Kazakhstan€¢ The scale of Mr Nazarbayev's victory in the presidential election, which exceeded...

Country Report

Kazakhstan

January 2006

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

Kazakhstan at a glance: 2006-07

OVERVIEW The president, Nursultan Nazarbayev, won the December 2005 presidential election, as expected. The opposition has abandoned its pledges to take to the streets in protest against electoral violations, but the political scene will remain tense. There is, in particular, a danger of political in-fighting within the Nazarbayev administration over the forecast period, especially as parts of the elite are wary of the possibility that Mr Nazarbayev may be preparing a dynastic succession. Fiscal policy will loosen, but high oil prices will ensure that the budget posts only small deficits in 2006-07. High producer price inflation and sustained inflows of hard currency will keep annual average consumer price inflation close to 7% in 2006, although it will ease in 2007 as producer costs rise less steeply on the back of lower energy prices. In 2006-07 continued growth in imports will dampen the rate of economic expansion, but the annual growth rate in 2006-07 is still expected to average just over 8%. The current account will remain in surplus, although this will narrow from 2006 to 2007, as oil prices fall over the period on the back of easing supply constraints.

Key changes from last month

Political outlook • The scale of Mr Nazarbayev's victory in the presidential election, which

exceeded all exit polls, suggests that there will be a further tightening of political controls.

Economic policy outlook • The 2006 budget was amended in its passage through parliament, with an

additional Tenge11bn (US$83m) allocated to social spending. The EconomistIntelligence Unit expects further revisions over the course of 2006, driven bypopulist spending pressures and higher oil prices than assumed in the budget.

Economic forecast • Strong producer price disinflation in the last quarter of 2005 has led us to

moderate our forecasts, and we now expect annual average producer price inflation to come down to around 14% in 2006-07, from 24% in 2005. This has boosted our real GDP growth forecast for 2007 from 8.2% to 8.4%.

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Kazakhstan 1

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

Contents

Kazakhstan

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07 7 Political outlook 9 Economic policy outlook 10 Economic forecast

13 The political scene

19 Economic policy

22 The domestic economy 24 Sectoral trends 26 Oil and gas

30 Foreign trade and payments

List of tables 10 International assumptions summary 10 Gross domestic product by expenditure 12 Forecast summary 13 Presidential election results, Dec 4th 2005 19 State budget execution, Jan-Sep 20 Draft central budget, 2006 21 Main economic policy indicators 22 Industrial output growth, Jan-Nov 24 Cumulative consumer prices, Jan-Nov 25 Metals production, Jan-Nov 2005 29 Main macroeconomic indicators 32 Main external indicators

List of figures 12 Gross domestic product 12 Consumer price inflation 23 Gross fixed investment by sources of finance, Jan-Nov 24 Prices and earnings 25 Agricultural output, Jan-Nov 31 Gross foreign direct investment inflows, Jan-Jun 2005

Kazakhstan 3


Kazakhstan January 2006

Summary

The president, Nursultan Nazarbayev, won the December 2005 presidential election, as expected. The opposition has abandoned its pledges to take to the streets in protest against electoral violations, but the political scene will remain tense. There is, in particular, a danger of political in-fighting within the Nazarbayev administration over the forecast period, especially as parts of the elite are wary of the possibility that Mr Nazarbayev may be preparing a dynastic succession. Fiscal policy will loosen, but high oil prices will ensure that the budget posts only small deficits in 2006-07. High producer price inflation and sustained inflows of hard currency will keep annual average consumer price inflation close to 7% in 2006, although it will ease in 2007 as producer costs rise less steeply on the back of lower energy prices. In 2006-07 continued growth in imports will dampen the rate of economic expansion, but the annual growth rate in 2006-07 is still expected to average just over 8%. The current account will remain in surplus, although this will narrow from 2006 to 2007, as oil prices fall over the period on the back of easing supply constraints.

Mr Nazarbayev won 91% of the vote in the presidential election held on December 4th, which Western observers characterised as flawed. The opposition's ability to campaign was severely restricted, and the Organisation for Security and Co-operation in Europe (OSCE) reported multiple irregularities both in the conduct of the vote and during the count. Nonetheless, there is little doubt that Mr Nazarbayev would have won even in a free and fair contest.

The budget for 2006 was amended in parliament in order to accommodate additional spending on social benefits and law enforcement. The National Bank of Kazakhstan (NBK, the central bank) raised interest rates on commercial banks' deposits in order to slow down credit growth.

The pace of economic expansion is slowing relative to 2004, with industrial output rising by 4.2% in January-November 2005, compared with a growth rate of 10% in the same period of 2004. Inflation has eased over the second half of 2005, but will still exceed the official end-2005 target range of 5-7%. Unemployment has remained broadly stable over the course of 2005.

Oil revenue continues to boost exports, resulting in a January-October trade surplus of US$8.7bn. The first-half current-account surplus reached US$913m, compared with US$9.9m in January-June 2004.

Editors: Dafne Ter-Sakarian (editor); Stuart Hensel (consulting editor) Editorial closing date: December 20th 2005 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

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 Soviet republics to declare its independence following the collapse of the Soviet Union. On August 30th 1995 a new constitution was approved in a nationwide referendum. This greatly increased the powers of the presidency and largely sidelined the legislature

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

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

December 4th 2005 (presidential), August 19th 2005 (one-half of Senate), September 19th and October 3rd 2004 (Majilis). Next elections: 2008 (one-half of Senate), December 2012 (presidential), September 2008 (Majilis)

The president, Nursultan Nazarbayev, first elected in December 1991 and re-elected in January 1999 and December 2005

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

Pro-presidential: People's Coalition of Kazakhstan, which comprises Otan (Fatherland) and Asar (All Together); Civic Party of Kazakhstan and Kazakhstan Agrarian Party (AIST bloc). Opposition: For a Just Kazakhstan, which comprises the Democratic Choice of Kazakhstan (DVK), Nagyz Ak Zhol (True Bright Path), and the Communist Party of Kazakhstan (KPK); Ak Zhol (Bright Path); Republican People's Party of Kazakhstan (RNPK); Lad (Harmony; ethnic Russians).

Prime minister Daniyal Akhmetov First deputy prime minister Akhmetzhan Yesimov Deputy prime minister, minister for industry & trade Sauat Mynbayev Deputy prime minister Byrganym Aytimova

Agriculture Serik Umbetov Culture, information & sports Yesetzhan Kosubayev Defence Mukhtar Altynbayev Economy & budget planning Kayrat Kelimbetov Education & science Byrganym Aytimova Energy & mineral resources Vladimir Shkolnik Environmental protection Aytkul Samakova Finance Arman Dunayev Foreign affairs Kasymzhomart Tokayev Internal affairs Zautbek Turisbekov Justice Onalsyn Zhumabekov Labour & social protection Gulzhana Karagusova Transport & communications Kazhmurat Nagmanov

Adilbek Dzhaksybekov

Nurtay Abykayev (Senate) Ural Mukhamedzhanov (Majilis)

Anvar Saidenov

Official name

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political parties

Council of Ministers

Key ministers

Head of the presidential administration

Central bank chairman

Speakers of parliament

Kazakhstan 5


Economic structure

Annual indicators

2001a 2002a 2003a 2004a 2005b

GDP at market prices (Tenge bn) 3,162 3,558 4,488 5,682 6,795

GDP (US$ bn) 21.5 23.2 30.0 41.8 51.2

Real GDP growth (%) 13.5 9.8 9.2 9.4 9.0

Consumer price inflation (av; %) 8.6 6.0 6.5 6.9 7.5

Population (m) 14.9 14.9 15.0 15.1 15.1

Exports of goods fob (US$ m) 8,928 10,027 13,233 20,603 26,207

Imports of goods fob (US$ m) -7,945 -8,040 -9,554 -13,818 -16,374

Current-account balance (US$ m) -1,390 -1,024 -273 530 1,537

Foreign-exchange reserves excl gold (US$ m) 1,997 2,555 4,236 8,473 8,694

Total external debt (US$ bn) 14.9 17.2 22.9 30.3b 39.7

Debt-service ratio, paid (%) 31.7 34.2 34.5 25.5b 23.7

Exchange rate (av) Tenge:US$ 146.7 153.3 149.6 136.0 132.8

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2004 % of total Components of gross domestic product 2004 % of total

Agriculture 8.3 Private consumption 55.6

Industry 38.8 Public consumption 12.0

Construction 6.2 Gross fixed investment 22.1

Trade 11.9 Change in stocks 1.3

Transport & communications 12.8 Net exports 9.0

Principal exports fob 2004 % of total Principal imports 2004 % of total

Oil & gas condensate 56.8 Machinery & equipment 26.8

Base metals 5.2 Light vehicles 4.3

Refined copper 5.0 Oil products 4.0

Ferroalloys 4.1 Base metal pipes 3.8

Natural gas 2.5 Sugar 1.2

Main destinations of exports fob 2004 % of total Main origins of imports cif 2004 % of total

Switzerland 18.7 Russia 37.7

Italy 15.5 Germany 8.2

Russia 14.1 China 5.9

China 9.8 Ukraine 5.7

France 7.3 US 4.4

6 Kazakhstan


Quarterly indicators 2003 2004 2005 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 QtrGeneral government finance (Tenge m) Revenue & grants 238 284 329 302 372 397 468 528Expenditure & net lending 283 260 318 357 371 347 423 478Balance -45 24 11 -54 0 49 45 50Output GDP at current prices (US$ bn) 8,034 7,758 9,822 12,260 12,421 11,659 14,621 12,714GDP at constant 1994 prices (Tenge bn) 162 138 153 185 178 151 167 201Real GDP (% change, year on year) 10.2 9.1 9.1 9.1 10.3 9.1 9.1 8.6Industrial production (% change, year on year) 11.3 9.4 9.1 12.0 9.4 7.4 6.6 0.9Employment, wages and prices Unemployment (m) 686 675 640 630 663 653 628 616Unemployment rate (% labour force) 9.1 8.6 7.8 7.9 8.6 8.3 7.7 7.6Monthly earnings (Tenge) 28,192 27,604 27,446 28,511 31,356 28,909 31,494 35,016 % change, year on year 15.6 23.1 17.3 21.0 11.2 4.7 14.8 22.8Consumer prices (% change, year on year) 6.9 6.5 6.7 7.4 7.0 6.9 7.6 8.1Producer prices (% change, year on year) 4.0 3.7 14.8 21.6 25.6 21.8 24.0 28.5Financial indicators Exchange rate Tenge:US$ (av) 146.69 139.80 137.23 135.71 131.40 130.26 132.16 135.16 Tenge:US$ (end-period) 144.22 138.88 136.45 134.56 130.00 132.55 134.99 133.89Interest rates Deposit rate (av; %) 3.0 3.3 3.1 2.6 1.9 2.3 2.6 1.9 Lending rate (av; %) 5.3 5.6 5.8 5.1 6.0 5.3 6.1 6.0 3-month money market rate (av; %) 5.2 5.1 5.0 4.8 4.0 3.4 2.7 2.1 Long-term government bond yield (av; %) 7.1 6.7 6.6 6.5 6.4 6.4 6.0 5.9M1 (end-period; Tenge bn) 479 524 626 672 755 814 877 919 % change, year on year 25.4 39.1 45.9 38.4 57.7 55.4 40.1 36.7M2 (end-period; Tenge bn) 938 1,018 1,180 1,281 1,588 1,687 1,763 1,941 % change, year on year 29.5 34.3 37.8 35.3 69.3 65.7 49.4 51.5

Sectoral trends Coal (m tonnes) 24.2 21.8 17.9 19.3 24.0 20.9 17.2 19.9Natural gas (bn cu metres) 2.3 2.3 2.6 2.8 3.7 3.7 4.1 3.0Crude petroleum ('000 b/d) 1,122 1,117 1,148 1,215 1,292 1,262 1,234 1,196Electricity (m kwh) 17,766 18,715 15,202 14,135 18,708 19,406 14,578 14,387Foreign trade (US$) Exports fob 3,521 4,002 4,538 5,550 6,003 5,656 7,422 7,266Imports cif 2,551 2,433 3,237 3,446 3,666 3,354 4,775 4,628Trade balance 970 1,569 1,302 2,104 2,338 2,302 2,647 2,638Foreign payments (US$ m) Merchandise trade balance 750 1,422 1,172 1,924 2,268 2,259 2,710 –Services balance -615 -586 -728 -779 -890 -740 -1,177 –Income balance -493 -497 -610 -881 -795 -1,019 -1,048 –Current-account balance -464 281 -271 98 421 496 416 –Reserves excl gold (end-period) 4,236 4,944 5,934 6,082 8,473 8,478 7,190 7,408

Sources: Statistics Agency of the Republic of Kazakhstan; IMF, International Financial Statistics; Ministry of Finance; National Bank of Kazakhstan.

Kazakhstan 7


Outlook for 2006-07

Political outlook

The president, Nursultan Nazarbayev, was declared to have won 91% of the vote in the presidential election held on December 4th 2005, giving him another seven-year term in office. Western observers perceived the election to have been flawed, and opposition leaders have argued that Mr Nazarbayev's share of the vote was boosted at the expense of his main opponent, Zharmakhan Tuyakbay. The opposition was never likely to have a genuine chance to campaign, as Mr Nazarbayev does not intend to relinquish his hold on power and his administration has marginalised all potential rivals. However, the president's next term in office could prove fractious. In the process of tightening his grip on the country's political life and economic resources, Mr Nazarbayev has alienated some of his allies. If Mr Nazarbayev does not take steps to appease the business elite—for instance, by implementing measures to improve the business environment and ruling out a dynastic succession—his own supporters might decide to push him to stand down, possibly in 2007. This raises the risk of an internal struggle for the presidency, which could be very destabilising.

The economic elite has so far supported Mr Nazarbayev through fear of the redistribution of assets that a "colour revolution" might bring—as has been the case in both Ukraine and Georgia. However, the increasingly authoritarian tenor of Mr Nazarbayev's rule also causes disquiet among the elite, as there is a perception that not only is the country's political life more restrictive than ten years ago, but also that this is having an increasingly adverse effect on the conduct of business. As state control increases, officials are reportedly becoming more aggressive in their rent-seeking; many in the business community perceive corruption to be on the rise.

Concerns over the future of the country under Mr Nazarbayev are made more acute by worries that he may be seeking to engineer a dynastic succession in the next presidential election, due in 2012. Mr Nazarbayev's 91% share of the vote has aggravated these concerns, as the result is seen as a step back from the previous presidential election, where Mr Nazarbayev had been content with a victory of 82% of the vote. The 2005 election, which Mr Nazarbayev was assured to win under virtually any conditions, was in many ways considered merely as a barometer for the president's intentions in 2012, when he is constitutionally required to stand down. The 91% result could symbolise a further political tightening, the primary aim of which might be to keep the presidency in the Nazarbayev family.

There is particular concern about Mr Nazarbayev's eldest daughter, Dariga Nazarbayeva, her husband, Rakhat Aliyev, and the husband of his second daughter, Timur Kulibayev. Ms Nazarbayeva's party, Asar (All Together), did not perform well in the 2004 parliamentary election, but she remains influential. Her polished management of her father's presidential campaign has added to existing concerns as to her political ambitions. That her position is still strong

Domestic politics

8 Kazakhstan


appeared confirmed even before the election by the sudden recall of her husband from his de facto exile to Austria as ambassador; he was appointed deputy foreign minister in July. Rumours that he is back in favour would appear to be substantiated by the unexpected resignation of Mr Kulibayev—Mr Aliyev's long-standing rival for the succession—from his influential position as vice-president of the national oil and gas company, Kazmunaygaz. The fact that these two unpopular figures appear still to be vying for position is a source of concern for many in the elite.

Kazakhstan seeks to chair the Organisation for Security and Co-operation in Europe (OSCE), but that organisation's monitors delivered an unfavourable report on the conduct of the election. Mr Nazarbayev will therefore need to persuade his international critics that, first, the irregularities were minimal, and, second, that those that did take place will be thoroughly investigated. Pursuing an effective public relations strategy abroad is also important in order to secure Kazakhstan's entry to the World Trade Organisation (WTO) in 2006, simultaneously with Russia. Kazakhstan will be helped in these aims by the fact that most Western leaders favour the maintenance of cordial relations with Kazakhstan. The country's oil potential, and the fact that, as the least authoritarian president in Central Asia—with the exception of the Kyrgyz Republic, where the situation is volatile and the state greatly weakened—Mr Nazarbayev is an important fulcrum in the region, will lead the West to downplay the less savoury aspects of Mr Nazarbayev's rule.

Russia has acquired renewed status in Central Asia, partly as a result of regional leaders' fears that Western states seek to export revolution, and partly as a result of Russia's own disappointments with the West—which have led the country to refocus on its former sphere of influence. Kazakhstan, in any case, has long-standing reasons for maintaining good relations with Russia—unlike, for example, Uzbekistan, which has often sought to distance itself from its former ruler. Aside from sharing one of the longest common borders in the world, Russia is Kazakhstan's main trade partner and the transit route for most of its oil. In addition, Mr Nazarbayev's pro-Russia policy has been mindful of the large number of ethnic Russians still living in Kazakhstan, who constitute a significant share of the skilled labour force. Since independence Mr Nazarbayev has been a vocal supporter of pan-regional structures, such as the Commonwealth of Independent States (CIS). As a result, Kazakhstan is now a member of several overlapping regional bodies, most prominent of which is the Shanghai Co-operation Organisation (SCO). A priority within these frameworks will be to ensure that popular unrest—which has flared up in Uzbekistan, and is still not completely quelled in the Kyrgyz Republic—does not gain any more momentum.

Relations with China will also acquire more prominence over the forecast period, driven by energy policy. China wants to secure access to Central Asian hydrocarbons, and Kazakhstan wants to diversify its export routes so as to strengthen its negotiating position on transit prices through Russia. The opening of a new eastward pipeline from Atasu in central Kazakhstan to Alashankou in western China in December thus marked the beginning of a more intense phase in energy co-operation between the two countries.

International relations

Kazakhstan 9


Economic policy outlook

The government remains committed to its 12-year plan to diversify the economy, the "Innovative Industrial Development Strategy for the Republic of Kazakhstan for 2003-15". The plan envisages the development of "technology clusters" in key sectors—such as oil and gas machine-building, tourism, food-processing, metallurgy and textiles. This approach carries significant risks. Although the guiding principle—essentially a form of public-private partnership—could be successful in theory, in practice it has to be seen against a backdrop of endemic corruption and informal links between government officials and the business community. The situation is further complicated by the likelihood of power struggles within the Nazarbayev administration, as various factions seek to strengthen their position with a view to the eventual succession.

Reports of rising discontent within the business elite are also of concern, as there are rumours that disaffected groups might seek to manoeuvre Mr Nazarbayev out of office by 2007 if economic reform is not pursued more vigorously—pitting these groups against the vested interests blocking reform. If such a scenario were to unfold, it would cause significant disturbances to the conduct of economic policy. Consequently, there is a possibility that Mr Nazarbayev will act on his pre-election promise to improve the business environment and develop small business.

The draft budget for 2006, approved in November, envisages a deficit of 1.4% of GDP. The draft is based on an oil price assumption of US$49/barrel (dated Brent Blend), revised upwards from US$47/b in the first draft. The new oil price forecast is nonetheless conservative, and the Economist Intelligence Unit expects the deficit to come in below 1% of GDP. This still represents a fiscal loosening relative to 2004-05; persistent discontent within the business elite will make it particularly important for Mr Nazarbayev to buttress his popular standing, and we therefore expect social spending to remain high in 2006. Indeed, extensive spending pledges in the run-up to the presidential election suggest that the likelihood of mid-year revisions to the 2006 budget is high. Our current assumption is that by mid-2006 Mr Nazarbayev will have cemented his position enough to allow for a fiscal tightening in 2007.

The burden of dealing with Kazakhstan's massive oil-related foreign-exchange inflows will be shared more evenly between the National Bank of Kazakhstan (NBK, the central bank) and the government in 2006-07, as the Ministry of Finance has announced plans to accelerate Kazakhstan's external debt repayments—a measure that will act as a sterilising instrument. This will help the NBK in its efforts both to prevent a rapid pace of real appreciation and to bring inflation down. Although the extent of disinflation possible will be limited in the context of large current-account surpluses and strong capital inflows, especially in 2006, by allowing some real appreciation and tightening monetary policy the NBK will at least succeed in moderating consumer price inflation to some extent.

Monetary policy

Policy trends

Fiscal policy

10 Kazakhstan


Economic forecast

International assumptions summary (% unless otherwise indicated)

2004 2005 2006 2007

Real GDP growth World 5.0 4.4 4.0 3.9

Russia 7.2 6.0 5.6 4.8

EU25 2.4 1.7 2.0 2.2

Exchange rates ¥:US$ 108.1 110.1 113.8 104.5

US$:€ 1.24 1.24 1.25 1.34

SDR:US$ 0.7 0.7 0.7 0.7

Financial indicators € 3-month interbank rate 2.13 2.15 2.56 3.13

US$ 3-month commercial paper rate 1.48 3.49 5.13 4.88

Commodity prices Oil (Brent; US$/b) 38.5 55.0 55.0 46.8

Gold (US$/troy oz) 409.5 445.0 460.0 430.0

Food, feedstuffs & beverages (% change in US$ terms) 8.6 -1.0 -3.6 -0.7

Industrial raw materials (% change in US$ terms) 21.0 9.1 -0.2 -10.7

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

As a result of ongoing strong oil demand and our long-standing forecast of a slowdown in the growth of supplies from both Russia and other non-OPEC producers, we expect oil prices to remain broadly at current levels in 2006. Our price projections include a risk premium to reflect the growing concerns over global spare capacity in crude oil, as well as tight refinery capacity. As OPEC production remains strong, global stocks will continue to rise, and we expect prices to ease from current highs. However, global demand could rise faster than currently projected. This is certainly feasible in China and other emerging non-OECD markets. China remains the wildcard in our demand outlook: its low oil consumption per head and huge potential for further industrial expansion could have important implications for oil demand growth.

A potential risk to the global outlook is rising US interest rates, which in Kazakhstan's case could put pressure on the country's increasingly indebted banking sector. Monetary tightening will gradually reduce international liquidity, ultimately putting pressure on emerging economies that have large financing needs. The financing situation for emerging-market economies has been unusually favourable over the past two years, and the transition towards a more normal level of risk-aversion could expose weaknesses in some markets. The slowdown in Russia is another concern, as the Russian economy remains a leading driver of growth within the CIS.

Gross domestic product by expenditure (Tenge bn at constant 1994 prices; % change year on year in brackets unless otherwise indicated)

2004a 2005 b 2006c 2007c

Private consumption 995 1,126 1,249 1,362

(9.5) (13.2) (10.9) (9.0)

Public consumption 158 180 195 206

(18.4) (14.0) (8.0) (6.0)

International assumptions

Economic growth

Kazakhstan 11


Gross domestic product by expenditure (Tenge bn at constant 1994 prices; % change year on year in brackets unless otherwise indicated)

2004a 2005 b 2006c 2007c

Gross fixed investment 336 356 381 438

(12.4) (6.0) (7.0) (15.0)

Final domestic demand 1,489 1,662 1,825 2,006

(11.0) (11.6) (9.8) (9.9)

Stockbuilding 33 42 40 38

(-1.0)d (0.5) d (-0.1)d (-0.1)d

Total domestic demand 1,522 1,704 1,865 2,044

(9.6) (12.0) (9.4) (9.6)

Exports of goods & services 644 729 835 943

(10.5) (13.1) (14.6) (13.0)

Imports of goods & services 489 572 677 794

(14.5) (17.0) (18.3) (17.3)

Foreign balance 155 157 158 149

(0.0)d (0.1) d (0.1)d (-0.4)d

GDPe 1,707 1,861 2,023 2,194

(9.4) (9.0) (8.7) (8.4)

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.d Contribution to real GDP growth. e Includes statistical discrepancy.

The pace of economic expansion will slow in 2006-07, partly as a result of base effects and partly owing to the external sector's causing a drag on growth in 2007. Demand for imports will be driven both by consumer spending (on the back of rising real incomes) and oil sector development. Three large-scale projects will dominate the economic landscape over the forecast period and beyond: Tengiz in western Kazakhstan, near the port of Atyrau; Karachaganak in north-western Kazakhstan; and the Kashagan offshore field. These three projects will push fixed investment growth to an annual average of 11% in 2006-07. Consequently, we expect import volumes to grow by around 18% annually. Nonetheless, export growth—driven by oil sales—will also be strong in 2006-07, at around 14%, thereby sustaining real GDP growth in the range of 8-9%.

An upturn in inflation is the main potential threat to macroeconomic stability in Kazakhstan, but our forecast envisages a gradual easing of price pressures, especially from producer prices. Substantial producer price deflation in the last quarter of 2005 has led us to revise downwards our forecasts for 2006-07; tighter monetary policies and a sharp fall in world oil prices in 2007 should both help to bring producer prices down to an annual average of 14% in 2006-07, from an estimated five-year high of around 24% in 2005. Consumer price inflation will therefore also trend downwards, additionally helped by a monetary tightening and the government's decision to accelerate external debt repayments. However, slightly loose fiscal policies and substantial current-account surpluses will partly offset these factors and constrain the pace of disinflation.

The NBK's shift in priority from exchange-rate policy to price stability in 2004 resulted in an immediate and significant appreciation of the tenge in real effective terms—indirectly confirming that the NBK had been making a considerable effort to keep the currency on a trend of depreciation. The NBK has now accepted a measure of real appreciation, especially since the tenge remains

Inflation

Exchange rates

12 Kazakhstan


some 10% below its 1997 value, according to our calculations. Consequently we expect the tenge to appreciate in real terms in 2006, although in 2007 a sharp fall in oil prices will help the monetary authorities' ongoing sterilisation efforts, easing pressure on the currency and allowing for real depreciation.

Kazakhstan's current account posted a very large surplus in the first half of 2005, driven by growth in oil export revenue, and supporting our expectation of a surplus for the full year. The current-account surplus will be maintained in 2006-07, as oil production will continue to rise, albeit at a slower pace than in 1999-2004. Nonetheless, a marked fall in oil prices from 2006 to 2007 will narrow the current-account surplus by nearly 1% of GDP. Import spending will remain high, as the government's import-substitution policies—implicit in its industrial strategy—are unlikely to succeed in developing the manufacturing sector. Capital imports for oil sector projects will constitute the main share of the import bill, but consumer imports will also rise as ordinary Kazakhs become more affluent.

Forecast summary (% unless otherwise indicated)

2004a 2005 b 2006c 2007c

Real GDP growth 9.4 9.0 8.7 8.4

Industrial production growth 10.1 4.2 4.1 8.4

Gross agricultural production growth 0.1 6.9 5.0 2.0

Unemployment rate (av) 8.4 7.8 7.7 7.5

Consumer price inflation (av) 6.9 7.5 6.7 6.4

Consumer price inflation (year-end) 6.7 7.2 6.4 7.0

Government balance (% of GDP) -0.3 0.3 -0.8 -0.6

Exports of goods fob (US$ bn) 20.6 26.2 32.2 35.7

Imports of goods fob (US$ bn) 13.8 16.4 21.0 26.2

Current-account balance (US$ bn) 0.5 1.5 1.3 1.0

Current-account balance (% of GDP) 1.3 3.0 2.3 1.5

External debt (year-end; US$ bn) 30.3b 39.7 42.1 47.5

Exchange rate Tenge:US$ (av) 136.0 132.8 133.5 133.3

Exchange rate Tenge:US$ (year-end) 130.0 133.4 133.4 132.0

Exchange rate Tenge:Rb (av) 4.72 4.70 4.69 4.74

Exchange rate Tenge:Rb (year-end) 4.68 4.63 4.60 4.52

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

External sector

Kazakhstan 13


The political scene �

As expected, the president, Nursultan Nazarbayev, was comfortably returned to power on December 4th. The presidential election was brought forward by the government-controlled Constitutional Council—Kazakhstan's supreme court—in August. State control of the media and harassment of the opposition, along with the relatively short notice at which the election was announced, meant that the contest was not free and fair. Mr Nazarbayev can now stay in power for another seven-year term, his third in office so far—the 65-year-old president first took power as first secretary of the Soviet-era Communist Party of Kazakhstan in 1989. The foreign reaction has been relatively mild, but there are likely to be serious questions about Kazakhstan's bid to chair the Organisation for Security and Co-operation in Europe (OSCE) in 2009.

Mr Nazarbayev was declared to have won 91% of all votes, slightly higher than the largest exit poll, which put his support at 89%. Turnout was also very high, at around 75%, a result seemingly at odds with official reports halfway through the voting. Mr Nazarbayev's main contender, Zharmakhan Tuyakbay—a former speaker of the Majilis (the lower house of parliament)—stood for the opposition "For a Just Kazakhstan" bloc and won just over 6% of the vote. The second oppo-sition candidate, Alikhan Baimenov—a former government official nominated by the opposition Ak Zhol (Bright Path) party—won less than 2% of the vote.

Mr Nazarbayev has never stood in a free and fair election. He faced no opponent in the 1991 presidential election, and cancelled the 1996 presidential election. During the January 1999 presidential election only three candidates stood against Mr Nazarbayev and only one of them explicitly opposed the president (his other supposed rivals voted for him); as a result, he won 82% of the vote on an 86% turnout. His only genuine opponent in 1999, Serikbolsyn Abdildin—the head of the Communist Party of Kazakhstan (KPK)—won 12% of the vote.

Presidential election results, Dec 4th 2005 Candidate Number of votes Share of vote (%)Nursultan Nazarbayev 6,147,517 91.15Zharmakhan Tuyakbay 445,934 6.61

Alikhan Baimenov 108,730 1.61Yerasyl Abylkasymov 23,252 0.34

Mels Yeleusizov 18,834 0.28

Source: Central Electoral Commission.

Stepping away from democracy?

A resounding victory

According to official preliminary results, the incumbent, Nursultan Nazarbayev, won 91% of the vote in Kazakhstan's presidential election on December 4th; the main opposition candidate, Zharmakhan Tuyakbay, took just 6.6%. The preliminary assessment of monitors from the Organisation for Security and Co-operation in Europe (OSCE), delivered on December 5th, was broadly negative. It praised the country for holding an election that was open to opposition candidates and in which candidates received free airtime on state media. Yet it criticised the harassment and intimidation of opposition campaigns, a marked pro-Nazarbayev

A flawed election keeps the president in power

14 Kazakhstan


bias in media coverage and the use of laws protecting the dignity of the president to stifle debate. The report's harshest criticisms focused on the conduct of the authorities during polling. It reported instances of multiple voting, ballot-box stuffing and pressure on voters. Counting procedures were violated and results protocols were tampered with. There was never an expectation that Kazakhstan would hold an election that accorded fully with Western standards. Yet, equally, the country is much more open than neighbouring Uzbekistan and Turkmenistan, which are police states that hold sham elections. Therefore, although the Kazakh authorities have since independence used many of the same tricks as their Central Asian counterparts to score over-whelming election victories—preventing opposition leaders from standing for office, harassing opposition campaigns, slanting media coverage, putting pressure on voters and stuffing ballot boxes—the country is considered to have a greater potential than its southern neighbours to hold a fairly open and fairly honest election. A realistic mark of progress at this point would have been if Kazakhstan's electoral process could have been bracketed with Russia's, rather than with the rest of Central Asia's. However, the Soviet-style result is reminiscent of the heavily manipulated referen-dums periodically held in the more oppressive Uzbekistan and Turkmenistan.

Safety or respectability?

Ahead of the election, the authorities went out of their way to emphasise that any post-ballot opposition demonstrations—in the manner of opposition supporters during the "colour revolutions" in Georgia, Ukraine and the Kyrgyz Republic—would be dealt with forcibly. Mr Nazarbayev is acutely aware of the risks that such a situation could spiral out of control, as it did in the neighbouring Kyrgyz Republic in March 2005. In the wake of the violent repression of anti-government demonstrations in Uzbekistan in May, Mr Nazarbayev strengthened his control over the armed forces and indicated that he would not tolerate violence under the pretext of demonstrations against alleged ballot-rigging. The strong-arm threats employed by Mr Nazarbayev pointed to an election that would be carefully managed, to protect or extend the president's authority. At the same time, however, a contrary impulse was informing the president's behaviour. Mr Nazarbayev has always seen himself as superior to the other Central Asian presidents with regard to political behaviour. He has never resorted to the kind of crude repression or outright violence seen routinely in Uzbekistan or Turkmenistan. Mr Nazarbayev, moreover, is eager for Kazakhstan to chair the OSCE in 2009—an aspiration that depends to a large extent on Kazakhstan's holding an OSCE-approved election. This helps to explain the less stringent restrictions on opposition activities during the election campaign. As the OSCE noted, there were advances with regard to candidate registration and access to the state media. Mr Nazarbayev's conduct also altered. In previous elections he had harshly criticised the opposition; this time he dwelt more on his own achievements and tended to speak of opponents in respectful tones. The purpose of this seemed clear enough: to show that Kazakhstan's political system and its leaders are maturing.

Old habits

At the key moment, however, Kazakhstan's leadership—or its electoral officials—failed to live up to the promises of a more open election. The fact that the official result for Mr Nazarbayev was more than 10 percentage points above the level of

Kazakhstan 15


support indicated by pre-electoral opinion polls and most exit polls add weight to the OSCE's assertions of voting and counting fraud. The 2005 presidential election result not only marks a failure for Kazakhstan to take a step towards fairer elections, in one sense it represents a step backwards. In two presidential contests and one referendum to extend his term, Mr Nazarbayev's share of the vote fell gradually, from 98.8% in 1991 to 95.4% in 1995 (the referendum) and 81% in 1999. A showing close to or slightly below the 1999 level could have been credibly presented as an accurate reflection of popular sentiment in Kazakhstan. The 90%-plus result cannot. It also seems to confirm a regressive trend seen in the past two years, following the 2004 parliamentary election where the opposition, in the form of Ak Zhol (Bright Path), won only one of the 77 available seats.

Who is to blame?

The one element of uncertainty surrounding the result is whether it reflects Mr Nazarbayev's express will, or the decision of local officials not to risk allowing a reasonably open contest. Mr Tuyakbay, for example, says that Mr Nazarbayev wanted the 2004 parliamentary vote to be reasonably free, but his wish was frustrated by local officials unwilling to leave the outcome to chance. It could be that the same thing has happened this time, with pro-Nazarbayev officials determined to ensure that the president scores an overwhelming victory and that they, as individuals, are not responsible for the municipality that delivers the lowest pro-presidential share of the vote. In either case, the medium-term political outlook for the country is worrying, as the heavy control exercised by the Nazarbayev administration over the electoral process leaves little room to believe that the president might consider a transfer of power. Instead, it suggests that the 2012 election might be even less free and fair—engineered to bring another member of Mr Nazarbayev's family to power—or, in a worst-case scenario, that there might not be an election at all. That would mark Kazakhstan's full adoption of the "Eurasian" political model, essentially a thinly veiled dictatorship, advocated by Islam Karimov in Uzbekistan and Saparmurad Niyazov in Turkmenistan. �

The electoral process worked consistently to deliver a massive victory for Mr Nazarbayev. First, most media coverage was devoted to Mr Nazarbayev, focusing on Kazakhstan's economic growth and promoting a close identification of the president with his country. Second, a public-sector pay rise of 32% on July 1st, with another 30% increase promised in 2007, secured the loyalty of the large public-sector workforce and its dependents. Third, government control over the Central Electoral Commission (CEC), ensured that the interpretation of sometimes vague election rules and the conduct of the count were strongly biased in favour of the incumbent. Finally, the authorities' close monitoring of the activities of political parties and non-governmental organizations (NGOs) impeded political competition and attempts to keep track of electoral violations.

Mr Nazarbayev enjoys undoubted popular support, and there is no question that he would have won without electoral manipulation. Reasonably reliable exit polls by the International Republican Institution—a US NGO—claimed that Mr Nazarbayev had won 83% of the vote; even his lowest exit-poll rating gave him an overwhelming victory of 77%. Yet despite the fact that electoral fraud was not necessary to ensure Mr Nazarbayev's re-election, the conduct of the

System guaranteed to deliver the pro-Nazarbayev vote

16 Kazakhstan


voting fell clearly below international standards. According to the OSCE mission, there were examples of multiple and proxy voting, ballot-box stuffing, and pressure on students to vote, as well as a failure to seal ballot boxes in some polling stations. In its statement after the election, the OSCE team of observers said that the government lacked the political will to hold free and fair elections. �

Observers from the Commonwealth of Independent States (CIS) predictably—given that most member countries have authoritarian or semi-authoritarian political systems—gave the elections a clean bill of health, and the Russian government endorsed Mr Nazarbayev fully. Less consistent was the reaction from the US, which—unlike Russia—has a stated policy of promoting democracy abroad. The US assistant secretary of state, Daniel Fried, visited Kazakhstan on September 30th and claimed after meeting Mr Nazarbayev that he had received assurances that the election would be fair. The US Secretary of State, Condoleezza Rice, followed Mr Fried to Kazakhstan a fortnight later and publicly called for free and fair elections. Yet after the election result was announced, the US official reaction was muted. On December 7th the State Department echoed the OSCE's reservations about the conduct of the election, but also noted that the result reflected the will of the electorate.

According to the US, Mr Nazarbayev has promised that the allegations of irregularities will be investigated, a pledge with which the US appears to be satisfied. The difficulty for the US is that its troops have been forced to leave the Karshi-Khanabad airbase in southern Uzbekistan, making access to Afghanistan and south-west Asia for counter-terrorism operations increasingly difficult. The US appears to have decided that the strategic priority of access to Central Asia for counter-terrorism for the moment outweighs what little it might be able to do to encourage democratic reform in Kazakhstan. �

During his election campaign Mr Nazarbayev underlined the relative economic achievements of Kazakhstan and its political stability, especially when compared with the recent episodes of unrest elsewhere in the CIS. The stress on economic development was further underlined in Mr Nazarbayev's post-election victory speech, in which he stressed that his was a policy of "evolution" and not "revolution." Mr Nazarbayev, who had already engaged in a pre-election spending spree by raising public-sector salaries, promised after the election that salaries will double by 2013 and that Kazakhstan's standard of living will approach that of eastern Europe.

There was little actual political content to the president's platform beyond vague promises of gradual democratisation and calls for a responsible—meaning quiescent—opposition. Mr Nazarbayev nonetheless appeared conciliatory towards his opponents during the election campaign, marking a change from previous elections. This, together with the president's promise to introduce "new faces" and "new ideas" in his next term, could signal a concern in the Nazarbayev camp as to the continued support of key business elites. There are persistent rumours in Kazakh political circles of internal discontent and, in particular, of resistance to the possibility that Mr Nazarbayev might seek to engineer a dynastic succession. The extensive social benefits promised by

President promises to deliver social benefits

International criticism is minimal

Kazakhstan 17


Mr Nazarbayev could therefore be seen as a pre-emptive move to ensure continued popular support in the event of an attempted "palace coup".

Fear of doubters within the elite might also explain Mr Nazarbayev's reluctance to confront his opponents directly. The president decided not to participate in a television debate among the presidential candidates on November 17th, choosing instead to go on an official visit to Ukraine. The official reason given by Mr Nazarbayev was, essentially, that he wanted to give the other candidates a chance. However, Mr Nazarbayev's abstention from the debate could in fact reflect a fear of looking disadvantaged in a direct confrontation with his younger and potentially more dynamic rivals. �

The government kept the opposition and its sparse media outlets in check mainly through a campaign of petty harassment, and by sending the police and the secret services to monitor opposition gatherings. Several opposition activists were arrested and briefly jailed for taking part in what the police decided were "unauthorised" rallies. The government also made vaguely threatening statements to discourage the population from participating in any protests against the eventual results of the election. This was partly achieved by reporting on the situation in the Kyrgyz Republic in the most unfavourable light possible, and repeatedly broadcasting footage of the March riots in that country. Parallels were then drawn between the instability in the Kyrgyz Republic and what a future without Mr Nazarbayev might look like.

The opposition had been greatly encouraged by the ouster of the Kyrgyz president, Askar Akayev, in March, but events since then failed to bear out their hopes of sweeping change across the CIS. The violent suppression of unrest in Uzbekistan in May, and the flawed yet incident-free parliamentary election in Azerbaijan in November, dampened the already weak prospects of a "colour revolution" in Kazakhstan. By December, sensing little popular support for its cause, the opposition had abandoned its threats of street protests and promised only to seek redress for electoral violations through legal channels.

The opposition's inability to campaign effectively—hampered by the considerable administrative and coercive resources deployed against it—is, however, only part of the reason for its lack of popularity. Opposition leaders also suffer from an image problem; most of them were originally part of the Nazarbayev establishment, and are therefore perceived by many to be no better—and potentially worse—than those already in power. This perception is not helped by the many rivalries among the various leading figures in the opposition, which strengthen the popular view that they are just disaffected and power-hungry. Although in 2005 the opposition was more united than in previous elections, the underlying rivalries between its leaders still leave the current alliances potentially ill equipped to last long. �

There is a fear in Kazakhstan that the election has confirmed not only Mr Nazarbayev's grip on the state, but also that of his family. The president has three daughters, all of whom have important business interests and are increasingly visible. With the opposition marginal and irrelevant, the field is open for the president to groom one of his daughters or two sons-in-law to

Election aggravates fears of dynastic succession

Opposition parties could not campaign effectively

18 Kazakhstan


succeed him. The president's eldest daughter, Dariga Nazarbayeva, is a deputy of the Majilis and leads her own political party, Asar (All Together), which supports her father. Along with her husband, Rakhat Aliyev, she is considered a possible successor to Mr Nazarbayev. Mr Aliyev is a former high-ranking official in the KNB (the local successor to the KGB), rumoured to have antagonised key members of Mr Nazarbayev's circle, and possibly Mr Nazarbayev himself, in late 2001. As a result, Mr Aliyev was sent to Vienna as ambassador, a post from which he returned in July to become deputy foreign minister—a move widely interpreted to mean that he is now back in favour. Mr Aliyev also reportedly controls NurBank, a leading bank in Kazakhstan.

The president's second and third daughters, Dinara Kulibayeva and Aliya Nazarbayeva, are less likely successors, as they have so far not shown any interest in politics. However, Ms Kulibayeva's husband, Timur Kulibayev, is widely thought to harbour presidential ambitions. Until October Mr Kulibayev was the first vice-president of the state-owned oil and gas company, Kazmunaygaz, and is said to control Kazakhstan's third-largest bank, Halyk Savings Bank. �

The election campaign largely avoided the most controversial issue in Kazakh politics, high-level corruption. The US Department of Justice has for some years now been investigating James Giffen, a US businessman and former advisor to Mr Nazarbayev, who is indicted on charges of making illegal payments to high-ranking Kazakh officials. His trial has been repeatedly postponed, but it is scheduled to start in April 2006. As part of his defence strategy, Mr Giffen has named Mr Nazarbayev as one of the recipients of these payments. Public discussion of the case is taboo in Kazakhstan, and the government takes all measures available to suppress discussion of the subject.

Attempts by opposition newspapers to report on Mr Giffen during the election campaign were thus vigorously suppressed. The government seized all copies of the newspaper Zhuma-Times on November 3rd on the grounds that it had insulted Mr Nazarbayev's honour. The newspaper was carrying an article about Mr Giffen's upcoming trial in New York. The government also impounded copies of Svoboda Slova in October after the newspaper attempted to cover Aliya Nazarbayeva's property development business. Zhuma-Times was then suppressed a second time on December 8th after it criticised the conduct of the presidential election. �

On November 11th a leading figure in the For a Just Kazakhstan bloc, 61-year-old Zamanbek Nurkadilov, was found dead from gunshot wounds in his home in Almaty, the former capital. He was reportedly killed by two shots to the chest and one to the head. Two of the shots appeared to have been fired through a cushion that was found next to his corpse. Baruzhan Mukhamedzhanov, the interior minister, and the police stated that Mr Nurkadilov was likely to have committed suicide, but the case is still under investigation.

His widow and For a Just Kazakhstan both claim that Mr Nurkadilov was murdered for political reasons. The main argument supporting this theory is Mr Nurkadilov's announcement, shortly before his death, that he would soon be making public evidence of high-level corruption in Kazakhstan, connected not

Press cannot report freely on the Nazarbayev family

Suspicious death casts shadow over politics

Kazakhstan 19


just to the ongoing investigation into Mr Giffen's affairs but also to other privatisations concluded in the early 1990s. On the other hand, Mr Nurkadilov was widely considered an erratic and unpredictable character, rumoured to have already had significant disagreements with his fellow opposition leaders in For a Just Kazakhstan. As a result, there is also speculation that Mr Nurkadilov may have been murdered by his colleagues, seeking to be rid of an awkward encumbrance. Finally, the police also claim that his domestic life was turbulent, supporting the view that he was depressed and committed suicide.

If the allegations that Mr Nurkadilov was murdered for political reasons were true, he would be the first recorded victim of such a crime since Kazakhstan became independent in 1991. So far the harshest punishment meted out to an opposition figure has been the imprisonment in 2002 of Galimzhan Zhakiyanov, a former governor of Pavlodar province, for alleged abuse of office. Consistent pressure from the EU and the US in the context of Kazakhstan's aspiration to chair the OSCE has led the authorities to release Mr Zhakiyanov early, at least in theory. In practice his freedom of movement remains restricted.

Economic policy

Higher than expected oil export revenue in the second half of 2005 served to offset the increase in public-sector spending motivated by the presidential election. As a result, Kazakhstan ran a consolidated fiscal surplus of Tenge144.6bn (US$1.1bn) in January-September 2005, compared with a deficit of Tenge19.1bn in the same period of 2004. The effect of high oil prices was clearly evident in a doubling of corporate tax revenue; this also highlighted, however, the fiscal accounts' reliance on oil, as corporate tax receipts accounted for around one-third of all tax revenue. The nine-month surplus nonetheless reflected a return to fiscal prudence after the mid-year election-driven outlay.

State budget execution, Jan-Sep (Tenge m)

2004 2005Revenue 915,057 1,383,330 Tax revenue 834,300 1,320,861 Corporate tax 234,491 488,132 Income tax 70,005 85,565 Social tax 119,620 138,677 VAT 191,185 244,114 Non-tax revenue 67,629 42,471Expenditure 871,819 1,153,358 Debt-servicing 21,750 21,211 Public services 57,016 66,560 Defence 43,403 56,467 Law enforcement 84,792 110,034 Education 139,722 178,175 Health 88,529 124,388 Social benefits 202,002 253,692

Net lending and financial operations 62,385 85,415Balance -19,147 144,557

Source: Ministry of Finance, Statistical bulletin.

Oil revenue pays for social spending

20 Kazakhstan


The government is being cautious with its budget for 2006, but it is subject to considerable spending pressures as the various parts of the elite seek to bolster popular support for the presidential administration led by Nursultan Nazarbayev. In the second parliamentary reading of the draft republican (central) budget, deputies amended expenditure to include an additional Tenge11bn, an adjustment that was accommodated with an increase in the forecast for world oil prices (from US$47/barrel to US$49/b) in order to leave the deficit target at the planned 1.4% of GDP.

The amendments clearly reflected the populist tenor of spending priorities. Revenue was cut from investment spending on various projects—for instance, the national innovation fund and the investment fund were each cut by Tenge1bn—in order to redistribute it among social spending categories. Spending on agriculture was increased by Tenge7.9bn, on education by Tenge5.5bn and on healthcare by Tenge2.6bn. Another expenditure item that has steadily attracted resources is law enforcement and security, spending on which was increased by Tenge2.6bn.

The amended budget was approved on November 9th, but there is evidence to suggest that further populist revisions are likely over the course of 2006. Already in December the economy minister, Kayrat Kelimbetov, announced that a new system for transferring revenue into the National Fund of the Republic of Kazakhstan (NFRK, the oil windfall fund) would be introduced in mid-2006, ahead of the originally planned date of January 1st 2007. From July 1st, all tax revenue from oil exports will be directed to the fund, instead of that from a few selected oil companies, as at present.

Draft central budget, 2006 Tenge bn % of GDPExpenditure 1,492 18.5Revenue 1,606 19.9

Balance 114 1.4

Source: press reports.

The National Bank of Kazakhstan (NBK, the central bank) is attempting to sterilize the large foreign-exchange inflows from oil exports by using a wide range of policy tools. Having already twice raised its benchmark interest rate, the refinancing rate, during 2005, the NBK has switched to the deposit side of the money market. To restrict liquidity, in October the NBK increased its rate on seven-day deposits for commercial banks to 3.5% from a previous rate of 3.2%. The hope is that the higher deposit rate will encourage banks to place more money with the NBK, thereby slowing the credit growth rate. The refinancing rate remains steady at 8%. The authorities' dilemma is unchanged—higher interest rates may slow down the inflation rate but they may also attract speculative capital and so cause additional nominal and real appreciation of the currency.

The NBK continues to issue a large volume of short-term notes as part of its sterilisation policy. During the first three quarters of 2005 the NBK issued Tenge2.7trn (US$20bn) in short-term notes. Despite the lack of any deficit financing requirement during the first three quarters of 2005, the government sold Tenge1.4trn of the second most frequently issued official debt instrument,

Budget for 2006 characterised by populist priorities

Monetary policy is tightening as sterilisation efforts continue

Kazakhstan 21


the MEOKAM, a government bond of between one- and five-year maturity (generally two years).

Kazakhstan has managed to avoid the financial crises that have dogged other former Soviet republics thanks to a well-thought-out and consistently implemented programme of banking sector reform in the 1990s. The danger for the authorities now is that, with liquidity increasing on the back of the oil boom, banks may not be making wise lending decisions. The expansion of all monetary aggregates is welcome because the economy needs to be remonetised after the high inflation of the 1990s. However, the acceleration of money supply growth could become increasingly difficult to accommodate, and there are inflationary and bad-credit dangers looming.

Credit growth in recent years has far exceeded the pace of economic expansion. By the end of October total banking sector loans to the real economy were worth Tenge2.2trn, or nearly 40% of GDP. Most of these loans were to corporate borrowers, who owed Tenge1.6trn of the outstanding loan book, an increase of nearly 50% year on year. Loans to households were growing even more strongly—albeit from a lower base—and were worth Tenge578bn, an increase of 118% year on year, largely attributable to mortgage lending.

To an extent, the banks are protecting themselves against credit risk by imposing high interest rates. Corporate loans in tenge of one to five years' maturity in October cost 13.8% per year, and even foreign-currency corporate loans carried a high interest rate of 12.2% per year. Accordingly, the currency composition of the loan book is becoming less dollarised than it was in the past. Tenge-denominated loans at the end of October 2005 accounted for 53% of all loans, compared with a share of 40% in 2002.

Main economic policy indicators Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecGeneral budget revenue (Tenge m) 2003 122 80 67 83 90 69 88 76 92 60 77 1012004 104 91 90 107 131 91 110 99 93 115 134 1232005 154 127 116 181 152 135 170 185 173 205 – –General budget expenditure (Tenge m) 2003 46 76 77 81 85 102 115 85 101 80 85 1182004 43 100 116 101 94 122 126 108 122 98 118 1562005 44 146 157 130 134 159 153 151 173 172 – –General budget balance (Tenge m) 2003 76 3 -10 2 5 -33 -27 -9 -10 -20 -8 -172004 60 -9 -27 6 37 -32 -16 -9 -29 17 17 -332005 110 -20 -41 51 18 -24 17 34 0 33 – –Exchange rate (Tenge:US$; av) 2003 155.53 153.98 151.55 151.82 151.21 149.15 146.94 146.76 147.90 147.92 147.07 145.082004 141.20 139.18 139.01 138.20 137.12 136.38 135.57 136.12 135.45 133.34 130.81 130.042005 130.11 130.13 130.53 131.37 131.37 133.75 135.66 135.52 134.31 133.83 134.10 –

Real effective exchange-rate index (CPI-based; 1997=100) 2003 66.9 67.9 68.7 69.1 71.3 72.4 72.8 72.2 71.9 74.0 75.7 78.92004 82.1 83.6 82.4 82.2 82.6 83.4 84.6 84.3 85.3 87.8 91.6 94.02005 94.1 93.8 93.8 92.6 92.5 89.7 88.3 88.9 89.5 89.8 – –Real effective exchange-rate index (PPI-based; 1997=100) 2003 81.2 83.0 84.4 84.3 84.4 82.9 84.7 85.3 86.0 87.3 89.6 92.4

Rapid credit growth remains a significant concern

22 Kazakhstan


Main economic policy indicators Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2004 96.9 98.2 99.2 101.2 103.0 104.7 106.1 110.6 113.3 117.9 124.4 123.62005 119.8 123.1 126.3 129.8 129.4 125.8 129.7 134.4 136.8 131.7 – –M2 (Tenge bn) 2003 686 732 758 779 818 856 869 873 947 956 951 9382004 935 971 1,018 1,052 1,111 1,180 1,187 1,234 1,281 1,335 1,488 1,5882005 1,514 1,581 1,687 1,616 1,710 1,763 1,792 1,800 1,941 – – –

M2 (% change, year on year) 2003 32.0 40.6 40.8 38.9 41.2 44.8 43.9 42.6 46.5 41.0 43.0 29.52004 36.4 32.7 34.3 35.0 35.8 37.8 36.5 41.3 35.3 39.6 56.5 69.32005 61.9 62.8 65.7 53.6 53.8 49.4 51.0 45.8 51.5 – – –

Notes. General budget expenditure data include net lending. M2 is cash in circulation plus deposits in tenge and convertible currency, according to IMF definitions. Real effective exchange rate indices are based on a US dollar/euro basket.

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

The domestic economy

Economic growth remains strong, in large part owing to the fact that massive levels of foreign direct investment (FDI) in recent years have built up capacity in the oil sector. Not only have oil production volumes grown considerably over the past ten years, but the expansion of the oil sector is also filtering through to the rest of the economy. In particular, the banking sector is growing rapidly in order to keep up with demand for credit and for banking services. The growth picture is positive, but with the caveat that it is almost entirely dependent on the oil sector and international commodity prices.

Real GDP grew by 8.9% year on year in the first three quarters of 2005, a little slower than the year-on-year growth rate recorded a year earlier of 9.1%. However, industrial output in January-September rose by just 4.2% year on year, far slower than the 10.3% year-on-year rate posted during the first three quarters of 2004. Industrial growth failed to pick up in the fourth quarter of the year, remaining static at 4.2% over January-November. The slower pace of expansion in Kazakhstan's industrial output is owing to a sluggish oil sector, where growth has stalled as investment projects have come to an end. Oil production should increase in 2006 when the expansion programme at the Tengizchevroil (TCO) joint venture, led by Chevron (US), comes on stream.

Industrial output growth, Jan-Nov (% change, year on year)

2004 2005Manufacturing 8.5 5.5Mining 12.8 3.4 Oil extraction 13.5 3.7Utilities 3.4 2.1Total 10.0 4.2

Source: Statistics Agency of the Republic of Kazakhstan.

The tailing off of FDI in the oil sector—attributable to the nature of the investment cycle in hydrocarbons projects—has had little effect on gross fixed capital investment, which is rising strongly on the back of residential housing

Economy remains robust, but output growth is slowing

Capital investment growth remains strong

Kazakhstan 23


construction. Gross fixed capital investment rose by 23% year on year in the first eleven months of 2005, reaching Tenge1.9trn (US$14.3bn). Foreign investors were responsible for 26% of all fixed capital investment in the period, with local firms and households responsible for just over 57% of the total. The concentration of investment in the oil and gas sector means that some 36% of all fixed capital investment during the first three quarters of 2005 was in one province, Atyrau, with 13% in the former capital and largest city, Almaty, and a further 10% in the new capital, Astana.

The rapidly expanding economy, in particular the construction sector, has stabilised the labour market. Unemployment has remained broadly static over the course of 2005, falling to 655,200 persons (8.3% of the workforce) in November from 656,200 (8.4% of the workforce) in November 2004. Although there is still considerable underemployment in the state and agricultural sectors, unemployment figures in Kazakhstan paint a fairly accurate picture compared with the data from other republics in Central Asia.

The fact that unemployment figures are not coming down rapidly nonetheless highlights one the drawbacks of Kazakhstan's reliance on the oil sector, as hydro-carbons extraction is not, after the initial development phase, labour-intensive. Furthermore, workers in the booming residential construction sector tend to operate in the grey economy. Developing the labour market further and bringing the official employment figures up would require improving the business climate for small and medium-sized enterprises (SMEs), which in other transition economies have been an important driver of both growth and economic diversi-fication. The president, Nursultan Nazarbayev, made several pledges ahead of his re-election in December to develop the SME sector, but the pervasive corruption and red tape in Kazakhstan are likely to prove difficult to eradicate.

Consumer price inflation is starting to moderate, but it remains above the government target. The fast-growing economy, a degree of fiscal relaxation in 2005 and heavy financial sector borrowing abroad have all contributed to an expansion in the money supply. As a result, annual consumer price inflation in November was still high at 7.5%, even if this was a deceleration from the 2005

Labour market is stable

Consumer price inflation is slowing marginally

24 Kazakhstan


peak of 8.2% in July. Unless there is substantial deflation in December, which is unlikely, the government will fail to meet its end-2005 target of 5-7%.

A key factor that is pushing up prices is strong real wage growth, in part a result of the government's pre-electoral public-sector wage increases. Average monthly wages in November were Tenge37,521 (US$280), an increase of 27% year on year in nominal tenge terms, and of almost 18% in real terms.

Cumulative consumer prices, Jan-Nov (% change)

2004 2005Food 6.1 6.8Non-food 5.9 5.2

Market services 5.2 7.6Total 5.8 6.6


The authorities' efforts to prevent excessive real appreciation appear to be bearing fruit. The authorities have been assisted by a substantial fall in FDI during 2005. Capital repatriation by foreign investors has had no negative impact on the real economy, while providing relief by reversing the effect of massive foreign capital inflows in recent years. As a result, the nominal exchange rate of the tenge has, after falling a little early in the year, begun to stabilise at around Tenge133-135:US$1. By end-November the tenge was trading at Tenge134.1:US$1, down in nominal terms by 2.5% year on year. In real terms, the tenge appreciated by just 0.6% year on year in November.

Sectoral trends

Output trends in the metals sector continue to be uneven, but the sector is making an important contribution to export earnings thanks to higher international prices for most metals. Copper earnings during the first three quarters of 2005 reached US$1bn, up by 41% year on year, despite a modest increase of 2.8% in volume terms (to 301,700 tonnes). The average export price for Kazakh copper in the first three quarters of 2005 was US$3,354/tonne, an

Tenge's real appreciation is slowing

Mixed fortunes in metals, but larger export earnings

Kazakhstan 25


increase of 37.2% year on year and close to the London price of US$3,467.4/tonne over the period.

The second most important metals export in January-September was ferroalloys, of which Kazakhstan exported 875,700 tonnes—a volume increase of 5.8% year on year. Earnings from this commodity were US$741m, up by 26% year on year. Iron ore export receipts were also boosted by soaring international prices. Kazakhstan earned US$519.6m from iron ore exports in the first three quarters of 2005, up by 88% on year, even though the quantity of iron ore exports dropped to 7.298m tonnes—a fall of 13% year on year.

Metals production, Jan-Nov 2005 '000 tonnes % change, year on yearSteel 4,086 -17.5

Alumina 1,378 2.7Ferroalloys 1,395 5.8Copper 380 -7.1

Zinc 325 13.3


The agricultural sector, which is largely unable to benefit from the economic surge caused by the oil sector, has nonetheless experienced reasonably good growth in 2005. The difficulty for the sector is that it suffers from overmanning, and will struggle to compete in the future assuming even a slight real appreciation of the tenge. The government will therefore continue to subsidise the sector—as shown by the additional budget expenditure planned for it in 2006 (see Economic policy)—as a means of sustaining employment until the economy is more broadly diversified. The agricultural sector grew by 7.2% year on year in January-November 2005, with crop production up by 9% and animal husbandry up by 4.7% year on year. The contribution of agriculture to exports is nonetheless continuing to fall. Kazakhstan sold just 1.2m tonnes of grain abroad during the first three quarters of 2005, down by 40% year on year. Accompanied by weaker export prices, the result was that grain export earnings dropped to US$146m in that period, a fall of more than half year on year.

Improved performance in agriculture

26 Kazakhstan


Oil and gas

Output of liquids (crude oil and gas condensate) rose by 5.8% year on year in January-November to 56.3m tonnes (1.2m barrels/day). Production of crude oil was stagnant in that period, barely growing by 0.7% year on year, but gas condensate output is rising rapidly (by 25.4% year on year in January-November) as a result of the start of production at the Karachaganak consortium, led by the BG Group (UK) and Eni (Italy). Output at Karachaganak is approaching 220,000 b/d. The joint venture led by Chevron (US), Tengizchevroil (TCO), nonetheless remains the largest single oil producer in Kazakhstan, with output of around 280,000 b/d. The joint venture is currently engaged in a US$4bn expansion programme that will continue until the end of 2006, and will result in production capacity of up to 500,000 b/d.

Kazakhstan is also developing its gas sector, with natural gas production in the first eleven months of 2005 rising by 16.3% year on year to 23bn cu metres. The development of the sector is designed to end gas imports from Uzbekistan, which has proved an unreliable supplier in the past. The neighbouring republic, which supplies gas to southern Kazakhstan, is raising the price of its gas exports to southern Kazakhstan from US$42 per 1,000 cu metres to US$54 per 1,000 cu metres. Kazakhstan is therefore starting to produce gas from a small set of fields in the south of the country at Amangeldy.

There has been an impressive recovery in the downstream sector, with output of all major refined oil products growing sharply. During the first eleven months of 2005 petrol output reached 2.1m tonnes, an increase of 23% year on year, and diesel production grew by 28% year on year to 3.4m tonnes. Output of fuel oil performed even more strongly, rising by 32% year on year to 3.3m tonnes. Yet despite the increase in production at Kazakhstan's three refineries—at Atyrau, Shymkent and Pavlodar—there is still a shortage of refined products in Kazakhstan. Neighbouring states cannot produce enough to meet their own needs and so import from Kazakhstan, which led to a surge of nearly 150% year on year in the value of refined products exports during the first three quarters of 2005. Oil producers in Kazakhstan therefore tend to export their oil in order to earn hard currency, rather than selling to the domestic market for much lower prices—largely fixed by the government.

The government response to this tactic has been heavy-handed, and involved the imposition of export controls. However, such measures seem to have only a limited effect, and encourage corruption among customs officials. The government initially banned all diesel exports as from July 1st until October 15th and then extended the ban until end-2005. The authorities also banned petrol exports from October 24th until end-2005. The customs control committee of the Ministry of Finance, which decides on export bans, also issued a decree prohibiting all exports of fuel oil from October 3rd 2005 until March 1st 2006.

In August it was announced that PetroKazakhstan (Canada) would be bought by the China National Petroleum Corporation (CNPC) for US$55 per share, valuing the company at US$4.18bn. The Canadian firm owned four major assets in Kazakhstan: the Kumkol oilfield in Kyzylorda province, an export

Gas condensate output growth outperforms crude oil

Refinery output is rising, but problems persist

PetroKazakhstan is sold to CNPC, after some delays

Kazakhstan 27


pipeline from the Kumkol field, the Shymkent oil refinery in Shymkent province, with a capacity of 140,000 b/d, and a 50% share in a joint venture with Lukoil (Russia) called Turgay Petroleum. Total proven and probable reserves are 550m barrels of oil, and peak production in 2004 was 151,000 b/d—making PetroKazakhstan the fourth-largest oil producer in the country after TCO, the Karachaganak consortium and the state-owned Kazmunaygaz. After lengthy delays and some controversy, the sale was finally completed in October, but not without a significant victory for the government: as part of the deal, CNPC agreed to sell a 33% stake in the company to Kazmunaygaz, giving the state greater leverage over the domestic oil products market, as it required.

PetroKazakhstan: a difficult exit

A straightforward transaction becomes complicated

The sale of PetroKazakhstan (Canada) to the China National Petroleum Corporation (CNPC) suffered from significant delays, perceived to be caused in part by the govern-ment's intention to regain control of the Shymkent refinery, and in part as another stage in the state's long-running feud with the Canadian company—which suffered persistent harassment during its years of operation in Kazakhstan. The government appealed to its right of pre-emption on all deals, as stipulated in changes to investment legislation passed in 2004. In September Dariga Nazarbayeva, the president's eldest daughter and a member of the Majilis (the lower house of parliament), asked that PetroKazakhstan lose its exploration permits because of its supposedly poor environmental record. The government then enacted legislation specifically aimed at PetroKazakhstan, as well as taking the company to court for alleged price-fixing. The Majilis passed a bill on October 5th allowing the government to step in when shares in companies that are engaged in any form of mining are up for sale. The second part of the campaign was to step up the ongoing prosecution of PetroKazakhstan for alleged price-fixing of refined oil products. The government's regulatory agencies had already imposed fines worth Tenge4.7bn (US$35m) on seven marketing firms linked to PetroKazakhstan. The committee for the protection of competition of the Ministry of Industry and Trade then demanded that PetroKazakhstan pay the authorities Tenge70bn—the profit that the company allegedly made by unlawfully manipulating prices. The Southern Kazakhstan Regional Court in Shymkent then ruled on November 24th that PetroKazakhstan had made illegal profits of Tenge96bn. The court also imposed a fine of Tenge1.47m (US$11,000). The large sums demanded are now in theory owed by CNPC, but as they relate to 2003 operations they could—also in theory—be demanded by CNPC from PetroKazakhstan's former shareholders.

Lukoil also objected to the sale to CNPC

Lukoil also weighed in to attempt to stop the sale. The Russian firm, which has good relations with the Kazakh government, is in dispute with PetroKazakhstan, and claims US$256m from the Canadian company. Lukoil sought legal redress in front of a Canadian court in Calgary, claiming that it had a right of pre-emption to buy up the PetroKazakhstan share of Turgay Petroleum. After the Canadian court ruled against the Russian firm on October 25th, Lukoil said that it would take its case to the International Court of Arbitration in Stockholm. However, its chances of success were considerably undermined by the completion of the CNPC deal.

28 Kazakhstan


While the argument over the sale of PetroKazakhstan to CNPC was raging, work was proceeding on an oil export pipeline linking Kazakhstan to China. The pipeline, from Atasu in Kazakhstan to Alashankou in the north-western Chinese province of Xinjiang, is a joint venture between CNPC, which already owns Aktobemunaygaz in western Kazakhstan, and KazTransOil, the fully-owned pipeline subsidiary of Kazmunaygaz. The pipeline was completed in November after a year and a half of work, and oil started to flow on December 15th. The pipeline is 1,000 km long and will have eventual throughput capacity of 20m tonnes/year (416,000 b/d). The pipeline, as well as CNPC's acquisition of PetroKazakhstan, is part of a Chinese government strategy of meeting the country's growing oil requirement with Central Asian gas.

The China route

A new pipeline opens new outlets for Kazakh oil

On December 15th Kazakhstan's president, Nursultan Nazarbayev, formally opened an oil pipeline linking Atasu in central Kazakhstan with Alashankou in the north-western Chinese province of Xinjiang. Its initial capacity is 10m tonnes/year, or approximately 210,000 barrels/day. The US$800m pipeline has been paid for by Kazmunaygaz, Kazakhstan's state oil and gas firm, and the China National Petroleum Corporation (CNPC). Because Atasu is not currently equipped to receive oil from Kazakhstan's oil-producing regions, the pipeline will initially be filled by crude delivered by rail from Aktobe and western Siberia (Russia). Within the next few years, however, an existing pipeline that links Atasu with the Kumkol oilfield will be reversed to allow Kumkol's oil to be delivered to China. After 2010 a 700-km pipeline will be built between Kumkol and Kenkiyak to link China to other Kazakh oilfields. At that time, the capacity of the line is to be doubled to 20m t/y. Kazakhstan currently produces around 1.3m b/d, the majority of which is earmarked for export. The lion's share of exports goes via the Russian pipeline system, although increasing quantities are now being delivered from the Tengiz field via the Caspian Pipeline Consortium (CPC) line to Novorossisk, a Russian port on the Black Sea. Much smaller volumes of Kazakh oil are exported via Azerbaijan and Iran (the latter through swaps), and to China via rail—in 2003, China imported 25,000 b/d from Kazakhstan. The new pipeline will facilitate a sharp increase in the level of oil trade between the two countries.

Advantages for both sides

For China, which until a few years ago was self-sufficient in oil, a pipeline with a capacity of 10m t/y or even 20m t/y will not solve its growing oil supply needs. It will, however, go some way towards meeting its import demand, and by sourcing the oil from Kazakhstan it will avoid extending its reliance on the Middle East or Russia. During the course of negotiations on building the pipeline, the issue of transit fees—which had the potential to render exports to China uncompetitive—was highly contentious. However, its importance has receded because CNPC took over PetroKazakhstan, the Canadian-owned oil company that runs the Kumkol field, in October 2005. As a result, China can now be confident that the oil that CNPC produces in Kazakhstan will find its way to the home market. Against the background of growing Kazakh interest in the Baku-Tbilisi-Ceyhan (BTC) pipeline, which runs from Azerbaijan's Caspian coast to a deepwater Turkish port on the

Kazakhstan has completed a pipeline to China

Kazakhstan 29


Mediterranean, the PetroKazakhstan deal and the completion of the pipeline to Alashankou give China a guarantee that it will not miss out on Kazakh oil. For Kazakhstan the pipeline's initial impact is limited, but its longer-term significance is considerable. The link to China marks the first major move away from Russia's near-monopoly on Kazakh oil exports. Currently most Kazakh oil is exported to the north and the west, but the pipeline to China offers geographical diversity by creating an eastern outlet.

Main macroeconomic indicators Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecIndustrial output (at constant prices; % change, month on month) 2003 -7.5 -4.7 6.9 -3.6 0.3 -0.6 -0.5 1.9 0.2 10.5 1.2 7.12004 -6.3 -5.0 8.0 -4.0 -0.2 1.4 1.6 4.1 -1.2 7.0 2.5 8.12005 -9.1 -9.8 8.3 -2.3 -1.2 -0.6 2.6 0.6 1.1 4.5 4.1 –Industrial output (at constant prices; % change, year on year) 2003 8.9 10.0 12.9 7.9 9.0 10.5 5.8 3.8 2.9 9.6 10.7 13.62004 8.7 9.0 10.2 9.0 7.8 10.5 10.7 12.2 13.2 7.4 9.7 11.12005 9.0 6.2 6.9 7.2 6.9 5.8 -0.3 0.7 2.2 2.4 6.8 –Retail sales (% change, month on month) 2003 -5.9 0.3 1.6 0.5 2.4 -0.4 0.9 3.1 1.7 1.6 1.5 6.32004 -12.1 -0.3 2.5 1.3 5.2 2.8 3.3 0.7 1.6 1.7 0.7 7.72005 -15.4 -0.1 4.1 0.4 5.9 2.0 5.0 2.8 0.5 n/a 0.0 –Retail sales (% change, year on year) 2003 8.6 9.2 6.9 12.4 9.3 10.5 10.4 10.0 8.7 9.2 9.9 12.02004 6.1 5.2 6.2 7.0 9.8 13.1 16.1 13.8 13.9 13.2 12.4 13.82005 9.9 10.1 11.8 10.7 11.4 10.6 12.5 14.9 13.4 14.2 13.5 –Unemployment ('000) 2003 718 703 677 675 672 668 664 642 620 644 678 6862004 693 689 675 666 665 640 640 633 630 648 656 6632005 666 664 653 638 637 628 627 619 616 646 655 –

Unemployment rate (%) 2003 10.0 9.7 9.3 9.0 8.6 8.3 8.5 8.2 7.9 8.3 8.8 9.12004 9.1 9.0 8.6 8.7 8.4 7.8 8.1 8.0 7.9 8.3 8.4 8.62005 8.7 8.6 8.3 8.3 8.1 7.7 7.9 7.8 7.6 8.2 8.3 –Consumer prices (% change, month on month) 2003 1.0 0.5 0.3 0.4 0.1 0.1 0.0 0.2 0.4 1.3 1.6 0.92004 0.7 0.5 0.4 0.4 0.2 0.3 0.2 0.4 0.8 1.1 0.9 0.92005 0.8 0.6 0.6 0.6 0.6 0.4 0.5 0.2 0.8 1.0 0.6 –

Consumer prices (% change, year on year) 2003 6.9 7.1 7.2 7.0 6.1 5.7 5.1 5.6 5.9 6.7 7.3 6.82004 6.4 6.4 6.5 6.5 6.6 6.9 7.1 7.3 7.7 7.5 6.8 6.72005 6.8 6.9 7.1 7.3 7.2 7.9 8.2 7.9 7.9 7.9 7.5 –Producer prices (% change, month on month) 2003 3.6 2.0 1.6 -2.3 -3.0 -2.8 1.6 1.6 1.5 0.4 1.8 0.22004 2.3 0.3 2.7 3.3 1.9 0.9 0.6 5.4 1.8 2.8 2.7 -2.82005 -1.8 3.5 3.5 4.9 0.1 0.6 6.0 3.3 3.1 -1.6 -1.5 –Producer prices (% change, year on year) 2003 21.5 23.1 22.5 15.1 8.0 4.8 3.8 3.7 3.1 1.1 4.6 5.92004 4.7 2.9 4.1 10.1 15.6 20.1 18.9 23.3 23.7 26.6 27.6 23.82005 18.8 22.7 23.7 25.7 23.4 23.0 29.7 27.1 28.7 23.2 18.2 –Average gross monthly wage (% change, year on year) 2003 16.0 15.2 7.7 15.2 12.5 15.2 14.7 14.3 14.3 15.2 13.9 15.62004 18.5 22.2 27.7 19.8 20.5 20.2 21.9 21.6 20.7 21.1 21.7 26.52005 14.5 12.8 5.9 14.7 15.2 14.4 20.6 23.5 24.4 27.0 – –

30 Kazakhstan


Main macroeconomic indicators Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecAverage gross monthly wage (real % change, year on year) 2003 8.5 7.5 0.5 7.6 5.9 8.9 9.1 8.3 8.0 7.9 6.3 8.22004 11.3 14.8 19.8 12.4 13.1 12.5 13.9 13.3 11.9 12.7 13.9 18.62005 7.2 5.5 -1.1 6.9 6.9 6.0 11.4 14.3 15.2 17.7 – –Average gross monthly wage (US$) 2003 135 137 143 148 150 157 160 159 159 165 161 1942004 176 185 199 195 199 206 211 209 210 222 221 2742005 219 223 224 235 240 240 255 259 263 280 – –

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

Foreign trade and payments

The oil boom has widened the size of the trade surplus substantially. Kazakhstan has benefited from simultaneously rising oil export prices, thanks to high global oil prices, and a surging volume of oil exports owing to rising production. The most recent trade figures from the customs service show a ten-month merchandise trade surplus of US$8.7bn, compared with one of US$5.4bn in the same period of 2004. The value of exports rose by 45% year on year in US dollar terms, with import costs up by 37%. Earnings from oil exports reached US$12.8bn in January-September (the latest available data), an increase of 62% year on year in US dollar terms. This was almost entirely attributable to rises in oil prices, as in volume terms oil exports rose by just 2.7% year on year (to 40.6m tonnes).

The downstream sector is starting to improve its export and output performance, although it is still unable to ensure full supply to the domestic market owing to significant price differentials. Earnings from refined oil products reached US$718m in January-September, up by 147% year on year in US dollar terms and by 59% year on year in volume terms (to 2.8m tonnes). Metals remain the second most important export earner after hydrocarbons, and although they bring in modest amounts of revenue when compared with oil, in 2005 they have benefited from favourable international price trends. The three most important metals exports—copper, ferroalloys and iron ore—yielded US$2.3bn during the first three quarters of 2005, up by 44% year on year.

The oil boom has pushed the current-account balance into a substantial surplus. Current-account data, published by the National Bank of Kazakhstan (NBK, the central bank), lag behind customs figures for merchandise trade by a quarter. Figures for the first half of 2005 show that the current account was in surplus to the tune of US$913m (3.5% of first-half GDP), compared with a small surplus of US$9.9m in the same period of 2004. Trade in goods on a balance-of-payments basis was in surplus by US$5bn, on the back of US$13.3bn in export revenue. On the import side, the cost grew at a faster pace than that in export receipts during the first half of 2005, rising by 34% year on year and reaching US$8.3bn. Adjustments for personal shopping, valuation problems and trade fraud are marginal and were equal to just 1.8% of import costs on a balance-of-payments basis in the first half of 2005. Personal imports amounted to US$636m in the first half of 2005, down by 21% year on year, which suggests a

Oil boom continues to drive export receipts up

Trade surplus offsets widening invisibles deficits

Kazakhstan 31


shrinking of the informal economy, as well as a greater availability of goods through domestic retail suppliers.

The rapidly expanding economy, and particularly activity in the oil sector, means that the services account is experiencing a large and growing deficit. In the first half of 2005 the services deficit reached US$1.9bn, with earnings of US$1bn—mostly freight and travel services—and costs of US$2.9bn. The most important invisibles costs came from oil- and gas-related activities. Most of these costs are paid for with inflows of foreign direct investment (FDI).

The income balance also continues to slip further into deficit as foreign investors reap a significant windfall on their hydrocarbons investments. The income deficit was US$2bn in January-June; although income credits went up by 66% year on year to US$290m, income debits rose by a faster 84% year on year, to US$2.4bn. The most important income debit was foreign investors' dividends and profits of subsidiaries, worth US$1.4bn—a fourfold increase over January-June 2004.

Investment into the oil and gas sector is lumpy, with projects going through phases of substantial investment followed by periods of much lower investment. As a result, there was a sharp drop in FDI inflows to just US$47.6m in the first half of 2005, compared with inflows of US$1.6bn in the same period of 2004. Reinvested earnings fell by 91% year on year to just US$41m in the first half of 2005, and capital repatriation grew to US$2.6bn, from just US$748m in January-June 2004.

Kazakhstan's foreign reserves (excluding gold) were worth US$6.9bn at the end of November, slightly lower than at end-November 2004 owing to government debt repayments. The government plans to amortize US$849m in external debt by the end of 2005, by which means it expects to save US$209m in external debt-servicing costs in 2006. However, even though official debt stocks are falling, private-sector debt is growing. Private-sector debt rose to US$32.3bn at the end of the first half of 2005, from US$22.7bn in mid-2004. Furthermore, whereas growth in private-sector debt used to be attributable to intra-company credits (used to finance hydrocarbons investments), commercial banks have

FDI has almost dried up for cyclical reasons

Private external borrowing continues to rise

32 Kazakhstan


overtaken non-financial borrowers as the main drivers of the expansion in Kazakhstan's external debt. Whereas intra-company loans had risen by 29% year on year at the end of June 2005, banks' external borrowing rose by 90%.

Main external indicators (US$ m)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecExports fob 2003 966 1,130 1,027 814 1,018 1,133 1,021 964 1,309 1,174 1,039 1,3082004 1,402 1,186 1,414 1,629 1,409 1,500 1,598 1,685 2,267 1,596 2,301 2,1062005 1,789 1,861 2,006 2,669 2,582 2,170 2,384 2,257 2,750 2,260 – –

Imports fob 2003 550 483 632 644 763 611 644 698 753 788 838 9252004 783 772 878 1,072 1,003 1,162 1,105 1,194 1,147 1,129 1,305 1,2322005 1,069 1,059 1,226 1,712 1,473 1,590 1,365 1,529 1,603 1,497 – –Trade balance 2003 417 647 394 170 255 522 377 266 556 385 201 3842004 619 414 536 558 406 338 493 491 1,120 467 996 8752005 720 803 780 958 1,109 580 1,019 728 1,147 763 – –

Foreign reserves 2003 2,952 3,299 3,355 3,499 3,834 3,704 4,097 3,946 4,270 4,090 3,973 4,2362004 4,738 4,859 4,944 5,513 5,851 5,934 5,953 5,944 6,082 6,295 7,506 8,4732005 8,510 8,631 8,478 7,903 7,896 7,190 6,955 6,996 7,408 7,738 6,927 –Gold 2003 627 583 568 570 623 790 604 633 660 663 689 7262004 701 687 744 685 700 701 699 734 746 774 826 8042005 782 809 794 808 781 821 805 820 901 904 947 –International reserves 2003 3,579 3,882 3,923 4,069 4,457 4,494 4,701 4,579 4,930 4,753 4,662 4,9622004 5,439 5,545 5,688 6,199 6,551 6,635 6,651 6,678 6,828 7,070 8,332 9,2772005 9,292 9,440 9,272 8,712 8,677 8,011 7,759 7,816 8,309 8,641 7,874 –

National Fund of the Republic of Kazakhstan 2003 1,933 2,003 1,999 2,219 2,272 2,688 2,677 2,691 2,774 3,084 3,256 3,6032004 3,666 3,687 3,745 3,732 3,695 3,701 3,729 3,764 3,884 4,209 4,590 5,0652005 5,148 5,128 5,158 5,171 5,173 5,214 5,234 5,393 5,551 5,857 6,172 –

Sources: IMF, International Financial Statistics; National Bank of Kazakhstan.

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