assessments

Kazakh Elections Raise the Specter of Unrest

8 MINS READFeb 25, 2015 | 09:57 GMT
The Specter of Social Unrest Rises Ahead of Kazakh Elections
(VYACHESLAV OSELEDKO/AFP/Getty Images)
A man casts his vote in Kazakhstan's April 2011 presidential election in the village of of Malovodnoe.
Summary

Kazakhstan is likely to hold an early presidential election amid the country's second major economic crisis in six years. The Kazakh economy is facing difficulties in nearly every sector. Though the government has plans to counter the mounting economic pressure, Kazakhstan will likely experience social unrest — something the government has not handled well in the past.

A proposal for snap presidential elections made it past the constitutional courts in Kazakhstan on Feb. 24. Rumors of snap elections began circulating in late January, and on Feb. 18 the ruling Nur Otan party backed a proposal for an early vote. The elections could be held as early as April — a year ahead of schedule. With a win for incumbent President Nursultan Nazarbayev all but assured, the elections would give Nazarbayev another five years in office.

The early election would serve two purposes. First, it is meant to renew Nazarbayev's mandate as he begins implementing tough reforms and measures to counter the country's precipitous economic decline. Second, it is meant to divert the attention of the Kazakh people from the country's economic crisis and ameliorate any social unrest related to economic conditions.

The Economic Slowdown

The Kazakh economy is slowing, with government forecasts for gross domestic product growth for 2015 shrinking from 4.5 percent to 1.5 percent. However, independent estimates range from flat growth to negative growth this year. For most of the past 15 years, Kazakhstan has made great economic strides, with growth of between 8 and 13 percent. However, 2015 figures resemble those of the 2008-2009 recession.

Several problems are contributing to the economic decline, but low oil prices have had the largest impact. Energy revenues are 25 percent of GDP and 60 percent of government revenues. Originally, Kazakhstan's 2015 budget was set on the price of oil being $103 a barrel, though in successive months it has been dropped to $90, then $80 and now $50 a barrel. The government has already cut its 2015 budget by 10 percent, with more revisions expected over the next few months.

Another factor is flat growth in energy production. Kazakhstan has attempted to increase its oil production by 2-6 percent each year. However, production has been flat since 2010 because of delays at the Kashagan oil project, which is not expected to come online for at least another two years. Astana has ordered the country's other energy projects to increase production, but low oil prices and relatively high operating costs provide little incentive. As a result, the government revised its 2015 oil production forecast from 2 percent growth to flat growth.

The government also revised its forecast for exports in 2015 downward by 44.7 percent compared with the previous year. Exports are slumping primarily because of Kazakhstan's inability to compete with cheap Russian raw materials caused by the weak ruble. In the fourth quarter of 2014, Kazakh copper exports were down 93 percent compared with the previous year, steel exports were down 16 percent and aluminum exports were down 26 percent. Cheap Russian goods are also affecting Kazakhstan's domestic economy. For example, automotive sales in Kazakhstan were down 60 percent in the fourth quarter of 2014 because Kazakhs rushed across the border to purchase cheap Russian cars. The same is likely true for appliances and electronics.

Furthermore, the weak ruble is affecting Kazakhstan's currency and financial system. Traditionally, the Kazakh tenge is pegged to the Russia ruble. However, following the Kazakh central bank's sudden 19 percent devaluation of the tenge in February 2014 and subsequent wild fluctuations in the value of the ruble, the currencies are divorced. Even with the devaluation and distance from the ruble, Astana still spent $10 billion in 2014 to prevent the tenge from following the ruble's volatility. Rumors are circulating that the government could sharply devalue the tenge again. Central bank chief Kairat Kelimbetov said he would prefer a gradual devaluation and not a one-off shock devaluation, but he made similar claims in early 2014 just before the 19 percent devaluation.

The previous devaluation and hints of further currency volatility have led most Kazakhs to use dollars, creating tenge deficits in many Kazakh banks. The Kazakh central bank also estimates nonperforming retail and corporate loans now make up 23.55 percent of total loans nationwide. That makes Kazakhstan one of the most debt-distressed countries in the world and leaves Kazakh banks near collapse, though the country's banking sector has faced similar challenges over the past few years.

The weak Russian ruble is also bad news for Kazakh migrant workers in Russia. Worker remittances from Russia make up approximately 9 percent of Kazakhstan's GDP. Many Kazakh workers have reportedly asked for their payments in dollars, though dollar currency in Russia is becoming increasingly scarce because many large Russian banks are under Western sanctions.

Finally, the sanctions on Russian banks are affecting Kazakhstan as well because the two countries' financial sectors are closely connected. Russian banks, such as Sberbank and VTB Bank, are investors in many large industrial projects in Kazakhstan. These two banks are becoming increasingly frugal in their investments and loans. Russian banks account for 12.6 percent of Kazakhstan's credit market. Moreover, Russia's counter-sanctions against the West on food imports are affecting the cost of imported food in Kazakhstan. Prices have risen more than 40 percent, in addition to inflation of 7.4 percent in 2014 and regional fluctuations in food and fuel prices as high as 50 percent.

Government Responses

The government is looking to take several measures to help the economy. Astana has $97 billion in reserves ($21 billion in currency reserves and $76 billion in its national wealth fund). The government could use this money to inject funds into the currency and the banks and to counter inflation, though the money could go quickly.

The Kazakh government is also attempting to woo foreign investment, particularly from the West. Astana has already dropped visa requirements for many foreign citizens to do business in Kazakhstan and drafted a stimulus program to compensate foreign investors up to 30 percent of their investment and up to 10 years in corporate tax breaks. More draft laws to attract investment include creating free economic zones, simplifying procedures for foreign personnel and repealing quotas on Kazakhs working on foreign projects.

One of the more important new draft laws is for foreign investor guarantees — something that has long plagued foreign groups working in Kazakhstan, where the laws and financial structures change frequently. This new draft law guarantees investors the same laws and tax structures for 10 years and offers clauses that would allow the foreign investor to use the International Court of Arbitration for any violations. The Kazakh government is even considering a mass privatization, its first since the early 1990s.

The government also plans to enact a 10-year anti-corruption program. The previous five-year anti-corruption plan had some success, raising Kazakhstan up 26 places on the Corruption Perceptions Index. The new government plan is different from its predecessor in that it looks to tackle conditions that create corruption instead of simply punishing the corrupt after the fact. In short, Nazarbayev is attempting to change the culture in Kazakhstan that leads to Kazakhs' comfort with corrupt practices, something rarely changeable in most former Soviet countries.

But to push these controversial laws and measures, as well as weather the increasingly intense financial storm, Nazarbayev needs a fresh mandate on power. In addition to the snap presidential election, Nazarbayev could call for fresh parliamentary elections if needed.

Likelihood of Social Unrest

The largest concern for the Kazakh government is preventing social unrest — something Astana has faced many times. Minor demonstrations about the economy have already popped up in Shymkent, Almaty and Astana. The government is lobbying companies not to decrease salaries or lay off workers. Its first concern is with the workers in the western regions, where energy production is concentrated and where protests and riots have erupted in the past. Many energy firms in the western regions are considering shrinking budgets for 2015, which will lead to cuts in either salaries or jobs. Already the government is in negotiations with Kazakh trade unions to prevent strikes.

The next area of concern is along the southern borderlands, particularly the Almaty and Shymkent regions. These regions have high population densities and high unemployment. In addition, these two regions have the largest populations of migrants, particularly from neighboring Central Asian states. With the other Central Asian states' economies in even worse shape than Kazakhstan's, and with migrant jobs in Russia becoming scarce, more Kyrgyz, Tajik and Uzbek workers are going to southern Kazakhstan for jobs. The country's declining economy only exacerbates the tension among these ethnic groups.

With the probability of social unrest escalating, the government is in a tough position. Cracking down on strikes and demonstrations in the past has only worsened sentiments toward the government. However, snap elections are a cultural fix in Kazakhstan, so much so that the news media immediately assume that new elections will take place whenever the government faces hardship. For example, a month after the government cracked down on striking workers in Zhanaozen in 2011, killing 16, Nazarbayev called early parliamentary elections. Kazakh leaders will likely try to use early elections as a way to limit unrest and renew the government's mandate to carry out reforms and enact measures to address the country's economic woes.

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