Is Kazakhstan risking a major source of long-term investment in exchange for short-term cash flow?

Kazakhstan’s economy is estimated to have grown by more than 5.5% in the first quarter. Growth in February alone topped 7.5% y/y. The reason for the strong growth is because of the surge in oil production as the giant Tengiz field completed a several year $46bn upgrade. The problem for President Kassym-Jomart Tokayev is that this extra oil, which also provides a much needed boost to budget income, has made the problem of overproduction against the country’s OPEC+ agreement much worse.

The President will soon have to decide whether to force the International Oil Companies (IOCs), which operate the country’s three major oil fields, to scale back production or he risks even greater OPEC anger and, possibly, expulsion from the group. Already it is clear that anger is at least one reason for OPEC+’s decision to boost oil production in June by 411,000 barrels per day (bbl/d), an otherwise strange decision against the backdrop of a weak oil price. It is at least partly to show Kazakhstan that the group has mechanisms to reduce the country’s oil revenue, and it is prepared to accept the short to medium-term cash flow consequences to force greater group compliance.

It also appears that “Plan A” which was for Russia to partly suspend loading of Kazakh oil in Novorossiysk port, citing safety concerns following a Ukraine drone attack, did not work because Russia needs Kazakhstan’s transit cooperation as much as the latter needs Russia. Hitting the oil price will also hurt Russia – perhaps a slap on the wrist for backing away from the Novorossiysk suspension threat within forty-eight hours of making it – but it serves as a clear warning to Astana.

The problem for President Tokayev is that he may not be able to force the IOCs to cut production because of the terms of the Production Sharing Agreements (PSAs). And he would prefer not to as to do so, would lead to a big drop in projected budget income and slower government investment. That will make the task of doubling the size of the economy by the end of his presidential term, in November 2029, even more difficult, if not impossible.

But the consequence of not scaling back oil production to comply with the quota is that the Gulf states, the backbone of OPEC and which have been increasing investment in Kazakhstan in support of the President’s modernisation and diversification efforts, may walk away from the Central Asian state. The decision to raise June production by an amount almost exactly equal to Kazakhstan’s over-production is a clear enough message.

In February-March, Kazakhstan’s average daily oil production exceeded 2.1mn barrels, including crude production at 1.88mn barrels. Kazakhstan’s quota for crude, within the OPEC+ agreement, is 1.468mn barrels.

One reason why Tokayev is reluctant to lean on the IOCs to reduce production is because he needs the money for investments to advance his ambitious economic reform program. The economy is today heavily dependent on oil (60% of the value of exports) and is starting to see good growth emerging in other areas. But it needs time and budget revenue to keep advancing growth diversification.

The agriculture and food sector is a good example of successful efforts to diversify the economy. Investment into this sector has increased 2.5 times over the past five years, delivering output growth of 40%. There is a lot more which can be achieved but this requires continued investment, such as in modernizing the stock of agriculture machinery, most of which is still Soviet era. That requires funding and that money is from oil exports.

Another strong success story for Kazakhstan is in technology and the advances in the digital economy. The value of start-up ecosystems grew to $26bn in 2024, up 18-times since 2019 with companies such as Freedom House and Kaspi.kz leading the investment and growth. Kazakhstan’s 2.9% start-up-unicorn conversion rate is higher than, for example, in Israel (2.3%), China (2.0%) and in the US (1.3%).

Kazakhstan is also planning the construction of two large-scale data processing centres (DPCs) with a combined investment of $2.7bn. The initiative aims to position the country as a digital and artificial intelligence (AI) hub for Central Asia. Construction is scheduled to begin in the first quarter of 2026, with initial operations expected by late 2027.

The country is also home to an abundance of critical minerals, the extraction of which is already a meaningful contributor to the budget and the economy, and which can deliver significantly more. Today, Kazakhstan is the world’s biggest producer of uranium, accounting for some 45% of global supply, although it has no domestics processing facility. It is also a major exporter of copper. There is plenty of available geological evidence to show that the country is home to many of the rare-earth minerals being sought after by the US and the EU, as both start to wean themselves off China supply and Beijing cuts exports in retaliation to tariffs.

Kazakhstan has recently announced the discovery of a substantial rare earth metals deposit, estimated to contain over 20mn tonnes, at the Zhana Kazakhstan site, approximately 420 kilometres (261 miles) from the capital, Astana. It is actively looking for investors to develop these resources.

The issue again is that while these industries are already fast growing, they will need major government financial support for several more years. Even with the higher oil production, the budget deficit is expected to be close to 3% this year because of the higher state investment project spending. President Tokayev has demanded an end to what he calls “inappropriate spending” and to limit transfers from the National (Samruk-Kazyna) Fund so that this fund may again boost long term savings. It means the government needs the higher budget income or to find a proverbial pot of gold. One possible source of that “windfall” could be a settlement of the government’s claims against the IOCs for alleged environmental damages, cost overruns and lower tax payments. The current value of these claims is more than $165bn which, coincidentally, is the total President Tokayev says needs to be spent on diversification programs over the next five years.

But here also is another high-risk gambit. If the government aggressively pursues these claims, including a threatened complete review of PSAs and of IOC equity positions in major oil projects, the danger is that other investors in growth target sectors, such as renewable energy and critical minerals, may decide that these actions are not legacy based one-offs, as officials now claim, but may similarly affect them in the future.

Kazakhstan has considerable potential for growth expansion and to deliver on the President's diversification and modernization targets, albeit unlikely within the time frame he would like. But to continue making progress, the country needs both budget income and external investors. In the ideal world, both can be pursued vigorously. Occasionally hard choices have to be made.