The future of Kazakhstan is now at the mercy of one oil field. The World Bank experts warn on the necessity of the urgent economic transformation of the country. The realization of these recommendations, however, is very unlikely.
A group of the World Bank experts has recently published a report with a title «Kazakhstan — the Quest for a New Growth Model: The Urgency of Economic Transformation — Country Economic Update (Spring 2018)».
The list of the authors contains the Kazakh experts: speaking as a part of the World Bank brand, they seem to have become freer and more frank in what they are saying. As a result, we have a scientific report that is, in fact, a colorful political manifesto.
The growth rate of the real Kazakhstan GPD has increased. In 2015-2016, the economy grew a little more than 1% a year. In 2017, the growth rate already constituted 4%. According to the data on the 1th quarter of 2018, it has surpassed this mark amounting to 4,1%. The authors of the report believe that this acceleration has a geopolitical explanation. In the 4th quarter of 2016, the Kashagan offshore oil field was placed on production.
Why has it become such an important factor for the Kazakhstan economy?
The thing is that the Kashagan field has been excluded from the OPEC agreement on the oil output reduction. This allows the owners of the field to play the part of «free-riders». This is how the economic theory calls those who uses the public goods without participating in their creation.
Whether or not can the OPEC be called a «public good» is open for interpretation. But not for the Kashagan developers. The price for oil extraction here is among the highest in the world and any decrease of oil prices makes it unprofitable. And the Kazakhstan Government would be first to suffer from such scenario since it lacks the possibility to impose taxes due to the legal status of the field. It is being developed under the PSC conditions and is managed by a consortium of oil companies. In other words, not only the extraction but the management system of the business itself and, consequently, the driver of the country’s economic growth is an offshore enterprise.
For how long will this driver be able to continue its «free-rider» floating? Probably not for long, given the morals of the international oil politics where no one shies away from any means to achieve their goals whose nature is determined exclusively by possibilities and not by ethical concerns. And one can rest assured that the OPEC members would certainly be able to find the means to fight the «free-riding» Kashagan.
Apart from the OPEC quotas, the Kashagan story has the pipeline component which is particularly sensitive for the Russian energy diplomacy. Azerbaijan has approached Kazakhstan with request to fill the Baku-Tbilisi-Ceyhan pipeline with the Kazakhstan oil, as reported by the Armenian news branch of the Russian information machine. The authors of the article say that this is «a repetition of the 2006 scenario». What they mean by it is not quite clear. But, for Kazakhstan, that year became a turning point for the entire domestic policy.
The Growth for the Rich
All this geopolitical hustle has a direct effect on the lives of the majority of the Kazakhstan population. But these effects will be asymmetrical. The fruits of the growth are to be consumed by a small group of people while the negative results that are almost impossible to avoid will affect the majority.
Let us start with the fruits. The growth of the oil extraction has led to the improvement of the current account and, consequently, to the growth of the national currency rate. According to World Bank, following the results of 2017, the tenge rate grew by about 10% in real terms against the dollar. Potentially, this growth could have affected the consumer demand statistics. But alas, it did not.
The authors of the report acknowledge that the acceleration of the economic growth did not lead to the increase of the people’s earnings. And the reported improvement of the consumer trust was not reflected in the statistics of the people’s reals incomes. Moreover, according to the 2017 data, the household incomes turned out to be under a tremendous pressure. The main reason was the wages that not only did not improve following the GDP growth but became even smaller.
In 2017, the real wages grew only in the two regions — the Aktobe region (by 1,2%) and the Kostanay region (by 0,6%). Even the two capitals were unable to avoid the real wages decrease. In Astana, the wages decreased by 1,1%, in Almaty — by 1,5%. On the other hand, it is, of course, well-known that the level of the income of the capital dwellers does not correlate to the employment rates in them. The local city elites have become used to living on the administrative rent that, in its turn, is formed by the «big oil splashes» form Kashagan.
The Kazakhstan President has some basis for saying that the people of the country have become richer. There are significantly more wealthy people living in Kazakhstan now than before and their wealth is shown through conspicuous consumption in all the spheres of the public life. However, the number of the poor people in the country has grown too, and no one knows how these people live. They do not have Instagram accounts, do not go to theaters, do not use cabs, do not stay in hotels, and do not boil over the state of the service sector in the cities. They are usually first to suffer when oil prices go down.
According to World Bank’s data, from 2013 to 2016 (the period of the maximum price drop), the share of the poor in the country whose everyday budget constituted 5.5 $ per day according to the international standard grew from 5,6% in 2013 to 7,9% in 2016. Supposedly, in 2017, it decreased to 6,9%. During the crisis, the share of the poor in most of the vulnerable Southern regions of the country grew more than twice: from 5,3% to 13,9% in the Kyzylorda region and from 5% to 12,5% in the Zhambyl region.
The current social-economic system differs radically from the Soviet one. The latter, due to a variety of the historical and systemic reasons, had to deal with the poverty. Nonetheless, during the periods of the economic growth, its fruits were divided more equally among the population. The material inequality expressed itself not through conspicuous consumption but, on the contrary, via the hidden accumulation of wealth brilliantly described in «Zolotoy telenok» («The Golden Calf», a novel of the Soviet comic authors Ilya Ilf and Evgeniy Petrov». Any kind of legal investment (besides bank deposits and government bonds) was out of the question.
The Banking Corpse
Potentially, the wealth accumulation system in the resource sector could become the foundation for the national economy development. Provided that it becomes a part of the credit system which is the effective mechanism of the free financial resources redistribution. At the moment, however, this is literally out of the question in Kazakhstan.
The World Bank experts believe that the official data published in Kazakhstan significantly undervalues the volume of the non-performing loans that, according to the IMF estimations, constitutes 40% of all the loans in the country. What does the Kazakhstan Government do? It gives the money to save the big banks (in 2017, they spent 2.1 trillion tenge or 4% of the GDP on that task).
Another 500 bln tenge (1% of the GDP) were allocated for the rescue of the five mid-size banks belonging to the «politically connected persons» (as stipulated by the WB experts).
At the beginning of April 2018, the National Bank of Kazakhstan announced the plans to give the additional financing in the amount of 200 tenge from the Unified Accumulative Pension Fund for the support of the bank crediting. It was all for nothing. As written by the WB experts, the banks «are adherent to the cautious crediting practices». In fact, this means that no crediting mechanism exists in the country. There are the mechanisms of target financing that is given to a limited circle of people. In other words, it is an export-oriented system.
According to the National Bank of Kazakhstan, the growth of the assets of the Kazakhstan citizens abroad has even become a factor of the international reserves decline by 4.5 $ bln. Note that this decline was taking place against the backdrop of the oil price growth. In other words, the more the wells and oil-derricks make, the more is taken out of the country. This system is operating independently, does not require any domestic demand and, therefore, is practically non-responsive to its indicators.
The Scenarios of the Future
We can predict the way the Government will react in a critical situation (the individual Kashagan liquidation or the common drop of the oil prices) from the fact which measures it had taken during the latest round of the oil prices decline. The government abandoned the program of the tax-budget stimulation reducing the state expenditures to approximately 20% of the GDP. Decreasing the budget dependency on the oil income and increasing the fiscal sustainability were the proclaimed goals of this step.
And reducing the annual guaranteed transfers from 4,5% of the GDP to 3% of the GDP was the main technical task that was to be completed by 2010.
Speaking of the Kazakhstan real economy, this reduction will primarily affect the earnings of the non-protected transfer receivers. The domestic demand will drop, the number of the poor increase. But the «unprotected groups» in Kazakhstan exist outside of the system. Moreover, they take all measure possible to distance themselves from it. They are working to satisfy the external demand and live in the world of the grand geopolitics.
The WB experts believe that Kazakhstan must immediately change the economic policy, introduce the structural reforms, and abandon the ineffective budget transfers. This seems to be the logical conclusion which, from the political point of view, is unrealizable in the situation when the authorities of the country are trying to hide in front of the whole world the obvious fact that almost half of the given loans have «disappeared».
The radical change of the budget policy may simply destroy the social policy in the country. It may activate the political life in Kazakhstan and bring to life the most horrifying scenario — the Lebanese one. Such a scenario is unlikely to be desired by the group of the rent oligarchs that are «playing politics» betting on the rise or demise of different fractions inside the single power party but are not ready for the «steppes politics» realia.