x Abu Dhabi, UAEFriday 28 July 2017

With Kazakhstan at crossroads, level heads must prevail

Over a 21-year time frame, Kazakhstan's economy is arguably the most successful of those that broke away from the Soviet Union in 1991. It has not grown the fastest, nor is its economy the biggest. But it has been the best at advancing the prosperity of its citizens.

Over a 21-year time frame, Kazakhstan's economy is arguably the most successful of those that broke away from the Soviet Union in 1991.

It has not had the fastest rate of growth over that period. According to IMF statistics, that honour goes to Azerbaijan, which has averaged 4.9 per cent against Kazakhstan's 2.6 per cent annually.

Nor is it the biggest economy. Ukraine takes that prize by some way and Kazakhstan's estimated US$216 billion (Dh793.43bn) output last year is smaller than that of the UAE and about the same size as Israel's.

But if the job of economic policymakers is to advance the prosperity of citizens, Kazakhstan wins in the most important aspect: per capita income is the highest of all the former Soviet republics, excluding the Baltic states (which had advantages from the outset with their proximity to the European Union).

So stability of political regime and the economic system, under the president Nursultan Nazarbayev, 71, have played a key role in increasing the material wellbeing of the people.

But the world leaders and economist superstars gathered in Astana for the city's fifth economic forum should not get carried away with that success. Kazakh GDP per head is still short of $11,000 per year, says the IMF, about one third of the average for the EU, and there are some warning sounds that must be heeded if Kazakhstan is to continue on its growth path.

The first and most obvious is that what laid the foundations for its success could also be increasingly vulnerable in current global economic conditions: energy and commodity resources.

Kazakhstan has about 1 per cent of the world's reserves of gas and perhaps three times that of global oil reserves.

It also ranks among the world's leading producers of virtually every raw material used in industry and commerce, from uranium and iron to gold and diamonds.

Bubbles come and go in the commodity markets and there are signs the global economy could be on the verge of another dip in these asset values. Sensible policymakers, as the Kazakh government has hitherto been, must try to even out these peaks and troughs.

Diversification away from dependence on one revenue earner is an economic strategy familiar to the UAE, but, as the Dubai financial crisis showed, the trick is to get the investment cycles synchronised. Dubai failed to do this in 2009, with consequences the emirate is still living with today.

With much greater physical resources to fall back on, Kazakhstan will probably not fall into the same trap. It rode the 2009 crisis well, devaluing its currency and injecting billions into the financial system in its own version of "quantitative easing".

But the country is now in a different position. It lies in an inherently unstable part of the world (and likely to become more so after the western withdrawal from Afghanistan) and increasingly reflects this in its economic policy. Does it go all-out to be a staging post on the New Silk Road by building pipelines eastwards for its energy exports to China?

Or does it rely on the old relationship with Russia, as it did when it joined the customs union linking the two countries with Belarus?

There is no easy answer to this dilemma, but Kazakhstan has to get the call right. If its economy slows down noticeably from the 6 per cent forecast for this year, it could unleash the kind of protests that led to serious unrest and deaths in the west of the country late last year.

The compact between policymakers and citizens that has worked so well for the past 21 years could come under further stress.

So far, in contrast to many other former Soviet states, the Kazakhs have reinvested their wealth at home, but weaker growth and social tension could spur an increase in capital flight.

In more senses than one, Kazakhstan finds itself at an economic crossroads. The path it chooses will be crucial for its own future and that of central Asia.

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