Earlier this year, the Central Asian nation of Kazakhstan announced a new campaign called “Invest in Kazakhstan,” which was designed to attract foreign investors. Throughout the campaign it released new commercials that enticed potential investors with exemptions from corporate income tax, land taxes, property taxes, and customs duties for up to ten years.
To lure new stockholders, the commercials promised state-in-kind grants (like goods, services and expertise), stability of investment legislation (drawing on the 2003 Kazakh Law of Investments which virtually guaranteed the stability of assets), strong protection of investors’ rights, no work permits for foreign labor, and visa-free entry for citizens of many countries. As if these benefits weren’t enough, Kazakhstan went even further, offering thirty percent cash back on investments. One would think that with this kind of economic bait – and the fact that Kazakhstan had very low debt – foreign investors would be jumping at the opportunities. So why hasn’t the country been able to draw more foreign investment?
Perhaps, with the exception of multinational oil companies, potential investors are turned off by the many disadvantages there are to investing in Kazakhstan. In addition to being quasi-democratic and geographically landlocked, Kazakhstan’s private sector lacks experience, still has to develop a larger educated workforce, and suffers from global doubt as to its financial ability to follow through on the aforementioned promises. It also doesn’t help that Kazakhstan acts like an autocracy at times in that its government is known for its lack of transparency and has high levels of corruption. It maintains tight controls over the press, lacks diversity, and has an unimpressive civil rights record. Dealing with these political complications would be an inevitable headache for investors.
Perhaps most importantly, Kazakhstan is currently dealing with a currency crisis where capital is hemorrhaging at an alarming rate. The tenge, Kazakhstan’s native currency, was tightly controlled for years until the government decided to switch to a floating exchange rate. This decision, due to falling crude prices around the globe, caused the tenge to lose almost a quarter of its value. However, as the dominoes have fallen in reaction to cheap oil from China to South Africa, Kazakhstan’s government still does not appear too concerned. In fact, while everyone else is calling it a crisis, Kazakh leadership is calling it a normal “transition.”
Even though Kazakhstan has recovered some of its losses (ten percent), there is still a very good possibility it will drop again in the next few weeks. This is because of the tremendous pressure on Kazakhstan by its neighbors. Like other emerging markets in the region, Kazakhstan – a country that is sandwiched between Russia and China – is economically dependent on both regional superpowers. Its economy is linked to Russia’s and has been negatively impacted by the Russian sanctions caused by the crisis in Ukraine. This impacts Kazakhstan on two fronts: the Russian ruble has become so weak that Russians can hardly afford Kazakh goods and, at the same time, Russian imports are threatening to flood Kazakhstan’s market with low-cost imports. To make matters worse, there is a weaker demand for Kazakhstan’s exports by China, the second-largest economy in the world. China’s recent move to devalue its currency – the Yuan – may have been done to boost the country’s exporters in an attempt to make their products cheaper and easier to sell. This could very well spark a currency war in the region and further damage susceptible currencies in emerging markets, including Kazakhstan. In sum, China’s devalued currency, Russia’s plummeting ruble and crushing sanctions, and the likely increased supply of oil from Iran after the new nuclear accord – all exacerbate the problem in Astana and may be putting Kazakhstan’s long-term economic future on shaky ground.
It appears that Kazakhstan, still resolute to integrate into the global market community, has an ambitious plan to use its WTO and EEU memberships to boost its image and attract new investments. Furthermore, the Asian Development Bank (ADB) just announced it will loan Kazakhstan one billion dollars so it can resume governmental programs designed to stimulate the country’s economy. This loan presents Kazakhstan with an opportunity to diversify, create new jobs, provide continued support and services to its disadvantaged citizens, grow its private sector, and build up smaller businesses. Unfortunately, making substantial domestic policy changes pertaining to civil liberties and democratic freedoms do not appear to be a part of the strategy at the moment.
While it is difficult to know exactly how this complex economic strategizing will play out in Kazakhstan, there is one thing we do know. Kazakhstan’s President Nursultan Nazarbayev – the only leader the former Soviet Republic has had since its independence in the early 90s – has great energy and enthusiasm for the future of his country. His grand geopolitical ambitions strive to take the country to new heights of economic, political and industrial growth. While Kazakhstan is considered authoritarian by international standards, by regional standards it is regarded as a much “softer” version than its Asian counterparts. This may give it an important edge as it strives to stay innovative and relevant while expanding its political, military, diplomatic, and economic reach.
Another important demographic factor is just how young the country is, in both population and geopolitical terms. For one, Kazakhstan has managed to utilize its resources and the productive capacity of citizens to not only break away from its domineering progenitor but also set itself up for long-term sustainability. It transformed itself mostly into a market economy that, under the right conditions and strategies, could dramatically transform and deepen from international trade and investment. While it would certainly be a stretch to describe Kazakhstan as a wealthy nation, it most definitely is not a poor one. Post-Soviet Kazakhstan has been remarkably responsible with its fiscal, industrial, trade and macroeconomic policies. Plus, it has worked very hard to carefully cultivate relationships with other countries so that Kazakhstan is largely regarded within the region as a stable and rational geopolitical voice.
While Kazakhstan still needs to diversify its overconcentration on natural resources, the country still has time, opportunities, important economic alliances, and room to grow. Kazakhstan’s economy and political ties do not necessarily have to remain constrained by corruption and political controls either. For the country to overcome the challenges it currently faces and to attract foreign investors, it needs to continue to embrace innovation that can accommodate social unity and a more balanced policy geared towards diversification and development. Perhaps the greatest challenge of all, but also provide definitive proof to the global community (and its foreign investors), is the willingness of the country to venture more boldly with democratic freedoms and civil liberties experiments that will accentuate and reinforce its sound economic strategies. Being able to develop both economically and democratically, to show the world that unlike so many emerging economies Kazakhstan is not afraid to give its people and its system more independence and freedom, might be the one element of harmony that will distinguish the country from all other competitors and, ironically, provide it with the stability to ride out the cyclical nature of economic crisis.