March 26, 2003
By Ariel Cohen, Ph.D. and Dr. Ariel Cohen
As the United States is engaging in regime change in Iraq,
the political turmoil in the Middle East is driving up the oil
prices. Kazakhstan is flush with oil and gas revenues. However,
without targeted government policy, the long term economic
consequences of the hydrocarbon boom may lead to crowding out
investment in the non-petroleum sectors and appreciation of the
Kazakh currency, the tenge. If President Nazarbaev's administration
will continue to preside over increases in income disparities and
underdevelopment, it eventually may face political instability due
to inflated popular expectations. Kazakhstan has done little to
prevent the Dutch disease, despite warnings from the World
BACKGROUND: According to government statistics,
Kazakhstan is boasting an impressive 9.8 percent economic growth
rate in 2002. It further expects GDP to grow at annual rates of
6.3-8.6 percent in 2004-2006, with total growth of over 27 percent
in the next four years. Whether this ambitious target is achieved
depends on volatile energy prices and the quality of national
economic management in Astana.
According to President Nazarbaev, who spoke at the recent
Kazakh-Italian business forum in Rome, Kazakhstan's projected
economic growth for the first quarter of 2003 is 9 percent. Italian
investment in Kazakhstan reached $1.3 billion dollars. But this is
barely a drop in the ambitious goal of $100 billion in investment
funds Nazarbaev wants to attract in the next 10-12 years.
Kazakhstan may be interested in working with the Italian
state-owned ENI, the operator of Agip-led consortium in the Kazakh
sector of Northern Caspian, and of the giant Karachanganak field,
to export oil via Iran. If such investments materialize, experts
say, they will flow overwhelmingly to the overheated oil and gas
Oil revenues continue to remain in record territory for 2003.
Kazakhstan has boosted oil production by 16.6 percent in 2002, to
42 million tons. International oil majors, such as Shell and
Hurricane oil have significantly expanded their Kazakhstani
holdings. Natural gas production and downstream production will
also grow: Kazakhstan has increased natural gas exports by 13.2
percent, and produced 30 percent more of gas condensate. Kazakhstan
will be developing Phase Three of the Karachaganak gas condensate
field, which will require a $2 billion investment. The Amangeldy
field in southern Kazakhstan will be expanded, and ChevronTexaco
will open a polyethylene plant in April 2003. ExxonMobil is
planning to develop a strategic program for Kazakhstan jointly with
the Energy Ministry for years 2003-2010. The first iteration of the
program will be submitted to the government in the third quarter of
Kazakhstan is boosting its hard currency and gold reserves, which
grew by 9.1 percent to $5.5 billion in January, and further
increased the National Fund to $1.933 billion, while gold reserves
grew by 14 percent to $627 million, according to the Kazakh Central
Bank press release quoted in the February Interfax Central Asian
Business Report. The Central Bank said that Tenge money supply
tripled, foreign deposits rose by 32.8 percent, and bank deposits
increased by 46.2 percent, while lending rose 37 percent in
Using growing demand for energy, Kazakhstan announced plans to
become the world's largest uranium producer by the year 2027. Its
national nuclear corporation, Kazatomprom, has increased the ore
production from 794,000 tons in 1998 to 2.4 million tons in 2002.
As it currently produces only five percent of the global output,
the goal to become number one seems excessively ambitious.
Kazakhstan has increased uranium production by 34 percent in 2002,
and is planning to expand export to China, Japan and Russia.
Astana is also interested in boosting its coal production from 70
million tons in 2002 to 74 million tons in 2003. The January 2003
figures are higher than January 2002 by 21 percent.
IMPLICATIONS: This natural resources windfall
is the strategic window of opportunity for Astana to address four
structural defects of its energy-driven economy: corruption;
capital flight; a dysfunctional social safety net; and the
money-losing nature of the non-extracting sectors of the
High-level corruption and capital flight may be the most difficult
to resolve. Most often perpetrated, or aided and abetted, by top
government officials, it is a net loss to the people of Kazakhstan.
Police measures are in themselves not effective, as law enforcement
is corrupt and controlled by the perpetrators. The fish is rotting
from its head. The government is unlikely to crack down on
organized crime and corruption which plague the economy. As long as
the government is not prosecuting the most odious "exporters" of
capital, even if they are politically connected insiders, the local
economy will remain too inhospitable - and bureaucracies too
corrupt - to make investment in non-energy sector attractive.
Second, it is the time for the Kazakhstani government to bring
internal energy prices, including natural gas and coal, to world
levels. Today's high oil prices will allow to provide subsidies to
retired or laid off workers, while closing down inefficient,
energy-guzzling enterprises and hiking railroad tariffs. Energy can
be exported to increase revenue. Some of the workers in remote
"company towns" can be relocated to more livable venues.
Third, social sector reform is long overdue. While salaries are
higher in the energy sector by a factor of at least two in
Kazakhstan, most of the gigantic profits are not invested back home
to create jobs outside of the oil and gas sector, nor are tax
proceeds efficiently distributed to support the elderly, sick and
CONCLUSION: The Kazakh government can battle
the Dutch disease by stimulating non-energy business development
and job creation, by simplifying registration for new business and
reducing corporate taxes and employment payments for these newly
created entities. As USAID and a number of NGOs repeatedly
demonstrated around the world, micro-lending to boost
entrepreneurship is yet another way to decrease unemployment and
In addition, some of the structural unemployment - 20 percent in
Kazakhstan, even higher in energy-poor Kyrgyzstan and Tajikistan -
can be alleviated by opening the doors of the oil and gas sectors
to workers from the areas hit with particularly high unemployment.
This can be achieved by loosening severe interior ministry
residence registration rules, which are a hick-up of the old Soviet
era "propiska" system, and by providing better living conditions in
the company towns owned by the extracting industries. As World Bank
Vice President Johannes F. Linn has suggested recently, regional
cooperation is likely to alleviate some of the structural
asymmetries and stimulate growth. Clearly, cooperation on water
utilization, pipelines, transport, and commerce is the most
Unequal income distribution in Kazakhstan, where average salary is
barely over $1,000 a year, (and even more so in Kyrgyzstan and
Tajikistan with only $200-$300 per capita incomes), may lead to
economic dislocation, social conflict, and uncontrolled migration.
Kazakhstani leaders were forewarned. Both Astana and international
financial institutions should address these disparities while the
energy bonanza lasts.
AUTHOR'S BIO: Ariel Cohen, Ph.D.,
is Research Fellow in Russian and Eurasian Studies at the Heritage
Foundation and author, with Gerald P. O'Driscoll, of "The Road to
Economic Prosperity for Post-Saddam Iraq" (2003). His expertise
includes international energy security.
This piece was originally published on the
Central Asia-Caucasus Institute website.
Confronting Kazakhstan's 'Dutch Disease'
Ariel Cohen, Ph.D.
Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
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Dr. Ariel Cohen
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