Not Just About Oil
Even though crude oil remains a primary resource fueling the steaming economy of Kazakhstan, the country is rapidly diversifying away from oil dependency, seeking a bigger role in shaping the global agenda via BRICS mechanisms. How? Kazakhstan's Deputy Prime Minister Kairat Kelimbetov offers some hints in an exclusive interview with BRICS Business Magazine.
Even though Kazakhstan is not a member state of the BRICS, what is your guess about the grouping as a cooperation mechanism? Does it have the potential to grow into a center of political gravity in the emerging world?
As a cooperation mechanism of dynamically developing countries, BRICS is neither a new block of global powers nor a political alliance. It is rather a new partnership model of global economic cooperation. The BRICS mechanism contributes to the strengthening of contacts and exchanges between developed or countries on the basis of solidarity, cooperation, and mutual benefit, without confrontation or actions against any third party.
As to Kazakhstan, formally we do not meet all the criteria originally set forth in the 2003 Goldman Sachs report Dreaming with BRICs: The Path to 2050. The BRICs are all populous, high-growth emerging markets, while our country has a small population size. We have, however, two of the original four BRICs countries as our direct neighbors and we have strong trade ties with both Russia and China.
Anyway, we must all work collaboratively to address the huge challenges of the modern world. Global power relationships are shifting and there are increasingly more global players, and it is clear that the ‘going it alone’ approach does not work in the long term. As we all struggle to learn what it means to be a part of a ‘global community’ not only in theory but in practice, there will be missteps. However working together, thinking longer term and sharing best practices while creating a fertile environment for innovation, we have a much better chance to succeed.
We do believe that the shift in geopolitical gravity from West to East as initiated by the BRICs is a force with which all nations must contend, and we are prepared to help shape this emerging future.
Is Kazakhstan interested in contributing to the BRICS discussion on a full-fledged basis? Specifically, do such matters as the development of a new Global Financial Architecture stay relevant to Kazakhstan’s own agenda?
We are undoubtedly interested in a full-fledged participation in any discussions that involve global economic policy dynamics, particularly with respect to emerging markets. The question of developing a new Global Financial Architecture (GFA) is one to which we have given much consideration.
There is no doubt there is a desperate need for a new GFA, and Kazakhstan is ready to be instrumental in pushing this agenda along.
We are confident that we can fix our own imbalances, but we still must contend with the effects of the imbalances caused by the actions and policies of other countries. Similarly, we cannot ‘fix’ the GFA, even in cooperation with other emerging economies.
So, my point is that Kazakhstan, together with other key high-growth states, should have a say in the reworking of the GFA. But we need more than just to have a talk. In order to get the problem addressed specific steps are to be taken.
Several years ago, the President of Kazakhstan, Nursultan Nazarbayev, proposed a G-Global group of nations to replace the G20 as the most influential force in setting international economic policy and to search for global anti-crisis solutions. Do you still stick to the idea?
Yes, we do. Clearly enough the relative economic power of the West is fading, and all the stakeholders – both emerging and declining powers – need to adjust to the emerging environment. We do believe the G-Global, which is an international virtual platform based on the Astana Economic Forum, can be helpful in reshaping global development for the benefit of all.
President Nazarbayev once mentioned global food and energy security amongst the most promising areas for cooperation between Kazakhstan and the BRICS. Do you feel Kazakhstan can play a role as a valuable supplier to the member states?
Access to affordable food and energy is going to be one of the most pressing challenges given the unprecedented growth of the global population, as well as improving living standards in low- and middle-income economies. The so-called ‘energy ladder’ demonstrates that there is a non-linear relationship between energy demand and economic growth. The same concept applies to food and water resources.
Kazakhstan has an enviable natural endowment of natural resources and arable land. So, given the low density of our population and the proximity to China, a net importer of oil and gas and foods, we are quite well positioned to play a key role in addressing the energy and food demands of the BRICS.
Since independence in 1991, Kazakhstan has attracted more than $150 billion of foreign direct investment (FDI), including $20 billion over the past year alone. What are the reasons behind the success?
As you know, Kazakhstan is a resource-rich country, with a strategic geographical location, and we currently rely heavily on our natural resources for wealth. However, we have always anticipated Kazakhstan’s economic stability and fiscal balance might be threatened by such a dependence on a single sector. As such, in order to diversify our revenue streams, we have been increasingly focusing on investments that can help achieve efficiency in other sectors of our economy such as agriculture, chemicals and pharmaceuticals, infrastructure, transport, and telecommunications.
As one part of that effort the government continues to form an adequate legal framework for the protection of investor rights. The basic legal act in the field of investments is the Investments Act, which regulates the legal and economic framework of investment promotion. The Act, according to international experts, is highly regarded by the foreign community and is considered one of the best in the area of investments in transition economies. It guarantees the full protection of the rights of investors and the stability of contracts, and explicitly administers state authorities’ activity with respect to investors.
Kazakhstan has an enviable natural endowment of natural resources and arable land. So, given the low density of our population and the proximity to China, we are quite well positioned to play a key role in addressing the energy and food demands of the BRICS
The Act also contains provisions dealing with the rules on compensation and damages to investors, according to which Kazakhstan will now reimburse losses from force majeure situations.
Beyond this, the government stays in continuous dialogue with foreign investors and Kazakh entrepreneurs seeking to provide an attractive environment for doing business in the country. To this end, Kazakhstan has created a number of special economic zones, based on established international practice.
Clustering out of oil dependency
The integrated energy-economic cluster
Kazakhstan has large resources of oil and gas and these are being developed in an environmentally sustainable way. The country has implemented a roadmap to virtually eliminate flaring and venting of natural gas and is working with the energy community to develop local content substantially. Kazakhstan also has a large potential for wind energy, mainly in the north of the country, and we are selectively developing wind farms to provide clean power to homes and businesses.
“We are adapting the best practices, and developing new ones as necessary, in order to create a sustainable energy-economic cluster for the 21st century,” says Kairat Kelimbetov.
The metallurgy and machinery cluster
Kazakhstan is rich in iron ore deposits. The country is currently upgrading its industrial base and practices to make optimal use of this, and other mineral resources, and turn it into value added products, including industrial machinery. By doing it in-country, Kazakhstan will reduce the environmental impact, while also creating valuable highly-skilled jobs.
The agricultural and food processing cluster.
Given the low population density and large amount of arable land, there is tremendous opportunity to increase Kazakhstan’s organic agriculture and cattle production, and to capture value throughout the entire value chain by linking in to food processing before exporting within the Customs Union and beyond.
The integrated chemicals-economic cluster in Southern Kazakhstan
This cluster will leverage Kazakhstan’s rich phosphorite reserves, the development of the oil and gas sector, and the recycling potential of sulfurous gases coming from the metallurgy sector and large stocks of various salts.
Do you offer investors any special programs, conditions or benefits in line with Kazakhstan’s vision for attracting FDI and supporting diversified economic development?
Kazakhstan has adopted a special program for 2010–2014 with the aim of attracting investments, development of special economic zones, and export promotion. The purpose of this program is to create an attractive environment conducive to direct investment in non-primary export-oriented and high-tech production, as well as to enhance integration into the world trading system through the promotion of exports of processed goods.
To tell you more, many are aware of the ‘Kazakhstan 2030’ program, but perhaps not everyone knows our country has already attained a number of long-term objectives set out in the program ahead of schedule. This prompted the adoption of the new strategy ‘Kazakhstan 2050’ several months ago, in which diversification of the economy is defined as one of the priority directions.
Following the diversification line Kazakhstan makes big bets on industrial clusters. Can you elaborate on that?
At the beginning of this year President Nazarbayev tasked the Government with the development of the so-called ‘new generation clusters’. The concept behind the effort is to deliver industrial-economic clusters that will capture deep value added from the industry value chains as opposed to export commodities. So far, we have envisaged four of them (see insert).
We believe they will help us achieve balanced socio-economic development, and will allow us to focus our activities and capture high value added and the synergies that exist among them. For example, the development of an advanced in-country metallurgy capability will provide for the technology and processes to develop advanced materials for wind turbines, agricultural machinery, food processing plants and oil and gas equipment. The development of agricultural machinery will in turn be used to increase the productivity of our agricultural sector.
Has the establishment of the Customs Union within the borders of Russia, Belarus and Kazakhstan in any way affected your country regarding investors’ attraction?
The establishment of the Customs Union has positively impacted on Kazakhstan’s attractiveness to foreign investors. According to the Ernst & Young’s 2012 Kazakhstan Attractiveness Survey, economic integration is an important factor in the improvement of our country’s investment climate. Investors see this regional organization as a stimulus to aid market expansion, enhance competitiveness and strengthen human capital skills. With the introduction of the Customs Union and Common Economic Space, the single market of Belarus, Kazakhstan and Russia contains nearly 170 million people. This will help to realize the economic potential of Kazakhstan.
The establishment of the Development Bank of Kazakhstan is obviously part of the diversification line. On what principles does it work? What are the key objectives?
The Development Bank of Kazakhstan (DBK), created in 2001, is a key state development institution that provides large-scale debt financing to companies active in the priority sectors of the economy to enable the development of infrastructure. The priority sectors, which include metallurgy, petrochemicals, chemicals, machinery, and infrastructure – for example transport logistics, tourism, electricity distribution and production, amongst others – are fully aligned with our country’s industrial diversification strategy.
There are two key underlying principles that govern the Bank. The first one is the Development Principle meaning the potential of a project to improve the socio-economic development of the economy. The second one is the Payback Principle implying the ability of the company to service its debt to the Bank.
The main objective is to stimulate the non-minerals sector of the economy by providing long-term debt financing. Given the large size of the country, one of the key objectives of the Bank is to ensure that the various regions receive a fair share of the financing.
What are the DBK’s priority projects in that way? How do you evaluate success?
According to our new strategy, approved in November 2012, the DBK’s priority projects fall into three groups. They include a) projects being implemented within the Accelerated Industrial & Innovation Program; b) projects being implemented by SWF Samruk-Kazyna; and c) commercially attractive projects which are considered too risky for commercial banks.
My point is Kazakhstan together with other key high-growth states should have a say in the reworking of the GFA. But we need more than just to have a talk. In order to get the problem addressed specific steps are to be done
The Bank’s success is evaluated through several key metrics. Firstly, there are standard financial indicators such as ROE, ROA, the quality of asset portfolio, and the volume of investments. And secondly, we assess development effects, as measured by the Development Effect Index, developed by the DBK based on the best-class experience from similar development institutions worldwide.
Are you happy with the DBK’s success? Are you looking to enlarge its mandate?
According to these metrics, the DBK’s success has been on average very good, especially when it relates to its primary objective of investing in the priority sectors of the economy. The portfolio, which includes some historical bad loans, is currently being cleaned up in an ongoing process, expected to be completed by the end of 2013.
Historically, the DBK has only provided traditional debt financing. So, you are right, going forward we intend to include other financing mechanisms, including project financing. This will allow us to implement our strategy faster and control risks better.
That said, economic and social development is never truly finalized. This is an ongoing process and the President of Kazakhstan has tasked the government with creating the National Development Agency, and the DBK will be a driving force within this new institution. It is important to note that the various development institutions are very complementary given that they each focus on a particular niche development activity. For example, the DBK’s niche is to invest in larger projects, while the Damu Fund provides financing to SMEs. The National Development Agency will be created to coordinate the activities of the various development institutions in Kazakhstan to achieve a single overarching objective: “Balanced Socio-Economic, yet Environmentally Sustainable, Development”.