politics
Managing dissent, limiting risk and consolidating power: The processes and results of constitutional reform in Kazakhstan
In Kazakhstan President Nursultan Nazarbaev believes his country is pursuing a unique model of constitutional and political reform that is defined by a moderate step-by-step process.
Kazakhstan Politics Roundup - June 25, 2008
Kazakh opposition says govt backsliding on reform
(Reuters) - Kazakhstan’s opposition accused the government on Tuesday of backtracking on pledges to bring more democracy ahead of the ex-Soviet nation’s chairmanship of Europe’s top democracy watchdog in 2010.
China ranks fourth among trade partners of Kazakhstan
(Kazinform) - Foreign Affairs Minister of China Yang Jiechi, who was nominated to this post last April, pays his first official visit to Kazakhstan.
The official visit of the Chinese FM is called to be a milestone in promotion of the Sino-Kazakh strategic partnership, Kazinform refers to the MFA’s press service.
Government to announce list of professional occupations requiring Kazakh language skills (Interfax)
Ambassadors of Kazakhstan to Korea and Iraq appointed (Kazakhstan Today)
Parliament and political parties in Kazakhstan
The independent Republic of Kazakhstan came into being following its declaration of independence on December 16, 1991, from the Soviet Union, leaving it and the other fourteen new countries that joined it the unenviable task of quickly developing the institutions of government.
Bankers of All Post-Soviet Countries, Unite!
Dosim Satpaev, the director of Risk Assessment Group for Exclusive, again. The original version in English can be found here, the Russian version is here.
Since August, the banking sector of Kazakhstan has attracted a special attention from society, first of all, in the view of its financial stability. But the event that took place on 12th December indicates the optimism and trust in the future from the side of our banking structures.
In Almaty it was officially announced about the establishment of Eurasian club of Bankers. We should mention here that on 26th September of 2007, during the 8th Almaty Interbank Conference “High growth banking systems of CIS”, the initiator of which was the “Bank TuranAlem” (BTA), memorandum of this club’s establishment was accepted.
As it is known, the idea itself was made public by the President of Republic of Kazakhstan N.A. Nazarbaev in the economic forum held in St. Petersburg on 10th June of 2007. And already this week, the constituent agreement was signed not only by the trustworthy banks such as Bank TuranAlem, KazKom, Alliance Bank, and Bank CenterCredit, but also by the Association of financiers of Kazakhstan, Association of Russian banks and Financial-Banking group of CIS.
There could be several reasons for the establishment of this club. Particularly, despite the fact that there is a range of regional organizations in the territory of former Soviet Union, which has such functions as development of multilateral economic cooperation, not any of them has the opportunities to perform this function in full measure because of wide dispersion of directions of its activity and certain bureaucratization. On terms of globalization and on the verge of possible joining of Kazakhstan and other CIS countries in WTO, it becomes necessary to consolidate the efforts of different fields of economy in order to uphold and further your own corporative interests on regional and global levels. It also concerns the financial institutes of post-soviet states.
Who Is Responsible for the Inflation in Kazakhstan
From Yaroslav Razumov in Exclusive. The English version can be found here, the Russian version here.
We asked Petr Svoik, the well-known economist whose economical forecasts frequently (and unfortunately) come true and the person who had experience working for government, to comment on the situation of increasing prices. In our opinion, the present situation shows that the economical problems in Kazakhstan are for the large part caused by the ineffective administering process. How and why does it happen?
- Petr Vladimirovich, to which extent the government and in general state organs are responsible for the increase of inflation?
- Considering the present state structures it is extremely difficult to say which member of the Cabinet is responsible for prices. The Ministry of Finance is definitely not. The Ministry of Economics has never monitored this issue and no one from its leaders said something definite about it, although ideally it should not be the case. The Statistics Committee examines the level of prices but can not influence it. Traditionally only the National Bank was responsible for prices. The population, community and journalists used to address all questions about prices to the National Bank.
In the meantime, the National Bank is able to influence only the monetary factor and there are many more other important price factors.
The present uncontrollable increase in prices revealed the problems that were implicit for many years. The state and a number of experts affiliated with it were euphoric when in 1999 oil prices started to increase, resulting in increase of the National Fund and the 10 % GDP growth rate. However, they didn’t consider seriously the simple fact that this economy was built on export of raw materials and import of absolutely all necessary goods.
- The monetary and non-monetary factors of inflation are sometimes a discussion topic among independent experts. Which factors prevail in our country?
- The inflation is a complex event and involves many factors - both monetary and non-monetary and the latter dominate. However, this fact was ignored and the National Bank made the government and all of us think that only monetary factor causes the increase in prices. However, it is not the reality.
What do we have now? First, the infrastructure component of pricing in Kazakhstan is problematic. The Kazakh transport, electricity and public utility industries, which influence every price, are in archaic condition, lack needed capacities and are catastrophically ineffective in everything. More specifically, they lack energy-efficient technologies. These industries as well as others, for example, road industry, require large investments not only to maintain the present capacities but also to enlarge them. Until now these industries were maintained using old Soviet reserve and as it came to its end the new investments are required.
These investments will result in higher utility, electricity and transport tariffs as well as in higher prices on everything else. And the government can not think of the prevention methods.
Moreover, there is no theoretical understanding of what parts of the investments and restoration costs could be included into infrastructure and utility natural monopolies’ tariffs. Also it is not clear how to obtain the money needed for the part of investments excluded from tariffs. For example, what money resources and on what terms should the government invest in infrastructure and public utility companies? And if there is private investor, what is the procedure of repayment? There are no answers to these questions. As there is no the required legislation. Thus it’s the description of the first non-monetary factor that caused the price growth.
Second, the domestic goods are quite expensive and hardly compete with the similar products from CIS countries even at the local market. Let‘s take a random example of Russian and Kyrgyz milk and sausage products that are demanded over the goods produced by several domestic companies.
Thus there is no real competition, effectiveness and the production costs economy. Consequently, these inefficiences affect the price growth.
And what is the effect of the domineering import on the inflation processes?
- Depending on the exchange rate of dollar for the importer‘s currency the imported prices carry the external inflation. And it is not the end. Already high import prices are increased further by the customs including the bribery and the payments to bazarkoms. These costs are essential.
Whether the supermarket or bazarkom «the sales business is entirely private. Still it is also akims» business. Through the land, rentals and infrustructure the local government controls everything from «bolashaks» to «„ramstores». The sales bussiness is obliged to pay a significant percentage of its income. My guess is from 20 to 25 %. Although it is just a conjecture as there are no specific researches to rely on. And this is also relevant to the question of price monitoring in Kazakhstan and who is responsible for it.
I can not estimate the increase in price of the import after it passes through customs, but here is the example from practice. The Kazakh businessman buys goods in Urumchi, delivery of one cubic meter volume of goods to Almaty costs 250 dollars for 1,5 km. But the delivery of the same cubic meter from Almaty to Astana costs 300 dollars for 1 km. It means that the Urumchi-Almaty transportation costs 50 dollars. Thus the rest 200 dollars were paid for something else. What part of this money is official customs taxes, profit of the transport company and what amount went for the structured bribery system?
Therefore, in conclusion it can be said that our economy – a) is noncompetitive in value, b) is highly corrupt, c) produces limited amount of goods and services, d) is inefficient in domestic production, i.e. not aimed at costs reduction. And all these factors result in higher prices. And the longer it gets the larger the influence.
- The initial increase of property prices and consequent price growth caused by mortgage loans are always associated with monetary factor …
- The property issue certainly had its impact on the inflation processes. However, it is not fair to blame banks as they also found themselves in difficult situation.
Kazakhstan has a dual economy. One part of this economy focuses on raw materials export and import of the foreign goods. The largest part of export earnings is accumulated in the offshore companies and National Fund and the rest is spent in the country as taxes, salaries and development funds. This additional currency initiates a substantial increase in purchasing capacity. However, this increase can be observed in the limited area of the country.
Those banks give loans using the external resources, which are borrowed at unreasonable interest rate. And this as well causes the inflation.
The above is one of the monetary problems. Another problem is that there are few options for investing the additional money, because of small number of domestic producers. Even assuming that all the production industry projects implemented since 1991 are functioning, the scale of industrial development is still not impressive. Consequently, the banks had to invest only to housing, office property and to giant trade centers. And it created so called “housing bubble” that everyone is worried about now.
So, the only banks that could function in this economy are export banks and they do not work with domestic passives. For example, let’s imagine there is one bank with geographical name. All the other banks do not have access to the export economy and its abundance of currency.
- It’s surprising that you are supporting the banking community. Especially after you criticized it 2-3 years ago.
- The banks can be blamed only for over active investments to property sector. But again it was the only possibility to invest. Also, banks had the unreasonably high margin when they could do well even with smaller interest rate. It is a simple fact - the smaller is the interest rate the stronger is the economy and longer is the economic cycle.
- And why the development cycle of Kazakhstan’s economy appeared to be so short – the “bubble” emerged within only several years?
- Unfortunately, in addition to small scale of our economy just half of transactions are made using tenge. Let’s take the official data without the black market’s unregistered circulation of cash. What is the ratio of credits in dollars to credits in tenge? Approximately fifty-fifty. What is the ratio of banking deposits? The same numbers. It means that half of the money in the economy is foreign currency. Consequently, the capacity of Kazakh economy is cut to half. It is the first reason.
The second reason. In my opinion, the present policy of the National Bank is harmful – it increased the refinancing rate to higher than the inflation level, practically stopping to grant loans to the second-tier banks. And the worst thing is not the rate but the unwillingness of the National Bank to give loans to commercial banks. This is very bad.
The correlation between the level of inflation and interest rate is arguable. In any case, the developed countries with independent credit emission do not apply it. The rates of Federal Reserve System, Japanese and EU banks are less than real inflation. If those countries applied the IMF and World Bank recommendations for the developing countries, their own development would have stopped. The developed countries connect their initial credit emission with the GDP growth rate. The emission involves the interval from 0 to maximum (rarely) 5%. The banks further raise the interest rate thus, the European and Japanese economies develop with 6-7 % interest rate. That is a normal practice. In our economy only the initial external rate is 8-9 % and it is further increased by the banks’ margins. That is why Kazakhstan experienced such a short economical cycle. The policy of the initial rate being higher than the inflation makes the loans forbidden. This policy is rather suitable for the inferior, undeveloped economies. However, in our country this rule is applied. Thus only foreign loans are available and those increase the level of inflation in the country.
- Then why the abundant in the last years foreign capital was invested into property and not, as there was no potential in industry, for example, to agriculture?
- Banks are interested in fast yielding investment projects. The agriculture lacked such projects until lately. This year the wheat industry experienced renewal. There is natural rent now, and the prices suddenly increased covering the costs 2-3 times. By the way the wheat is the only component of export that brings foreign currency into country. Unfortunately, this currency mainly goes to agriculture producers, common agriculture workers do not get advantages from the perfect world market conditions. At best they cover their costs. The city owners of hundred thousand hectares and elevators are the ones who enjoy the greatest profit. At least they are domestic owners and they carry the currency into the country. Probably, this would help develop the agriculture industry. Of course, if the land owners make investments to the agriculture and not to the city property.
- Which factors – monetary or non-monetary – had a greater influence on increased prices of bread at Kazakh market?
- At the time of “perestroika” reform, at the final years of the USSR, the country received rich harvest. But the system was so unbalanced that it couldn’t be gathered. Zhvanetsky had an exceptional statement: the rich harvest was the last straw that completely ruined the USSR economy. That was a really funny joke.
What do we have? Kazakhstan long ago received the advantage of high oil prices, but for the population it resulted only in high prices of gasoline at the local market. Now we have higher prices on wheat, however, instead of profit people get higher prices for bread.
Why? It is a question for the government. The independent government should establish the national social and economical policy that will provide the total surplus from favorable prices.
Then it should redistribute this surplus in the country more or less fairly and effectively in economical sense.
At present time, there is no government structure (or even a person) that could be responsible for prices, understand the pricing situation and influence it.
The government is absolutely unable to make the necessary actions in this sphere. For instance, now it is forming wheat stocks by artificially lowering the purchasing price. The world market price is 250 dollars, while government pays only 200 dollars. Prime minister calls for the actions from “akims”, but the government itself uses anti market measures to market entities.
Now, from all said you can make a judgement which factors were crucial for the inflation.
Oil and Investment Games of Central Asia
Another interesting piece of analysis by Dosym Sotpaev, the head of Almaty-based Risk Assessment Group. The article can be also found here and the Russian version here.
What had to happen sooner or later, has happened. The government of Kazakhstan has started operations in the conflict against Agip KCO consortium on all fronts. Not the fact of the conflict with one of the largest foreign investors is interesting here, rather the tendency.
The period from 1991 till 2002 was most favourable for attracting foreign investors and their activities. During this period Kazakhstan lost control practically over all of its oil and gas deposits, after selling them to foreign companies. Since 2002 – till present time we observe the policy of establishing investment parity and strengthening the control over investors. There are objective as well as subjective reasons for this.
Firstly, due to favourable pricing condition on the market, Kazakhstan could create strong enough economic platform to decrease dependence from foreign investors. It was also connected to increased role of the state in the economy, including oil and gas sphere, where positions of state owned KazMunayGas are improving.
Secondly, new oil and gas elite appeared in Kazakhstan; this elite wanted an access to the resource pie, which for a long time belonged to foreign investors.
Thirdly, Kazakhstan started forming a new legislation base for resource sector. The main difference from the previous one is in strengthening new priorities in forming investment climate. While during the previous decade Kazakhstan’s priority was attracting foreign investors, in the recent years the priority is supporting national companies, which are closely connected with political elite. For example, several years ago a new law on investments was adopted in Kazakhstan, it cancelled 6th article of the old law “On foreign investments”. According to the abolished article, the government undertook responsibility to restrain from actions that would harm the investors.
The government also adopted the law “On changes and amendments to some legislative acts of Republic of Kazakhstan on the issues of mineral resources and conducting operations with oil in Republic of Kazakhstan”. Now the government officially has a priority in purchasing shares of investors’ projects that decide to trade them. Besides, Kazakhstan has already adopted the amendment to oil legislation, which prohibits transfer of rights for the resources within two years of singing the contract. The term “concentration of rights” was also included into legislation on natural resources, it means that the government has the right to interfere into a deal if it threatens considerable increase of foreign ownership that influences national security. According to the government, the reasons behind the changes are the interests of national security, and that the previous legislation didn’t provide the government with enough control over national resources.
Fourthly, the government of Kazakhstan has already started decreasing the dependence on western capital by broadening the areas of investment activities and inviting Russian, Chinese, Indian and South Korean companies. Activities of Chinese companies in oil and gas sector of Kazakhstan will only increase. It can be seen from their serious intent to participate in new tenders for development of Caspian deposits.
The first sign of changes in government’s policy regarding foreign investors were frictions between the government and “Tengizchevroil” about ecology. It was very uncommon in mid 1990s, the frictions ended up with a big penalty levied to the company.
Later the tax committee of the Ministry of Finance of Kazakhstan stated that it wanted to reconsider tax regulations of large oil companies; the contracts signed during 1993 – 1997 were to be reconsidered. The government wants the companies that came to our country more than ten years ago to stop emphasising investment risks in Kazakhstan. It means that they have to agree to increasing tax payments to the budget. That is to pay according to standard tax procedure of Kazakhstan. Particularly Astana is trying to increase TCO’s input into national economy by 20% without taking into account the growth of extraction of hydrocarbons.
Unexpectedly for everyone, in April 2006 KNB (Kazakh National Bank) of Kazakhstan accused some foreign companies that their activities threaten national security. Nurgali Bilisbekov, head of economic security department of KNB, said that KPO (Karachaganak Petroleum Operating) and Agip KCO consortiums take actions to maximize their profits to the prejudice of Kazakhstan. This was one of the first precedents when KNB publicly accused foreign investors in threatening national economic security. Previously the main accusations towards the investors were about breaching ecological norms, labour legislation or, in extreme cases, non-payment of taxes.
Early this year Karim Masimov, Prime Minister, stated that in general implementation of contractual conditions by producers of natural resources is unsatisfactory. Then it was about extending the exploration periods, postponing beginning of industrial production from the deposits and increasing the costs. It has an obvious hint at the activities of large foreign oil and gas companies working on Karachaganak, Kashagan and Tengis deposits. Thus, the situation has been coming to this ending since long ago.
The government considers the price of political risks, which our country pays to oil investors that came during that period, to be overvalued. In early 1990s the government provided them with very beneficial taxation conditions and guaranteed invariability of terms of the contracts. That’s why in 2007 the government of Kazakhstan stated that it intends to strengthen control over export-import activities of largest producers of natural resources in the country.
On the instructions of the Prime Minister the Ministry of Energy and Mineral Resources together with the Ministry of Economy and Budget Planning have to arrange efficient monitoring of fulfilling the contractual liabilities. Strengthening the monitoring meant collecting the information required for pressing the investors. Then it seemed that the government would try to convince the producers that reconsidering the contract terms once was better than the government’s increased and adversary attention towards their activities.
In addition notice that the government of Kazakhstan often makes concessions to Kazakhstani investors. Extracting and processing with the country’s own companies is emphasized. For accomplishing this goal “KazMunayGas” wants to receive $70 billion in investments and credits from local businesses. Kazakhstani investors also received additional mechanism of cooperating with the President. On 21st of April 2007 the President announced creation of National Investors Council. Currently the investments into the country’s economy by local investors are $80 billion, which is $20 billion more than by foreign investors. However the main task for the President was to redirect internal investments of local companies into non-resource sphere, where foreign investors are not very active.
In perspective the government of Kazakhstan will continue to pursuit the policy of strengthening the control over all large foreign oil and gas investors. Possibly the international consortium that develops Karachaganak gas deposit will be the next target for the government, this consortium has also announced increase of exploration costs.
Besides, the policy of attracting foreign investments will provide more favourable conditions in non-resource sectors. New socio-economic programme of the government for 2007 – 2009, presented by Karim Masimov on 9th of February 2007, confirms it.
Hence, figuratively foreign investors are offered the role of a sheep rather than of a horse rider in kokpar game (Central Asian game of horse riders). It is surprising how our government discovered all of these ecologic and customs violations after a decade of closing their eyes on them. A big mistake by the investors was to accept the rules of the game and make those violations, after becoming accustomed to “blindness” of our officials. Now these officials successfully use the mistake as a powerful pressure tool.
