Kazakhstan re-jigs government in bid to boost flagging growth

By bne IntelliNews August 7, 2014

Naubet Bisenov in Almaty -


Kazakhstan's President Nursultan Nazarbayev announced a major government reshuffle on August 6, as part of attempts to revive economic growth, which has slowed due to stagnant oil production and falling exports.

Nazarbayev announced the changes are aimed at reducing the bloated bureaucracy. In the new slimmed-down government, the number of ministries will be cut from 17 to 12. Nine agencies have been abolished and committees reduced from 54 to around 30.

"We now need to create an efficient system of government and we need a compact government. We don't need to bloat bureaucracy more than it is necessary," Nazarbayev said according to Tengrinews. He noted that the civil service has grown by over 8,500 to more than 90,000 people over the past decade.

Prime Minister Karim Massimov retained his job in the reshuffle - though he will now have only two deputies, instead of four - as did Deputy Prime Minister Bakytzhan Sagintayev who is handling Kazakhstan's negotiations on the Eurasian Economic Union.

The plan is that a more effective government will help to boost growth. Expansion of the Kazakh economy has fallen below target due to the stagnant oil and gas production sector - mainly because of delayed production at the giant Kashagan field in the Caspian - and falling exports to Russia and Ukraine. GDP expanded by just 3.8% in the first quarter of this year, well below the government's 6% target for the whole year.

Telling officials that the country's energy sector is in a "mess", Nazarbayev announced the creation of a giant new energy ministry, to be headed by the former chief of the state nuclear company, Vladimir Shkolnik. In a move apparently without intended irony, the enlarged ministry will also encompass the duties of the disbanded environment ministry. Two other ministries to be expanded are the national economy ministry and the investment and development ministry.

Analysts met the government re-jig with a lack of enthusiasm. "I don't expect the reshuffle itself to change Kazakhstan's investment climate because, as far as the announcement goes, the reshuffle does not entail any changes in economic policies," Sabit Khakimzhanov at Halyk Finance tells bne. "By default, we expect the policies to remain largely unchanged. That does not mean that the policy is not changing or that the investment climate is not improving - it is; but not because of the reshuffle."

Noting that on the surface the reduction of bureaucracy makes sense, Eurasianet suggests the realities in Kazakhstan mean it's likely to drag on efforts to improve growth, as officials fight over a redirected and reduced power and rent flows. "One shake-up likely to spark a round of infighting ... is the abolition of the financial police, replaced by an anti-corruption agency," it writes, noting "cynics may see as just another redivision of lucrative spoils in the war on graft."


Astana is currently struggling to maintain oil output at last year's 82m tonnes. The delay in production at Kashagan, which was halted last autumn, means the country's output will see no significant rise until late 2015 at the earliest.

At the same time, the conflict in Ukraine and economic struggles in Russia have damped demand for Kazakh exports. Russian imports from the country fell to $2.1bn in January-May of this year from $2.6bn in the same period of 2013, while Kazakh exports to Ukraine fell from $1.05bn to $722m, according to the Kazakh Statistics Agency. 

Nazarbayev said Kazakhstan should take the Ukraine crisis into account in its economic policy. The government fears EU and US sanctions imposed against Russia over the Ukraine crisis may also affect the Kazakh economy and Astana is preparing for further sanctions. Kazakhstan and Russia, along with Belarus, are members of the Customs Union which will be transformed into the Eurasian Economic Union in January 2015.

"In line with [Nazarbayev's] orders, a separate package of measures has been drafted in case of the imposition of further sanctions against Russia and the worsening of the situation in Ukraine. This plan will be implemented in September 2014," Minister of Economy and Budget Planning Yerbolat Dossayev told the government meeting without elaboration, according to Tengrinews.

Halyk Finance's Khakimzhanov shares the concern over the impact of sanctions against Russia on the Kazakh economy but he believes the root problem is the conflict between the West and Russia. "It is not just the sanctions, it is the escalation of the conflict and we don't see anyone gaining from it in the long term. The conflict will affect Kazakhstan in many ways, some of them are predictable, but most are not," he said. The analyst believes that Russia's response to the sanctions and the impact on the Russian economy will determine the level of Kazakhstan's exposure.

"The channels are obvious," Khakimzhanov continues. "One is through the cross-border trade and trade diversion. Russia is Kazakhstan's major trading partner and a transit territory for much of our exports. We have a huge Russian business presence, but we don't know if it will shrink or expand as a result. We have close ties with Russia culturally and politically, and our economic policies are often informed by Russia's policies."

Timothy Ash of Standard Bank, suggests that, as is happening elsewhere, sanctions by the West may force Russian companies to reduce investment in Kazakhstan because of problems with securing funding. However, he adds that could actually benefit Astana in the longer run. "It might actually be argued that this could all work in Kazakhstan's favour, as in reducing exposure to Russia, Western banks and commodity majors might refocus attention on Kazakhstan," Ash said in note.

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