Kazakhstan – Development Plans Hit Roadblocks

President Nursultan Nazarbayev ordered the second major reorganization of the government in the space of just four months in August. The headline changes included a reduction in the number of ministries from 17 to 12, the merging of several agencies into a new Ministry of National Economy, and an overhaul of the Ministry of Energy, which has been a focus of criticism owing to serious setbacks for the project to develop the Kashagan oil field.
As was the case in April, the more recent reshuffle occurred against a backdrop of sluggish real GDP growth and rising inflation, both of which have complicated the government’s task of soothing the popular discontent that has contributed to outbursts of unrest and periodic labor-related strife over the past two years. The challenge of sparking an economic revival has been compounded by the negative fallout from the Russia-Ukraine crisis, including a fall in global oil prices that is in part attributable to the dampening effect of an escalating sanctions war on economic activity in both Russia and the EU.
Indeed, with the plummeting ruble pushing the tenge steadily higher vis-à-vis the Russian currency, in the process undermining the competitiveness of Kazakhstan’s exports, speculation is growing that the central bank may be forced to devalue the tenge for a second time this year. The erosion of household savings and inflation produced by a 19% devaluation implemented in February has contributed to deepening discontent, and a second devaluation in a climate of already-simmering tensions would carry a risk of worrisome unrest.
The fanfare that accompanied the inauguration of Kashagan oil production in September 2013 proved to be short-lived, as the discovery of an offshore gas leak revealed that the entire pipeline would need to be replaced. With the resumption of production possibly delayed until 2017, and global oil prices falling, the government is looking to the non-oil private sector to power a near-term economic revival.
In May, when the government unveiled plans to introduce a package of generous incentives aimed at attracting FDI outside the energy sector. Specific incentives include a waiver of the corporate tax for a period of 10 years, 90-day visa-free entry, longer leases for land used for commercial agriculture, states subsidies of fuel and transportation expenses, exemption from local-hiring quotas until one-year after the start-up of operations, a 30% investment subsidy, and guaranteed long-term contracts for the provision of goods and services to public-sector entities.
The government has indicated that it is prepared to tap the national oil fund to cover the cost of the program and other stimulus measures, which is projected to total about $5.5 billion over two years. However, it remains to be seen whether investors bite, and yet another tussle with the partners in the consortium spearheading the Kashagan project, included the threat of a lawsuit (a tactic the government has used repeatedly to convince foreign firms to sell partial shares in projects to state-owned KazMunaiGaz), could have a chilling effect.