Oil Prices Not Expected to Debilitate Kazakh Economy, Say Experts

By Tom Michael

oil well and blue skyOver the past two decades, few countries on earth have experienced the highs and lows of fluctuating oil prices like Kazakhstan.

The Central Asian nation, owner of the second-largest oil reserves among former Soviet Union countries, saw a period of dazzling economic growth between the mid 1990s and late 2000s thanks in greater part to the discovery of new oil reserves and the revenues it created. Kazakh President Nursultan Nazarbayev used the country’s newfound oil wealth to build infrastructure, improve education and health care, and position the ambitious nation more firmly on the geopolitical map.

But in recent years, plunging oil prices coupled with the devaluation of currency in neighboring Russia – Kazakhstan’s number one importer of oil – have slowed Kazakhstan’s once speeding economy to a crawl.  A year ago, the global price of crude oil hovered at about $115 per barrel. Six months later, in January 2015, it had fallen by more than half, to $49 per barrel.

In mid-May, the International Monetary Fund predicted that economic growth in Kazakhstan would slow as well, to an average 2.0 percent this year from 4.3 percent in 2014. Meanwhile, Kazakhstan’s gold and foreign currency reserve combined with its rainy-day “oil fund”, formally known as the National Fund, currently stand at a respectable $100 billion.

Shortly before his election to a fifth term in April, Nazarbayev offered a blunt assessment of his country’s economic woes in connection with plunging oil prices and its largest trading partner, Russia.

“Unfortunately, our union is now being tested by great challenges, because export prices have fallen, especially in Russia and Kazakhstan, for oil and other export commodities,” Nazarbayev told reporters in the Kazakh capital of Astana at a joint press conference with Russian President Vladimir Putin and Belarussian President Alexander Lukashenko as he referred to the Eurasian Economic Union which went into effect in January 2015. “But measures have been taken and everything has now been stabilized.”

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Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department

Kazakh-Russian relations may have stabilized in the context of the tumultuous oil economy, but both countries’ economic challenges continue. However, Kazakhstan appears better conditioned to recover.

“The twin shocks of the economic slowdown in Russia, a key trading partner, and lower oil prices are taking a toll on the region,” Juha Kähkönen, Deputy Director of the IMF’s Middle East and Central Asia Department told reporters in Almaty in May.

“Exchange rate developments—such as the appreciation of the U.S. dollar and the depreciation of the ruble—are compounding the problem,” he said. “Overall, the outlook for the region has not been this weak since the global financial crisis in 2008-09.”

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Dr. Robert Cutler, a senior research fellow at the Institute of European, Russian and Eurasian Studies at Carleton University

Dr. Robert Cutler, a senior research fellow at the Institute of European, Russian and Eurasian Studies at Carleton University in Ottawa, has studied Central Asian economies extensively, especially Kazakhstan’s. Cutler told EdgeKz that falling oil prices, while economically painful for Kazakhstan, should not be debilitating for the Central Asian giant.

Cutler said Kazakhstan’s longstanding and robust oil trade with Italy is stable, despite disagreements between the countries’ about their joint development of the giant Kashagan oil field in the North Caspian Sea, near Atyrau.

“Italy is Kazakhstan’s main partner for (oil) deliveries into Europe, and it does not look like oil trade between the two countries will suffer much,” Cutler said. “It has, in fact, in recent years been increasing. It is also useful to note that the country’s oil exports to China are on a steady level.”

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Production at Kazakhstan’s Kashagan oil field is expected to come online in 2017

Kazakhstan’s massive Kashagan oil field is the world’s largest oil discovery of the last 30 years. The offshore field holds proven oil reserves of a staggering 16 billion barrels, but it has been bedeviled by technical glitches and delays since its discovery in 2000. The megaproject finally began producing oil in September 2013, only to be shut down a month later after workers discovered gas leaks in pipes running from the platform to shore.

Because the lines were manufactured with ordinary steel, they were prone to corrosion by a highly sulfuric gas found in Kashagan’s oil. Some 200 kilometers of the inadequate pipeline are now being replaced with nickel steel. But it won’t come cheap – or quick. Initially slated for completion last year, it now appears the production at Kashagan won’t resume for another 18 months or so, leaving major development partners including ExxonMobil, Royal Dutch Shell, Total, Eni and CNPC waiting even longer than expected for a return on their combined $50 billion investment.

Cutler is optimistic the line will be repaired and the oil extracted.

“Despite conflicting reports, it appears that the offshore Kashagan project is proceeding as scheduled with the replacement of corroded pipes, targeting a projected date at the end of 2016 for resumption of production,” Cutler said. “However, there are indications that a capital investment plan in Tengiz (also on the North Caspian sea near Kashagan) may be delayed due to decreased revenues and increased world supply.”

Cutler said Kazakhstan has been seeking advice from the Asian Development Bank about how best to decrease its economic reliance on the energy sector, which comprises about 25 percent of the country’s gross domestic product.

“The energy sector represents about 40 percent of state revenue and well over half of the country’s export earnings,” Cutler said. “Nazarbayev has prioritized the growth of the manufacturing sector, with a focus on non-oil products, followed by the development of a knowledge-based economy.”

“As a result, last year Kazakhstan signed a framework agreement with the Asian Development Bank to promote economic diversification, in particular industrial policy, small- and medium-sized enterprises and the banking sector.”

Kairat Umarov, Kazakhstan’s ambassador to the U.S., told EdgeKz that “last year was very stressful for Kazakhstan due to tensions in Ukraine and following exchange of sanctions among the U.S., E.U. and Russia.”

“Although these sanctions were tailor-made to affect specific industries in Russia, Kazakhstan felt its collateral damage effect,” he said. “The government of Kazakhstan has made efforts to convert the slowdown into an opportunity to mobilize the society and businesses to reduce the dependence on the extracting industries.”

Kazakhstan has no access to open water ports, Umarov said, but the country is working to make Kazakhstan “not a land-locked, but a land-linked country.”

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Kairat Umarov, Kazakhstan’s Ambassador to the U.S.

“We are actually a continental bridge for goods that move from east and west, south to north,” Umarov said. “By 2020, Kazakhstan aims to become a key transit hub for Eurasia and beyond by developing transportation, logistics, and export centers.”

“Kazakhstan is also setting up the Western Europe-Western China International Transportation Corridor, which will cut the transportation time from China to Europe in third, from 30 to 10 days,” he said.

Meanwhile, U.S. officials have made it clear that Kazakhstan will remain a key partner in the energy realm.

“Central Asia is a major source of energy feeding a growing global demand for energy resources,” Richard E. Hoagland, principal deputy assistant secretary in the U.S. State Department’s bureau of South and Central Asian Affairs, said during a speech in December 2014. “U.S. companies have major investments in Central Asia’s energy sector, especially in Kazakhstan.”

On December 10, 2014, Kazakhstan’s Foreign Minister Erlan Idrissov paid an official visit to the United States. During his visit, U.S. Secretary of State John Kerry and Idrissov co-chaired the third meeting of the Strategic Partnership Dialogue between the two countries. Kerry’s presence was an indication of the importance of the bilateral relationship. After the meeting, the State Department and the Kazakh foreign ministry issued a statement affirming, in part, that the United States and Kazakhstan “intend to work together to support both the diversification of Kazakhstan’s non-oil sector and expansion of its role in global energy security as Kazakhstan pursues its 2050 Strategy.”

“Kazakhstan and the United States plan to organize a business development mission to Kazakhstan in 2015 and to work together to establish a permanent dialogue to facilitate trade and economic cooperation,” the statement said.

Nurzhan Zhambekov, an international business development specialist at HSBC in Toronto and graduate of the Edmund Walsh School of Foreign Service at Georgetown University in Washington, has written and lectured extensively about Kazakhstan’s energy sector.

Zhambekov, a Kazakh native who returned to his hometown of Shymkent for a visit in May, told EdgeKz that Nazarbayev deserves high marks, in general, for his management of Kazakhstan’s oil-dependent economy, both before and after the precipitous drop in oil prices.

“The government did a good job of building up assets in the National Fund in the oil boom years prior to 2014,” Zhambekov said. “That is tiding over Kazakhstan in this low oil price environment. So far, the management of this situation has been good. There is stimulus spending by the government that helps support the economy with the help of the transfers from the National Fund.”

Zhambekov predicted that oil production would remain stagnant until Kashagan re-opens.

“The energy production forecast in the short term may be stable due to delays in Kashagan project and falling oil prices,” he said. “However, the longer-term forecast is for an increase in production as Kashagan gets developed. Sagging prices have not affected Kazakh capital projects in the oil realm so far.”

Zhambekov also said Kazakhstan’s move to boost its exports of minerals and agricultural goods bodes well for the long-term health of its economy.

“Kazakhstan has increased uranium production and become the world’s largest uranium producer in recent years,” he said. “The agricultural sector is developing as well, particularly in wheat production.”

Umarov, Kazakhstan’s ambassador in Washington, pointed out that as a member of the Eurasian Economic Union, Kazakhstan has one of the lowest tax rates in the area and is a gateway to the vast market of 180 million people.

“Any Western company establishing its presence in Kazakhstan will enjoy the best investment environment and easy export of its products produced in Kazakhstan to Russia or any other countries in the region,” he said. “This year, we expect to join the WTO, which will add to the attractiveness of Kazakhstan.”

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Kazakhstan is in the late stages of efforts for accession to the World Trade Organization

The U.S. government supports Kazakhstan’s WTO bid. Umarov also said the country’s economic diversification efforts have been well-received within the country.

“We have made necessary adjustments and accelerated efforts to diversify the economy,” Umarov said. “It can be challenging for the society as a whole to go through the structural changes. However, we are confident that these steps are necessary to be made now rather than later. Also, the special focus is placed on increasing the efficiency of the ongoing projects, while cutting costs wherever possible.”

At the same time, the country has not given up on investing on its most important resource – human capital.

“The Kazakh government continues with full support for the social programs, educational initiatives and trainings, because we believe that investment in human capital will bring about long term benefits and it is key to being successful in the globalized world,”  the ambassador said.

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