Between 2000 and 2010, Kazakhstan, Central Asia's largest economy, was one of the world's fastest growing economies. Its gross domestic product of more than $201 billion dwarfs those of its neighbors Uzbekistan ($51 billion), Turkmenistan ($33.7 billion), Tajikistan ($6.9 billion) and Kyrgyzstan ($6.4 billion). Kazakhstan is among the top trade partners for each of the other Central Asian states except Turkmenistan.
The Pillars of the Kazakh Economy
The largest contributors to the Kazakh economy are energy and mining. These sectors account for 78 percent of export revenues, 33 percent of gross domestic product and 40 percent of the government's budget. Of those two sectors, energy is the more important in keeping the government's coffers full. Kazakh oil production has more than tripled since the fall of the Soviet Union, growing from 589,000 barrels per day in 1991 to 1.84 million barrels per day in 2013. Natural gas production has grown as well, from 7 billion cubic meters in 1991 to more than 40 billion cubic meters in 2013.
These increasing energy supplies primarily are exported to Europe via Russia. However, since 2005 Kazakhstan has diversified its oil exports and now sends 16 percent of what it produces to Asia. Moreover, Kazakhstan plans to send 15 billion cubic meters of natural gas annually to China starting this year, if Kazakh natural gas production grows sufficiently.
With markets for its energy supplies growing, and with oil prices averaging $100 per barrel after the 2008 financial crisis, Kazakhstan has been able to put large amounts of cash in the government's National Fund. Currently, the fund stands at $58 billion, and Astana plans to raise it to $93 billion this year and to $122 billion by 2016, though the country's current economic problems could change these plans.
Foreign Investment and the Credit Boom
Interest in Kazakhstan's energy industry made the country the largest recipient of foreign investment among the former Soviet states in the 1990s. Large Western firms, such as Chevron, ExxonMobil and Shell, came into the country to develop its vast energy reserves and build pipeline networks to Europe. Since 2012, Kazakhstan has been the 19th largest recipient of foreign direct investment in the world, with much of that investment going to the energy and metals sectors. Kazakhstan was also the first former Soviet state with a sovereign investment rating.
Gaining attention for its growing energy exports and receiving vast amounts of foreign direct investment, Kazakhstan expanded its banking system rapidly during the post-2002 global credit expansion. Kazakh banks' total assets, which were 5 percent of gross domestic product in 1998, were 91.8 percent of gross domestic product by 2007. During the 2008-2009 financial crisis, these assets collapsed and stand at 44 percent today, in line with Western economies.
Such rapid growth should have set off many alarms, particularly because it was made possible entirely by foreign lending and not at all by an increase in domestic deposits. Moreover, with the rapid expansion of investment and credit, Kazakh companies have begun relying more on credit (foreign and domestic) than revenue. When the global financial crisis hit Kazakhstan, the country's banking and financial systems were not developed enough to stand without foreign cash. In addition, oil prices had plummeted from $147 a barrel to approximately $60 a barrel, leaving the government without its primary revenue maker.
The country was able to survive the financial crisis by drawing from its National Fund. However, Kazakhstan has not restructured its financial and business system in order to withstand any future declines in foreign credit and investment. Moreover, Kazakh firms' habit of relying on credit has grown worse, leading to a massive increase in unpaid debts.
Current Economic Troubles
On the surface, Kazakhstan's economy looks relatively healthy. The country's gross domestic product growth was 6 percent in 2013, up from 5 percent in 2012 and 1 percent in 2009 during the global financial crisis. For 2014, Kazakhstan's Central Bank estimates a gross domestic product growth of 7 percent, while the International Monetary Fund predicts 5.2 percent. Kazakhstan's seemingly robust economy is owed mostly to high oil prices over the past year. Another key driver of economic growth in 2013 was continued credit from Western institutions, according to the World Bank.
Despite appearances, questions remain about the Kazakh economy's continued stability. First, though Kazakhstan has a strong energy sector, its continued expansion is uncertain. This could make growth more difficult and could undermine Astana's spending goals. The Kazakh government's budget depends on the long-delayed Kashagan oil project's starting production in 2014. However, the project has been delayed because of pipeline leaks. The budget for Kashagan has swelled from $10 billion to an estimated $46-60 billion, and it is unclear that production will begin this year. If production is delayed, the government will be forced to revise its budget.
Second, numerous external issues are affecting Kazakhstan. The availability of global credit is tightening up as the United States tapers its monetary expansion. In addition, Kazakhstan's neighbor, Russia, has experienced a 10 percent decline in its currency since the start of the year. Because Russia and Kazakhstan are joined by a customs union, Astana tries to keep its currency as closely pegged to the Russian ruble as possible. This means that Russia's financial woes affect Kazakhstan. For instance, on Feb. 12 the Kazakh Central Bank devalued its currency, the tenge, by 19 percent in relation to the dollar, following a similar though more gradual fall in the value of the Russian ruble. The sharp devaluation was meant to be a quick fix for Kazakhstan's large state firms and government revenues, but it hit working-class Kazakhs hard, slashing their purchasing power by nearly one-fifth.
Last, the global credit boom that benefited the Kazakh economy in the early 2000s resulted in many Kazakh banks and large companies racking up more debt than they can handle. Kazakhstan's total external debt is $148 billion (73 percent of the 2012 Kazakh gross domestic product of $202 billion). Moreover, as of January, 35.8 percent of the loans Kazakh banks granted were nonperforming — up 18.7 percent since the start of 2013 — though nonperforming loans at some major banks are as high as 87 percent. Meanwhile, many large Kazakh companies continue relying on borrowing to finance investments and operations. Many Kazakh firms have stopped repaying their local debts, contributing to the jump in nonperforming loans.
The Kazakh government has begun taking bold steps to alleviate this situation. In late February, Kazakh President Nursultan Nazarbayev ordered all banks operating in Kazakhstan to reduce their share of nonperforming loans to 15 percent of their portfolios by 2015 and to 10 percent by 2016. Also in late February, the Kazakh parliament passed legislation to start restructuring the banks deemed most troubled. This restructuring should be enough in the short term to keep the Kazakh financial system stable, although many banks still have troubling amounts of debt and nonperforming loans. The National Fund can serve as a safety net should the government need more funds than expected to manage the country's financial problems.
Contagion to Other Central Asian States
The Kazakh government appears capable of handling the country's economic difficulties in the short term, but its financial issues are rippling across other Central Asian states. Most of the region's economies are intertwined and sensitive to changes. With the Russian ruble's gradual decline in recent months and the massive devaluation of the Kazakh tenge, Kyrgyzstan, Tajikistan and Uzbekistan took measures to prevent their currencies from being affected.
The most important effect of the financial stresses in Russia and Kazakhstan is on remittances from Central Asian migrants working in those countries. Remittances from workers abroad make up large parts of the gross domestic product in Tajikistan (48 percent), Kyrgyzstan (31 percent) and Uzbekistan (16.3 percent). Nearly all of those workers abroad are in Russia and Kazakhstan. They are paid in local currencies, but remittances typically are transferred in dollars. With the devaluations of the tenge and the ruble, the value of remittances reportedly has shrunk by 20 percent. Uzbek, Tajik and Kyrgyz migrant workers can do little about this, since they do not have easy access to other labor markets, and working abroad is still more lucrative than returning home.
This strain on remittances could prompt instability in the smaller Central Asian countries. The region has seen many protests and even revolutions based on difficult social, political and economic circumstances in these countries. The Kyrgyz, Uzbek and Tajik governments are responding as best as they can to prevent their neighbors' financial stress from deeply affecting their countries. However, should the region's financial situation worsen, these countries do not have a financial safety net such as Kazakhstan's to prevent their own economic crises.