GOOD MOOD

Kazakhstan 2015 | DIPLOMACY | YEAR IN REVIEW

The government had its hands full mitigating a broad spectrum of economic and diplomatic challenges in 2014, but the country is in good hands, and its long-term prospects have never been better.

President Nazarbayev's pragmatism in the face of political instability abroad, and economic challenges at home has demonstrated why Kazakhstan remains Central Asia's best bet for long-term growth and regulatory discipline. With energy prices set to stay below break-even price through 2017 according to most estimates, Kazakhstan has deployed a strategy of measured responses in the form of monetary policy, Keynesian infrastructure projects, and good old-fashioned economic stimulus as successive economic challenges rear their heads.

President Nazarbayev summed up the mood, warning that, “hard times are coming. You all hear and see it. The crisis and sanctions in world politics increase the risks for the global economy. Prices for hydrocarbons and metals and other products are falling. It will be difficult for us, because we are part of the global economy.” Yet while the economy certainly warranted intervention, the president assured the country that the state would stand by investors and the people, and that the global downturn would “not affect [the government's] social expenses.” In true form, fat has been trimmed from development projects, without reducing crucial social welfare spending.

To the north, Russia continues to wallow in the economic doldrums, thanks to a lack of diversification and a surplus of diplomatic adventurism. Yet in Kazakhstan, President Nazarbayev has consistently pursued a politically realist policy that ingratiates the country with all parties, even going so far as to offer visa-free entry to citizens of the US and other important trading partners. Concurrently, 2014 ushered in the Eurasian Economic Union treaty that binds Kazakhstan, Belarus, and Russia to unfettered trade and free movement, while economic and political management of the union will be shared by all three partners. In other words, Kazakhstan has established itself as a paragon of international cooperation and progressive trade ties.

Another defining moment in 2014 was the devaluation of the tenge, which fell by 19% on February 11 and set an inauspicious tone for year. Kazakhstani authorities are spending $2 billion to $3 billion per month to maintain the tenge's current exchange rate—about 185 per dollar—while low oil prices and capital uncertainty put further pressure on the currency. The business community is bracing for another devaluation, although such an event is unlikely to occur before the 2015 elections. That said, other Central Asian countries have also devalued their own currencies, often by even larger margins, and currency stability is still a ways off for the entire region.

Without diminishing the severity of this monetary crisis, what was noteworthy in the subsequent months was the way in which firms in the country shrugged off the effects of this setback, remained optimistic about the future, and went on to post healthy growth rates. While growth was an anemic 3.8% in 1Q2014—by Kazakhstan's standards, which skew higher than those in more developed markets—the last quarter saw a healthy 4.3% growth rate.

Looking to the future, the Asian Development Bank is circumspect about 2015, warning that low oil prices, and continued economic weakness in Russia represent a real threat to growth in Kazakhstan. The organization anticipates a growth rate of 1.9% this year, with the rate rising to 3.8% by 2016. The important story here however is the way in which firms are responding to these austere times. After speaking to hundreds of the country's business leaders, a picture of realistic expectations, and investments hedged on long-term growth emerged in TBY's analysis. In a validation of levelheaded economic principles, firms in Kazakhstan are self-correcting and evolving to adapt to the changing global reality—diversify or perish. And in Kazakhstan, the former is most pronounced.

Kazakhstan also made headlines this year with a project thousands of miles away—in space. After having launched some the most important space missions in human history from its Baikonur spaceport—the world's first and largest operational space launch facility, located in the desert steppe—three more cosmonauts/astronauts launched into space in spite of otherwise tense relationships between the US and Russia, courtesy of Kazakhstan. Now, Kazakhstan is working hard to train a new generation of rocket scientists to ensure that this point of national pride remains in the country.

The impending Expo 2017 has also defined infrastructure investment over the last year as the country pursues a no-holds-barred building campaign. In addition to erecting a city's worth of futuristic structures that will house the event, new roads and airports are in the pipeline, to say nothing of the hotels and other service related structures in the works. When all is said and done, Chairman of the Board of "Astana EXPO-2017" National Company Talgat Yermegiyayev estimates that the event will cost $3 billion.

A slump in energy and commodity prices has the local mining and extractive industries on their back feet, but once again, investors are choosing to focus on the vast reserves that remain in the ground while eating the costs. The government is currently evaluating mining regulations, to facilitate investment and exploration by foreign firms. The outcome of these reforms should be announced in the middle of 2015, in conjunction with a slew of new exploration licenses. These reforms and new exploration projects have analysts predicting that the sector will reach a value of $30 billion by 2017. When this happens, the industry will have its already massive uranium sector to thank, as well as anticipated increases in other sectors.