Kazakhstan - Economy

Despite a lack of free speech and human rights, Kazakhstan's oil wealth has brought a higher standard of living than in most other Central Asian former Soviet states. The overall strong growth of the Kazakhstani economy in the decade up to 2005 -- averaging 9% a year with inflation remaining under control -- raised the standard of living for Kazakhstani citizens across the board. Economic growth averaged 9.2% a year during 2005-07, and the percentage of the population living below the poverty level dropped from 28% in 2001 to under 14% by 2009. But the subsequent global economic crisis hit heretofore economically successful Kazakhstan hard, in part because Nazarbayev's economic and financial policies of the last two decades have embedded Kazakhstan in the global economy.

Despite the first family's accumulation of assets, Nazarbayev has done quite a good job ensuring that the country's burgeoning wealth is shared with other elite clans and factions -- not to mention the fact that there has been a very significant reduction in the country's poverty rate since independence, from roughly 50 percent of the population in the mid-1990s to around 9 percent by 2005.

Oil, gas, and mineral exports are key to Kazakhstan's economic success. Since 1993, Kazakhstan's extractive industries have attracted $30.7 billion in foreign investment, which represents almost 76% of the total foreign direct investment in Kazakhstan for that period. Kazakhstan has significant deposits of coal, iron ore, copper, zinc, uranium, and gold. Oil and gas is the leading economic sector. Production of oil and gas condensate in Kazakhstan amounted to 67.2 million tons in 2007, an increase from 64.5 million tons in 2006. Kazakhstan exported 60.2 million tons of oil and gas condensate in 2007. Natural gas production in Kazakhstan in 2007 amounted to 16.6 billion cubic meters. Kazakhstan holds about 4 billion tons of proven recoverable oil reserves and 3 trillion cubic meters of gas. Industry analysts believe that planned expansion of oil production, coupled with the development of new fields, will enable the country to produce as much as 3 million barrels per day by 2015, lifting Kazakhstan into the ranks of the world's top 10 oil-producing nations.

Kazakhstan's 2005 oil exports were valued at $17.4 billion, representing over 70% of overall exports. Major oil and gas fields and their recoverable oil reserves are Tengiz (7 billion barrels); Karachaganak (8 billion barrels and 1,350 billion cubic meters of natural gas); and Kashagan (7-9 billion barrels). Starting in 2004, the Government of Kazakhstan increased its take of oil deals by increasing taxation of new oil projects. In 2007, the government amended the "Law on Subsoil and Subsoil Use." The amendments give the government the right to annul or amend subsoil contracts if the contracts pose a danger to the country's national economic security interests. The government insisted it would not use the amendments retroactively to annul existing contracts.

Much of Kazakstan's economic future depended upon its ambitious three-stage privatization program, which began in 1992 and reached the end of its second stage in 1995. The Kazakstan State Property Committee had responsibility for all three phases. In the first stage, housing and small enterprises employing fewer than 200 people were privatized. Most conversions of small enterprises were accomplished by auction to groups of employees, often under the leadership of the incumbent manager. Housing, which by 1995 was nearly all in private ownership, was privatized either by giving the residence outright to its current occupant or by payment of government-issued vouchers. The second stage entailed the privatization of almost everything except the republic's mineral wealth and industrial plants employing more than 5,000 people (such plants accounted for most of Kazakstan's military-related industry).

Privatization of the largest state enterprises was the principal goal of stage three, which did not begin as scheduled in late 1995. Until that time, these enterprises were run as self-managing joint-stock companies in which the government of Kazakstan was the largest stockholder. This interim stage, which was considered beneficial, required preparation of profit-and-loss statements in anticipation of full commercial operation sometime in the future. Meanwhile, 3,500 medium-sized firms, including 70 percent of state-owned industries, were offered for sale in a mass privatization program beginning in April 1994.

Kazakhstan made significant progress toward the creation of a market economy since it gained independence in 1991, and the European Union (2000) and the U.S. Department of Commerce (March 2002) granted it market economy status. Kazakhstan also has attracted significant foreign investment since independence. As of September 30 2012, foreign investors had placed a total of $177.7 billion in Kazakhstan, primarily in the oil and gas sector. Kazakhstan is widely considered to have the best investment climate in the region. Numerous international firms have established regional headquarters in Kazakhstan.

The government of Kazakhstan has actively consolidated state-owned enterprises in recent years. At the end of 2012, six state-owned holding companies existed in Kazakhstan. Kazakhstani law requires national holding companies to publish annual reports and submit their books for independent audit.

Samruk-Kazyna - National Welfare Fund (S-K) was modeled on Singapore's Temasek. Kazakhstan's largest national holding company, it manages the state's assets in oil and gas, energy, transportation, telecommunication, and the financial and innovation sectors. According to some estimates, Samruk-Kazyna controls more than half of Kazakhstan's economy and is the nation's largest buyer of goods and services. Samruk-Kazyna's official purpose is to facilitate economic diversification and to increase effective corporate governance; however, it spent its first two years spearheading the government's anti-financial crisis program.

Kazakhstan has a sovereign wealth fund which is formally named the National Oil Fund of the Republic of Kazakhstan. Established by Presidential decree in 2000, the fund aims to diminish the country's budgetary dependence on fluctuating world oil prices and to accumulate savings to benefit future generations. The Fund receives all direct taxes and a percentage of revenues from the oil sector, revenues from the privatization of state property in the mining and manufacturing industries, and proceeds from sales of farmlands, as well as the Fund's investment income. The Ministry of Finance owns the National Fund.

The government's Program for Accelerated Industrial Development, part of its “Road Map for Business 2020,” created investment priorities aimed at diversifying Kazakhstan's economy away from an overdependence on extractive industries. The government of Kazakhstan adopted a "National Plan for Attracting Investment" in December 2011 which seeks to improve the investment climate by simplifying visa procedures, customs clearance, and transit across borders, as well as establishing special service centers for foreign investors under regional municipal authorities. In 2012, every regional government set up an Investors’ Service Center.

In 2011, Kazakhstan announced the goal of joining the Organization of Economic Cooperation and Development (OECD). To meet OECD requirements, the government will need to amend its investment legislation.

Russia, Belarus, and Kazakhstan officially entered into a Customs Union on July 1, 2010. As a condition of membership, Kazakhstan has almost doubled its average import tariff and introduced annual tariff-rate quotas (TRQs) on poultry, beef, and pork. U.S. exporters have raised concerns about the possible trade-limiting effects of these TRQs, as well as the way TRQs are calculated and distributed. According to the Ministry of Economic Development and Trade, Kazakhstan will slightly increase tariff rate quotas in 2013.

On January 1, 2012, the Customs Union partners created the Common Economic Space (CES) which is intended to be a step toward further economic integration. While many agreements for the Common Economic Space are still being negotiated, the first 17 came into force in 2012. The government of Kazakhstan has asserted that CES agreements comply with WTO standards. If CES agreements are not WTO compliant, however, WTO commitments supersede CES rules.

Kazakhstan's monetary policy has been largely well managed. However, in 2007, rapid increases in global commodity prices helped push inflation rates as high as 18.8%. Prior to this, inflation had remained relatively steady at 9.5%, up from 8.4% in 2006. Inflation from 2002-2004 was 6.6%, 6.8%, and 6.7%, respectively. Because of its strong macroeconomic performance and financial health, Kazakhstan became the first former Soviet republic to repay all of its debt to the International Monetary Fund (IMF) in 2000, 7 years ahead of schedule. In March 2002, the U.S. Department of Commerce graduated Kazakhstan to market economy status under U.S. trade law. The change in status recognized substantive market economy reforms in the areas of currency convertibility, wage rate determination, openness to foreign investment, and government control over the means of production and allocation of resources.

In September 2002, Kazakhstan became the first country in the former Soviet Union to receive an investment-grade credit rating from a major international credit rating agency. Estimated level of external debt in 2006 was $73.46 billion. In 2005, Kazakhstan's gross foreign debt was about $43.40 billion. Kazakhstan has been successful in reducing the ratio of government debt to GDP in recent years. In 2007, total governmental debt was $5.7 billion, which amounts to 5.5% of GDP. In 2000, total government debt equaled 21.7% of GDP. While government debt has continued to decrease, several years of aggressive private-sector borrowing and lending practices contributed to a liquidity and credit crunch in 2007. Total external debt (public and private) increased dramatically from $73.46 billion (2006) to $96.37 billion (2007), now equivalent to 94.4% of GDP.

An upturn in economic growth, combined with the results of earlier tax and financial sector reforms, dramatically improved government finances from the 1999 budget deficit level of 3.5% of GDP to a deficit of 0.5% of GDP in 2005. However, the budget deficit level in 2007 was $1.8 billion, or approximately 1.7% of GDP. Government revenues grew from 19.8% of GDP in 1999 to 22.6% of GDP in 2001 to 25.7% of GDP in 2005. Government revenues in 2007, like other sectors of the economy, declined slightly to 22.7% of GDP. In 2000, Kazakhstan adopted a new tax code in an effort to consolidate these gains. On November 29, 2003 the Law on Changes to Tax Code was adopted, which reduced the value added tax (from 16% to 13%), the social tax (from 21% to 13%), and the personal income tax (from 20% to 10%). Kazakhstan furthered its reforms by adopting a new land code on June 20, 2003 and a customs code on April 5, 2003. Further revisions to the customs code were expected to be adopted in 2008.

Kazakhstan instituted an ambitious pension reform program in 1998. There are 14 saving pension funds, one of which is state controlled. The National Bank oversees and regulates the pension funds. The pension funds' growing demand for quality investment outlets triggered rapid development of the debt securities market. Pension fund capital is being invested almost exclusively in corporate and government bonds, including Government of Kazakhstan Eurobonds. The Kazakhstani banking system is developing rapidly. Its capitalization now exceeds $1 billion. The National Bank has introduced deposit insurance in its campaign to strengthen the banking sector. Several major foreign banks have branches in Kazakhstan, including ABN-AMRO, Citibank, and HSBC.

Agriculture accounted for 5.82% of Kazakhstan's GDP in 2007. Grain (Kazakhstan is the seventh-largest producer of wheat in the world) and livestock are the most important agricultural commodities. Agricultural land occupies more than 220 million hectares, about 68% of which consists of pasture and hay land. Chief livestock products are dairy goods, leather, meat, and wool. The country's major crops include wheat, barley, cotton, and rice. Wheat is the leading agricultural commodity in Kazakhstan's export trade. Kazakhstan harvests 14-15 million tons of wheat per year.