Kazakhstan regions prove growing headache for govt

By bne IntelliNews January 21, 2014

Clare Nuttall in Astana -

Kazakhstan's regions are the source of the country's mineral wealth, but still lag far behind its two main cities, Almaty and Astana, in living standards, which has become a major source of resentment. Motivated by both political and economic considerations, the government has embarked on new efforts to develop regional economies and attract investment outside the natural resources sector.

Many of Kazakhstan's regions share a similar set of problems - small populations scattered over a wide area, poor transport infrastructure and over-reliance on single industries. The problem is particularly acute in areas where oil or mineral deposits are nearing the end of their productive life. But even where production is booming the benefits have been slow to trickle down, meaning little is being done to diversify local economies and increase living standards.

"A lot of regions have a strong focus on mining or oil and gas, and many single industry towns. Transforming them into developed, diversified economies is a challenge for policymakers, as Kazakhstan is a large, landlocked territory without very good infrastructure," says Jibran Punthakey, economist with the OECD Eurasia Competitiveness Programme. The OECD is currently working on a 3.5-year project co-financed by the European Union and the Kazakhstani government to diversify regional economies in Kazakhstan and make them more attractive to foreign investors.

"Most of Kazakhstan's regions have a small economy, with populations typically under one million, so growth potential in the internal market is limited. This means they need to look to markets elsewhere in Kazakhstan or internationally, and attract investment from outside the region. However, it is difficult to bring foreign investors into remote areas," Punthakey adds.

The case of Kyzylorda

Kyzylorda, which occupies the southwest corner of Kazakhstan, faces all of these obstacles. The region has a population of just 700,000, mostly living along the Syr-Darya river, which winds its way through an area of semi-desert the size of the UK to what remains of the Aral Sea.

Kyzylorda's remoteness from Central Asia's main population centres was the reason for its choice as the Soviet Union's first rocket launch centre, the Baikonur Cosmodrome, where Yuri Gagarin blasted off in 1961 to become the first person in space. However, this has made it more difficult for the region to develop away from its reliance on oil and gas production. While the region has no deposits on the scale of the Kashagan or Tengiz fields, oil and gas and mining account for around 50% of the regional economy, which increases to two-thirds if related services companies are taken into account. The region also has one of the world's top five vanadium deposits, which could potentially supply up to 10% of global demand for the metal in future, the mayor, or akim, Krymbek Kusherbayev announced in 2013.

Speaking at the Kyzylorda Invest conference in November, Kusherbayev said the region had seen the largest increase in investments of any Kazakhstani region. "We are working to improve the business environment and conditions for investors," he said.

At the same forum, Deputy Minister for Industry and New Technologies Nurlan Sauranbayev acknowledged that, "Kyzylorda oblast has been under-estimated and under-valued... it is a treasury of valuable elements that are in high demand all over the world."

Some of this income has trickled down to the general population, at least in the region's centre Kyzylorda, where new cafes and restaurants - including locally grown coffee and patisserie chain Brownies, which recently opened its fifth outlet - are mushrooming.

Residents say the state of city has improved since February 2013 when Kusherbayev, a former deputy prime minister and presidential adviser, was appointed. Roads and parks have had a facelift and a no-tolerance policy on littering was introduced. Although Kyzylorda still has potholed, barely lit roads outside the city centre, provision of electricity, heating and other utilities has improved and new housing - one of the top gripes of Kazakhstanis across the country - is being built along the Syr Darya.

There have also been attempts to create a local manufacturing sector. Unfortunately, given the small regional economy, the bulk of production would have to be exported outside the region, which has been held back by poor transport links, though this will change when the Western Europe-Western China highway, currently under construction, is completed.

As part of the government drive to attract more investment, investor service centres have been opened across Kazakhstan. Kyzylorda's opened in mid-2013, and is staffed by a team of young, enthusiastic English speakers, who say their initial aim is to promote the region. "The first step is to promote the region to Europe, the US and Asia," Gabit Auyelbek, main manager of the centre, tells bne. "Later we expect to see an agricultural cluster and a metallurgical cluster set up. The opening of the Western Europe-Western China road will create opportunities for hotels and cafes to open."

Explosive situation

Across Kazakhstan, the standard of living is considerably lower outside Astana and Almaty, with the trickle down of wealth slow even in the western oil towns. Poor local governance, high corruption levels and low standards of housing and utilities provision have all led to growing discontent. This came to a head in December 2011, when a seven-month strike by oil workers in the town of Zhanaozen erupted into rioting. At least 14 people were shot dead by police in the worst outbreak of violence in independent Kazakhstan's 22-year history.

In the two years since then, the government has stepped up its efforts to develop the regions and reduce dependence on the extractive industries. Funds have been channeled into Zhanaozen and other mono-industry towns, and a new ministry for regional development was launched in January 2013. The state accelerated an industrial and innovative development programme, which was launched in 2010 to help create new industries and diversify production, and in the aftermath of the 2008 crisis it has absorbed projects across the economy. The follow-up programme, currently being discussed within the government, is expected to have a tighter focus on diversification and the manufacturing sector.

However, autumn 2013 saw mounting criticism of government officials for failing to carry out state programmes in areas including housing, agriculture and regional development. On November 5, Prime Minister Serik Akhmetov threatened to sack ministers and regional governors who failed to resolve outstanding problems by the end of the year. A survey by the National Association Institute for Democracy found that 85% of respondents backed the criticisms.

There have also been signs that Kazakhstanis in the main industrial towns have recently become more willing to resort to strikes to demand higher wages and better conditions. Astana's efforts towards regional development are to a large extent motivated by the need to forestall unrest and preserve the country's reputation as a stable destination for investors.

In the medium term, raising salaries and living conditions in the regions is expected to be one of the most important objectives for Kazakhstan.

Kazakhstan regions prove growing headache for govt

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