Kazakhstan faces economic, trade and foreign policy challenges from Ukraine crisis

By bne IntelliNews August 14, 2014

Naubet Bisenov in Almaty -


Kazakhstan's foreign policy is facing one of its stiffest tests since the country gained independence from the Soviet Union in 1991.

Despite the declared "multi-vector" foreign policy, Astana has been caught in the midst of tit-for-tat trade wars between its closest ally and major trading partner Russia and the West over the crisis in Ukraine. For the moment, though, Astana has managed to secure its national interests by persuading Moscow that as members of the Russian-led Customs Union, Kazakhstan and Belarus should not be drawn into these wars.

Russia's confrontation with the West following its annexation of Crimea and support for separatists in eastern Ukraine presents a number of challenges to Kazakhstan. US and EU sanctions against Moscow are hurting Russia's economy. This in turn is depressing demand for Kazakh imports, which in the first five months of 2014 were down about 20% from the year-earlier period. Experts predict that the trade restrictions imposed on Russia could lead to a depreciation of its currency and higher inflation, which is likely to impact the Kazakh economy because Russia is Kazakhstan's largest supplier. In addition, Kazakhstan, Russia and Belarus have agreed to deepen their integration by transforming the Customs Union into the Eurasian Economic Union (EEU) in January 2015.

The situation in Kazakhstan is further complicated by the problems in its oil and gas sector, which is struggling to maintain oil output at last year's 82m tonnes: the continuing delays in getting production from the giant Kashagan oilfield in the Caspian Sea, which was halted last autumn due to the need to replace pipelines linking the field with onshore facilities, means the expected significant increases in output will not happen until Kashagan restarts production, which is not expected before late 2015. As a result, the Kazakh economy posted growth of only 3.8% in the first quarter of 2014, well below the government target of 6% for the whole year.

Gulf in understanding

Given the unpredictable consequences of the sanctions for the Kazakh economy, Astana has drafted a "separate package of measures," which is going to be implemented in September, National Economy Minister Yerbolat Dossayev told a government meeting on August 6.

No details of the plan have been made public, but Kazakhstan will likely have to rethink and diversify its trade relations, while managing to maintain good relations with the US and EU despite the sanctions. In a June paper entitled "Foreign Policy in Kazakhstan: Looking Outwards and Moving Forwards," the Kazakh Foreign Ministry-funded think-tank the Eurasian Council on Foreign Affairs (ECFA) acknowledges that "Russia has always been a close partner with Kazakhstan" due to "deep and historic ties" between the countries, but insists that Kazakhstan is not a "Kremlin puppet."

One of the regions that Kazakhstan could expand its trade with is the Gulf Cooperation Council countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). Kazakhstan's trade with these countries totalled $210m in 2012, or less than 0.2% of the country's total exports. Expanding Kazakhstan's trade with these countries has "significant prospects," Almaty-based political analyst Rasul Zhumaly tells bne. "One the one hand, they are an important region; on the other, given Kazakhstan's multi-vector foreign policy, they are one of the few alternatives we can use to conduct a balanced foreign policy."

Kazakhstan and Gulf countries are close in many ways – geographically, culturally and in terms of nomadic past and Islamic heritage. Furthermore, they also have economic compatibility that derives from the similar structure of their economies, which is mostly based on the oil and gas industry, says Luca Anceschi, lecturer in Central Asian Studies at the University of Glasgow. "Despite these similarities, Kazakhstan and the Gulf countries do not interact, and the relations between them are not developed as they should be and not as what many people would have thought they would develop in the 1990s," he says in an interview with bne.

There are two reasons for the poor development of relations between Kazakhstan and Gulf Arab countries. Since both have lop-sided economies with a big emphasis on oil and gas, they are not particularly interested in investing in one another. The second reason is political, namely an Islam practised in the Gulf which the Kazakh government regards as a danger. "In my opinion, for economic and political reasons compatibility has transformed into incompatibility and that's why Kazakhstan is not interacting with the Gulf countries as it should be," Anceschi explains.

Historically, Kazakh people practised the Hanafi school of Islam, whereas Gulf Arabs mostly practise the Salafi (aka Wahhabi) school of Islam. Anceschi believes that the problem is not in differences between these schools of Islam, but it is about what the Kazakh government wants Islam to be in Kazakhstan. "The Kazakh government is instrumental in making this gap to be more substantive than it is," he says.

In order to prevent the penetration of what authorities describe as alien versions of Islam into Kazakhstan, the government has reduced its links with Saudi Arabia because the promotion of Islam is a central part of its foreign policy. This has been done through cutting the number of Kazakhs performing the annual pilgrimage to Mecca, limiting the number of students studying at Saudi Islamic educational establishments and imposing restrictions on independent mosques that operate outside the semi-official Spiritual Directorate of Kazakhstan's Muslims. "The insulation of Islam practised in Kazakhstan has created an Islam which is more coherent with the regime and tame," Anceschi notes.

Fly Emirates

Out of all the Gulf countries, Kazakhstan has the closest relationship with the UAE, which accounted for over 80% of the country's trade with the region in 2012. According to Anceschi, this is down to the close personal relationship between President Nursultan Nazarbayev and UAE President Sheikh Khalifa, the emir of Abu Dhabi.

The Emirates are popular not only with President Nazarbayev, who visits the country a few times a year in both an official and unofficial capacity, but also with ordinary Kazakhs: 10,000 Kazakhs are believed to permanently reside there and about 1,000 Kazakh students study there. The UAE is the third most popular destination for Kazakh travellers after Moscow and Istanbul.

In addition to opening up the Gulf countries as export markets for Kazakh products, Kazakhstan could also learn from these countries' experience in developing their oil and gas sectors. "At one point they also ceded their oilfields to global oil giants to develop them... and the Arabs have managed in a civilised way to return them and now own them 100%," the analyst Zhumaly says.

Zhumaly also cites Dubai's experience in diversifying its formerly oil-based economy after it ran out of oil for export in the early 2000s. The Kazakh government has made diversifying the country's economy to reduce its dependence on the oil and gas industry a top priority. "Despite losing such a powerful springboard, this emirate is developing very well. In a very short time, some 20 years, it has managed to create a strong alternative – a hi-tech, diversified economy based on property, manufacturing, tourism, services and re-exports," Zhumaly says.

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