INTELBRIEF

January 3, 2014

TSG IntelBrief: TSG Central Asia Series: Kazakhstan: Pursuit of a Diversified Economy

Astana, Kazakhstan
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Today’s Kazakhstan at a Glance

Though the West knows the Middle East as the cradle of ancient civilizations, birthplace of Abrahamic religions, and for its abundant energy resources, the vast territories of Central Asia do not typically attract the same level of attention.

Central Asia is a mosaic of world-class architecture and diverse, ancient cultures with an art scene yet to be discovered by audiences worldwide. Kazakhstan is a country that represents much of what Central Asia has to offer.

The largest country in the region, with one of the highest per capita incomes in Central Asia, and known for an ambitious plan to become a significant emerging economy, Kazakhstan is a hotbed of development.

But for the Aral and Caspian Seas to southwest, Kazakhstan is land-locked, bordered by China, Russia and three other former Soviet states. The region’s evolving energy dynamics, the country’s geographic articulation, and the need to have access to international markets have made it clear to Kazakhstan’s leadership that the most secure route to economic prosperity and geopolitical relevancy is the development of a diversified economy.

Until recently Kazakhstan’s exports were entirely dependent on Russia, but Astana has gradually reduced its dependence on Moscow by building railroads, new pipelines to China, and a new network of highways.

An Infrastructure-based Development

As part of its ambitious efforts to develop its economy, Kazakhstan under President Nursultan Nazarbayev, has implemented a diversification strategy focused on infrastructure industries whose development are fueled by revenues from the country’s vast energy sector. Key infrastructure sectors under development are transportation, finance, and information and communication technology.

Kazakhstan has the second largest oil reserves among the former Soviet republics with Kashagan, Tengiz, and Karachaganak oil fields at the center of its energy development. The combined reserves of these three energy fields are estimated at around 23 billion barrels of oil.

Kazakhstan has adopted a foreign policy based on mutual interests and understanding with each of its neighbors as well as with outside powers. President Nazarbayev’s government has called this foreign policy “multi-vector,” with the key objective of avoiding economic dependence on a single regional state.

As the world’s second largest exporter of uranium, Kazakhstan has forged strategic partnerships with China, Canada, and South Korea in the development of new nuclear reactors in exchange for export of uranium. South Korea is particularly active in upgrading Kazakhstan’s entire power transmission lines and modernizing the country’s power stations via Korea Electric Power Corp (KEPCO).

In the financial sector, Astana has implemented series of reforms to develop an advanced capital market that attracts international investments. Introduction of insurance deposits is one such reform. Also, several major foreign banks have opened branches in Kazakhstan, including RBS, Citibank, HSBC, and Kookmin of South Korea.

In the energy sector, China remains the most active player in the country. Tethys Petroleum, an oil and gas exploration and production company primarily focused on Central Asia and the Caspian Region, is involved in projects that are concentrated on the export of natural gas to China.

China has been instrumental in the development of the Korgas Pass, a strategic and multi-modal transportation infrastructure that connects China and Kazakhstan by pipeline, railway, and highway. Through the Korgas Pass China experienced its first import of hydrocarbon energy from Central Asia to the mainland, a milestone for Beijing.

Strategic Implications

As Astana diversifies its economy by focusing on infrastructure and developing new energy export routes to international markets chiefly via China, Russia loses leverage in influencing socio-political and economic developments in the former Soviet republics. On the other hand, China is developing a new trade ecosystem in Central Asia that seeks to circumvent US-controlled and dominated international waters and neutralizes the presence of the US Navy in projecting power via international waters. Due to Kazakhstan’s large territory and expanding ties to China geopolitical equations in Central Asia are bound to undergo transformations that will be to the benefit of Beijing. In this new environment Russia finds it increasingly important to forge new partnerships with regional states before becoming irrelevant by China’s economic weight.

There is a relative paucity of US presence in Kazakhstan, characterized by few American multinationals and an apparent non-committal approach to development of the energy and transportation infrastructure. The TAPI, or Trans Afghanistan, pipeline project that started in Turkmenistan—though with US support in principle—faces funding challenges.

Given the region’s vast energy resources and China’s increasing reliance on them, the stakes are high for development of a transportation infrastructure tied to a larger regional network. China has practically frozen out key Asian economic powers Japan and India, in regional geopolitical developments. In policy circles reference to the “Chinese Marshall Plan for Central Asia” is increasingly heard.

• Kazakhstan will continue to invest in and modernize key infrastructure projects including the banking sector

• President Nazarbayev, the country’s first and only president since its independence in 1991, is not likely to introduce democratic reforms any time soon; his focus will be on the development of a middle class

• China will continue to expand its footprint in the so-called Silk Road corridor as US draws down its presence after the Afghan mission

• Development of a transportation infrastructure will be the cornerstone of the Chinese economic strategy in Kazakhstan, aimed at diversifying trade routes.

• Kazakhstan is the largest landlocked-by-territory country in the world

• Population is over 17 million, though it has one of the lowest population densities in the world

• Literacy rate is among the world’s highest at nearly 100%

• It has the world’s 11th and 14h largest proven reserves of oil and natural gas, respectively; it is the 17th largest oil and 30th ranked natural gas producer

• Its nominal GDP is around the 50th largest, and real growth rate estimate for 2012 was 5%

• Kazakhstan ranked 50 of 189 countries assessed in the 2014 World Bank, International Finance Corporation Ease of Doing Business survey

• Kazakhstan is approximately 70% Muslim and 26% Christian.

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