While Kazakhstan’s abundant natural resources are a blessing, they can also be a curse when it comes to developing a competitive manufacturing sector. For decades, Soviet planners used the country almost exclusively as a source of raw materials, which left it with very little industrial legacy after the country gained independence. Once it opened up to the global market, the ‘Dutch disease’ of overdependence on natural resources, which has affected many mostly oil-rich countries, frustrated the Kazakh government’s efforts to diversify the economy.
Additionally, Kazakhstan’s landlocked status and isolation from major markets used to be another major impediment to the competitiveness of local manufacturers. Yet the sharp devaluation of the Kazakh tenge that followed the end of the US dollar peg in mid-2015, combined with the infrastructure development triggered by the country’s new role as a key connection link between China and Europe in Beijing’s grand vision of a modern Silk Road, are revamping the business case for the development of an export-oriented domestic manufacturing. A new industrial plan is now in the making to turn this opportunity into a proper industrial strategy.
A strategy for industry
“We are preparing the country’s third industrial plan for the 2020 to 2025 period and it will be ready by the end of the year,” says Alisher Abdykadyrov, chairman of the Kazakhstan Industry and Export Centre, the state body in charge of promoting manufacturing and exports.
“The main idea here is to diversify our exports. So far we haven’t achieved much in that direction,” he adds. “During the Soviet Union [era], manufacturing was mostly located in the western part – Russia, Belarus, Ukraine – whereas we were simple suppliers of raw materials. We have to develop a manufacturing sector before we start exporting. We are in the process of doing that, but we need to leapfrog to the next stage of manufacturing development by focusing on high-added-value products.”
Kazakhstan’s exports matrix remains concentrated on a few raw or semi-processed commodities; oil and gas, metals and minerals alone made up about 87% of the country’s exports in 2017, according to World Bank figures.
The country’s market of 18 million people scattered over a vast landmass does not offer the economies of scale that global manufacturers frequently need to thrive, meaning that the country is looking to become a base for export-orientated producers. From that perspective, the sharp devaluation of the tenge of the past four years – a US dollar now buys 385 tenge, twice as many as in 2015 – boosted the international competitiveness of Kazakh products. In dollar terms, the average nominal salary in Kazakhstan is now about $435 per month, while the cost of a retail power supply is about 3 cents a kilowatt hour, according to official data – few other countries in the world have cheaper production inputs.
Cutting cost of trade
On top of these cost benefits, the infrastructure development triggered in Kazakhstan by China's Belt and Road Initiative (BRI), which was first mentioned in a speech by Chinese president Xi Jinping at Nursultan Nazarbayev University in Nur-Sultan (the capital of Kazakhstan, then know as Astana) in 2013, could potentially cut the country’s traditionally high trade costs by 50%, according to estimates by Dutch bank ING. Soft barriers are also falling with Kazakhstan’s recent membership of the World Trade Organisation, as well as the Eurasian Economic Union (EEU).
Kazakh authorities now hope to capitalise on these recent developments and find a place for local manufacturers in the value chains along BRI corridors that already generated trade of $1300bn in 2018, according to figures from China’s ministry of commerce.
“Exporters select a location based upon its closeness to resources and markets, or if they can find local efficiencies in terms of human capital. We are located next to big markets such as China and Russia, at the doorstep of Europe, and we do have both natural and human capital resources. Now we should try to get into the global value chain,” says Mr Abdykadyrov.
Zoning in on production
Kazakhstan’s abundant natural resources have already attracted several major investors along established value chains such as petrochemicals and agribusiness (see page 14). Yet a broader industrial base has yet to materialise. Despite some 1200 new industrial projects in the past decade, manufacturing accounted for only 12% of Kazakhstan's GDP in 2018, according to figures from the country's ministry of industry, against an average of 21% for other upper- and middle-income countries.
The new industrial plan aims to foster further industrial development and thus diversify exports as well, by leveraging the country’s special economic zones (SEZs) and industrial parks to increase the manufacturing, production and export of Kazakh goods.
There are currently 12 SEZs scattered around the country. Some have a specific industrial focus, mirroring the country’s priorities in terms of industrial development. Petrochemicals and heavy industries characterise the mandate of SEZs in Aktau, Atyrau, Pavlodar, Karaganda, Taraz and Ontustik, in a clear effort to add value to the domestic oil and gas and mining value chains. Other SEZs in Nur-Sultan, Almaty, Turkistan and Khorgos have a more mixed mandate, while two new SEZs have recently joined the list with a clear focus on R&D and high added-value activities across the board: Techgarden in Almaty and Astana-Technopolis in Nur-Sultan.
Launched in 2018, Astana-Technopolis currently hosts eight companies. “We are looking mostly for export-oriented projects to cater to the markets in Russia, Uzbekistan, the Commonwealth of Independent States countries, the EEU and the region as whole,” says Ardak Dossanov, chairman of Astana-Technopolis. “In Nur-Sultan’s first SEZ there was no specific priority, any project from cheap to chic could be installed. For Astana-Technopolis we want only hi-tech projects across priority sectors such as medicine and other innovation-driven industries.”
Any company operating under a SEZ regime pays no corporate income tax, value-added tax, land tax, property tax or social tax for the whole life of the SEZ in which it chooses to locate (the latter is subject to certain conditions), regardless of whether it sells its products or services domestically or abroad. Besides, Kidi is now offering reimbursement over certain export costs such as marketing and international fairs.
If Kazakh authorities are striving to set up a business environment conducive to innovative, export-oriented manufacturing, it will still come down to each company to raise its game – even more so now that Kazakhstan is physically connected to the global market through rail connections bound to China, Russia, Uzbekistan and beyond.
“We cannot compete with Chinese products,” says Kanybek Aitakov, the general director of LED Solutions, a company producing lighting equipment and operating in one of Nur-Sultan’s industrial parks under an SEZ regime. The company has partly shifted its focus on smart lighting solutions developed in house to find new business opportunities in the context of the government’s Smart City programme. “Smart lighting is the future for our company. If we don’t succeed we will end up like them,” adds Mr Aitakov, pointing to a greenhouse that stands on the site of a former rival LED factory that went bankrupt.
Kazakh authorities believe the time is ripe for the country’s manufacturing sector to develop, innovate and go global. They are following in the footsteps of many other oil-rich countries that have been forced to look beyond oil after the end of the commodity boom. The global market brings tremendous opportunities, but also competition, and the dividing line between success or failure for this latest 'made in Kazakhstan' drive is a fine one.