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Astana, Kazakhstan’s capital city since 1997, has grown exponentially over the past 18 years and is now central to the country’s future plans, a position emboldened by its hosting of global events such as Expo 2017. Jacopo Dettoni pays a visit.

Oil-rich Kazakhstan is widely acknowledged as the most business-friendly market in central Asia, as evidenced by the fact that it is the largest FDI recipient in the region and the second largest among former Soviet Union countries after Russia. Yet FDI into Kazakhstan remains mostly concentrated in the extractive sectors (oil and gas, mining), whereas investment in sectors such as finance has struggled to recover since the global financial crisis.

However, the country’s government is now stepping up efforts to reform Kazakhstan’s business environment and lure back investors. On the regulatory side, a renewed framework introducing generous incentives for investors willing to develop projects in key sectors came into effect in January. Additionally, a number of initiatives were launched in the first half of 2015 aimed at better integrating Kazakhstan into the regional and global economy, including the founding of the Eurasian Economic Union (EEU) and the WTO membership announced in June.

At the same time, president Nursultan Nazarbayev is rolling out large public investment programmes to counter the current economic slowdown and add momentum to the grand vision of Kazakhstan 2050, which aims to put Kazakhstan among the world’s 30 largest economies by 2050; the country currently ranks 48th in terms of nominal GDP, according to IMF figures.

City of dreams

The city of Astana forms the core of this vision. Declared Kazakhstan’s capital in 1997, when it was just a small town at the heart of the boundless steppe spanning the country, Astana has experienced impressive development over the past 18 years. The city has turned itself into the centre of the country’s political life. Its modernist and glittering centre, dominated by the iconic Bayterek tower rising before the Ak Orda presidential palace, mirrors the magnitude of its ambitions.

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Our main aim is diversification of the economy – Ruslan Tasbergenov, Ministry of Investment and Development

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Astana has also emerged as a major venue for international events, and its grand debut in the high society of the world’s capital cities will be Expo 2017. The event will present local authorities with the chance to take the city to its next phase of development: making it a benchmark not only for politics, but also for the country’s business and judicial life, which historically belonged to former capital city Almaty.

Mr Nazarbayev set himself apart from central Asian autocrats such as Islam Karimov in Uzbekistan or Saparmurat Niyazov and his successor Gurbanguly Berdimuhamedow in Turkmenistan by opening up Kazakhstan to foreign investors and gradually improving the overall investment framework. Corruption and sparse financing in the local market are still regarded as major barriers to competitiveness, as highlighted in the latest World Economic Forum Global Competitiveness report, yet overall, Kazakhstan fares better for business competitiveness than other major economies in the former Soviet Union.

Resource rich

Kazakhstan’s relatively liberal business environment, paired with its richness in hydrocarbons and mineral resources, has proved a fertile ground for FDI. Kazakhstan attracted inflows of $9.6bn in 2014, according to figures from the 2015 World Investment Report by Unctad – more than any other Commonwealth of Independent States (CIS) country excluding Russia, which attracted FDI inflows worth $21bn for the year.

Foreign investment is pouring into Kazakhstan’s extractive industries. Russia’s Polymetal International carried out the largest acquisition in central Asia in 2014 by purchasing Kazakh gold producer Altynalmas for $1.1bn. Overall, more than half of the current FDI stock concerns geological exploration activities in the oil and gas and mining sectors, according to the Unctad report. Oil multinationals such as Chevron and ENI operate, respectively, Tengiz and Kashagan, Kazakhstan’s two largest oilfields. Exploitation of the latter, considered the biggest oilfield ever discovered outside the Middle East, is running years behind schedule but is slated to come online by the end of 2016. 

Nevertheless, adverse economic conditions are damaging the country’s prospects and its appeal as a major FDI destination. A recession in Russia and economic slowdown in China, both vital trading partners and sources of FDI to Kazakhstan, combined with the stabilisation of oil prices at about $60 per barrel (well below the average of more than $100 in recent years) have lowered Kazakhstan’s economic growth to 4.3% in 2014, down from 6% a year earlier. The government expects annual GDP growth to further slow to 1.5% in 2015. The national currency, the tenge, lost a quarter of its value in August 2015 after it was allowed to float. At the same time, FDI inflows decreased by 6.4% in 2014 from a year earlier, and are declining further from 2008’s peak of $14.3bn, according to Unctad figures. The situation does not seem to be improving in 2015, with gross FDI inflows down by 24% year on year in the first quarter, according to figures from the country’s central bank.

Astana city officials are quick to point out that the capital’s growth figures are looking healthier, however. They cite a 10% increase in FDI into the city in the first quarter of 2015 compared to Q1 2014, while manufacturing has increased nearly 8% and construction services 18%. The number of finished residential buildings has shot up almost 80%. 

A new mandate

Given the challenging market conditions, Mr Nazarbayev gave mandate to a new government formed in April 2014 – led by Karim Massimov – to push through a number of initiatives and reforms aimed at improving the country’s business environment beyond the extractive sectors and better diversifying its economy.

“We’re trying to create a favourable [business] climate in Kazakhstan,” says Ruslan Tasbergenov, deputy chairman of the Committee on Investment within the Ministry of Investment and Development. “But history shows that a country which has natural resource dependencies won’t last long. So our main aim is diversification of the economy. This is the reason why we started the second stage of a nationwide industrialisation programme this year. We identified the main areas we will focus on. They are machinery, metrology, petrochemicals, the food industry and construction materials. They are the priorities for Kazakhstan’s development and we actually introduced a new package of investment incentives [to facilitate their development].”

Reform on the way

The country’s renewed investment law, approved in June 2014 and operative since January 2015, introduced generous incentives for investors developing projects in key sectors. These incentives included corporate income tax exemption for 10 years and a state subsidy covering up to 30% of construction and installation costs. Investors in greenfield projects also get free land and exemption from custom duties for bringing equipment into Kazakhstan, according to Mr Tasbergenov.

At the same time, the government has teamed up with the OECD to strengthen reforms aimed at improving governance standards in Kazakhstan, reinforcing institutions and paving the way for policy reforms. Mr Nazarbayev also outlined an ambitious reform programme right after securing a five-year term in the April 2015 elections, looking to upgrade the country’s institutions and eventually more evenly distribute governance powers between the presidency and parliament.

“The government also realised that Kazakhstan is a relatively small market with only about 17 million people, and thus developed a multi-vector foreign trade policy,” says Janet Hackman, country director for Kazakhstan at the European Bank for Reconstruction and Development.

Kazakhstan is one of the founding members of the EEU, alongside Russia and Belarus. The EEU aims to develop a common market among CIS countries stretching from eastern Europe all the way to China’s western border. The union of the three founding members and Armenia, which joined along the way, came into effect on January 1. Kyrgyzstan is also set to join and is expected to become a fully fledged member by the end of 2015. Meanwhile, Kazakh authorities finally wrapped up 19 years of negotiation for WTO membership, which is now expected to become operative in the second half of this year.

The public purse

As the much-needed reforms took shape, Mr Nazarbayev tapped the National Oil Fund to set up the Nurly Zhol programme, which involves public investment in infrastructure and other key sectors between 2015 and 2017; $9bn was pledged by the state and the same amount from international institutions for implementation. The programme once again highlights the central role of capital city Astana in Mr Nazarbayev’s vision of a modern Kazakhstan.

Astana’s population has trebled to 835,000 since becoming capital, and accumulated investment in the city between 1997 and 2013 reached a total of $25.6bn, according to government figures. An untouched landscape only 20 years ago, the western bank of the Ishim river is now home to the country’s main political institutions. As Expo 2017 approaches, ambitious projects are under way all over the city to upgrade its infrastructure.

Kazakh authorities have vision and ambition, but some still have a poor track record in management. A corruption case involving the top management of the state body running Astana Expo 2017 hit the headlines earlier in June, renewing concerns over the integrity of local public officials, but perhaps also indicating a tougher line on mismanagement of public funds – particularly when subject to international scrutiny.

Should all the planned reforms eventually be implemented, Kazakhstan’s upgraded business environment just might prove the perfect fit for foreign investors looking to gain
a toehold at the heart of central Asia.

This article is sourced from fDi Magazine
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