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IFC’s director: “We see that Kazakhstan has tremendous long-term potential”

Wiebke Schloemer, IFC’s Director for Türkiye and Central Asia

For the second year in a row, the economy of Kazakhstan is undergoing changes that were difficult to predict until recently. Most of them are a direct consequence of the ongoing war in Ukraine. Kazakhstan had to rebuild supply chains and strictly control business contacts with Russia. At the same time, the country was able to take advantage of the opened up opportunities, for example, to start selling oil to Germany and poach companies leaving the Russian market. Investors who have studied the capacity of the AIFC are now looking at Kazakhstan with interest, the largest crypto exchanges are coming to the country, and banks are benefiting and earning record profits. Moreover, Kazakhstan is now perceived by many not as Russia’s southern neighbor, but as the economic core of Central Asia. The director of the International Finance Corporation (IFC), which is a member of the World Bank Group, for Turkey and Central Asia, Wiebke Schloemer told Kursiv about the forced new reality, its influence on local business and residents, a historical chance for Kazakhstan and what else has to be done.

What is your evaluation of the economic situation in Central Asia as a whole and in Kazakhstan in particular?

– Central Asian economies, including Kazakhstan, continue to demonstrate strong growth dynamics. In the first quarter of 2023, their economies grew by 5.5 percent on average, which is above the pre-COVID rates of around 5 percent. Despite close economic ties to Russia, economic activity in these Central Asian countries has held up well, partly due to a surge in incomes and financial inflows to the region, along with stable commodity prices.

Central Asian economies have proven resilient to adverse geopolitical headwinds related to Russia’s invasion of Ukraine. They have strengthened their trade cooperation with Russia, serving as intermediaries and supplying their own products in the vacuum created by international firms’ withdrawal from the Russian market. The volume of money transfers to Central Asia from abroad has increased significantly, boosting bank deposits and profits. The influx of Russian firms and individuals has strengthened demand in the retail, real estate, and hospitality sectors.

Growth in Kazakhstan has benefitted from a similar influx of Russian firms and individuals, from opportunities related to major global players’ exiting Russia, and from ongoing efforts to diversify transport and oil transit routes.

What is the outlook for the economy in both the region and Kazakhstan?

– We believe that the economies in the region will continue to grow, not only because of the situation in Russia, but also thanks to increased commodity exports and China’s economy reopening.

More broadly, we can see that Central Asia is opening itself to new investors. Reform processes are underway and the world is starting to learn more about the region. The interest of investors has also been piqued by the region’s diverse natural resources, plentiful human capital, emerging tech sector, and fast-growing financial services industry. The challenge now is to promote itself better to investors.

The region offers access to attractive consumer markets. With a total population of around 77 million people, the five countries represent a fairly large market. At the same time, the countries in the region possess significant oil, gas, and uranium reserves, which makes them attractive as destinations for new production facilities and as potential suppliers of energy resources to Western and Asian markets.

To capitalize on existing opportunities, these countries need to continue implementing large-scale structural reforms aimed at ensuring economic diversification, reducing and optimizing the role of the state in many sectors, and improving the environment in which the private sector operates.

Kazakhstan’s economy, according to the World Bank’s latest economic update, is set to experience a moderate growth acceleration, with real GDP forecast to rise by 3.5 percent in 2023 and 4 percent in 2024, supported largely by the hydrocarbons sector.

The country needs to press on with structural reforms to address its medium-term development challenges, including curbing inflationary pressure, continued monetary tightening, and control of fiscal spending.

– What are the strengths and weaknesses of Kazakhstan’s economy and the economies of other Central Asian states?

– Central Asia possesses vast energy resources, critical metals, and rare earths. It also plays a pivotal role in transregional connectivity. Of equal importance is that many countries are making concerted efforts to attract foreign investment.

However, economic growth and export revenues in Central Asia remain commodity-driven, which is a mixed blessing, as it suppresses the growth and development of non-commodity sectors. Also, the region’s growing, young populations are often unable to find jobs at home and continue to look mainly to Russia for employment.

As for Kazakhstan, its economy has seen remarkable growth since the 2000s thanks to the removal of trade barriers, privatization, and the opening of its energy sector to FDI. These reforms have strengthened Kazakhstan’s economy, but it still faces profound challenges. The agenda for economic diversification away from non-oil sectors remains unfinished. In this regard, policies should focus on creating a level playing field, reforming state-owned enterprises, and making public institutions more efficient. Reducing the reliance on traditional trade routes, especially for oil exports through the Russian territory, as well as shared infrastructure, would also help mitigate logistical risks.

Kazakhstan is one of the most energy- and carbon-intensive economies in the world. Its energy mix lacks diversification: 80% of electricity generation is coal based. The World Bank Group has recently released Kazakhstan’s Country Climate and Development Report, which states that major changes can be made across key economic sectors to allow the country to address the climate crisis. Specifically, Kazakhstan will need to incentivize climate-smart agricultural practices, invest in efficient water infrastructure, and strengthen other infrastructure to build resilience.

– What (economic) advantages does Kazakhstan have in comparison with neighboring countries?

– At IFC, we see tremendous long-term potential in Kazakhstan. The country’s economy is the largest in Central Asia in both absolute and per capita terms. There is an abundance of natural resources, including the 12th largest proven oil reserves in the world and the 2nd largest known recoverable resources of uranium. Its location at the heart of Central Asia and proximity to Russia and China, offer a great connectivity potential, which has been partially realized through the Belt and Road Initiative. Among Central Asian countries, only Kazakhstan and Turkmenistan have access to the Caspian Sea, which puts them in a fairly advantageous position for the development of transport and trade potential.

There are opportunities to diversify its economy, as Kazakhstan offers significant prospects in petrochemistry, metallurgy, tourism, and pharmaceuticals. Kazakhstan could also become a major food exporter. It is already the leading grain producer in Central Asia, regularly dubbed the region’s breadbasket. Wheat takes the lion’s share of grain production, accounting for 80%, but it also grows barley, cotton, sunflower seeds, and rice.

The agricultural sector’s potential remains largely untapped. About three-quarters of the country’s land is suitable for farming, but, at present, just 40% is used for agriculture. Scaling up agricultural production could increase regional food security as well as create jobs as agriculture, directly, or indirectly, supports the livelihoods of one in three Kazakhs.

IFC supports agribusiness in Kazakhstan. For example, we recently financed KazFoodProducts, one of the country’s leading agribusiness groups, to grow sustainably, create jobs, and bolster food security in the region. With IFC’s support, it will be the country’s first company to obtain an EDGE Gender Equality Certification, which sets benchmarks and standards for workplace gender equality.

At the same time, IFC notes that there are difficulties in using these routes and they cannot be considered as a full-fledged and the only replacement for transit through the territory of Russia. What, in your opinion, should Kazakhstan do in this direction? What new routes and in cooperation with which partners to develop?

– This is a good question, and I recently spoke about the Middle Corridor at the Astana International Forum as I believe that this is at the heart of Kazakhstan’s connectivity and integration.

Russia’s invasion of Ukraine has led to logistical bottlenecks and affected existing transit routes. In that regard, the Middle Corridor is emerging as a potential alternative to the dominant Northern Corridor. Kazakhstan can play a central role, but success will depend on the ability of all countries along the route to eliminate trade barriers and set up regular and reliable freight schedules. Unlocking the Middle Corridor’s vast potential is complex and challenging as it requires significant infrastructure development, logistical and regulatory reforms, and intensified regional cooperation.

With these prospects in mind, the transit countries along the Middle Corridor have accelerated efforts to improve transportation and trade connectivity. These endeavors focus on expanding capacity by adding new ports, ferries, and trains along the route; building storage facilities; and developing soft infrastructure such as integrated customs and border management, unified regulations, and common technical standards.

IFC can provide crucial support in building and modernizing infrastructure. By mobilizing private sector investment, IFC can bridge the funding gap and attract more international investors. IFC has the experience to do so. For example, IFC supported the modernization of Almaty International Airport by spearheading a $450 million financing package for the airport’s owners, a consortium led by Türkiye’s TAV Airports. The funding aids the construction of a new international terminal at the airport, the busiest air transportation hub in Central Asia.

We also acted as lead transaction advisor for the Kazakh government in structuring the highly successful public-private partnership for the BAKAD project, a ring road encircling Almaty. Similar to BAKAD, IFC could also help structure deals related to the construction of a container terminal in the Aktau Sea Port and to the establishment of a dry port on the China-Kazakhstan border. Both projects are crucial to enhancing Kazakhstan’s position within the Middle Corridor.

In the same report (country economic update), the World Bank talks about the growth of Kazakhstan’s GDP, largely provided by the oil and gas sector with its growing level of production. In light of the green transition, how might this affect Kazakhstan in the future? Now the country is successfully replacing the volumes of Russian fuel that have been retired due to sanctions, but can there be a situation in the foreseeable future when Kazakh oil, gas and other minerals turn out to be undemanded, at least in the West?

– While Kazakhstan currently is a competitive oil and gas producer, it will have to face fundamental market shifts over the longer term. Russia’s invasion of Ukraine, price volatility in oil and gas markets, and changing consumer behaviors all add to the overall uncertainty.

Around 80 percent of Kazakhstan’s oil production is exported, mainly to Europe and the US, so the country is benefiting from the increased European demand for non-Russian-sourced gas. Kazakhstan’s relatively low marginal production costs will also help sustain competitiveness in the short to medium term, but it will need to improve its product offering, for example by offering low-carbon hydrogen. Its oil and gas sector is exposed to export risks due to a reliance on pipelines that transit Russia and addressing this issue will require exploring alternate routes and investing in pipeline infrastructure.

Also, Kazakhstan has achieved the largest overall gas flare reduction of all countries between 2012 and 2021, thanks to strictly enforced regulations, coupled with a domestic gas market that incentivizes associated gas recovery. This sets a positive case for other countries of the region.

Once the country develops its large renewables potential, new gas pipelines could be designed which can be repurposed for hydrogen transport in the future. Importantly, Kazakhstan is more dependent on oil and gas revenues than many other producers. While prices are currently elevated, the trajectory will likely remain volatile. In terms of its oil and gas value chain’s carbon intensity, Kazakhstan is in the middle of the pack among major oil producers. Without a shift to decarbonization, it will likely face an eroding competitive position.

Going forward, finance mobilization for the sustainable use of resources is important for transitioning to a green economy. In this regard, IFC can help identify scalable investment opportunities and connect public and private sector participants. Furthermore, IFC can support PPP projects in transmission and distribution, green projects which leverage the country’s geothermal water resources, and e-mobility projects.

Kazakhstan is increasing the volume of attracted foreign direct investments from year to year. Will it be possible to maintain this trend in the face of sanctions against Russia and the corresponding risks for Kazakhstan?

– As I mentioned earlier, Kazakhstan as well as other Central Asian economies have proven resilient to adverse geopolitical headwinds related to Russia’s invasion of Ukraine. Kazakhstan’s foreign direct investment inflows grew by 11% to over $25 billion in 2022 despite the sanctions against Russia and its concentration in mining industries.

Planned reforms to improve the business climate, lower market entry barriers, and reduce the footprint of politically exposed persons in the economy may further promote FDI and the development of smaller enterprises in the medium term. In general, FDI is likely to continue growing in the short term, but the global uncertainty regarding interest rates, inflation, and commodity prices remains.

How else can a country attract foreign investors, apart from traditional investments in the oil and gas sector?

– There are two paths we should consider. First, improving the efficiency by which resources move to more productive uses. This can be achieved via privatization or by eliminating discriminatory regulations which allow less productive firms to survive.

Second, encouraging innovation by reducing the risks associated with testing new products and markets. The effective enforcement of rules and sound intellectual property rights internalizes the economic benefits of innovation, thereby encouraging investment. A non-discriminatory regulatory environment, including appropriate investor protection laws, can promote long-term investments. Deepening the financial sector and developing instruments and supporting regulatory frameworks, including those for subnational financing and PPPs to fund critical urban infrastructure projects in the transport, energy transmission and distribution, water supply, and wastewater sectors will be key areas of focus. The country’s renewable energy sector is well positioned for investment with abundant wind, hydro and solar resources. The recently signed several memorandums of understanding with private operators to develop large-scale wind projects can contribute to the growth of the renewable energy sector in Kazakhstan.

Fintech is actively developing in Kazakhstan. Some market participants believe that the country is ahead of many developed economies in terms of the degree of manufacturability and digitalization. How does the World Bank assess the state of affairs in the sector? Can fintech become a full-fledged driver for the national economy and squeeze out the extractive industry?

– Kazakhstan has experienced growing mobile and internet penetration rates, with the pandemic accelerating the use of digital services. The country is keen to set policies in place which enable tech startups and venture capital growth. These efforts include regulations and policies aimed at supporting venture and private equity sector development. Major developments have been the adoption of the Law on Alternative Investment Funds and the establishment of the Astana International Financial Center (AIFC), a platform that provides a preferential tax regime and has an independent financial court. Most venture capital and private equity players in the region, as well as a number of prominent startups, are registered at AIFC, which provides a favorable regulatory environment.

Thanks to a good level of digitization, we believe that Fintech is one of Kazakhstan’s promising industries. Its geographical position grants the country an opportunity to become a potential regional hub. However, the current geopolitical uncertainty in the region creates opportunities as well as risks for the sector’s development. In the meantime, the fintech market and the startup industry’s pace of growth are limited by a low level of transparency and the limited number of venture investors.

Moving forward, supportive initiatives from the government and infrastructure enhancement efforts are expected to further drive innovation and adoption in the sector. In this regard, IFC engages with regional governments to discuss policy changes that enable a nascent ecosystem to grow and create conditions for more investments.