Buffeted by Russia and China’s economic malaise and the sinking oil price, Kazakhstan is reaching to the West for finance. But there’s a catch: to get cash, corporate governance will need a clean sweep, writes Michael Mesquita.
WHEN 76-year-old President Nursultan Nazarbayev was “re-elected” last April, tongues waggled about a successor.
The President, having controlled Kazakhstan since before the collapse of the Soviet Union, would tacitly select and slowly groom the anointed to take his place, according to the popular narrative.
But a lot has changed since then. There are far more pressing matters to deal with first. Rather than focusing on transition, Nazarbayev is fully occupied mitigating the fallout from plunging oil revenues and a slowing economy.
Oil accounts for almost a quarter of Kazakhstan’s economy and nearly 60% of its balance of payments. In the latest budget revision, the government slashed its assumed price for oil to $40 this year and next, and $50 from 2018 – still significantly above current levels.
Dependence on its giant neighbors has exacerbated Kazakhstan’s economic woes. China’s slowing economy has reduced its appetite for Kazakh oil, copper, steel and other commodities while anti-Russia sanctions and declining crude revenue have hobbled its largest trading partner.
The much-touted Eurasian Economic Union – a commercial bloc cutting tariffs between Kazakhstan and Russia, Belarus, Armenia and Kyrgyzstan – came into effect just over a year ago but with little effect on lifting fortunes. In fact, as the ruble crashed last year, Kazakhstan became flooded with cheap Russian goods. Rather than trade harmonization, a small trade war flared up as Kazakhstan struggled to keep its goods competitive.
The reason for the disparity in prices was Kazakhstan refused to allow its tenge to mirror the slide of the ruble. The central bank in Almaty spent more than $30 billion to prop up its currency last year, before capitulating. Devaluation and a subsequent floating of the exchange rate in August sent the tenge tumbling more than any currency worldwide, losing 80% of its value.
Such economic turmoil and sluggish growth at little more than 1% last year puts the process of succession firmly on hold. Nazarbayev bases his legacy on establishing a modernized – albeit democratically undeveloped – nation with an open market economy that can compete globally. He would be unwilling to relinquish control while the country is in its current economic shape.
Bar any health issues, Nazarbayev will remain at the helm, probably well into the next presidential election scheduled for 2020.
Rehabilitating the economy requires radical changes. Kazakhstan plans to restructure its national companies, and sell shares in those that fall under the ownership structure of the sovereign wealth fund, Samruk-Kazyna. “Bloated” state companies, the President said in his state-of-the-nation address in November, are a drain on budget resources and discourage foreign investment.
The public offerings will include strategic businesses such as the national oil company KazMunaiGas, rail company Temir Zholy and nuclear energy producer KazAtomProm, according to the fund’s Chief Executive Officer Umerzak Shukeyev.
While the government is likely to retain a blocking stake, these IPOs will force the regime to clean up the commercial environment and introduce best practices in corporate governance, greater transparency and a regulatory environment that’s more aligned with international standards.
The West has already begun to capitalise on these opportunities. In November, Nazarbayev travelled to the UK to meet Prime Minister David Cameron. During the visit, as many as 24 agreements were signed totalling $3.8 billion in trade deals with the likes of Rio Tinto, Independent Power Corporation, William Hare Limited and Hikma Pharmaceuticals.
The President also inked agreements with France the same month, and has been deal-making in Japan, China, India, Qatar, Iran and Afghanistan too.
Can We Talk About Succession Yet?
While Nazarbayev seems determined stay at the helm for at least the next few years, paths to succession are starting to take shape.
The President appointed his daughter, Dariga Nazarbayeva, the former deputy chair of the Mazhilis or lower house of Parliament, as Deputy Prime Minister last September. While her appointment sparked inevitable speculation of favoritism from her father, there is also a wider context.
Nine months earlier, Dariga’s son, Nurali Aliev, was appointed Deputy Mayor of Astana. And around the time of Dariga’s appointment, talk surfaced that she had married the chief of the country’s main gas company. Dariga’s rumoured marriage to Kairat Sharipbayev, the General Director of KazTransGas, has still not been confirmed officially but is corroborated by sources close to the company.
Put together, these appointments and social connections strengthen the Dariga clan in the inevitable succession battle, particularly the link to the state energy assets through Sharipbayev. Until last year, this sector of the economy had largely been under the influence of the President’s son-in-law, Timur Kulibayev.
The dynamic between these two family members, and the networks they support, will be a key watch point in the months ahead. While the Dariga network evolves and strengthens, Kulibayev – as well as his trusted ally, Prime Minister Karim Massimov – remain keen competitors.
Nazarbayev’s trick for keeping Kazakhstan stable in a volatile region has been striking the right balance between such opposing clan interests. Finding equilibrium will be crucial as the President prepares to leave office – eventually.
2016 Watch Points:
In a telling statement to cabinet members in November, Nazarbayev warned that no position is guaranteed. A political reshuffle could have a profound impact on elite dynamics and resource distribution.
Kazakhstan has been traditionally viewed as an ‘old guard’ elite network dominated by Nazarbayev loyalists. However, the troubling economy may provide impetus to replace the old elite with a younger, more Western-leaning generation. Watch out for Almaty Mayor Baurzhan Baybek, who could usher in a new era of government accountability. Also, since last year, the mining magnate, Kenges Rakishev – the son of Defence Minister Imangaly Tasmagambetov – has taken a sizable interest in the largest bank, Kazkommertsbank, and has recently moved into the media industry.
The author is Michael Mesquita, Senior Analyst (CIS) at West Sands Advisory Limited. Michael is involved in a longstanding project focused on investigating the intricacies of informal elite networks of power in the CIS, and how these networks exert influence.
West Sands Advisory Limited is a business intelligence, investigations and political advisory firm that has, since 2006, helped clients identify opportunities and reduce risk in emerging and frontier markets www.westsandsadvisory.com