The establishment of the Russian-led Eurasian Economic Union (EEU) has created more headaches than opportunities for Kazakhstan’s investors and producers so far. With the collapse of the Russian rouble, Kazakhstan found itself suddenly flooded by cheap Russian products shaking the already fragile foundations of its narrow industrial base.

Yet local authorities pledge the EEU will eventually produce benefits and Kazakhstan will be able to attract foreign investment by leveraging what is a relatively business-friendly climate compared with other EEU members.

“The EEU creates a bigger market for Kazakhstan and sets the ground for freer trades between EEU partners. In this respect, we can definitely see growing export-oriented FDI,” says Borisbiy Zhangurazov, chairman of national export and investment agency Kaznex Invest. 

Common market

Built on the foundation of a custom union between Russia, Belarus and Kazakhstan, and officially launched on January 1, 2015, the EEU aims to establish a common market among Commonwealth of Independent States (CIS) countries. Armenia and Kyrgyzstan have also signed up for EEU membership, alongside the three founding members. At the same time, negotiations are under way with other potential EEU members from the former Soviet Union, such as Tajikistan.

The union started on the wrong foot though, as the Russian economy took a double hit from Western sanctions and falling oil prices, causing a collapse of the Russian rouble in the currency market. The rouble has lost more than 44% against the Kazakhstani tenge since June 2014, giving Russian production an additional competitive boost in the Kazakh market – the EEU already set customs duties at zero – with companies producing locally struggling to remain competitive with cheap Russian imports and to see any of the promised EEU benefits. 

“Beyond the contingent market circumstances, Kazakhstan has got the potential to become an investment hub for the whole market. New FDI might come from Russia and Belarus as Kazakhstan’s investment climate is better than theirs,” says Mr Zhangurazov. 

Improving climate

Kazakhstan boasts a more liberal investment climate than Russia and Belarus. President Nursultan Nazarbayev set himself apart from other central Asian autocrats such as Islam Karimov in Uzbekistan or Saparmurat Niyazov and his successor Gurbanguly Berdimuhamedow in Turkmenistan by opening up the country to foreign investors and gradually improving its overall investment framework.

Corruption and scarce access to financing in the local market are still regarded as a major cause of concern for Kazakhstan’s competitiveness, however, as highlighted by the latest edition of the World Economic Forum’s Global Competitiveness report. Yet overall Kazakhstan fares better for business competitiveness than Russia, and both the upcoming EEU partners Armenia and Kyrgyzstan, according to the report.

Besides, a new investment framework came into effect in January 2015 in Kazakhstan. Effective immediately, investments targeting a number of prioritised sectors will benefit from generous state incentives. 

Kazakhstan’s relatively liberal business environment, combined with its abundance of hydrocarbons and mineral resources, has provided a fertile ground for FDI inflows. The country attracted more than $24bn of gross FDI inflows in the first three-quarters of 2014, with some $7bn going to the oil sector alone, according to the latest figures published by the National Bank of Kazakhstan, the country's central bank.

Among EEU partners, Russia and Belarus stand out with gross FDI contribution of $1.14bn and $165m, respectively. Total net FDI in Kazakhstan amounted to $9.74bn in 2013, far more than any CIS country other than Russia, according to figures from Unctad’s 2014 World Investment Report.

On the other hand, Kazakhstan has been unable to prevent foreign investment outflows in certain sectors, such as the financial sector, where international groups such as UniCredit, HSBC and AIG dismantled their local operations as they struggled to rake in the profits they had been expecting upon entering the country. 

EEU test

Kazakh authorities are now willing to test the country’s ability to cater to the EEU market through the development of foreign and local investment in the oil service industry. Foreign investors relocating manufacturing units or service centres in the country or setting up joint ventures with local partners will gain preferential access to procurement processes in some of the country’s largest oil projects, such as the expansion of Karachaganak, an oil and gas field operated by Italy’s Eni and British Gas near the city of Oral in the north-west.

“We can turn the local industry into a platform for the whole EEU oil and gas market,” Murat Zhurebekov, managing director of state agency PSA, which oversees compliance of the oil production sharing agreement between the operator and the Kazakh state at Karachaganak, said during a conference in March. 

At the same time, Mr Nazarbayev has successfully developed a so-called multi-vector foreign policy looking to maintain Kazakhstan's solid relationship with its traditional partners in the region, primarily Russia, as well as develop ties with other major economic powerhouses such as China, the EU and the US. This approach has laid the foundations for ongoing negotiations for membership of the World Trade Organisation (WTO), which is expected to happen at some point in 2015. It has also diversified Kazakhstan’s sourcing of FDI. 

“Conduct of the efficient multi-vector foreign policy remains a key advantage for Astana [Kazakhstan's capital city] in this situation. In the context of major worsening in Russia’s relations with the West on the one hand, and the rise of China’s central Asian clout on the other, Kazakhstan continued to successfully manoeuvre between the interests of great powers related to key commercial investors,” a 2015 report by Russian firm Minchenko Consulting reads. “In that respect, liberal ‘rules of the game’ in Kazakhstani investment represent a natural complement of the multi-vector foreign policy.”

China’s endorsement

Chinese investments in Kazakhstan represent the most emblematic success of the government’s multi-vector approach. China’s accumulated FDI in Russia, Kazakhstan and Belarus increased from $11.02bn to $24.67bn between 2009 and 2013, with Kazakhstan accounting for 91.5% of all Chinese investment in these countries, according to figures from the Eurasian Development Bank.

As Mr Nazarbayev readies himself for early presidential elections held on April 26, improving the country’s investment climate is again his top priority. Falling oil prices and the Russian slowdown have not spared Kazakhstan, with annual economic growth expected to slow to 1.5% in 2015, from 4.3% in 2014, according to forecasts from the European Bank for Reconstruction and Development. The government now appears in full swing to keep the economy afloat by tapping the huge foreign reserves accumulated in the national oil fund in the past few years – $71.7bn at the end of February.

Meanwhile, it hopes the new investment rules will gain traction and the EEU and WTO memberships will eventually create more opportunities for a combination of local and foreign investment.