhstan is still reluctant to make a firmcommitment. According to Mr Kabyldin, Kazakhstan would like to startexporting oil from the offshore Kashagan field through the BTC as of 2007,when it will have the 400,000 b/d of exportable oil volume that will makeusing the BTC commercially viable. The previous date mentioned by Kazakhofficials for such exports had been 2008.

The problem is that any such exports will require building a pipeline under theCaspian Sea from the Kashagan field to Baku, a decision that cannot be takenwithout reference to ongoing discussion over the status of the sea between itslittoral states. In particular, Russia has recently objected to the construction ofsuch pipelines (see The political scene). Furthermore—as Mr Kabyldin pointedout—the decision of whether or not to use the BTC would not be for thegovernment, but for the North Caspian consortium, which operates theKashagan field and is known as Agip KCO after its lead operator. Thefundamental problem with official pipeline policy is that it is toothless: apipeline from Kazakhstan to Azerbaijan could cost around US$2bn, money thatthe government does not have. Consequently, export pipelines will ultimatelybe built by foreign investors along routes of their choosing. Officially,Kazakhstan advocates multiple export routes to prevent dependence on a singlepipeline. In reality, however, Kazakhstan will depend on the CPC and, to alesser extent, Transneft’s pipelines for at least the next five years.

In March BG (UK) announced plans to sell its 16.67% stake in Agip KCO in twoequal shares to two Chinese state-owned companies, Sinopec and the ChinaNational Offshore Oil Corporation (CNOOC). Under the terms of the sale, eachof the firms would pay US$615m for its share, giving BG US$1.23bn for its one-sixth share in the Kashagan consortium. BG’s other partners nevertheless have

BG’s departure from Kashagancould mean less oil for BTC

Kazakhstan continues toprevaricate on BTC

Kazakhstan 27


a right of first refusal, and may yet make a pre-emptive offer. The consortium’srules gives its members 60 days to match any offer from an outside party. Ifexisting members decide to share BG’s stake between them, they will be likelyto make their offer as close to the deadline as possible, in order to prevent abidding war with the Chinese companies.

However, if no pre-emptive bids are made—several of the companies that formAgip KCO are looking to enter the Chinese market, and may be unwilling toantagonise that country’s government—the entry of Sinopec and CNOOC intothe consortium would further undermine Kazakhstan’s commitment to theBTC route. Although Kashagan consortium members now own 15% of the BTCpipeline consortium, the two Chinese firms would be likely to ship their shareof future Kashagan production east, back to China. As a result, one-sixth ofKashagan peak output—expected to be around 800,000 b/d within ten years—will not be available for the BTC. China has said that it wants ultimately toimport 50m tonnes/year (1m b/d) of oil from Kazakhstan—a figure thatexceeds total production in 2002—which would render an oil export pipelinefrom Kazakhstan to China economically viable. At the moment the mainChinese oil venture in Kazakhstan, the majority stake held by the ChineseNational Petroleum Company (CNPC) in Aktyubinskmunaigaz, only producesaround 90,000 b/d.

Recent developments are in danger of marginalising KazTransOil. The CPC isout of its control, as would probably be the case with any export pipeline toChina and a possible pipeline from Kashagan to Baku. Attempts by KazTransOilto gain control of all liquids exports from Kazakhstan have failed, withopposition from foreign investors. In addition, the opening of the CPC hasdeprived KazTransOil of considerable export volume, causing the amountexported by the company to drop by 5.3% to 30.3m tonnes in 2002. It remains tobe seen what role KazTransOil and its parent company, Kazmunaigaz, can play,given their lack of funds for investment.

The government, which set up Kazmunaigaz in a surprise decision in February2002, has ambitious plans to expand oil production to 150m t/y (3m b/d) by2015, but no ability to fund them: according to the government, the project willrequire anywhere between US$51bn and US$80bn. However, these figures maybe exaggerated, as Kazakhstan has to date carried out significant developmentprojects with just US$13.8bn in FDI.

The dispute between the government and TCO has been resolved to thegovernment’s advantage. The dispute had centred on ChevronTexaco’s desire tofund a US$3.3bn expansion programme to raise production from current levelsof 270,000 b/d to 440,000 b/d by 2006. ChevronTexaco wanted to acceleratethe amortisation of capital costs and finance development through reinvestedprofits. The government refused, arguing that it would lose between US$600mand US$1bn in tax revenue as a result. When the government failed to sanctionthe plan, ChevronTexaco was forced to suspend the programme in November.Following the suspension, the two sides began negotiating and reached a dealthat was overall favourable to the government.

ChevronTexaco settlementcreates a worrying precedent

Future of Kazmunaigaz isunclear

28 Kazakhstan


• As previously agreed, TCO will source US$550m-750m of the inputsneeded to implement the expansion programme from Kazakh firms. Since inpractice these will be mostly state-owned firms, this implies a potential subsidyto the state-owned sector.

• TCO will pay US$810m in additional taxes—rather than paying less tax, asit had originally proposed.

• TCO has agreed to finance US$1bn of the expansion programme by takingout loans rather than reinvesting profits—the government demand that led to thesuspension in the first place.

• The foreign companies in TCO will help Kazmunaigaz to fund its 20%share of development costs (US$660m) with a loan. The terms of the loan areunclear, but this point raises doubts as to the purpose of Kazmunaigaz if it canonly participate in a joint venture by borrowing from its foreign partners.

The implications of ChevronTexaco’s climbdown are worrisome for otherforeign investors. TCO had previously been one of the few oil ventures inKazakhstan that had managed to keep its original contract intact and fend offgovernment attempts to force it to renegotiate its investment terms. If thegovernment can successfully force its largest foreign investor to retreat on keypoints of its investment programme, then no foreign company in Kazakhstancan operate with any certainty over its contractual relationship with the state.

Financial and other services

Both the president, Nursultan Nazarbayev, and Grigory Marchenko, the head ofthe NBK, have recently held up the financial sector as a symbol of theeconomic transformation of Kazakhstan. The sector is certainly growing rapidly,but it remains small, with total assets equal to 30.7% of GDP at the end of 2002.Sectoral growth has been driven in part by increased lending to the economy,which includes non-bank enterprises and households. Total lending to theeconomy rose by 37% year on year in 2002, to Tenge673bn (18% of GDP), upfrom Tenge490bn (15% of GDP) at end-2001. However, financial intermediationcontinues to play a relatively minor part in Kazakhstan’s economic develop-ment: FDI in 2002 was equal to 8.2% of GDP. Oil sector development, carriedout primarily by foreign companies, will continue to be driven in theforeseeable future by reinvested profits.

The small size of the financial sector makes credit growth an importantdevelopment, but this raises risks with regard to credit quality. AlthoughKazakhstan’s is certainly the healthiest banking sector in the CIS, Kazakh banksretain a risk aversion that is clear from the way in which loans remainlargely denominated in US dollars—although the proportion of US dollar-denominated loans has fallen a little, from 71% of the total at end-2001 to 69%at end-2002. However, despite the lack of confidence in the tenge, the maturityof the loan portfolio of commercial banks is becoming longer, with medium-and long-term loans amounting to 57% of the total at end-2002, compared with51% at end-2001.

Banking sector is growing, butfrom a low base

Rapid credit growth couldweaken loan portfolio

Kazakhstan 29


The growth in banks’ loan portfolio has been funded by a deepening depositbase. Deposits were worth Tenge603bn (16% of GDP) at end-2002, up by 36%year on year, from Tenge445bn (14% of GDP) at end-2001. There is clearly moreconfidence in the tenge as a store of value, since even though most deposits arein foreign currency, the ratio of tenge deposits to total deposits rose to 40% atend-2002, from 36% at end-2001. However, deposits are increasingly short term,with the ratio of sight deposits rising from 31% to 37% over the same period.

The government is keen to allow foreign firms into the growing pensionsindustry, but only with controlled access. As of December 2002 foreign firmscan manage local pension funds, but total foreign involvement cannot exceed25% of total pension fund assets. Similarly, foreign firms can now own localasset management firms but cannot manage more than 50% of all assets undermanagement in Kazakhstan. Total pension fund assets are small, at justUS$1.6bn (6.6% of GDP), of which 28% is held by the State Pension Fund. Mostpension funds invest in government paper and Kazakh governmentEurobonds. The stockmarket is small and provides little exposure to the fast-growing oil sector.

However, while praising the advances of the financial sector, Mr Nazarbayevhas also raised the possibility of greater government interference in the sector.In a speech on February 14th, Mr Nazarbayev said that banks were making toomuch money and that their lending rates might have to be capped. These largeprofits stem from the fact that the difference between lending and deposit ratesis high, and from the fact that there are very few banks large enough to supplythe services that large state-owned firms and foreign investors require.However, the large intermediation spread of around 400 basis points betweenlending and deposit rates is a function of the risk aversion of local banks, and itis actually coming down as a result of increased competition in the sector. Werethe government to interfere in the sector, this would hamper the progress madetowards a greater level of financial intermediation in Kazakhstan.

Main macroeconomic indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Industrial output (at constant prices; % change, month on month)2001 -6.3 -7.0 11.0 0.0 -7.0 4.0 -0.3 -1.0 2.7 4.7 3.5 4.42002 -2.6 -7.0 6.1 -2.0 -6.3 -0.9 5.6 2.5 -1.2 8.7 0.4 6.22003 -7.5 -4.7 – – – – – – – – – –Industrial output (at constant prices; % change, year on year)2001 35.1 24.9 34.3 29.7 14.8 27.1 3.1 8.5 8.4 16.9 14.2 7.32002 11.6 11.6 6.7 9.2 10.0 4.7 10.8 14.7 10.4 14.6 11.2 13.12003 7.4 10.1 – – – – – – – – – –Unemployment (‘000)2001 240 245 242 242 239 235 223 228 223 223 221 2162002 790 778 768 691 682 666 637 625 614 639 676 7242003 724 707 – – – – – – – – – –Unemployment rate (%)2001 3.4 3.4 3.4 3.7 3.1 3.1 3.0 2.9 2.9 3.0 2.8 2.92002 11.0 10.9 10.7 9.2 9.1 8.8 8.4 8.3 8.1 8.5 9.2 10.22003 10.1 9.8 – – – – – – – – – –

Government control offinancial sector could increase

30 Kazakhstan


Main macroeconomic indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Consumer prices (% change, month on month)2001 1.1 0.8 0.7 0.7 0.4 0.1 -0.1 0.0 0.2 0.7 0.9 1.02002 0.7 0.3 0.2 0.5 0.9 0.5 0.6 -0.3 0.1 0.6 1.0 1.42003 1.0 0.5 0.3 – – – – – – – – –Consumer prices (% change, year on year)2001 8.4 9.1 9.8 10.2 9.8 9.1 8.6 8.4 8.1 7.6 7.0 6.42002 6.2 5.7 5.2 5.0 5.5 6.0 6.7 6.4 6.3 6.1 6.2 6.62003 6.9 7.2 7.3 – – – – – – – – –

Producer prices (% change, month on month)2001 -8.5 2.0 1.3 -3.4 0.0 1.1 -0.3 -2.0 0.5 0.1 -1.6 -3.52002 -4.5 0.6 2.1 3.9 3.5 0.2 2.5 1.8 2.1 2.3 -1.6 -1.12003 3.6 2.0 – – – – – – – – – –Producer prices (% change, year on year)2001 8.2 8.2 7.3 4.9 7.2 5.1 3.1 -0.8 -4.0 -6.0 -8.3 -13.82002 -10.1 -11.3 -10.7 -3.9 -0.5 -1.4 1.4 5.2 6.9 9.3 9.4 12.02003 21.5 23.3 – – – – – – – – – –

Sources: Agency of the Republic of Kazakhstan for Statistics; Kazakhstan Economic Trends; Economist Intelligence Unit.

Foreign trade and payments

The opening of the Caspian Pipeline Consortium (CPC) Tengiz-Novorossiskpipeline has given an important boost to oil exports. According to customs data,Kazakhstan ran a trade surplus of US$3.2bn (13.2% of GDP) in 2002. Exportrevenue reached US$9.7bn, a 12% increase that far outpaced a 2% rise in importcosts to US$6.5bn. Although the agricultural sector managed to increase itsexports in 2002, crude oil accounted for over half of exports, and its share islikely to continue rising in coming years.

As most crude is sold either to Caribbean tax havens, Italian oil terminals orend-consumers in eastern Europe, rising oil exports mean a further tilt in thedirection of trade away from the former Soviet Union. In 2002 theCommonwealth of Independence States (CIS)—mainly Russia—took just 23% ofexports on a customs basis, down from 30% in 2001. Increasing imports ofWestern capital goods for oil-related projects meant that the CIS’s share ofKazakh imports also fell, to 47% in 2002, down from 52% in 2001.

According to official figures, Kazakhstan exported 39.27m tonnes (787,000 b/d)of oil during 2002, an increase of 21% compared to 2001. This increasecompensated for the fact that the average price of Kazakh crude fell by 2.7% toUS$17.5/barrel in 2002, from US$17.98/b in 2001. This implies that the discountto Dated Brent blend continued to widen in 2002, since Brent prices rose froman average of US$24.5/b in 2001 to an average of US$25/b in 2002. Crude oilthus brought in just over US$5bn (20.7% of GDP) in export receipts—an increaseof 18% on 2001—and accounted for 52% of all export receipts in 2002, up from49% in 2001. The widening discount can be attributed to the fact that as Kazakhoil is pumped through the Russian pipeline system, it is blended with lower-grade Russian oil before reaching its market. Although the CPC pipeline has anoil quality bank designed to compensate Kazakh producers for the loss of

Exports have risen thanks tohigher crude oil volumes

Kazakh oil still suffers fromRussian blends

Kazakhstan 31


quality, this is insufficient to compensate for the effect of increased exportvolumes through Russia—the transit route for over two-thirds of Kazakh oil.

Government restrictions have caused a substantial decrease in the volume ofrefined products exports. Kazakhstan exported just 1.11m of refined products in2002, down by 24% in volume terms. The fall in export volumes was partlyoffset by a 21% increase in the export price for refined products, to an averageUS$107/tonne, but even so total receipts from overseas sales of refined productsin 2002 fell by 18% compared with the previous year, to US$119.2m.

As part of its close control over the downstream sector, the government restrictsexports whenever it feels that the domestic refined products market isinsufficiently supplied. The government therefore extended its intermittent banon diesel exports from March 15th until June 1st. However, the restriction on theexport of fuel oil, set to run from September 28th 2002 until March 31st 2003,was lifted early, on February 7th, because the domestic market was oversupplied.

The agricultural sector brought in US$433.5m in export receipts, up by 7.4% butstill only some 5% of the total. This was in part because higher cotton andwheat export volumes—of 139,000 tonnes and 4m tonnes, respectively—wereaccompanied by much lower export prices, even though world prices for bothcommodities rose during 2002. The cotton export price of 34 US cents/lb was a29% discount to the Liverpool Index price, whereas in 2001 the export price wasa 13% discount. Similarly, the wheat export price in 2002 was a large 46%discount to the US Gulf ports price, compared with an 18.5% discount in 2001.The data thus suggest that higher production and export volumes in theagricultural sector are being achieved at the expense of quality.

Commodity composition of exports, 2002

US$m% change,

volume terms % of total% change,US$ terms

Energy 5,339 15.5 55.0 n/a Crude oil & gas condensate 5,037 18.0 51.9 -2.5 Refined products 119 -8.0 1.2 21.1 Coal 183 -18.0 1.9 -7.9

Metals 1,277 1.7 13.1 n/a Iron ore 119 41.0 1.2 6.8 Ferro-alloys & products 341 8.0 3.5 -6.9 Copper 576 -5.0 5.9 -3.1 Zinc 156 -1.0 1.6 -10.8 Alumina 30 -17.0 0.3 -8.8 Lead 55 0.0 0.6 -3.8Agricultural products 434 7.4 4.5 n/a Wheat 329 3.0 3.4 -22.0 Cotton fibre 105 24.0 1.1 -15.1Total incl others 9,709 12.3 100.0 n/a


According to customs data, Kazakh import costs reached US$6.5bn in 2002, a farslower increase in nominal terms than was seen in 2001—of 2% compared with25.9%, respectively. Strong economic growth has been pulling in imports in

Refined products exports areperforming poorly

Agricultural exports are paidbelow world prices

Import expenditure growthslows

32 Kazakhstan


recent years, but the 2002 import data, combined with data showing broaderindustrial output growth (see The domestic economy), suggest that importsubstitution is gradually taking place. A weak exchange rate is also preventingmore rapid import growth, and ensuring that most imports continue tooriginate in Russia.

The economic crisis in neighbouring Uzbekistan has led to a boom incrossborder shopping, providing employment and customs revenue forKazakhstan. The Uzbek government’s severe restrictions on imports and theclosure of some of the largest bazaars in Uzbekistan have meant that manyUzbeks have had to cross into Kazakhstan to buy basic goods. Many small-scaleUzbek importers have also moved to the border region with Kazakhstan.Instead of these traders buying goods in Kazakhstan and then importing theminto Uzbekistan, Uzbek consumers now enter Kazakhstan, do their shoppingand then return home. The Uzbek authorities have responded by alleging thatthese personal imports are a health hazard, and closed sections of the Uzbek-Kazakh border in December 2002. The Uzbek press and media, which arealmost all under government control, then embarked on an anti-importscampaign that included accusing Kazakhstan of sabotage.

Data from the National Bank of Kazakhstan (NBK) showed that higher exportshelped to halve the current-account deficit, reducing it to just US$596m (2.4% ofGDP) in 2002. The trade surplus on a balance-of-payments basis was US$2.4bn,somewhat lower than the trade surplus according to customs data. The NBKestimates unrecorded imports, which results in discrepancies between the twosets of data. Exports on a balance-of-payments basis rose by 12% to US$10bn,slightly higher than the export receipts recorded by the customs service. On abalance-of-payments basis, imports dropped by 2.6% to US$7.6bn, 18% morethan import costs as reported on a customs basis. The claimed drop in importcosts seems odd, given rising demand for consumer goods and capital goods,implying that the NBK import figure is likely to be revised.

Current account(US$ m unless otherwise indicated)

1998 1999 2000 2001 2002Exports fob 5,871 5,989 9,288 9,025 10,066Imports fob -6,672 -5,645 -6,848 -7,850 -7,646Trade balance -801 344 2,440 1,175 2,420Services balance -250 -172 -871 -1,530 -2,147Net income -296 -500 -1,142 -1,115 -983Current transfers (net) 122 157 249 230 113Current-account balance -1,225 -171 676 -1,240 -596 (% of GDP) -5.5 -1.0 3.7 -5.5 -2.4

Note. Totals may not sum owing to rounding.

Source: IMF, International Financial Statistics.

The services and income balances remained in deficit in 2002, largely a resultof the accelerating pace of oil sector development. Such costs are expected torise further in 2003, owing to the expansion programmes at Tengizchevroil(TCO) and Agip KCO; the government is thus expecting the current-account

Uzbekistan is restrictingsmall-scale crossborder trade

Current-account deficit halvedin 2002

Kazakhstan 33


deficit to grow to US$603m (2.3% of GDP) in 2003. This will not present afinancing problem, since Kazakhstan can still rely on substantial foreign directinvestment (FDI) inflows. Although Kazakhstan attracted less FDI in 2002 thana year earlier, total net FDI nonetheless reached US$2bn, or 8.2% of GDP.

According to data from the IMF’s International Financial Statistics (IFS), by theend of January 2003 Kazakhstan’s international reserves had reached US$3.6bn,providing over 3 months of goods and services import cover at 2002 prices. Thereserves data does not, moreover, reflect the true strength of Kazakhstan’sbalance-of-payments position, since it does not include a further US$2.3bn—equal to 2.6 months of import cover—held in the National Fund of the Republicof Kazakhstan (NFRK) as of end-February.

Main external indicators(US$ m unless otherwise indicated)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecExports fob2001 680 730 695 745 817 794 734 635 743 771 632 6722002 674 590 723 562 856 650 1,003 723 1,039 854 1,059 9792003 966 – – – – – – – – – – –

Imports fob2001 424 484 513 563 562 651 544 491 501 492 562 5762002 522 420 478 480 590 609 586 582 532 505 631 5572003 550 – – – – – – – – – – –Trade balance2001 256 246 182 182 255 143 190 144 242 279 70 962002 152 170 245 82 266 42 417 141 507 349 428 4222003 417 - - - - - - - - - - -Foreign reserves2001 1,826 1,929 1,978 2,121 1,905 1,801 1,887 1,931 1,921 2,088 2,070 1,9972002 2,045 2,057 2,095 2,146 2,222 2,281 2,343 2,507 2,571 2,531 2,448 2,5512003 2,952 – – – – – – – – – – –

Gold2001 491 488 476 486 490 498 490 505 537 517 505 5112002 519 522 534 541 570 556 538 547 562 554 558 5862003 627 – – – – – – – – – – –International reserves2001 2,317 2,417 2,454 2,607 2,395 2,298 2,377 2,435 2,457 2,604 2,575 2,5082002 2,564 2,579 2,628 2,686 2,792 2,836 2,881 3,054 3,133 3,086 3,006 3,1362003 3,579 - - - - - - - - - - -

Sources: Agency for the Republic of Kazakhstan for Statistics; IMF, International Financial Statistics.

National Fund is now nearlyas large as official reserves

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