EurasiaNet Business & Economics - Kazakhstan Positioned as Locomotive of Eurasian Integration

BUSINESS & ECONOMICS

KAZAKHSTAN POSITIONED AS LOCOMOTIVE OF EURASIAN INTEGRATION

Gregory Gleason 2/11/02

On course to become one of the world’s top oil exporters in the next decade, Kazakhstan is vigorously promoting Eurasian economic integration. If successful, Kazakhstan could act as the locomotive for a broader regional economic recovery. But some experts caution that Kazakhstan’s own economic growth is vulnerable to over-reliance on oil exports.

Kazakhstan’s economy grew at a 13 percent rate in 2001, the Ministry of Economics and Trade announced in January. That was the highest growth rate in the Commonwealth of Indpendent States (CIS), and it was higher than many analysts had anticipated. Kazakhstan’s economy, like that of its northern neighbor, Russia, has been expanding in recent years thanks largely to strong world demand for oil and minerals. International financial institutions had been forecasting a strong recovery for Kazakhstan’s export sectors, but the year’s robust, across-the-board growth in industry, services, and personal incomes exceeded already optimistic predictions.

Improvements in tax administration and public expenditure management over the last few years have helped strengthen the country’s fiscal position. In 2000, Kazakhstan achieved a budget surplus and even took the unusual step of repaying IMF loans ahead of schedule. Along with well-deserved accolades, however, the Kazakhstan government has also been receiving messages of caution. Some economic observers worry that Kazakhstan’s reliance on natural resources exports may leave the country vulnerable to sudden fluctuations on the international market.

Over-dependence on commodity-driven exports can lead to the so-called "Dutch disease"-situation in which oil-rich countries draw in large amounts of foreign capital for needed oil industry development, but find that the resulting strong exchange rates hinder the country’s ability to competitively price its other goods and services. Under the Dutch disease scenario, an over-developed energy sector ends up dominating other branches of the economy, both economically and politically.

The potential for Dutch disease to hit Kazakhstan is readily evident. The country’s oil industry is gearing up for a decade of steep growth. Kazakhstan oil production rose to over 800,000 barrels per day in 2001, with nearly 70 percent of production bound for export. Major new oil fields will be brought on line in the years ahead, including the giant Kashagan oil field that represents the world’s largest new find in the past 40 years.

Kazakhstan’s oil production could reach 3.5 million barrels per day in 2010 with over 90 percent destined for export. Today, fuel and metals exports account for over 60 percent of Kazakhstan’s total export earnings. With the projected increase in oil production over the coming decade, that figure could top 80 percent.

Kazakhstani officials seem to be aware of the dangers. To guard against the danger of a sharp drop in oil prices, the government has adopted a number of measures, including the establishment of a national stabilization fund that is financed by current oil revenue. The fund is designed to insulate the state budget from market volatility, provide savings for future generations, and discourage the government from resorting to oil revenues to fund public programs that could be funded on a cost-recovery basis from user fees or other sources.

Another step Kazakhstan has taken to balance the economy is to encourage the growth of processing and manufacturing industries. Kazakhstan’s newly appointed Prime Minister, Imangali Tasmagambetov, told the parliament at his first formal address January 28 that the Government’s future economic priorities would emphasize expansion of the chemical and mineral processing industries, improvement in infrastructure for transport and communication, and improvement in banking and finance.

Kazakhstan’s national stabilization fund and economic diversification measures are important steps. But what may be unique in Kazakhstan’s strategy to avoid oil dependence in the years ahead is Kazakhstan’s effort to spur regional economic integration. In his speech to the Kazakhstan parliament, Tasmagambetov identified participation in the Eurasian Economic Community as a major Kazakhstan Government objective.

The "EvrazEs," as it is known by its Russian language acronym, was the brainchild of Kazakhstan President Nursultan Nazarbaev. The economic group - which consists of Belarus, Kyrgyzstan, Kazakhstan, Tajikistan and Russia - was founded in October 2000 and began functioning in May 2001. [For additional information see the EurasiaNet business and economics archive]. The group represents the most ambitious effort yet to create a Eurasian customs union and free trade zone since the breakup of the USSR. Grigoriy Rapota, a former Russian security official who recently became the organization’s first secretary-general, has stated that harmonization of energy and transportation tariffs is one of the organization’s major goals.

In addition to supporting the EvrazEs, Kazakhstan is promoting other forms of regional integration and coordination. Kazakhstan is supporting Russian President Vladimir Putin’s January 2002 proposal to establish a regional alliance of gas producers. Such a group could play a similar function for CIS countries as that played by OPEC for Persian Gulf oil producers.

Nazarbaev also endorsed the idea of a Central Asian Partnership, a renewed form of cooperation among four Central Asian countries that since 1994 have sought to harmonize trade and customs policies. In addition, Kazakhstan has concluded an energy partnership with the United States. The energy partnership reaffirms the importance of multiple oil export routes in Central Asia while supporting the development of the Baku-Tbilisi-Ceyhan pipeline linking Kazakhstan’s oil fields to the world markets via Turkey.

The end of the Afghanistan war is now creating new diplomatic and commercial possibilities for the entire Eurasian region. Vast European and Asian markets, so long separated by Cold War animosities and cultural differences, now may be looking at the possibility of supra-regional trans-continental integration. If Kazakhstan’s integration aims prove successful, oil could emerge as one of the great sources of international cooperation in the decades ahead.

Editor�s Note: Gregory Gleason teaches international politics at the University of New Mexico.

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