Oil and gas producers in central Asia and the Caucasus are scrambling to widen the scope of their economies amid bleak prospects for global commodity markets. Even Saudi Arabia, the unquestioned kingpin of the oil market, is moving in this direction: deputy crown prince Mohammad bin Salman Al Saud has announced plans to launch a $2000bn fund to diversify the Saudi economy. Authorities in countries such as Azerbaijan and Kazakhstan have come up with a combination of reforms, infrastructure overhauls and privatisation efforts to breathe new life into ailing economies and create a path for post-oil economic growth.

“These are turbulent times, but we had even harder times in the 1990s. We made it then, we will make it this time,” Azerbaijan’s deputy economy minister, Sahil Babayev, told investors at May’s 2016 EBRD annual meeting in London.

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The drop in oil prices has hit hydrocarbons producers on both sides of the Caspian basin, where some of the largest hydrocarbons deposits outside the Middle East are to be found. If Turkmenistan seems to have weathered the storm (the country’s annual growth for 2015 stood at 6.5%, although there is little scrutiny, if any, of government official figures), Azerbaijan and Kazakhstan saw economic growth plummet to 1.1% and 1.2%, respectively, in 2015, and international observers expect further slowdowns in 2016. Both countries must also deal with increasing pressure on inflation caused by the rapid depreciation of the Azeri manat and the Kazakh tenge prompted by the end of long-standing pegs to the US dollar in 2015.

Mandate for change

Azeri and Kazakh authorities are now renewing efforts to stabilise their economies and realise economic potential away from the traditional oil and gas sectors, which account for more than two-thirds of both countries’ exports.

“A lot of reforms are under way,” Mr Babayev told fDi. “The introduction of investment certificates alone means a full reform of the economy because we are introducing a special economic regime for a full range of industries in the country.”

Introduced in March, investment promotion certificates grant seven-year tax and customs incentives to investors willing to develop new projects in priority industries in Azerbaijan, excluding the oil and gas sector, and committing to carrying out at least 10% of the planned investment. President Ilham Aliyev also gave a mandate to the government to outline a large-scale privatisation plan intended to cover part of the budget shortfall caused by the economic slowdown and the falling manat (the Azeri currency has depreciated by 92% since early 2015), as well as add vitality to the economy as a whole. Unlike Saudi Arabia, where the government is working on the sale of 5% of the coveted state oil company Saudi Aramco, Azeri state oil firm Socar does not feature among the assets currently under assessment for privatisation, as energy minister Natig Aliyev confirmed in February.

Kazakhstan’s state reduction

Across the Caspian Sea, Kazakhstan’s government also launched an ambitious privatisation programme at the end of 2015. “We are planning to reduce state presence in the economy by 15% by 2020,” says deputy finance minister Ruslan Beketayev.

The assets directly or indirectly controlled by sovereign wealth fund Samruk-Kazyna make up about 40% of the Kazakh GDP and have grown by 30% in the past five years despite government efforts to slim down the fund’s portfolio. According to the new privatisation plan, some 44 major assets and subsidiaries belonging to Samruk-Kazyna will be up for sale between 2016 and 2020, including stakes in state oil firm KazMunaiGas, Kazatomprom, which is the world’s largest producer of uranium products, and national railway company Temir Zholy.

The Kazakh government, led by long-serving authoritarian president Nursultan Nazarbayev, is also deploying infrastructure developments to keep the economy afloat. The Nurly Zhol (‘Bright Path’) programme is expected to unlock $9bn of investment into key infrastructure across the country between 2015 and 2017 and is intended to become a local complement to China’s One Belt One Road initiative, which will turn Kazakhstan into a key transit corridor for goods manufactured in China en route to Europe, and vice versa.

“In terms of FDI, a significant expected increase of investment from China, including the development of the Silk Road Economic Belt [the central Asian stretch of the One Belt One Road initiative], combined with expected recovery of FDI from the EU and other countries, can be expected to boost growth and, more broadly, provide a platform for creating better connectivity and growth (including in the non-infrastructure sectors) in the country,” the EBRD wrote in its latest Regional Economic Prospects report.

However, both Azerbaijan and Kazakhstan face an uphill task in convincing local and, above all, international investors that there is any value beyond their oil and gas sectors or state-backed infrastructure developments. Net inflows of foreign investment into the Kazakh economy halved to $4bn in 2015 compared with a year earlier, the lowest level since 2005, according to figures from the country’s central bank. In Azerbaijan, FDI inflows decreased slightly to $7.4bn in 2015 from $8bn, but oil and gas accounted for 88.5% of total 2015 FDI, figures according to figures from the Central Bank of Azerbaijan.

Kyrgyzstan's big plans

Smaller countries in the region are also looking for new life after the commodity boom. One such country is Kyrgyzstan, whose recent economic uplift was largely pinned to the fortunes of flagship gold mine Kumtor operated by Canadian company Centerra Gold. As gold prices fell throughout 2015, Kyrgyz authorities were forced to look elsewhere to defend the country’s economic growth. 

“Our new direction in terms of economic policy is to make effective use of the benefits we had from the accession to the EU’s Generalised System of Preferences [GSP+] and the Eurasian Economic Union [EEU],” says Arzybek Kozhoshev, Kyrgyzstan’s economy minister. “From this perspective, we will make the most of the resources of the Kyrgyz-Russian Development Fund to support SMEs across the country.”

Kyrgyzstan officially joined the Russian-led EEU, a common market spanning a group of former Soviet republics, in August 2015, and the GSP+, which grants Kyrgyz exporters tariff-free access to the EU market for more than 6000 products, in February of this year. Nonetheless, the potential benefits from both initiatives are by no means certain because the country’s limited production base reduces its capacity to export and compete in broader economic blocs. Local authorities are now tapping the $1bn Kyrgyz-Russian Development Fund to support the growth of local SMEs in sectors such as agricultural production and processing, and small-scale hydro-electric power generation, in which the country boasts a large untapped potential.

These reforms have the potential to rewrite the historically poor track records of governments across the region in terms of implementation. The huge hard currency reserves accumulated in the good times of the commodity boom will win authorities in Baku, Astana and elsewhere some time, but the future of their economies rests on the quality of the reforms under way.