Wednesday, 13 February 2013

Kazakhstan Embarks on Far-Reaching Economic Reforms

Published in Field Reports

KAZAKHSTAN EMBARKS ON FAR-REACHING ECONOMIC REFORMS

by Georgiy Voloshin (02/06/2013 issue of the CACI Analyst)

In his December 2012 address to the nation, President Nazarbayev presented an ambitious program of political, economic and social transformations aimed at permitting Kazakhstan to become one of the world’s thirty most developed and prosperous countries by 2050. Nazarbayev’s decision in mid-January 2013 to reorganize the government, via the establishment of a new ministry in charge of regional development and the optimization of policy functions within existing structures, was the first demonstration of this new course. Later on January 23, the Kazakh president met with members of his government in order to provide concrete guidelines for the short- and medium-term.

The first proposal announced by Nazarbayev was the creation of a single pension savings fund that would regroup assets from 11 existing pension organizations, both state-owned and private, which are currently controlling over US$ 21 billion worth of private savings (the number of clients is slightly over 8.5 million in a country of almost 17 million people). In Nazarbayev’s view, the purpose of this move would be to improve money lending to the non-extracting sector of the Kazakh economy by centralizing the placement of pension funds within the private sector, under the government’s regulatory supervision. This could not only provide better growth opportunities for small and medium businesses but also ensure the preservation of strategic reserves accumulated by the National Fund due to the high oil and gas revenues of the past pre-crisis years.

According to Kairat Kelimbetov, Prime Minister Akhmetov’s deputy in charge of economic policies, the merger of separately functioning investment organizations could become operational already on July 1, 2013, while he also suggests placing a single entity under the supervision of the National Bank. However, the Bank’s chairman Grigory Marchenko insists on the necessity of keeping the single fund within the government’s purview, since the National Bank is not authorized by the current legislation to be a regulator and a custodian at the same time. Whatever the government’s final decision on this issue, a recent survey conducted by Kapital.kz has shown that almost 37 percent of Kazakhstanis are skeptical about the utility of such a merger. Only 6.6 percent of them believe that the yield of their pension accounts may even increase thanks to improved management and stricter oversight.

The second proposal put forward by Nazarbayev concerns Kazakhstan’s banking sector. In his Kazakhstan-2050 strategy, Nazarbayev stated that budgetary funds should hence be used exclusively for the implementation of large-scale investment projects. The participation of the state in private entities is furthermore expected to diminish during the next wave of mass privatizations for which the government will draft a registry of non-strategic assets open to purchase by foreign companies.

On February 4, Nazarbayev ordered the National Welfare Fund Samruk-Kazyna to withdraw from Kazakhstan’s three crisis-stricken banks, BTA, Alliance Bank and Temir Bank, by the end of this year. In the case of BTA, Samruk-Kazyna became its majority shareholder in early 2009 after acquiring 81.84 percent of ordinary shares in exchange for urgent financial assistance. In early December 2012, the bank completed the last stage of restructuring aimed at decreasing the level of sovereign debt by more than 70 percent. Although Samruk-Kazyna’s participation in the remaining banks has been less significant from the very beginning, their restructuring schemes are also actively supported by Kazakhstan’s authorities. Whereas the future of the three institutions remains uncertain, Samruk-Kazyna’s Deputy Director Elena Bakhmutova earlier said that they could be either merged together and then sold to private investors or directly returned to the private sector provided they comply with the new banking rules introduced in the wake of the 2008-2009 financial turmoil.

Finally, Nazarbayev also suggested giving increased priority to the diversification of the national economy, while the development of the extracting sector is now expected to be more beneficial for local populations. In last November, the Kazakh president decided to lift the ban on the exploitation of newly discovered mineral deposits. Asset Issekeshev, the Minister of Industry and New Technologies, earlier said that subsoil users should spend at least one percent of their annual earnings on research and development activities as well as the transfer of technological innovations to their Kazakhstan-based counterparts. Moreover, additional measures are already being discussed with regard to the parity of remuneration between foreign and domestic workers and the volume of purchases of local production by energy companies (the so-called “local content”). Recently, Nazarbayev advised the country’s trade unions to demand better working conditions for the locally hired workforce, also insisting on the need to ensure sustainable infrastructure and higher environmental standards. While tightening the rules of the game for such industrial giants as Chevron, ArcelorMittal or ENRC, Kazakh authorities are looking not only for increased revenues but also for improved social justice.

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