Devaluation to benefit Kazakh miners but could worsen social tensions

By bne IntelliNews March 24, 2014

Naubet Bisenov in Almaty -

Kazakhstan's mining sector stands to benefit from the February devaluation of the national currency. But fears that higher inflation and falling living standards could worsen simmering grievances of miners against their employers have forced some companies to pledge a 10% wage hike.

Kazakhstan's central bank devalued the national currency from KZT155 to KZT185 to the dollar on February 11, in an effort to counter a gradual 10% decline in the value of the Russian ruble since late last year. Russia is Kazakhstan's largest trading partner, accounting for over a third of Kazakhstan's imports, and Kazakhstan's trade deficit with Russia stood at around $12bn last year.

In the short term at least, the devaluation will certainly favour Kazakhstan's mining companies, which mostly export their output. This should translate into a windfall for the Kazakh government; since oil and gas and other raw materials account for over 90% of Kazakhstan's exports, and are priced in dollars, the budget will receive more cash in tenge terms for its commodity exports.

"In general, we believe the devaluation is a positive phenomenon for the mining sector because mining is labour intensive, while revenue from it is in hard currency. That is why since most production costs such as wages and taxes remain in tenge and revenue in dollars, we expect profit margins to go up because of the devaluation," Leila Kulbayeva, a mining analyst at Almaty-based investment bank Visor Capital, tells bne. "However, the devaluation will not have an impact on output figures in the mining sector, as output depends on production capacity and the global demand. The global markets are quite volatile now and as a major consumer of metals China has not shown signs of increasing demand."

However, Alex Nice, a Kazakhstan analyst at the London-based Economist Intelligence Unit, reckons any competitive gains could be short-lived. "The devaluation created a lot of public anger, and there has been widespread coverage of the likely impact on the cost of living. As a result, we could see workers demanding price-indexed wage rises," he says.

Indeed, pressure could build on Kazakh mining companies to do more to improve labour relations. Fearing job cuts, workers at Kazakhstan's major copper producer Kazakhmys and steel giant ArcelorMittal Temirtau have staged protests against poor working conditions and low pay in recent months, and the rising cost of living is seen provoking social discontent among Kazakh miners if their employers fail to meet their expectations.

Nice points to the need for Kazakh mining companies to cut costs to make their output competitive, which would mean reducing the workforce, but this is opposed by the government. "Some Kazakh mining companies are still suffering from a problem of excess capacity. The devaluation will have provided some respite, but the companies remain in a difficult position because there is pressure from the government to avoid redundancies," Nice says. "The authorities seem to be taking a dual approach to the issue. On the one hand, they are exerting pressure on companies (particularly those which are foreign owned) to avoid redundancies and maintain wages; at the same time, there are proposals to amend the labour law to make it harder for unions to organise strikes."

Playing to the gallery

Since the violent protests in the western oil town of Zhanaozen in December 2011, when Kazakh security troops killed 15 people, the government has taken seriously the grudges of local miners, who believe the country's growing prosperity is being built at their expense. After the devaluation in February, President Nursultan Nazarbayev personally urged the mining companies to increase pay by 10%. "The Kazakh government is acutely sensitive to labour unrest, particularly following the 2011 unrest in Zhanaozen," says Kate Mallinson, a Kazakhstan analyst at the London-based GPW consultancy. "Many of the country's cities and towns were built around mine sites and corporate social responsibility expectations remain high. In light of the recent devaluation and the concomitant inflationary pressure, the government is likely to increasingly put the burden on large mining companies to address the situation with increased salaries."

The Kazakh government does not tend to alienate foreign investors, but occasionally plays to the gallery: it openly criticised pay policies at ArcelorMittal Temirtau, whose billionaire owner Lakshmi Mittal is reported to have made additional investment conditional on further cost savings.

Kazakh Deputy Industry and New Technologies Minister Albert Rau claimed at a parliamentary conference on labour relations on March 14 that ArcelorMittal Temirtau did not remunerate workers properly for their qualifications. "At Arcelor, shame to point out, the difference in pay for qualifications is pennies. Of course, it is easier [for workers] to create noise than work on improving their qualifications," Rau said. "On this, to tell the truth, we do not have a good understanding with the management."

The government, aware of the problems in a sector that has been stagnant for several years due to sluggish global demand, is working on improving the business climate. "In spite of Kazakhstan's mineral pedigree, many deposits are underinvested as a result of various issues including the bureaucratic nature of approval and regulatory processes. Recent initiatives to liberalise the sector and encourage foreign investment are a positive step to increasing output," says Mallinson.

The potential for social unrest linked to the February devaluation in Kazakhstan will rise further if, as expected, more economic and political sanctions are imposed by the US and EU on Russia for its annexation of Crimea. A further fall in the Russian ruble could quickly eat up the estimated 10-percentage-point spare room that Kazakhstan's National Bank gave the tenge in dropping its value by a fifth, and some argue it might have to devalue the currency again. "When the trade balance worsens, this affects the exchange rate. Theoretically, if the Russian ruble depreciates for a long time - for, let's say, six months - this will represent risks of further devaluation for the tenge," Visor Capital's Kulbayeva says.

Despite the short-term benefits of the devaluation for Kazakhstan's mining companies, they may yet find themselves in an awkward position because of the very source of these benefits.

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