On the “Market Deficit” Syndrome

The criticism of the state’s excessive presence in the economy has long become the norm for both the Kazakhstan and foreign experts. However, apart from the nepotism and the lack of the desire to lose their positions and incomes on the part of certain high-level officials, something else is working against decreasing the number of the quasi-state agencies and the share of the state sector in the economy. And this something demands an expert analysis of the situation.

The main difference between the Kazakhstan quasi-state sector and its analogs in the developed countries lies in the fact that, even though it does operate in the conditions of the market economy, the latter is seriously crooked. And not only by the authoritarian (to the point of the oligopoly) political system but also by the incompleteness of the market processes. They stopped developing by the end of the 1990s and, since then, the changes (if they have been happening at all) have rather been moving in the opposite direction.

To prove it, let us consider the Kazakhstan oil-processing industry and the tightly connected to it motor fuel domestic market. To save time and space, we cite an article published on the Forbes-Kazakhstan website.

“Where does the second problem of the resource companies’ disinterest in owning a share of the domestic market come from? There is too much state at this market which makes this business senseless, the report authors explain. The processing prices at the domestic market are much lower than the export ones, and, for the past two years, this gap has only widened. “If, in 2013-2014, they constituted 40% of the average Urals at Mediterranean Sea, then, in 2015 – 33%, in 2016 – 25-29%. The sale earnings amounted to 50% in 2013 and to 32-37% in 2016”, the report says. Without  bringing the domestic prices to the level of the export parity (the netback, in other words, the market price minus the cost of the transportation and the export taxes), a further development of the sector is impossible, the experts believe, because the KazMunayGaz’ extracting business is diminishing (albeit slower than expected).

So far, the state has been acting through the use of force – one can lose the export license for supplying the lower than required quantities to the oil-processing plants. However, 70% of the oil extracted today is accounted for by Tengiz, Karachaganak, and Kashagan whose subsoil users are protected by the production sharing agreement and, in the future, when the modernized oil-processing plants will require more resources, these force methods will not work on them.

Despite a certain liberalization of the market (the marginal prices for the major oil products have been abolished, the processing tariffs are now determined not by the Committee on Regulation of Natural Monopolies and Protection of Competition but by the KazMunayGaz board of directors), the oil processing is not a sector of the Kazakhstan market economy, the authors of the report believe: “the oil-processing plants… are not the actual market participants that buy oil and sell the oil products. Instead, they receive a tolling fee for processing crude oil. The size of the fee is determined by the state company”.

The reasons why the state is constantly and actively meddling with this sector of the national economy are obvious – Akorda is afraid that abandoning the state limitations will lead to such a significant rise of the domestic consumer prices for the motor fuel that the enraged Kazakhstanis will start expressing their displeasure on a massive scale not only on the Internet and in the kitchens but in the streets as well. Therefore, the concessions the authorities make are only the small ones.

And Akorda is right to be afraid. To prove it, we will quote another passage from the aforementioned article.

“As a whole, in the opinion of HIS Market, in Kazakhstan, the oil-processing and oil products sales market is under the direct control and regulation from a number of the state agencies including the Ministry of Energy, Ministry of Finance, Ministry of Investment and Development, and Ministry of Agriculture. Even the schedule of crude oil supplies to the oil-processing plants are regulated as well as the annual outputs and the monthly schedules of the processing, and the volumes of the exports are approved. The consultants recommend abandoning the tolling scheme and moving the sector towards the real commercial basis which includes purchasing of oil and selling the oil products and, in the long-run, equating the Kazakhstan export taxes with the Russian ones since we have joined the economic union without the tax borders.

However, the report states that even abandoning the marginal prices had instantly led to their increase at the market and in the dollar equivalent, too: the gasoline prices increased from 36 to 38 cents, the diesel fuel prices – from 34 to 39 cents. The increase could have been even more significant had it not been for the fear of the Committee on Regulation of Natural Monopolies and Protection of Competition’s investigation. The increase of the petroleum products prices always leads to the rise of the prices in the other sectors both food and otherwise. How this will affect the inflation and, consequently, the tenge rate and the real earnings is quite obvious.”

So, if Akorda allows the oil-processing industry and the domestic market of the motor fuel to operate in the market conditions, the consumer prices for the major motor fuels in Kazakhstan will immediately jump to the Russian level because, mainly, the export goods come from Russia. Then, they will start growing even more. At least, twice – by our crude estimates. This will immediately challenge the domestic political stability since the people will offer only one explanation for what is happening – the power and the affiliated big “players” are fattening themselves at the expense of the regular citizens.

The same kinds of “pitfalls” are hidden in many other sectors of the national economy starting from agriculture and finishing with the housing and utilities infrastructure. Perhaps the more or less market-type mechanisms are now at place in the trade, the electrical energy industry, and the cargo transportation industry and not even all the time since the Kazakhstan officials have more than enough zeal. Besides, Akorda is constantly demanding the local authorities to ensure that the prices for the main consumer goods and services grow as slowly as possible.

So, in the conditions when the market relationships exist but in a very crooked way, the national economy is constantly forming the zones where the private capital is not working simply because it is not profitable. As a result, the state, the quasi-state holdings, the national and “simple” companies responsible for one or the other economy sector or a state program have been solving this problem by the means of creating the fitting agencies. No matter in what form – be it independent affiliated companies or structural divisions.

Obviously, the private intent and interest of certain influential persons in Akorda is always at play even if several quasi-state companies have been created in affiliation with their relative or ally. Most of the several hundreds of the state agencies that now must be privatized had been created precisely for the reason that it was required by the circumstances. Therefore, the yet another privatization is guaranteed to solve only one task – to change the form of ownership. As for the other key task – to increase the effectiveness in this business-niche – it is unlikely to be completed simply because nothing else is going to changed.

As a result, it is possible that, after some time, the Kazakhstan government will have to create new quasi-state agencies simply because the private business will still has not entered the business-niche and the former global business, now privatized, have gone bankrupt or lost the ability to perform this function. It looks like it is these practical considerations that are not being publicly discussed since the decrease of the state’s share in the economy and the privatization of the quasi-state sector have become Akorda’s political slogans that have forced the Kazakhstan authorities to de-facto change the policy in this matter.

Thus, the phenomenon of the drastic discrepancies between Akorda’s words and their actions observed during the past years on a regular basis is the result of not only the poor job performed by the state agencies, of the greed, corruption, and the low-level qualifications of the Kazakhstan officials. We would like to call this the syndrome of the “deficit market”. By the way, we recall that, during the last years of the USSR existence, the state did put up a fight – but only against the superfluous managerial personnel. As a result, the fight was lost because orders are one thing, but the need to survive is something much more implrtant. The definition of the “snowdrops” unknown to the young generation of the Kazakhstanis, was born exactly during those years.


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