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Country Report July 2003

Kazakhstan

July 2003

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Kazakhstan at a glance: 2003-04

OVERVIEWThe president, Nursultan Nazarbayev, has stated his intention of standing for re-election in 1996, and there is no indication that the authoritarian drift incurrent government policy will ease over the forecast period. The governmentwill seek to restrict political activity further, and to marginalise what remainsof the opposition. However, instability at cabinet level reflects continueddivisions within the political elite that will remain a potential source ofpolitical instability. Fiscal policy will loosen slightly, but not enough to meetKazakhstan�s extensive infrastructural needs or to reverse the degradation ofkey social systems such as education and health. Household consumption willplay an increasingly important role in growth, but the oil sector will continueto be the mainstay of the economy, sustaining annual real GDP growth above7% in 2003-04 through export revenue and capital investment. Price pressuresfrom foreign-exchange inflows will be hard to contain, keeping annual averageinflation at around 6% over the Economist Intelligence Unit�s forecast period.The current-account will post small deficits as a result of chronic deficits on thebalance of services and easing oil prices.

Key changes from last month

Political outlook• The appointment as prime minister of Danial Akhmetov, a loyal supporter

of the president often assigned to troublesome posts, confirms ourexpectation of further restrictions on civil and political liberties.

Economic policy outlook• The government�s continued reluctance to loosen fiscal policy in order to

meet Kazakhstan�s investment needs has led us to revise our forecasts forbudget deficits in 2003-04 from around 2% of GDP to around 1% of GDP.

Economic forecast• Monthly inflation of close to zero in May and June has led us to make

downward adjustments to our forecast. We now expect annual averageinflation of around 6% (compared with our earlier forecast of 7%) in 2003-04.

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Kazakhstan 1

Country Report July 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2003-047 Political outlook8 Economic policy outlook10 Economic forecast

13 The political scene

17 Economic policy

21 The domestic economy21 Economic trends23 Mining24 Agriculture25 Oil and gas

29 Foreign trade and payments

List of tables10 International assumptions summary12 Forecast summary19 NBK refinancing rate20 Main economic policy indicators21 GDP growth by sector, Jan-Mar26 Refined products, Jan-May 200329 Main macroeconomic indicators31 Current account32 Main external indicators

List of figures12 Gross domestic product12 Consumer price inflation23 Exchange-rate movements24 Kazakhmys: ore output24 Agricultural growth, Jan-May28 Kashagan equity shares

Kazakhstan 3


Summary July 2003

The president, Nursultan Nazarbayev, has stated his intention of standing for re-election in 1996, and there is no indication that the authoritarian drift in currentgovernment policy will ease over the forecast period. The government will seekto restrict political activity further, and to marginalise what remains of theopposition. However, instability at cabinet level reflects continued divisionswithin the political elite that will remain a potential source of politicalinstability. Fiscal policy will loosen slightly, but not enough to meetKazakhstan�s extensive infrastructural needs or to reverse the degradation ofkey social systems such as education and health. Household consumption willplay an increasingly important role in growth, but the oil sector will continue tobe the mainstay of the economy, sustaining annual real GDP growth above 7%in 2003-04 through export revenue and capital investment. Price pressures fromforeign-exchange inflows will be hard to contain, keeping annual averageinflation at around 6% over the forecast period. The current-account will postsmall deficits as a result of chronic deficits on the balance of services andeasing oil prices.

Imangaly Tasmagambetov resigned as prime minister in June, and was replacedby Danial Akhmetov. Mr Tasmagambetov had lost the support ofparliamentary deputies over a controversial new land code. After hisresignation, the land code was approved with minor amendments fromMr Nazarbayev. The US investigation into Kazakh oil deals in the mid-1990s hasplaced US-Kazakh relations on an awkward footing.

Kazakhstan�s fiscal position is comfortable, as evidenced by a January-Maysurplus of Tenge77bn (US$524m). The IMF and other multilaterals haverecommended that the government increase expenditure in order to addressKazakhstan�s extensive investment needs. The government plans to cut tax ratesin 2004, and to compensate for the loss of income with a tax on oil production.The monetary stance is stable.

Real GDP growth reached 10.6% year on year in the first quarter of 2003.Industry, and especially the oil and gas sector, continued to be a key driver ofeconomic expansion, but strong growth in construction and services points to agathering �trickle down� effect. Inflation accelerated in the first quarter of theyear, but fell back in May and June. Unemployment is falling slowly, but is stillhigh, at around 9%.

In the first quarter of 2003 Kazakhstan posted its largest quarterly current-account surplus on record, amounting to US$626m (10.6% of GDP). Reservesnow exceed public-sector debt.

Editors: Dafne Ter-Sakarian (editor); Leila Butt (consulting editor)Editorial closing date: July 10th 2003

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2003-04

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 Sovietrepublics to declare its independence following the collapse of the Soviet Union. OnAugust 30th 1995 a new constitution was approved in a nationwide referendum. Thisgreatly increased the powers of the presidency and largely sidelined the legislature

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

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

January 10th 1999 (presidential), October 8th 2002 (one-half of Senate), October 10th and26th 1999 (Majlis). Next elections: 2005 (one-half of Senate) 2004 (Majlis),2006 (presidential)

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

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

Otan (Fatherland; pro-president party); the Kazakhstan Civic Party and the KazakhstanAgrarian Party (pro-president parties); Forum of Democratic Forces (main oppositionumbrella group), led by the United Democratic Party (UNP), which includes theRepublican People�s Party of Kazakhstan (RPPK, centrist; vehicle of opposition figureAkezhan Kazhegeldin); Democratic Choice of Kazakhstan (DCK, centrist; emerged in 2002from within the state apparatus); Ak Zhol (centrist; splinter group of the DCK);Communist Party of the Republic of Kazakhstan (CPRK; mainstream Soviet communists,somewhat reformed); Azat Republican Party (Kazakh nationalists); Lad (ethnic Russians)

Prime minister Danial AkhmetovFirst deputy prime minister Aleksandr PavlovDeputy prime minister Sauat MynbayevDeputy prime minister Karim MasimovDeputy prime minister & minister for agriculture Akhmetzhan Yesimov

Culture & information Mukhtar Qul-MuhammedDefence Mukhtar Altynbayev

Economy & budget planning Kairat Kelimbetov

Education & science Zhaksybek Kulekeyev

Energy Vladimir Shkolnik

Environmental protection Aitkul Samakova

Finance Yerbolat Dosayev

Foreign affairs Kasymzhomart Tokayev

Industry & trade Adilbek Dzhaksybekov

Internal affairs Kairbek Suleymenov

Justice Georgy Kim

Labour & social protection Gulzhana Karagusova

Transport & communications Kazhmurat Nagmanov

Grigory Marchenko

Official name

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political parties

Council of Ministers

Central bank chairman

Key ministers

Kazakhstan 5


Economic structure

Annual indicators1998 a 1999 a 2000a 2001 a 2002 a

GDP at market prices (Tenge bn) 1,748 2,016 2,600 3,285 3,747GDP (US$ bn) 22.3 16.9 18.3 22.4 24.4

Real GDP growth (%) -1.9 2.7 9.8 13.2 9.5Consumer price inflation (av; %) 7.3 8.4 13.4 8.4 6.0Population (m) 15.0 14.9 14.8 14.8 14.8

Exports of goods fob (US$ m) 5,871 5,989 9,288 8,928 10,067Imports of goods fob (US$ m) -6,672 -5,645 -6,848 -7,607 -7,646

Current-account balance (US$ m) -1,225 -171 676 -1,092 -596Foreign-exchange reserves excl gold (US$ m) 1,461 1,479 1,594 1,997 2,551Total external debt (US$ bn) 6.1 6.1 11.8 14.4 12.7 b

Debt-service ratio, paid (%) 14.4 19.4 31.6 31.8 33.8 b

Exchange rate (av) Tenge:US$ 78.30 119.52 142.13 146.74 153.28

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002 % of total Components of gross domestic product 2000 % of totalAgriculture 7.9 Private consumption 64.0Industry 29.3 Public consumption 11.2

Construction 6.1 Gross fixed investment 13.6Trade 12.0 Change in stocks -0.2Transport & communications 11.5 Net exports 11.5

Principal exports 2002 % of total Principal imports 2002 % of totalMineral products 61.0 Machinery & equipment 43.0Metals 23.0 Chemicals 15.0Food products 5.0 Mineral products 13.0

Chemicals 4.0 Metals 11.0Machinery 2.0 Food products 8.0

Main destinations of exports 2002 % of total Main origins of imports 2002 % of totalBermuda Islands 20.7 Russia 39.1

Russia 15.7 Germany 8.7China 10.5 US 7.0

Commonwealth of Independent States 22.9 Commonwealth of Independent States 46.7EU 14.0 EU 17.0

6 Kazakhstan


Quarterly indicators2001 2002 20032 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

General government finance (Tenge bn)Revenue 162 166 198 172 200 220 216 268Expenditure 198 175 250 144 212 202 249 199Balance -36 -9 -51 29 -12 18 -33 69OutputGDP at current prices (US$ bn) 5,404 6,622 5,795 5,087 5,888 7,028 6,425 5,928GDP at constant 1993 prices (Tenge bn) 118 144 134 114 127 158 147 127GDP at constant 1993 prices (% change, year on

year) 13.3 14.8 14.0 10.5 8.1 9.6 9.8 10.6Industrial production index (1997=100) 118 123 136 134 131 139 154 147Industrial production index (% change, year on

year) 22.0 23.3 23.5 22.9 11.0 12.5 12.9 9.4Employment, wages and pricesEmployment ('000) 3,550 3,863 3,989 3,928 4,021 4,095 4,122 4,084Unemployment rate (% of the labour force) 3.3 2.9 2.9 10.8 9.0 8.2 9.3 9.7Monthly earnings (Tenge) 17,393 18,301 19,141 18,817 19,981 20,525 20,768 21,496Monthly earnings (% change, year on year) 19.7 30.4 25.2 17.4 14.9 12.2 8.5 14.2Consumer prices (1995=100) 108 109 111 113 114 116 118 121Consumer prices (% change, year on year) 9.7 8.3 7.0 5.7 5.5 6.4 6.3 7.2Producer prices (1995=100) 101 100 98 92 99 105 108 112Producer prices (% change, year on year) 5.7 -0.6 -9.4 -10.7 -1.9 4.5 10.2 22.5Financial indicatorsExchange rate Tenge:US$ (av) 146.0 147.1 148.7 151.7 152.8 154.0 154.6 153.7Exchange rate Tenge:US$ (end-period) 146.5 147.7 150.2 152.2 153.1 154.6 154.6 151.5Refinancing rate (%, end-period) 12.0 11.0 11.0 8.0 8.0 8.0 7.5 7.5M1 (end-period; Tenge m) 265,654 284,285 270,009 244,108 262,332 297,722 381,975 376,669M1 (% change, year on year) 29.5 21.7 14.3 -2.4 -1.3 4.7 41.5 54.3M2 (end-period; Tenge m) 468,079 533,823 556,626 538,615 591,588 646,693 723,924 758,226M2 (% change, year on year) 47.1 48.4 40.2 28.6 26.4 21.1 30.1 40.8Sectoral trendsProductionCoal (m tonnes) 15.9 18.0 21.3 17.7 12.2 19.2 21.6 21.7Natural gas (bn cu metres) 3.1 2.5 2.9 3.1 3.1 2.5 3.7 1.7Crude petroleum ('000 tonnes) 8,927 8,956 9,413 9,748 10,004 10,938 11,282 10,855Electricity (m kwh) 12,448 11,342 15,836 16,060 13,379 12,634 16,397 17,904Foreign trade (US$ m)Exports fob 2,356 2,112 2,075 1,987 2,068 2,765 2,891 3,122 CIS 750 652 - - - - - -Imports cif 1,776 1,536 1,630 1,420 1,679 1,700 1,692 1,665 CIS 1,011 741 - - - - - -Trade balance 580 576 445 567 390 1,065 1,199 1,458Foreign payments (US$ m)Merchandise trade balance (fob) 298 296 156 410 220 772 1,018 1,349Services balance -382 -457 -458 -263 -519 -695 -671 -409Income balance -306 -283 -315 -156 -222 -277 -327 -336Current-account balance -313 -391 -587 31 -477 -168 17 626Reserves excl gold (end-period) 1,801 1,921 1,997 2,095 2,281 2,571 2,551 3,355

Sources: Kazakh Economic Trends; Agency of the Republic of Kazakhstan for Statistics (ARKS); IMF, International Financial Statistics; National Bank of Kazakhstan.

Kazakhstan 7


Outlook for 2003-04

Political outlook

The ongoing curtailment of civil and political liberties in Kazakhstan is part of agrowing trend towards authoritarian rule by the president, NursultanNazarbayev. He is unlikely to relinquish office willingly, and has already statedhis intention to stand for re-election in 2006. Mr Nazarbayev is neverthelessfaced with the problem that the loyal ministers he needs to secure his controlof Kazakhstan�s political space are not necessarily the most effective in terms ofconducting economic policy. As a result, the turnover of cabinet ministers couldcontinue to be quite high.

The image of Mr Nazarbayev�s administration is being tarnished by corruptionallegations resulting from an ongoing US Federal Grand Jury investigation intothe payment of bribes to high-ranking Kazakh officials. Public discussion of thescandal is a taboo issue, but Mr Nazarbayev clearly feels under pressure from it.He will therefore seek not merely to neutralise potential opposition!especiallyfrom those who try to raise the issue!but also to eliminate even those limitedopportunities for organised dissent that have been available until now. This hasbeen made evident by the appointment in June of Danial Akhmetov to replaceImangaly Tasmagambetov as prime minister. A long-standing and trusted allyof Mr Nazarbayev, Mr Akhmetov had previously taken over in 2001 asgovernor of Pavlodar province from Galymzhan Zhakiyanov, currently servinga jail sentence on charges of corruption that are almost certainly related to hisopposition to Mr Nazarbayev�s government. Pavlodar region had become afocus of protest, but since Mr Akhmetov�s appointment there have been fewsigns of further unrest.

Harsh measures against political activists are therefore likely to continue underMr Akhmetov, tempered by attempts to co-opt any moderate politicalorganisations that are prepared to work within the confines of the currentpolitical framework. This strategy is facilitated by endemic divisions within theopposition, which allow Mr Nazarbayev to pursue divide-and-rule tactics.

The conclusion in April 2003 of the process of re-registering political partieswith the Ministry of Justice!in accordance with the stipulations of the 2002law on political parties!has led to the demise of nearly two-thirds of thecountry�s political groupings. Of the 19 political formations in existence beforere-registration, only seven remain!Ak Zhol, Aul (Village), the Agrarian Party, theCivic Party, the Communist Party of the Republic of Kazakhstan (CPRK), Otan(Fatherland) and the Patriots� Party. One of the new law�s main stipulations hasbeen the setting of a prohibitively high party membership threshold of 50,000,a specification calculated to eliminate most opposition parties from the politicalscene before the next election to the Majlis (the lower house of parliament),due in 2004.

As expected, the surviving seven parties are regarded as pro-government inorientation, with the exception of the CPRK (the re-registration process of which

Domestic politics

Election watch

8 Kazakhstan


was subject to considerable interference by the authorities) and Ak Zhol, asplinter group of the Democratic Choice of Kazakhstan (DCK) that retains someindependent views while working alongside the government. Among thesmaller opposition parties not seeking re-registration was the RepublicanPeople�s Party of Kazakhstan (RPPK). The party has been severely weakenedover the past few years by the exile of its leader, Akezhan Kazhegeldin, partlybecause his absence has led to the emergence of rival factions within the party.The DCK has opted to remain a movement instead of attempting to register as aparty, and could benefit from the closure of so many opposition parties.However, the most immediate consequence of the new law has been areduction in the electorate�s choice, and in the number of sources ofparliamentary opposition to the government.

Notwithstanding Kazakhstan�s full co-operation with the US-led �war onterror�, Mr Nazarbayev has failed to avoid US, and to a lesser extent EU,criticism of his repressive rule. Neither has he succeeded in securing formalassurances that the current US government investigation into oil sector bribeswill not implicate him. Corruption and human rights abuses are likely tocontinue to bedevil relations with the US and the EU. As a result,Mr Nazarbayev has sought international partners with which relations are notconditional on his domestic political conduct, such as Russia and China.

Recent attempts to tighten the existing strategic partnership between Russia andKazakhstan are, however, unlikely to yield concrete results. Over the past yearRussia has placed more emphasis on its foreign policy towards theCommonwealth of Independent States (CIS) and on regaining its influence inCentral Asia!which it regards as an important buffer area to its south. Thisaligns Kazakhstan�s interests in securing its porous borders from drug-traffickingand Islamist extremism. Such concerns have boosted efforts by Russia andKazakhstan in April to transform the ineffective CIS Collective Security Treaty(CST) into a regional organisation!the Collective Security Treaty Organisation(CSTO). However, the revival of Russian interest in the CIS and its schemes forcloser co-operation are a long-standing feature of Russian political rhetoric thathas yet!despite more than a decade of such initiatives!to lead to any results.The ineffectiveness of the Russian armed forces, combined with the oftenerratic nature of Russian policy towards the CIS, makes Russia a partner ofnecessity rather than of choice.

Economic policy outlook

The appointment of Mr Akhmetov signals policy continuity. In particular,relations with foreign investors!the main casualty of Mr Tasmagambetov�stime in office!are unlikely to improve much. The government had begun tomove against foreign companies even before Mr Tasmagambetov becameprime minister, largely because there is a widely shared perception inKazakhstan that the oil deals signed in the 1990s made too many concessions toforeign investors. Furthermore, investors� trust in the reliability!and stability!of the government is likely to have suffered serious damage, and it isquestionable whether a new government will be able to repair it.

Policy trends

International relations

Kazakhstan 9


Furthermore, these more adverse conditions are now set in a legal framework.The new law on foreign investment, signed by Mr Nazarbayev in January 2003,and replacing the 1994 law, contains several clauses of concern to foreigninvestors. The wording is sometimes ambiguous, and foreign investors� mainconcerns are the narrow definition of what constitutes an investment dispute;the lack of clear provisions for access to international arbitration; and weakcontract protection. The law only counts disputes between investors and statebodies to be investment disputes, suggesting that in disputes with privateKazakh companies foreign investors will not be allowed recourse tointernational arbitration. Even more worrying is the stipulation that onlydisputes arising in connection with the foreign investor�s activities are to beconsidered an investment dispute; this implies that breaches of contractcommitted by the government will not be considered a matter for contention.Under the 1994 investment law, violations by both parties were classed ascauses for dispute. Finally, the 1994 law provided a clear mechanism for seekinginternational arbitration, and considered the decisions of international courts asbinding. Under the new law, neither appears to be the case.

Higher than expected oil prices in early 2003 have led the government to makeupward revisions to the republican (central) budget. Revenue is now expectedto total Tenge710bn (US$4.6bn) instead of Tenge622bn, as originally planned.The average oil price assumption (for dated Brent Blend) was raised toUS$26/barrel from US$21.2/b. Expenditure (including net lending) has also beenraised, from Tenge704bn to Tenge793bn, leaving the target for the republicanbudget deficit unchanged at 1.9% of GDP, or Tenge83bn. The extra revenue willfor the most part be destined for aid relief for Zhambyl oblast, which in Maysuffered an earthquake.

Multilateral agencies, concerned about Kazakhstan�s decaying infrastructure,have recommended that the government take advantage of its sound financialposition to increase investment expenditure. However, the government has sofar proved reluctant to loosen fiscal policy significantly, and in January-MayKazakhstan�s state budget (which includes local and republican budgets) posteda surplus of Tenge77bn. The Economist Intelligence Unit expects someloosening as the government seeks to bolster public support for Mr Nazarbayevthrough increased social expenditure. However, the trends so far this year haveled us to revise our budget balance forecasts for Kazakhstan. Instead of a deficitof some 2% of GDP, we now expect the budget deficit to remain at around 1%of GDP in 2003 and 2004.

Over the forecast period the National Bank of Kazakhstan (NBK, the centralbank) will continue to face a monetary policy dilemma that is common toother hydrocarbons producers in the CIS!most notably Russia. High oil priceshave led to large hard-currency inflows, strengthening the real exchange rateand constraining the pace of disinflation!a policy priority across the formerSoviet republics. Furthermore, although oil prices are forecast to trenddownwards in 2003-04, this will be of limited help to the NBK, since inKazakhstan�s case current-account pressures on the tenge are compounded bylarge capital inflows of foreign direct investment (FDI). The NBK estimates that

Fiscal policy

Monetary policy

10 Kazakhstan


it can sterilise foreign inflows of around US$1bn-1.2bn, but this is likely to be aconservative assumption. Although a widening current-account deficit willdampen the trend of real appreciation in 2003, capital-account inflows will fuelinflationary pressures, and we therefore expect the NBK to adjust its monetarypolicy and to maintain a neutral stance over the forecast period.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004Real GDP growthWorld 2.1 2.9 3.0 3.7Russia 5.0 4.3 5.6 4.0EU 1.5 1.0 0.8 1.8

Exchange rates¥:US$ 121.5 125.3 116.2 115.5US$:� 0.896 0.945 1.150 1.183SDR:US$ 0.785 0.772 0.710 0.702Financial indicators� 3-month interbank rate 4.26 3.33 2.17 2.06US$ 3-month commercial paper rate 3.61 1.70 1.04 1.75Commodity pricesOil (Brent; US$/b) 24.5 25.0 25.5 18.3Gold (US$/troy oz) 271.1 310.3 335.0 315.0Food, feedstuffs & beverages (% change in US$

terms) -1.9 12.7 2.1 1.8Industrial raw materials (% change in US$ terms) -9.7 2.2 10.2 3.5

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

Global growth will be disappointing in 2003 and is expected to accelerate onlygradually in 2004. Real GDP growth in Russia, Kazakhstan�s main trade partner(excluding oil exports to the Bermuda Islands) will accelerate to 5.6%, from 4.3%in 2002. The EU recovery in 2004 will be weaker than previously forecast, withgrowth now expected to be just 1.8% instead of 2.1%, and Russian growth willdecelerate to 4% on the back of low oil prices and real exchange-rateappreciation. The main downside risk to our forecast concerns the valuation ofthe US dollar. Although a weakening of the US dollar against the euro alreadyunderpins our forecast, a sharper than expected depreciation would be likely tostifle the fragile recovery within the EU.

Another key risk for Kazakhstan is the fact that the global oil market is nowtending towards oversupply. OPEC�s recent decision to curb production fromJune by 2m barrels/day (b/d), while at the same time increasing members�quotas, will do little to alleviate the situation!especially given the likelihoodof a quick restoration of Iraq�s pre-war production capacity. However, OPEC isexpected to make further cuts to restrain the extent to which prices fall.Although growth in global oil demand will pick up slightly in 2004,fundamental oversupply will continue to plague the global oil market, andcheating by OPEC members is likely to depress prices in 2004. We expect oilprices to average US$25.5/b in 2003, falling to US$18.3/b in 2004. There is apossibility that oil prices could plunge to much lower levels, particularly if

International assumptions

Kazakhstan 11


the global economy remains weak and if post-war Iraqi oil productionexpands significantly.

We expect real GDP growth of around 7% in 2003, rising to over 8% in 2004 asthe global economy picks up and several major oil sector projects bear fruit!offsetting a decline in oil prices. Real GDP growth in the first quarter of 2003was 10.6% year on year, driven by a surge in oil prices in the run-up to the warin Iraq. Although the Agency for Statistics of the Republic of Kazakhstan doesnot publish a breakdown of the data by expenditure, the evidence suggests thatprivate consumption is an increasingly important driver of growth. Althoughindustry!and particularly the oil and gas sector!continues to be the linchpinof the economy, strong growth in construction and services suggests thateconomic growth in the oil sector is beginning to have a knock-on effect onhousehold consumption.

The first-quarter data confirmed the trends seen in 2002, when average annualreal GDP growth reached 9.5%!driven by year-on-year industrial output growthof 9.8% and construction growth of 19.3%. Industrial output data, moreover,showed that production in consumer goods sectors experienced strong growth,leading us to revise our growth projections for private consumption over theforecast period!a decision supported by the first-quarter 2003 results. Thesefavourable developments will not, however, alter Kazakhstan�s basic economicstructure, and growth will continue to be financed and driven by oil. TheCaspian Pipeline Consortium (CPC) will be nearing completion of its firstphase of expansion, designed to push the pipeline�s capacity to an annual38m tonnes. The Kashagan offshore field is also expected to increaseKazakhstan�s oil production volumes to around 1.2m b/d, although there is arisk that the start of full production, which the government wants to take placein 2005, could be subject to delays.

Cumulative inflation in 2003 stood at 2.3% by the end of June, making thegovernment�s end-year projection of 5.3% look slightly optimistic!especially inview of a substantial seasonal upsurge in the fourth quarter of every year.Nevertheless, monthly inflation of close to zero in May and June has led us tomake small downward adjustments to our inflation projections, as a result ofwhich we now expect average annual inflation to be around 6% in 2003-04,compared with our previous average annual forecast of 7% for the period.

Kazakhstan�s reliance on oil has raised persistent concerns over the dangers of�Dutch disease�!whereby an appreciating real exchange rate crowds out thenon-oil sector!especially given the pre-existing weakness of domesticmanufacturers, which is a legacy of the Soviet period. Given the inflationarypressures generated by strong growth and large hard-currency inflows, theexchange rate is therefore a key source of risk to Kazakhstan�s broader economicdevelopment. In January-June 2003 the tenge appreciated in nominal terms forthe first time since 1995. With limited sterilisation instruments at its disposal,the NBK will therefore struggle to prevent both real and nominal appreciationat the same time as controlling inflation. The pursuit of these contradictoryaims will thus result in the steady real effective appreciation of the tenge.

Inflation

Exchange rates

Economic growth

12 Kazakhstan


Kazakhstan�s surging oil exports, combined with higher than expected oil pricesin the first quarter of 2003, led to a record quarterly current-account surplus ofUS$626m in January-March. The effect of the oil price surge ahead of the war inIraq was clearly visible, as mineral exports accounted for 66% of exportrevenue, compared with 61% in 2002 as a whole. However, lower oil prices in2004 will cause the merchandise trade surplus to narrow from 10% of GDP in2002 to 6% of GDP in 2004. The effect of this on the current-account balancewill be compounded by a sharply rising services deficit. Large-scaleconstruction projects related to mining and infrastructural development, inparticular, have led to chronic deficits on the services balance, reaching some9% of GDP in 2002. The narrowing trade surplus and a steadily wideningservices deficit will therefore lead to small current-account deficits in 2003-04.

Forecast summary(% unless otherwise indicated)

2001a 2002 a 2003b 2004b

Real GDP growth 13.2 9.5 7.2 8.3

Industrial production growth 13.5 9.8 c 14.2 15.7Gross agricultural production growth 16.9 2.7 5.0 1.5Unemployment rate (av) 2.9 8.8 c 8.6 8.5

Consumer price inflation (av) 8.4 6.0 6.4 6.1Consumer price inflation (year-end) 6.4 6.6 5.5 6.2

Government balance (% of GDP) -0.4 -0.3 -1.1 -0.8Exports of goods fob (US$ bn) 8.9 10.1 11.4 11.1Imports of goods fob (US$ bn) 7.6 7.6 8.6 9.1

Current-account balance (US$ bn) -1.1 -0.6 -0.4 -0.9Current-account balance (% of GDP) -4.9 -2.4 -1.2 -2.5

External debt (year-end; US$ bn) 14.4 12.7 c 11.6 11.3Exchange rate Tenge:US$ (av) 146.7 153.3 149.5 145.8

Exchange rate Tenge:US$ (year-end) 150.2 154.6 146.0 146.6Exchange rate Tenge:Rb (av) 5.03 4.89 4.70 4.34Exchange rate Tenge:Rb (year-end) 4.98 4.86 4.49 4.31

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

External sector

Kazakhstan 13


The political scene

Imangaly Tasmagambetov stepped down from his post as prime minister onJune 11th after the passage of a new land code through parliament showed himto have a weak hold over the Majlis (the relatively lively lower house). He hadthe shortest tenure of any post-independence prime minister, having only beenin the post since January 28th 2002. Mr Tasmagambetov�s performance asprime minister had been lacklustre and this was evident in his poor handlingof parliament.

Although the bicameral legislature is packed with supporters of the president,Nursultan Nazarbayev, the Majlis and the Senate (the more compliant upperhouse) nonetheless do represent vested interests within the regime and attemptto articulate their concerns on some issues. Land reform is a particularlysensitive issue in Kazakhstan because 35% of the population is employed in theagricultural sector. Any measures that adversely affect this segment of thepopulation therefore carry an implied risk of significant social unrest.Mr Tasmagambetov�s draft land code raised concerns because it would createconditions favourable to a wholesale transfer of rural land to large agriculturalcorporations controlled by Kazakhstan�s business elites. At present, this is thede facto situation because individual plots have been leased by these largeagricultural concerns, thus forming sizeable estates. However, the land remainsformally leased to small farmers. Under the terms of the new land code,Kazakhstan�s impoverished peasantry would be unlikely to be able to purchasetheir leases, which could then be bought directly by the current sublessees!thecontrollers of the large estates.

The final law approved by parliament thus contained over 500 amendments,according to some reports, leading Mr Tasmagambetov to argue that the aims ofthe draft had been completely undermined. Given the contentiousness of theissue, it is questionable whether Mr Tasmagambetov could have wonparliament over by means of political deals and favours. Instead, the primeminister decided to force matters by calling a vote of confidence in hisgovernment: if the government won, its version of the land code would havebeen approved without parliament�s amendments.

Under the constitution, a vote of no confidence needs a two-thirds majority inboth the Majlis and the Senate to pass. This legal provision in the currentconstitution highlights the ease with which the government is able to bypassthe Majlis, since it can rely on the Senate!a body of political appointeescontrolled by the president!to vote with the government. This was plainly seenwith regard to the land code, since it enabled the Senate to overturn the Majlis�sclear protest vote: 55 of 77 deputies voted against the government, but 34 of 39senators voted in favour.

Despite this, the scale of the protest in the Majlis was a clear signal of thegovernment�s loss of support. This did not bode well for Mr Tasmagambetovbecause the seemingly autocratic rule of Mr Nazarbayev relies heavily onpolitical consensus. As a result, prime ministers are quick to resign once itbecomes apparent that their position is weak among key elites.

Prime minister is forced toresign over land reform

Controversy over land issueforced prime minister�s hand

Mr Tasmagambetov wins aPyrrhic victory

14 Kazakhstan


In Mr Tasmagambetov�s place, Mr Nazarbayev appointed Danial Akhmetov, along-time ally, as prime minister on June 13th. In 2001 Mr Akhmetov had takenover as governor of Pavlodar province from the now disgraced GalymzhanZhakiyanov, who is currently serving a jail sentence on charges of corruption.Before then Mr Akhmetov had been deputy prime minister. Mr Akhmetov cantherefore be seen as a Nazarbayev stalwart, often appointed to strategic postswhere the president�s power appears to be weakening.

Mr Nazarbayev made a point of not humiliating Mr Tasmagambetov. Keepingformer high-ranking officials quiet is a fundamental political strategy of thepresident, especially following the damage done after his rift with the secondpost-independence prime minister, Akezhan Kazhegeldin, who led thegovernment from 1994 to 1997. Mr Kazhegeldin is one of Mr Nazarbayev�s mostvocal critics, and has been instrumental in tarnishing the Kazakh president�simage in Western media. Mr Tasmagambetov has therefore followed the fate ofhis predecessor as prime minister, Kasymzhomart Tokayev, who lost the primeministership but stayed in the cabinet and returned to being minister for foreignaffairs. Mr Tasmagambetov, who came from outside the cabinet, has retainedministerial rank and is now the state secretary.

The resignation of Mr Tasmagambetov led to a minor reshuffle, but manymembers of his cabinet survived. More importantly, Mr Nazarbayev used thereshuffle as an opportunity to complete the reintegration of Uraz Dzhandosovinto the ruling elite. Mr Dzhandosov, a former head of the National Bank ofKazakhstan (NBK, the central bank), had been the deputy prime minister but hewas dismissed on November 21st 2001 after he helped to found the oppositionDemocratic Choice of Kazakhstan (DCK) movement while still in the cabinet. In2002, however, Mr Dzhandosov left the DCK to found the more moderate AkZhol (Bright Path) party, and earlier in January 2003 he became a presidentialadviser. In June Mr Nazarbayev appointed Mr Dzhandosov to replace YerbolatDosayev as head of the State Agency for Regulating Natural Monopolies andProtecting Competition. Mr Dosayev has moved on to become the new financeminister, replacing Zeinulla Kakhimzhanov, who had served as minister forstate revenue and minister of finance.

After the change in government, the new land code was adopted without toomuch difficulty. The Majlis passed the land reform bill, along with revisionssuggested by Mr Nazarbayev, on June 18th. Mr Nazarbayev rejected a key Majlisproposal that there be an upper limit to the size of land plots. Ak Zhol and16 Majlis deputies called for a referendum on May 22nd, but Mr Nazarbayevused the Constitutional Council�s ruling of June 10th!which stated that thenewly adopted land code was in line with the constitution!to argue againstthe need for a referendum. Given that five of the Constitutional Council�sseven members are appointed by the president and the Senate, its conclusionwas hardly surprising.

The relatively high turnover of prime ministers in recent years is a result ofgrowing factionalism within the ruling elite. The emergence of the DCK inNovember 2001 was an indication of the deep divisions that had opened up in

Kazakhstan now has its thirdprime minister in three years

Government changes, but notmuch

Land reform goes through

Cabinet instability reflectsintra-elite divisions

Kazakhstan 15


the government. Although Mr Nazarbayev has since successfully neutralised theDCK as an effective opposition movement, squabbling within the elite con-tinues, and the president has been forced to rely increasingly on ministers whoare loyal rather than experienced. However, the most loyal of Mr Nazarbayev�sprime ministers!Sergei Tereschenko (who served in 1991-94), NurlanBalgimbayev (1997-99) and Imangaly Tasmagambetov (2002-03)!have provedthe least effective, which bodes ill for Mr Akhmetov. By contrast, Kazakhstan�smost successful prime ministers have also been the most ambitious.Mr Kazhegeldin and Mr Tokayev (1999-2002) both pursued cogent economicpolicies and revived the economy, but also attempted to position themselveswith a view to succeeding Mr Nazarbayev. Whereas Mr Nazarbayev was able toneutralise Mr Tokayev and keep him within the ruling elite, Mr Kazhegeldin wasforced into exile and has become an implacable foe of the president.

Intra-elite factionalism has also inadvertently revealed the scale of corruption inKazakhstan. As part of its attempt to smear Mr Kazhegeldin, the governmentclaimed that the former prime minister had Swiss bank accounts and propertyin Belgium, and in 1998 called on both countries to investigate. It thentranspired that the Swiss authorities found a bank account held by a Kazakhcitizen, but it was in Mr Nazarbayev�s name. The issue has escalated over theyears, gaining in complexity and becoming known as the �Kazakhgate� scandal.The affair culminated in 2003 with the indictment of two US businessmen,James Giffen and J Bryan Williams; the latter pleaded guilty to tax fraud inJune. The opposition and the independent media seized on the affair in2001-02, prompting a furious official response that resulted in the harassmentof several prominent journalists and the closure of Kazakhstan�s independentbroadcast media (January 2003, pages 13-14).

Some sort of informal agreement appears to have been struck between theauthorities and Mukhtar Ablyazov, a founder member of the DCK, under whichhe is to leave politics in return for being released from prison. Mr Ablyazov is aformer minister of trade and industry who was arrested on March 27th forabuse of office, embezzlement and tax evasion; he was released from prisonafter being pardoned by Mr Nazarbayev on May 13th. It is, however, likely thathe was detained because he owned the Tan (Dawn) television channel, whichhad broadcast calls for inquiries to be made into the Swiss bank accounts heldby high-level officials, including Mr Nazarbayev. The television station wasrepeatedly sabotaged and then forced to close.

Speaking on May 14th, the day after he was released, Mr Ablyazov said that hehad left the DCK, claiming that the party he had helped to found was onlyinterested in criticising the authorities and appealing to Western powers. Hemade it clear that he would become a businessman again and had forsakenpolitics. He had apparently formally asked for a pardon in April, although henever admitted that he was guilty of abuse of office. The release of Mr Ablyazovhas confirmed the political nature of justice in Kazakhstan. At the time of hisconviction, officials had claimed that Mr Ablyazov was guilty of a serious crime.His release would therefore seem to indicate either that he was innocent or thatthe government has changed its mind as to the gravity of his crime.

Mukhtar Ablyazov is released,casting doubt on his trial

16 Kazakhstan


A US Federal Grand Jury is conducting an investigation into corruptioninvolving the Kazakh oil sector, and this is creating difficulties for both theKazakh government and Kazakh-US relations. At the heart of the investigationis Mr Giffen, a New York-based lawyer who had been a consultant toMr Nazarbayev. Mr Giffen was arrested on March 31st at JFK airport in NewYork attempting to board a flight to Kazakhstan, and he was then charged withpaying US$78m in bribes to two unnamed Kazakh officials. According to USinvestigators, Mr Giffen took US$138m from oil companies between 1995 and2000, and passed on US$60m to one Kazakh official, the higher ranking of thetwo, and US$18m to the other. Swiss bank accounts containing up to US$150munder the control of Messrs Balgimbayev, Giffen and Nazarbayev are currentlyfrozen. Many of the accounts were with Crédit Agricole. Mr Giffen denies thecharges and has said that he will fight them.

Mr Giffen�s alleged bribes have been linked by investigators to a 1995 deal tohelp finance the processing and marketing of gas condensate from theKarachaganak field; the 1996 purchase of 20% of Tengiz by Mobil Oil (US, nowExxonMobil); the 1997 acquisition of 1.75% of the Caspian Pipeline Consortium(CPC) by Amoco (US, now merged with BP of the UK); the 1998 production-sharing agreements (PSAs) signed by the Karachaganak and Kashagan consortia;and the 1998 acquisition of half of the Kazakh state�s share in the Kashaganconsortium by Philips Petroleum (US, now ConocoPhilips).

The Giffen case took an important step forward when Mr Williams, a formerofficial with Mobil, put in a guilty plea to charges of conspiracy and tax evasionin June. Mr Williams had initially pleaded not guilty to these charges. He leftMobil in 1998 and the company has stated that it had no knowledge of thealleged illegal payments!a statement with which Mr Williams agreed at hiscourt hearing in June. Mr Williams acknowledged US$7m in undeclared income,of which US$2m was a payment for his involvement in arranging Mobil�spurchase of half of the Kazakh government�s 50% stake in the Tengizchevroil(TCO) joint venture in 1996 for US$1.05bn. Mr Williams has argued that theUS$2m payment was not a kickback. It is unclear whether or not Mr Williamswill be co-operating with prosecutors. He will be sentenced in September.

The government has hinted that the criminal investigation into the mid-1990s oildeals could jeopardise Kazakh-US relations, but Kazakhstan has little leverage inthe matter, since the country is of limited strategic importance to the US!especially in a climate of cordial US-Russian relations. Kazakh support in theUS-led �war on terror� is largely confined to overflight rights and emergencylanding rights for coalition aircraft on their way to airbases in Afghanistan, theKyrgyz Republic and Uzbekistan. By contrast, Kazakhstan has every interest inmaintaining this co-operation, since to withdraw its support would risk handingits main regional rival, Uzbekistan, a strategic advantage in Central Asian politics.

The government�s powerlessness in the face of the investigation has beenreflected in repeated efforts to influence the process through indirect means.Kazakhstan has hired a firm of lobbyists in Washington DC with a brief toimprove Kazakhstan�s image. In a similar vein, American lawyers acting for the

A US trial is proving awkwardfor Mr Nazarbayev

Veiled Kazakh threats to USlack credibility

Former Mobil executive pleadsguilty

Kazakhstan 17


government have sent a letter to the US Department of State warning of theconsequences of the ongoing prosecution to US-Kazakh relations.

There has been no progress in the long-running talks between the five CaspianSea littoral states (Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan) toagree a new legal convention for the sea. However, Kazakhstan, Azerbaijan andRussia are pushing ahead with what is, in effect, a separate deal for thenorthern and western Caspian Sea. Kazakhstan, Azerbaijan and Russia areexpected to sign an agreement governing their claimed national sectors of thesea sometime this year. Kazakhstan had already signed a bilateral agreementwith Russia in 1998, laying down the boundaries between the national sectorson the seabed. This was supplemented in 2002 by an agreement modifying thepreviously agreed median line and providing for the joint development of threeoffshore fields straddling the delimitation. Azerbaijan and Russia finalised asimilar accord in 2002. These two separate bilateral agreements could be turnedinto a new trilateral accord that could become a de facto new legal conventionfor the northern and western Caspian. As a first step towards such a treaty,Kazakhstan, Azerbaijan and Russia signed a document on May 14th 2003agreeing where their three respective Caspian Sea zones meet.

Economic policy

High revenue related to the oil sector and rapid economic growth mean thatthe government is having no problem meeting its fiscal targets. In January-May2003 Kazakhstan�s state budget (which includes local and republican budgets)posted a surplus of Tenge77bn (US$524m). Given Kazakhstan�s extensiveinvestment needs, the larger than expected revenue has led the IMF, in itsannual Article IV review of Kazakhstan, to recommend that the governmentloosen fiscal policy!an opinion shared by all the multilateral agencies workingin Kazakhstan. Official domestic debt levels are low and there is now no netexternal debt. Given that oil revenue is likely to remain strong for at least themedium term, the government is in a position to increase spending andalleviate some of the severe poverty that exists in rural areas, and to upgradethe country�s obsolescent infrastructure.

However, having suffered unexpected external shocks in the past!such as the1998 Russian financial crisis!the government appears reluctant to raiseexpenditure without a concomitant increase in revenue. This was clearlyevident in budget revisions made in March, after a better than expected first-quarter general budget surplus of Tenge69m (US$451m). Both revenue andspending targets were raised, thus keeping the budget deficit forecastunchanged at Tenge82.8bn (1.9% of GDP). Revenue is now set at Tenge710.2bn(16% of GDP), instead of the original budget forecast of Tenge622bn (14% ofGDP), and expenditure is set at Tenge793bn (18% of GDP), compared withTenge704bn (16% of GDP). Much of the extra spending will go on relief andreconstruction in Zhambyl province following an earthquake there in May.

The aim of not weakening the fiscal position through increased spending hasalso been a driving factor behind proposals for an oil production tax, revenue

Northern littoral states movecloser to Caspian resolution

Fiscal stance is comfortable

Oil tax could damageprofitability

18 Kazakhstan


from which would allow the government to implement tax cuts in other areas,as recommended by the multilaterals. The government led by the new primeminister, Danial Akhmetov, plans to cut the value-added tax (VAT) rate by 1percentage point, to 15%, as of January 1st 2004, and to lower social payrolltaxes from 21% to a scaled range of 7-20%.

The outgoing finance minister, Zeinulla Kakhimzhanov, said on June 9th that theoil production tax would only apply if the �world price� of oil (meaning datedBrent Blend) was over US$12/barrel. The production tax, based on the Brentprice, would be 10% at prices between US$12/b and US$15/b, 17% at pricesbetween US$15/b and US$20/b, and 24% at prices between US$20/b andUS$25/b, with the top rate of 31% at a Brent price of over US$25/b. As the averageprice of Brent at the end of the first quarter was over US$31/b, oil producerswould have been forced to pay just under US$10/b in tax, which!given oilproduction of 1m barrels/day (b/d) during the first quarter!would have yieldedUS$876.87m (14.8% of first-quarter GDP) in production tax revenue. The oilproduction tax would thus have doubled the total amount of fiscal revenue.

It is unclear if the oil production tax would replace all other taxes and royaltieslevied on the oil sector. If the oil production tax were to be levied on top ofexisting taxes, then some companies would be priced out of business. Inaddition, the suggestion that the tax be based on the prevailing �world price�fails to take into account the fact that the export price of Kazakh oil is around30% below Brent prices. During the first quarter the export price of Kazakh oilwas US$22.08/b, so an oil production tax based on the first-quarter Brent pricewould have taken US$9.74/b, or 44% of the export price. The proposal also failsto take into account the fact that the �world price� of oil and the taxable profitsfrom oil production are not the same: the cost of doing business in Kazakhstanand the cost of production can be substantial.

For some time the government has been proposing a large-scale sale ofexploration blocs in Kazakhstan�s sector of the Caspian Sea. The sale has beendelayed, in part because of uncertainties over the investment environment andthe frequent changes that the government makes in the organisation of thestate-owned oil sector. The IMF, among other foreign lenders, has alsoexpressed concern about the investment environment.

Quite how the government will proceed with the new exploration blocs isunclear. The president, Nursultan Nazarbayev, claimed on June 18th that allfuture contracts in the Caspian Sea would be characterised by �openness andtransparency�, and that contracts would be respected. Since this last promisehas been made and broken in the past, it raises questions as to the likelytransparency of deals. An added source of potential concern for investors is thegovernment�s plan for the state-owned oil and gas company, Kazmunaigaz, tohold a 50% stake in all future Caspian ventures. The problem for foreigninvestors is that Kazmunaigaz lacks the financial resources for the capital-intensive exploration and development that is required to develop the CaspianSea. This raises the risk that the government might lean on Kazmunaigaz�sforeign partners to provide �assistance�!in effect a subsidy!to allow it toparticipate in such future ventures.

Government pledgestransparency in future oil deals

Kazakhstan 19


The National Bank of Kazakhstan (NBK, the central bank) has kept itsbenchmark interest rate, the refinancing rate, stable at 7.5%. Although year-on-year inflation rose during the first three months of 2003, the NBK kept the rateunchanged and real interest rates!both on a monthly and on a compoundannual basis!have remained positive. Although the NBK seems unlikely toraise interest rates unless there is a sustained acceleration of inflation, it seemsequally unlikely to cut interest rates substantially while year-on-year inflationremains at over 6%.

NBK refinancing rate(%; end-period; 3-month maturity)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2001Annual rate 14.0 12.5 12.5 12.5 12.5 12.0 12.0 12.0 11.0 11.0 9.0 9.0Monthly rate 1.2 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9 0.9 0.8 0.8Real monthly rate 0.1 0.3 0.4 0.3 0.7 0.9 1.1 1.0 0.7 0.2 -0.2 -0.2Real annual ratea 6.5 4.1 3.4 3.0 3.4 3.5 4.1 4.3 3.5 4.0 2.4 3.02002Annual rate 9.0 9.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 7.5 7.5Monthly rate 0.8 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.6 0.6Real monthly rate 0.0 0.5 0.5 0.1 -0.2 0.1 0.1 1.0 0.6 0.1 -0.4 -0.7Real annual ratea 3.1 3.7 3.1 3.3 2.8 2.3 1.6 1.9 2.0 2.2 1.5 1.12003Annual rate 7.5 7.5 7.5 7.5 � - - - - - - -Monthly rate 0.6 0.6 0.6 0.6 � � � � � � � �Real monthly rate -0.4 0.1 0.3 0.2 � � � � � � � �Real annual ratea 0.8 0.6 0.4 0.5 - - - - - - - -

a Refinancing rate on a compound annual basis.

Sources: National Bank of Kazakhstan; Economist Intelligence Unit.

Recent months have seen substantial growth in net foreign assets, enablingsimilar growth in domestic credit and broad money. The NBK has been carefulto sterilise the foreign-currency inflow into the economy, partly through thepayment of any oil windfall into the national oil fund!the National Fund ofthe Republic of Kazakhstan (NFRK)!and partly by buying up foreign exchange.Net foreign assets at the end of the first quarter were Tenge793bn (18% of GDP),up by an impressive 49% year on year. The economy remains substantiallydemonetised, but monetary aggregates are growing at year-on-year rates of over30%. Although the ongoing process of remonetisation makes it difficult toassess real money demand growth, the data suggest that it is proceeding rapidly.There nonetheless seems to remain significant scope for the money supply toincrease further without inflationary consequences.

Growing demand for money is evident in a boom in domestic credit. Accordingto figures from the IMF�s International Financial Statistics (IFS), domestic creditrose by 28% to Tenge461bn (10.5% of GDP) at the end of the first quarter of2003. The sound medium-term growth prospects for the economy created bygrowing oil exports are making Kazakhstan�s banks attractive for foreignlenders. BankTuranAlem, the formerly state-controlled foreign trade bank,successfully floated a US$225m Eurobond with seven-year maturity at thebeginning of June with a coupon of just 7.875%, a spread of 493.5 basis points

Monetary policy stance isstable

Net foreign asset growth ishelping remonetisation

Rapid credit growth might leadto lower asset quality

20 Kazakhstan


above US Treasuries of similar maturity. The lowest coupon yet achieved by aKazakh borrower was in October 2002, when the Kazakhstan DevelopmentBank sold a US$100m five-year maturity Eurobond for a 7.125% coupon.Previous sovereign Eurobonds had higher coupons, as the economy was notperforming as well and sentiment towards emerging markets at the time wasless favourable. The European Bank for Reconstruction and Development(EBRD) has taken a 15% stake in Kazkommertsbank for US$30.6m, valuing thebank, Kazakhstan�s largest, at US$204m.

So far rapid growth in lending appears to be largely an effect of pent-up demandfor credit, rather than a sign of a deteriorating loan portfolio. Nonetheless, thereremain concerns as to how well companies in the non-oil sector would weatheran economic downturn. In order to address these and other banking sectorconcerns, in 2004 the NBK plans to set up an independent supervisory body,which should strengthen the monitoring of credit lending procedures.

Main economic policy indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

General budget revenue (Tenge m)2001 94,095 58,832 54,891 67,301 50,701 44,015 63,131 56,567 46,023 62,739 72,261 63,3372002 53,385 57,605 61,173 69,730 74,803 55,508 68,920 90,130 60,509 63,777 87,366 64,9402003 122,341 79,506 66,561 83,280 89,942 � � � � � � �

General budget expenditure (Tenge m)2001 22,687 48,217 53,790 50,939 62,910 83,789 61,971 54,729 58,136 59,691 73,544 116,4882002 27,417 47,488 68,729 67,135 66,567 78,603 66,224 63,559 72,128 69,101 71,917 107,9862003 46,129 76,314 76,692 80,826 85,001 � � � � � � �General budget balance (Tenge m)2001 71,408 10,615 1,101 16,362 -12,209 -39,774 1,160 1,838 -12,113 3,048 -1,283 -53,1512002 25,968 10,117 -7,556 2,595 8,236 -23,095 2,696 26,571 -11,619 -5,324 15,449 -43,0462003 76,212 3,192 -10,131 2,454 4,941 � � � � � � �

Exchange rate (Tenge:US$; av)2001 145.1 145.2 145.4 145.5 145.9 146.4 146.7 147.1 147.5 147.9 148.4 149.62002 151.1 151.8 152.1 152.5 152.9 153.1 153.5 154.1 154.4 154.4 154.3 155.12003 155.5 154.0 151.6 151.8 151.1 149.0 � � � � � �Real effective exchange-rate index (CPI-based; 1997=100)2000 69.9 70.3 70.6 71.0 71.0 71.1 71.0 70.2 69.7 70.2 71.0 71.22001 71.0 70.8 70.3 70.0 69.9 69.6 69.3 68.8 68.5 68.8 69.4 69.72002 69.4 69.7 70.6 70.8 � � � � � � � �Real effective exchange-rate index (PPI-based; 1997=100)2000 83.2 86.2 88.2 85.1 84.9 86.6 87.2 84.5 84.5 86.1 85.1 82.22001 77.5 78.0 78.6 80.7 82.8 82.2 83.2 84.4 85.5 87.0 85.6 83.92002 84.4 85.4 86.5 86.4 � � � � � � � �M2 (Tenge bn)2000 381 401 419 408 412 468 507 508 534 524 522 5572001 519 520 539 561 579 592 604 612 647 678 665 7242002 686 732 758 � � � � � � � � �M2 (% change, year on year)2000 48.8 53.4 60.8 51.1 44.9 47.1 48.2 46.3 48.4 35.5 35.9 40.22001 36.4 29.7 28.6 37.4 40.5 26.4 19.2 20.5 21.1 29.4 27.3 30.12002 32.0 40.6 40.8 � � � � � � � � �

Notes. General budget expenditure data include net lending; data for 2000-01 include privatisation revenue. M2 is cash in circulation plusdeposits in tenge and convertible currency.

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

Kazakhstan 21


The domestic economy

Economic trends

Rapidly rising real GDP growth has enabled Kazakhstan to regain its level ofoutput before independence in 1991. The economy contracted by 31% in 1991-95and then had tepid and faltering growth until 1999. From 2000 to 2002,however, annual real GDP growth has averaged 10.8%. During the first quarterof 2003, real GDP at market prices grew by 10.6% year on year, helping thelevel of output to reach its 1991 level again. However, to some extent thecomparison is forced, as the composition of output has changed dramaticallysince 1991 and Kazakhstan now produces few of the low-quality industrial andconsumer goods that it did in the Soviet era. The decline in real GDP per headhas also been less severe than the overall decline in economic activity, as thepopulation has fallen by around 14% since independence.

First-quarter nominal GDP was Tenge911bn (US$5.93bn). The fastest-growingsector during the first quarter of 2003 was construction, which expanded by12% year on year, largely owing to work related to the oil sector. Industrialoutput rose by 10.4% year on year in the first quarter, with the sectoraccounting for 32.8% of GDP. The fastest-growing industrial subsector was theextractive industry, which is dominated by oil and gas, and which expanded by13.4% year on year during the first quarter. The utilities subsector!water,electricity and gas distribution!raised output by 11.9% year on year.

GDP growth by sector, Jan-Mar(% change, year on year)

2002 2003GDP at factor cost 10.7 10.7Agriculture 5.5 5.4Industry 12.1 10.4Construction 10.5 12.0Transport & communications 10.5 9.1Trade & public catering 13.0 10.0Other services 10.6 12.4

Source: Agency of the Republic of Kazakhstan for Statistics.

Rapid real GDP growth had fostered a sense of optimism in the previousgovernment!the outgoing prime minister, Imangaly Tasmagambetov, said inMay that his government wanted real GDP to grow by 250% by 2015,equivalent to 11% per year. The new prime minister, Danial Akhmetov, hastaken a slightly more conservative but still ambitious stance, seeking toachieve growth of 150% by 2006. This implies an average annual real GDPgrowth of 7-7.5%, and average annual industrial output growth of 9-9.5%. Thegovernment�s real GDP forecast for 2003 is for 8.3% growth, with nominal GDPreaching Tenge4.37trn (US$28.4bn).

The main motor of growth in Kazakhstan has been rising export volumes,largely of crude oil. Oil production has been financed by substantial inflowsof foreign direct investment (FDI), which accounts for over half of capital

Real GDP regains its pre-independence level

Growth targets scaled down,but still ambitious

Most investment is into the oilsector

22 Kazakhstan


investment. During the first quarter of 2003 total capital investment wasTenge156bn (17% of GDP), a year-on-year rise of 3.7%. Most investment!53% ofthe total during the first quarter of 2003!went into the oil and gas industry;transport and communications came a poor second with 16% of the total.Most investment came from foreign firms and the domestic private sector(91% of the total), with the rest coming from the state sector. Foreign capitalinflows, whether of foreign debt or FDI, accounted for 35%of total investment, with firms� balance sheets providing 58% of allinvestment funds.

Economic growth is slowly starting to erode the high level of unemployment inKazakhstan. There were 656,400 unemployed at the end of May, equal to 8.8%of the workforce, down by 3.8% from 682,200 (9.1% of the workforce) a yearearlier. Current unemployment statistics!collated on the basis of InternationalLabour Organisation (ILO) methodology as of 2000!paint a more accuratepicture of the state of unemployment. Before that, unemployment data werebased only on those who registered as unemployed, and missed hiddenunemployment, such as those on short-time working or on indefinite unpaidleave. The true rate of unemployment is probably a little, but not substantially,higher than the 9% rate reported by official statistics. The slow pace ofenterprise restructuring means that underemployment remains widespread!particularly in the agricultural sector!as many workers remain nominally oncompany payrolls solely to receive in-work benefits. Officially recordedunemployment and underemployment, particularly in rural areas, result inconsiderable levels of poverty.

Inflation accelerated in the first quarter of 2003, but prices rose by only 0.1%month on month in May and June. As a result, despite the acceleration in theearly part of the year, cumulative inflation was 2.3% in January-June 2003,compared with a rate of 5.5% over the same period of 2002. The volatility ofinflation over the first half of the year can in part be attributed to the cost offood during the winter months: in particular, the IMF has noted thatimpediments to the movement of food within Kazakhstan lead to higherprices than are strictly necessary. However, the slow pace of disinflationsuggests that inflation is partly structural, the result of rapid economic growthand increases in productivity pushing up prices in the services sector.Although the target of 5.9% year-end consumer price inflation of the NationalBank of Kazakhstan (NBK, the central bank) is attainable!it matches the Juneyear-on-year rate!the government�s forecast of year-end consumer priceinflation of 5.3% for 2003 rests on a best-case scenario of low monthlyinflation for the remainder of the year. The IMF is starting to be concerned bythe government�s failure to curb inflation and believes that there should be atougher anti-inflationary stance.

Growing oil exports are resulting in rising hard-currency inflows, which in turnare exerting upward pressure on the tenge. The nominal appreciation of thetenge began in February and by the beginning of July the national currencywas trading at around Tenge147:US$1, compared with Tenge154.6:US$1 at end-2002!a strengthening of 5% against the US dollar. As a result, in real effective

Fast growth is having an effecton unemployment

Inflation speeds up, thenslows down again

Real appreciation isincreasingly an issue

Kazakhstan 23


terms (using the real exchange rate weighted by trading partners) the tengeappreciated by 2% over the first four months of the year, a trend that wasreversed only by the sharp disinflation seen in May.

The current exchange-rate arrangement is a managed float, also known as adirty float. The NBK intervenes in the market to prevent excessive currencyvolatility. During the first half of 2003 the NBK has been selling tenge andbuying US dollars, thereby hoping to slow the real appreciation of the tengeand also keeping the real effective exchange rate on a steady trend of realdepreciation. The IMF, however, wants the NBK to intervene less and believesthat the exchange rate needs to be more flexible. The IMF view is that tengeappreciation may be needed to bear down on inflation.

Mining

The relative decline of the metals sector in terms of both output and exports iscontinuing, despite the fact that the sector is the second largest recipient of FDIand a significant employer. With the exception of alumina and zinc, theproduction of all major metals fell in the first quarter of 2003. Metalsaccounted for just US$307m of export earnings on a customs basis during thefirst quarter of 2003, up by only 0.4% year on year and accounting for justunder 10% of total exports. The most important metals export is copper, whichbrought in US$123m (2% of GDP)!down by 11% year on year. Most copper inKazakhstan is produced by Kazakhmys, a firm controlled by the German-basedsubsidiary of Samsung (South Korea). Kazakhmys is one of the largest investorsin the metals sector and operates two large copper smelters. However, like mostother investors in the non-oil sectors of the economy, Kazakhmys faces theproblem of the nominal exchange-rate appreciation rendering it lesscompetitive in export markets.

Lower production volumesand fewer exports

24 Kazakhstan


Agriculture

The agricultural sector is shrinking as a proportion of economic output becauseit has been growing more slowly than other sectors, but it remains the secondlargest employer in Kazakhstan, with around 35% of the workforce. The maincrop in Kazakhstan is grain, as the Soviet authorities gave large areas ofnorthern Kazakhstan over to this crop during the 1960s. The grain harvest isexpected to come in at 12.5m tonnes in 2003, 23% lower than in 2002. Theharvest will have suffered from adverse weather conditions, given cold weatherin the spring and a lack of precipitation. In addition, the area given over to grainhas been reduced from 14m ha to 13.7m ha. As a result, the prospective yield for2003 is 0.9 tonnes/ha, down by 21% from the 2002 yield of 1.2 tonnes/ha.

In the Soviet period Kazakhstan used to produce bumper harvests of up to30m tonnes, although the quality was often poor. The grain sector more thanmeets domestic demand with a harvest of under 4m tonnes; the real challengeis to increase quality so as to earn more from exports. According to governmentsources, grain exports are expected to increase by 23.5% to 5.2m tonnes in 2003,on the expectation that a smaller harvest will also be a better-quality harvest.

The livestock sector is steadily recovering and herd sizes for all animals arerising, thereby continuing to reverse the sharp declines of the early 1990s.Production of livestock and poultry was 249,600 tonnes during the first quarterof 2003, a 5% year-on-year increase. The dairy industry also appears to berecovering. Milk output was 644,900 tonnes, up by 7% year on year, and outputof eggs was 485m, a 10% increase on the first quarter of 2002.

Land reform

A new land code is finally approved

The contentious new land code that brought down the prime minister, Imangaly Tasmagambetov, in June, has proved anillustrative example of policymaking in Kazakhstan. Although it has been Kazakhstan�s most prominent political issue inrecent months, few outsiders have seen the actual document, and the discussion surrounding the provisions of the codehas many points of uncertainty.

Grain harvest disappoints, butremains above 1990s levels

Kazakhstan 25


Nevertheless, a few general principles appear clear, and have survived the many vicissitudes of the code�s passage throughparliament. The document defines three types of land use: outright ownership, temporary ownership, and lease holding.People working on the land will be given priority to buy land outright and are entitled to avail themselves of a plannedfacility for payment in instalments over ten years. Only Kazakh citizens will be allowed to be landowners; foreigners willhave the right to lease land for up to ten years. The law also limits the size of the land plots to be sold, in order to preventthe emergence of large estates; the limit to be set was one of the most contentious points in the debate between parliamentand the government. As a result, the president, Nursultan Nazarbayev, has determined that the limit will be set at thediscretion of regional authorities.

Land reform is to be accompanied by increased availability of interest-free loans to farmers and by the institution of asystem of compulsory insurance in plant cultivation to cover farmers against natural hazards. These innovations areintended to introduce an independent, land-owning peasantry to the theory and practice of borrowing in the financialmarket and to taking responsibility for their holdings by insuring themselves against bad weather and other risks. Such acultural change would stimulate the growth of small and medium-sized enterprises (SMEs) in the food-processing industry.

However, given the complex social and cultural factors involved, the effects of land reform are unlikely to be immediate. Inparticular, the consolidation of existing large estates!formed by the agglomeration of small plots subleased from farmers bywell-connected members of Kazakhstan�s business elite!appears an inevitable part of the process, and one that could giverise to considerable rural discontent. Those small farmers that do survive, in all likelihood because their land is not of highenough quality to attract the interest of estate-holders, will be an unattractive prospect for banks and will instead continueto rely on multilateral assistance and government subsidies for the foreseeable future.

Oil and gas

In the first five months of 2003 the production of liquids (crude oil andassociated gas) reached 20.8m tonnes!equivalent to 1m barrels/day (b/d), andan increase of 12.5% year on year. Over half of the increase in liquids wasattributable to higher extraction of gas condensate, output of which more thandoubled in comparison with the first five months of 2002. Most gascondensate is produced by the North Caspian joint venture!led by BG (UK)and Agip (Italy)!which is developing the giant hydrocarbon deposit atKarachaganak in north-western Kazakhstan. The main crude oil producer is theTengizchevroil (TCO) joint venture, led by ChevronTexaco (US), which isdeveloping the Tengiz field in western Kazakhstan. Tengiz has proven reservesof 6bn-9bn barrels of oil.

The gas industry is lagging behind the oil sector largely because of thedifficulty in finding commercially attractive export markets. Kazakhstan haslittle exportable gas and it is a long way to hard-currency markets, so that thelikely netback price will be low. Nonetheless, gas production is rising rapidly,largely owing to the Karachaganak joint venture. Natural gas output was2.8bn cu metres during the first five months of 2003, an increase of 13% yearon year. Kazakhstan is a net gas exporter, although it is forced to import asmall amount of gas from Uzbekistan for southern Kazakhstan, because thereare two natural gas pipeline networks in the country that are notconnected to each other. Gas imports from Uzbekistan will end in comingyears as local gas deposits in southern Kazakhstan, the Amangeldy fields, arealready being developed.

Liquids production tops the1m b/d mark

26 Kazakhstan


The refining sector is finally moving out of the doldrums after a decade ofdecline and stagnation. The revival of the sector is, however, artificial to someextent and dependent on state intervention. The government has forced state-owned oil producers to load the three refineries at Atyrau, Chimkent andPavlodar, even though they tend to pay rather less for their oil than the averageoil export price. According to figures quoted by the Prime-TASS news agency,the refineries took in 3.1m tonnes (189,000 b/d) of oil during the first fourmonths of 2003!up by 30% year on year. The refineries are, nonetheless, stilloperating at well below their combined nameplate annual capacity of18.5m tonnes (371,000 b/d).

Refined products, Jan-May 2003(m tonnes) (% change, year on year)

Petrol 0.8 8.8Diesel 1.2 36.5Fuel oil 1.4 30.0

Source: Agency of the Republic of Kazakhstan for Statistics.

The highly politicised nature of the judicial system in Kazakhstan wasillustrated by the Supreme Court�s decision in March to reduce the fine againstTCO after the joint venture backed down in a dispute with the government.The prosecutor for the province of Atyrau had taken TCO to court in 2001 forallegedly illegally storing sulphur!a by-product of Tengiz crude!in the open.The original fine imposed on TCO was Tenge10.8bn (US$72.8m). However, afterTCO agreed to the government�s demands of some US$810m in additionaltaxes!rather than paying less tax as TCO had originally proposed!the SupremeCourt decided to reduce the fine on appeal, although it retained the verdict.

On March 26th the Supreme Court cut the fine by 90% to just Tenge1.08bn(US$7.3m). The fine has now been paid by the company. The dramaticreduction in the size of the fine after the joint venture conceded to thegovernment over its expansion programme suggests that the two events areunlikely to be a coincidence. Environmental standards at Tengiz are widelyreported to be poor, and they are unlikely to have improved over the pastyear!independent sources estimate that some 7m tonnes of sulphur haveaccumulated at Tengiz in potentially hazardous conditions. The environmentalcase is therefore likely to have been used by the government as a form ofpressure. ChevronTexaco was the last major foreign company in Kazakhstan tohave refused to allow its contract to be renegotiated or its tax paymentsincreased. The reduction in the size of the fine may be a government signal thatthe dispute is now considered closed.

ChevronTexaco!which holds half of the equity in TCO!has also held out anolive branch to the government. In April ChevronTexaco�s chief executiveofficer (CEO), David O�Reilly, pledged not only that there would be increasedinvestment!with US$2.5bn to be ploughed in during the coming three years!but also that more investment could come if contracts were respected. Inreality, the government shows no such inclination, and it may even beemboldened by its ability to take on TCO and win. The high stakes for whichthe government was playing are illustrated by the fact that TCO is Kazakhstan�s

Downstream sector is beingrevived

TCO compromises, and itsenvironmental fine is reduced

ChevronTexaco seeks to limitstate intervention

Kazakhstan 27


largest investor, with US$4bn invested in Kazakhstan during the past tenyears!equal to 26.1% of total FDI to date. According to figures given out by thepresident, Nursultan Nazarbayev, TCO has paid taxes and royalties of US$2.7bnto the government, with US$1bn of these payments made in 2002 alone(equivalent to 4% of 2002 GDP).

Having successfully renegotiated the terms of its engagement with TCO, thegovernment has turned its attention to the consortium developing the giantoffshore Kashagan oilfield, Agip KCO. The Kashagan field contains7bn-9bn barrels of proven reserves. An international consortium first signed adeal to explore the Caspian Sea bloc where Kashagan was discovered in 1993.The current consortium was set up in 1997 and began its operations in 1999.The consortium does not expect to begin commercial production of oil until2006 or 2007. However, the government is demanding that production begin in2005. The consortium has indicated that some oil will be produced in 2005, butnot in commercial quantities, leading Mr Nazarbayev to express hisunhappiness with what he considers to be a delay.

The government is now using similar tactics to those it employed against TCOso as to pressure Agip KCO into changing its stance or paying compensation.The authorities have delayed approving the development plan submitted byAgip KCO in December 2002. In addition, the government has withdrawn theconcession initially made to Agip KCO exempting it from paying value-addedtax (VAT) on its activities. The government ruled in February that the non-payment of VAT only applies to oil production activities!which does notcurrently apply to Agip KCO, since it is engaged in exploration, geological andseismic work. According to one source who spoke to the Financial Times, aLondon-based newspaper, if the government were to demand retrospectiveVAT payments and impose penalties, then Agip KCO and its subcontractorswould have to pay an estimated US$500m. The consortium has investedUS$2bn to date but has yet to make a profit.

Government pressure on Agip KCO stems largely from the disagreement overthe start date for production. However, the government also seems unhappythat the Western members of Agip KCO decided to prevent two Chinese state-owned oil companies from entering the consortium by buying in May the16.67% share of Agip KCO owned by BG (UK). The government appeared tohave been hoping that, with two Chinese partners owning one-sixth ofAgip KCO, their future oil production volumes could be committed to the long-discussed, but still not built, oil export pipeline from western Kazakhstan toChina. However, after BG decided to sell its share in two equal halves toSinopec (China) and CNOOC (China), all of the other members of Agip KCO!with the exception of Inpex (Japan)!decided to exercise their right to buy BG�sshare pre-emptively. The Chinese firms reacted with equanimity and thedecision has had no effect on the Western firms� operations in China. BG is thefourth company to leave the consortium that is now developing Kashagan,following the departure of Kazakhoil (the then state-owned oil producer), BP(UK) and Statoil (Norway).

Government is now pressuringthe Kashagan consortium

Kazakhstan hoped for Chineseparticipation in Agip KCO

28 Kazakhstan


The one large Chinese investor in Kazakhstan, the China National PetroleumCompany (CNPC), had in the past been the first foreign investor to be targetedby the government�s aggressive attitude to foreign firms. Now, however, thegovernment seems to be taking a very favourable stance towards the company,and appears keen to kickstart stalled plans for an oil export pipeline betweenwestern Kazakhstan and China. The 1997 deal to give CNPC equity in theAktobe oilfield!controlled by the then state-owned firm Aktobemunaigaz!wasinitially hailed as the start of a massive US$9.5bn programme of investment,which would include the construction of a 3,000-km oil export pipeline fromAktobe, in western Kazakhstan, to China, supposedly by 2005.

The amounts invested by CNPC in Kazakhstan have, however, been modest.CNPC has so far built a shorter pipeline to link its Kenkiak field with theKazakh Caspian Sea port of Atyrau. Work on another short pipeline, fromAtasu in north-eastern Karaganda province to Alashankou, near the border-crossing into China at Druzhba, began in May. To encourage CNPC to producemore at Aktobemunaigaz and to move ahead with the Aktobe-China exportpipeline, in May the government sold its remaining 25.12% share inAktobemunaigaz to CNPC for US$150m. The deal valued Aktobemunaigaz as awhole at US$598m. Construction of the longer export pipeline has been heldup because of concerns about its commercial viability. Aktobemunaigazproduced just over 4m tonnes (86,000 b/d) of oil in 2002, just 9% of nationalproduction. The Aktobe-China export pipeline could cost up to US$3bn andwill probably need a minimum throughput commitment of 400,000 b/d to becommercially viable. In the meantime, Aktobemunaigaz is shipping some of itsoil westwards through the Caspian Pipeline Consortium (CPC) export pipelinethat runs from Tengiz to the Russian Black Sea port of Novorossisk!althoughthe volume of its exports, at an expected 12,000 b/d by the second half of2003, is low.

Official attitude to Chineseinvestment has warmed

Kazakhstan 29


Main macroeconomic indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Industrial output (at constant prices; % change, month on month)2001 -6.3 -7.0 11.0 0.0 -7.0 4.0 -0.3 -1.0 2.7 4.7 3.5 4.42002 -2.6 -7.0 6.1 -2.0 -6.3 -0.9 5.6 2.5 -1.2 8.7 0.4 6.22003 -7.5 -4.7 6.9 -3.6 0.3 � � � � � � �Industrial output (at constant prices; % change, year on year)2001 35.1 24.9 34.3 29.7 14.8 27.1 3.1 8.5 8.4 16.9 14.2 7.32002 11.6 11.6 6.7 9.2 10.0 4.7 10.8 14.7 10.4 14.6 11.2 13.12003 7.4 10.1 10.9 4.5 9.0 � � � � � � �

Unemployment (�000)2001 240 245 242 242 239 235 223 228 223 223 221 2162002 790 778 768 691 682 666 637 625 614 639 676 7242003 718 703 677 667 656 � � � � � � �Unemployment rate (%)2001 3.4 3.4 3.4 3.7 3.1 3.1 3.0 2.9 2.9 3.0 2.8 2.92002 11.0 10.9 10.7 9.2 9.1 8.8 8.4 8.3 8.1 8.5 9.2 10.22003 10.0 9.7 9.3 2.6 8.8 � � � � � � �

Consumer prices (% change, month on month)2001 1.1 0.8 0.7 0.7 0.4 0.1 -0.1 0.0 0.2 0.7 0.9 1.02002 0.7 0.3 0.2 0.5 0.9 0.5 0.6 -0.3 0.1 0.6 1.0 1.42003 1.0 0.5 0.3 0.4 0.1 0.1 � � � � � �Consumer prices (% change, year on year)2001 8.4 9.1 9.8 10.2 9.8 9.1 8.6 8.4 8.1 7.6 7.0 6.42002 6.2 5.7 5.2 5.0 5.5 6.0 6.7 6.4 6.3 6.1 6.2 6.62003 6.9 7.2 7.4 7.2 6.4 5.9 � � � � � �Producer prices (% change, month on month)2001 -8.5 2.0 1.3 -3.4 0.0 1.1 -0.3 -2.0 0.5 0.1 -1.6 -3.52002 -4.6 0.7 2.1 3.9 3.5 0.2 2.5 1.8 2.1 2.3 -1.6 -1.12003 3.6 2.0 1.6 -2.3 -3.0 � � � � � � �

Producer prices (% change, year on year)2001 8.2 8.2 7.3 4.9 7.2 5.1 3.1 -0.8 -4.0 -6.0 -8.3 -13.82002 -10.2 -11.3 -10.7 -3.9 -0.5 -1.4 1.4 5.2 6.9 9.3 9.4 12.02003 21.7 23.3 22.7 15.4 8.1 � � � � � � �

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

Foreign trade and payments

Rising global oil prices helped almost to treble the size of the trade surplusduring the first quarter of 2003. According to figures collected on a customsbasis!which tend to understate the level of imports, and, to a lesser extent,exports!the trade surplus during the first quarter of 2003 was US$1,458m, upfrom US$567m in the same period of 2002. The value of exports wasUS$3,122m, compared with US$1,987m in the first quarter of 2002, andrecorded imports went up to US$1,665m, a more modest increase in valueterms from US$1,420m in 2002. The customs service misses a small amount ofexports, such as the crossborder buys of shoppers from Uzbekistan, as well asconsiderable volumes of smuggled imports of consumer goods. Balance-of-payments figures, which correct for these deficiencies in the customs data, gavea smaller trade surplus of US$1,349m.

Higher oil prices boost tradesurplus

30 Kazakhstan


Largely thanks to higher prices, and, to a smaller extent, increased exportvolumes, crude oil and gas condensate exports accounted for 57% of exportearnings on a customs basis during the first quarter of 2003. The first-quarteroil export price was US$22.08/barrel, up by 67% from US$13.25/b a year earlier.Prices for dated Brent Blend averaged US$31.43/b in the first quarter of 2003, upby 48.5% year on year. The narrowing spread between the Kazakh oil exportprice and Brent is likely to be a result of falling transport costs, but a significantdifference remains between the Kazakh price and the international benchmark.This can be attributed to sales of oil by Kazmunaigaz to Ukraine, which paystoo little for its oil, and to losses resulting from the blending of Kazakh oil withlower quality Russian crudes in the Russian pipeline system.

Some of the spread, however, may also be attributable to the routing of oilexports through tax havens in the Caribbean. Of total exports on a customsbasis during the first four months of 2003, 18% of the total!all crude oil!nominally went to Bermuda. In reality, the Bermuda oil purchasers are Kazakhor Russian trading companies which then sell the oil on to the true end-consumer. Although data often indicate that the price paid by the Bermudacompanies is generally in line with the average Kazakh oil export price, thequestion remains of whether a higher oil export price might be achievablewithout this intermediation.

The increasing value of oil exports to hard-currency markets has caused asharp reduction in the share of exports to the Commonwealth ofIndependent States (CIS). In 2003 the CIS took just 18% of first-quarter exportson a customs basis, down from 28% of first-quarter 2002 exports. The CISalso provided a smaller proportion of Kazakhstan�s imports, but the fact thatthe decline was not as large as on the export side again reflects the weight ofoil in the structure of exports. Kazakhstan took 45% of all imports on acustoms basis from the CIS in the first quarter of 2003, down from 46% inthe first quarter of 2002. The true share of the CIS in supplying the Kazakhmarket may be lower when smuggled goods and unrecorded imports aretaken into account. Although many of these goods come through the CIS,they are often not produced in the CIS but instead come from Western orAsian manufacturers.

Balance-of-payments data from the National Bank of Kazakhstan (NBK) showeda first-quarter current-account surplus of US$626m (10.6% of GDP), a recordhigh since independence. This was driven entirely by the booming tradesurplus, which offset a US$745m deficit on the services and income balance.The deficit on the balance of services is being driven by strong growth ininvisibles imports, which, in turn, is largely the result of oil sector explorationand development. However, oil sector activity has also ensured large andsustained inflows of foreign direct investment (FDI), which resulted in grossinflows of US$2.6bn in 2002 (10.5% of GDP), and US$255m in the first quarterof 2003 alone.

Although inflows of FDI fell by 9.3% in 2002 when compared with 2001, theywere the second largest annual inflow recorded in Kazakhstan since indepen-dence. As a result, the total stock of FDI by the end of 2002 was US$13.7bn. For

Oil provides more than half ofall export earnings

Current account posts recordsurplus

Direction of trade shifts fromCIS, largely owing to oil sales

Kazakhstan 31


comparison, the stock of government and government-guaranteed debt at theend of 2002 was US$3.5bn. The decision to fund economic development withforeign equity as opposed to foreign debt has been a major factor in stimulatingrapid economic growth in Kazakhstan.

Current account(US$ m unless otherwise indicated)

2001 2002 20032 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Current-account balance -313 -391 -587 31 -477 -168 17 626Goods: exports 2,430 2,216 2,083 2,066 2,152 2,872 2,977 3,192Goods: imports -2,133 -1,920 -1,927 -1,655 -1,932 -2,100 -1,959 -1,843Trade balance 298 296 156 410 220 772 1,018 1,349Services: credit 326 349 327 345 378 455 409 -Services: debit -708 -806 -785 -607 -897 -1,150 -1,080 -

Services: balance -382 -457 -458 -263 -519 -695 -671 -409Income: credit 53 69 44 43 83 70 77 -Income: debit -359 -352 -359 -199 -305 -347 -404 -

Income: balance -306 -283 -315 -156 -222 -277 -327 -336Current transfers: credit 108 92 99 94 109 117 105 -

Current transfers: debit -30 -40 -68 -54 -65 -85 -108 -Current transfers: balance 78 52 31 40 44 32 -3 21FinancingInward direct investment 484 569 891 563 513 732 753 -Outward direct investment -3 -8 -16 -422 14 -7 -8 -Net foreign direct investment 481 561 876 142 527 724 745 255Inward portfolio investment -59 85 23 -20 -36 -18 -109 -Outward portfolio investment -257 -337 -99 -52 -431 -186 -396 -Net portfolio investment -317 -252 -76 -72 -467 -203 -505 -100Memorandum itemsCurrent-account balance (% of GDP) -5.8 -5.9 -10.1 0.6 -8.1 -2.4 0.3 10.6Merchandise trade balance (% of GDP) 5.5 4.5 2.7 8.1 3.7 11.0 15.8 22.8Services balance (% of GDP) -7.1 -6.9 -7.9 -5.2 -8.8 -9.9 -10.4 -6.9Income balance (% of GDP) -5.7 -4.3 -5.4 -3.1 -3.8 -3.9 -5.1 -5.7

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

The impressive growth of foreign-exchange reserves, according to figures fromthe IMF�s International Financial Statistics (IFS), means that they now exceedpublic-sector foreign debt. The IFS reports that foreign-exchange reserves at theend of May 2003 stood at a record US$3.4bn. In terms of import cover, reserveswere worth just under four months of goods and services imports, calculated at2002 levels. Reserves of gold add another 18 days of import cover. Furthermore,the National Fund of the Republic of Kazakhstan (NFRK), the oil windfall fund!which is also not included in reserve calculations!contained US$2.3m at theend of May.

Reserves now exceed externaldebt

32 Kazakhstan


Main external indicators(US$ m unless otherwise indicated)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecExports fob2000 680 730 695 745 817 794 734 635 743 771 632 6722001 674 590 723 562 856 650 1,003 723 1,039 854 1,059 9792002 966 1,130 1,027 814 � � � � � � � �Imports fob2000 424 484 513 563 562 651 544 491 501 492 562 5762001 522 420 478 480 590 609 586 582 532 505 631 5572002 550 483 632 644 � � � � � � � �Trade balance2000 256 246 182 182 255 143 190 144 242 279 70 962001 152 170 245 82 266 42 417 141 507 349 428 4222002 417 647 394 170 - - - - - - - -Foreign reserves2000 1,826 1,929 1,978 2,121 1,905 1,801 1,887 1,931 1,921 2,088 2,070 1,9972001 2,045 2,057 2,095 2,146 2,222 2,281 2,343 2,507 2,571 2,531 2,448 2,5512002 2,952 3,299 3,355 3,499 � � � � � � � �

Gold2000 491 488 476 486 490 498 490 505 537 517 505 5112001 519 522 534 541 570 556 538 547 562 554 558 5862002 627 583 568 570 � � � � � � � �International reserves2000 2,317 2,417 2,454 2,607 2,395 2,298 2,377 2,435 2,457 2,604 2,575 2,5082001 2,564 2,579 2,628 2,686 2,792 2,836 2,881 3,054 3,133 3,086 3,006 3,1362002 3,579 3,882 3,923 4,069 4,457 4,494 - - - - - -

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

Kazakhstan - iuj.ac.jp › mlic › EIU › Report › Kazakhstan › ... · Kazakhstan July 2003 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom Kazakhstan

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