Apr 25, 2015 | 12:59 GMT

4 mins read

In Kazakhstan, Instability May Be Unavoidable

A Plethora of Immediate and Long-Term Challenges Facing Kazakhstan

For Kazakhstan, instability may be unavoidable in the coming years. The country will hold an early presidential election April 26. The election itself is not seriously contested, but it comes as the government is facing numerous challenges regarding its economy and future political transition, which long-serving President Nursultan Nazarbayev will struggle to solve after his expected election win. The combined effect of low oil prices, the devalued ruble and competition among the country's clans could contribute to significant economic and political policy shifts following the election. However, the changes may not be enough. 

Nazarbayev's chief challenge following the election will be to address Kazakhstan's economic woes and prevent social unrest. Over the past two decades, Nazarbayev has stayed in power by using the country's energy revenues to finance public expenditures and maintain a balance among clans. The decline of global oil prices has thus threatened the regime's core source of power and influence.

Energy revenues generally account for about 25 percent of Kazakhstan's gross domestic product and 60 percent of government revenues. In addition, the fall of global oil prices cut down net profits for state-owned KazMunaiGas by 67 percent in 2014 compared with 2013 levels. Moreover, the country's oil production declined last year by 1.2 percent, and it is expected to fall further in 2015. Given the decline in oil revenues, the Kazakh government could no longer execute its 2015 budget plan and was forced to cut expenditures by 10 percent. So far, the public's reaction to the cuts has been subdued, but any additional spending cuts or layoffs will likely be met with social unrest.

The weakening of the Russian ruble could also contribute to instability in Kazakhstan. The Kazakh economy is closely tied to Russia, through both large trade volumes and financial institutions. Russian goods, made cheaper by the decline of the ruble, have flooded the Kazakh market. As a result of this imbalance, Kazakh exports to Russia declined by 41.2 percent in January compared to the previous year.

Kazakhstan's central bank devalued the Kazakh tenge by 19 percent in February 2014, but the rapid fall in the value of the ruble in late 2014 and early 2015 has reportedly forced the government to spend $2 billion to $3 billion per month to support the currency. Bank of America Merrill Lynch expects the tenge to be devalued by another 30 percent later this year. Stratfor sources in the country have indicated that a new collective of the most powerful businessmen in Kazakhstan, led by the president's son-in-law and local oligarch Timur Kulibayev, is pushing for a devaluation. Such a move will help Kazakh businesses compete with Russian goods. There are reports that dollarization of accounts in Kazakhstan has risen by 60 percent over the past quarter. Nevertheless, a further devaluation could alienate Kazakhs who are paid in tenges, erode their purchasing power and fuel more social unrest.

To improve the economic situation and prevent social unrest, Nazarbayev will work to implement reforms to attract Western investment in the country, particularly in the energy sector. Prime Minister Karim Massimov has already conducted a world tour, including stops in Europe, the United States and Turkey, to promote investment in Kazakhstan. To incentivize investors, the Kazakh government has introduced new reforms to stamp out corruption and guarantee consistent regulations. At the same time, the government has already announced a program aimed at de-dollarizing the economy in an effort to combat the growing trend of keeping funds in dollars rather than local currency.

These reform efforts face significant domestic and international challenges. Low oil prices may discourage Western energy companies from committing to large-scale investment in Kazakhstan. The impending political transition may also cast a shadow over the country's efforts to portray a stable, long-term regulatory framework for investors. Moreover, contradictory statements from Kazakhstan's central bank over the past year have eroded trust in the institution, and many Kazakh businesses and households will likely resist efforts to convert their funds into dollars.

Preparing for a Future Transition

While facing a host of immediate challenges, Nazarbayev is also paving the way for a future transition of power. One proposal Nazarbayev is considering is giving more power to the country's parliament; he has even hinted in recent months that this shift could start after the election. Under a parliamentary system, Kazakhstan's different clans could retain key portfolios and share power. Nazarbayev hopes that the transition to a parliamentary system would lower the risk of a power struggle once he steps down.

But the shift to a parliamentary system could be met with opposition. The values of the country's resources are shrinking while local competition among the clans is increasing and could lead to political infighting. Furthermore, there is no guarantee that all of the factions will agree to a parliamentary arrangement once Nazarbayev is no longer in power. Despite Nazarbayev's efforts, any transition of power will risk stoking social unrest and competition among the elite.

The April 26 election will give Nazarbayev a renewed mandate for what may be his last official term as Kazakhstan's president. Nazarbayev will probably bolster the country's economy while also paving the way for a new political reality. Nazarbayev will encounter resistance in the near term, but reforms have the potential to ensure Kazakhstan's future economic, political and social stability. 

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