QR Briefing: 05/09/2023
Author: Richard Spooner
May 9, 2023
Kazakhstan Drops Plans to Manufacture Kalashnikovs
In Kazakhstan, the implementation of a manufacturing project in the city of Kokshetau, capital of the Akmola Region that surrounds Astana, has been suspended, according to a statement by the Ministry of Industry and Infrastructure Development. It was planned to launch the production of Kalashnikov assault rifles in 2022. "Due to the current geopolitical situation, the implementation of this military project has been suspended," the ministry's official statement reads.
Military Personnel Get a Raise
President Tokayev announced at a press conference in Astana on May 7, National Defenders Day, that salaries in the Kazakh military will increase by almost a third in 2024. “Infrastructure and supplies are gradually improving; wages and social benefits are growing. The military and the police can always count on help from the State,” he stated.
In February the government increased salaries for 600,000 teachers by 25% and for 74,000 physicians by 30%.
The US and UK Visit Astana to Discuss Sanctions
The final days of April saw a flurry of statements, visits, and views expressed on Kazakhstan’s vulnerability to secondary sanctions if it were determined that the country illegally assists Russia. From April 23—26, Assistant Secretary Elizabeth Rosenberg of the Treasury Department and Assistant Secretary Matthew Axelrod of Commerce were in Astana to meet with government officials and representatives of the private sector “to exchange information and identify strategic priorities.” During the visit Rosenberg issued a statement declaring that Russia actively seeks to evade export controls and sanctions to obtain what it needs to modernize its military by importing goods through third countries, and that the supply of such items and goods to Russia through the territory of Kazakhstan is a direct violation of export controls and the laws of the United States. She added that the problem is not “iPhones or washing machines” but dual-use goods that might be used for military purposes, including computer chips and components for integrated electronic systems. According to Rosenberg, Russian intelligence has been actively searching for new routes to import dual-use goods, and some Kazakh businesses are helping Russia evade sanctions.
Kyrgyzstan and Armenia are the countries most closely associated with a surge in imports of potential dual-use goods that may be intended for re-export to Russia, as per recent articles in The Nation and The Financial Times. The government of Kazakhstan has assured the US it understands the urgency and importance of restrictions the West has imposed on Russia. Since Russia invaded Ukraine and sanctions were strengthened, Kazakhstan has been noted for being responsive to US concerns and active in keeping communications open.
At the same time, one cannot deny it is an imposing task for the government to control the activity of Kazakh business in such a way as to exclude the possibility of violations. A few days before Assistant Secretary Rosenberg’s statement, on April 20, Kazakh economist Almas Chukin gave an interview to one of Kazakhstan’s most respected business commentators, Arman Baitasov, discussing Kazakhstan’s perspective on sanctions against Russia and difficulties it faces within the Eurasian Economic Union (EAEU). Chukin sees these issues as follows: “I would divide the sanctions into four types. There are sanctions on products, which are simple and understandable: aircraft, spare parts for aircraft, military equipment, electronics. The second type is dual-use items, here things are vague, because, for example, a thermal imager can be inserted into a microwave oven to measure temperature, or it can be used in a tank’s targeting system. A PlayStation graphic processor unit is also suitable for cruise missiles. The third type of sanctions are currency sanctions, Russia’s excommunication from the financial world. And there is a fourth type – the invisible sanctions that no one formally introduced, sanctions from shareholders and consumers, public opinion sanctions.”
As to the impact of sanctions on the EAEU, Chukin stated, “sanctions significantly disrupt the supply of certain commodities from Russia, and more than half of the materials we receive from foreign suppliers came from Russia. In addition, we see so-called reverse sanctions, which were not intended for Kazakhstan. Our Sokolov-Sarbay Metallurgical Plant supplies pellets to Russia's plant in Magnitogorsk, and our Bogatyr Komir company in Ekibastuz supplies them with coal. Now Russian metallurgy is under sanctions, and millions of tons of our products have nowhere to go. It’s quite likely we will see shutdowns at these plants, and we have many such enterprises in Kazakhstan. At the same time, an opportunity opens to deliver coal from Ekibastuz to Europe, if Russia would permit the transit.”
Speaking about currencies Chukin stated: “One month, two, maximum three, and the ruble will begin a free fall.”
As to Kazakh companies or individual businessmen cooperating with Russian companies or individual businessmen who are under sanctions, Chukin believes there certainly is a danger, but tempers that concern as follows: “The most important thing is that our government do everything correctly. Out of our tens of thousands of businessmen, some seek to make money on this trade. A website is being created where there will be explanations for businessmen about what is allowed and what is not.”
It would seem such a website is overdue.
On April 27 a statement was released by the US Treasure Department, prompting an article to appear the next day on www.forbes.kz under the title “The US is Prepared to Assist Kazakhstan on the Issue of Observing Sanctions against Russia,” quoting the statement from the day before and adding that Washington likewise is ready to help minimalize the economic consequences of this policy for Kazakhstan.
David Reed, Director for Sanctions at the UK Foreign Office, who arrived in Astana together with US assistant secretaries Rosenberg and Axelrod, gave an interview to Forbes Kazakhstan just before his arrival, from which the statements below are excerpted.
Q: Do you think the people of Kazakhstan have reason to worry about your visit? Is there a threat that the West will apply sanctions against Kazakhstan?
- I want to make it clear that we consider Kazakhstan our important bilateral partner. We are among the top 10 investors in Kazakhstan and have extensive relationships spanning decades. We plan to sign an agreement on strategic partnership and cooperation in the future to further develop our partnership. The Minister of Foreign Affairs and International Development recently visited Kazakhstan, and we look forward to further high-level interactions in the future.
Q: Do you have evidence that under the guise of a “permitted” product, sanctioned goods are moving from Kazakhstan to Russia? If yes, please tell us what kind of goods, how they pass through Kazakhstan, who is in the supply chains?
- From trade data in open sources, we see there are some jumps in the export to Kazakhstan of goods subject to UK sanctions, with a corresponding jump of those goods going to Russia. We know that some of these goods end up in war zones in Ukraine. We believe that neither the UK nor Kazakhstan wants this.
Q: How do you assess the actions of the Kazakh government to prevent circumvention of sanctions against Russia?
- We welcome the Kazakh government's repeated assurances that Kazakhstan does not want to serve as a route to circumvent sanctions. We are here to learn more about the steps the government is taking to prevent this from happening.
Q: Kazakhstan and Russia have the longest continuous land border in the world. The countries are closely connected economically and do not have a customs border. Kazakh business is very active and knows how to make money. The shelves of Russian stores are full of goods from companies that left Russia after the start of the war in Ukraine, and some of these goods come from Kazakhstan. Is it realistic in such conditions to completely avoid the movement of sanctioned goods from Kazakhstan to Russia?
- We fully recognize that Russia and Kazakhstan are deeply interconnected economically, and we are not asking Kazakhstan to isolate itself economically from Russia. However, it is in our interests to ensure that Russia does not receive goods that allow it to continue the war. We want to work with the Kazakh government to make sure Kazakhstan does not become a center for sanctions circumvention.
- The purpose of my visit is not to give recommendations to the government of Kazakhstan regarding the conduct of international relations. I am glad that we can work in partnership, and I believe that we have a common goal – to end this war, which is causing untold damage not only to Ukraine, but also to Russia's closest neighbors and far beyond its borders.
Q: How would you describe in one word the message you want to convey to Kazakhstan with your visit? Would it be "warning," "alarm," "threat," "cooperation," "hope," or something else?
- I think "partnership."
The Economic Forecast for Kazakhstan
According to the World Bank’s recently published spring update, Kazakhstan’s economy should see only modest acceleration of near-term growth, with real GDP rising 3.5 percent in 2023 and 4 percent in 2024, driven by increased oil production, direct foreign investment in mining and the government’s budget-sponsored housing program. Forecasts for 2023 are less than pre-war projections due to, among other factors, reduced growth prospects among the country’s major trading partners and domestic inflationary pressure, particularly but not only from increased food prices. Prospects for growth face several risks. Shutdowns of the Caspian Pipeline Consortium would cause oil production and budget revenue to drop, while inflation, having reached its highest level since the late 1990s, is expected to remain high in 2023, affecting the most vulnerable households and potentially causing social tension. As www.kapital.kz reported on May 6, annual inflation in Kazakhstan for April was 16.8 percent, although the rate fell for the second consecutive month, from 21.3 percent in February to 18.1 percent in March and then to April’s mark.
Given the Caspian region’s heightened geopolitical tension due to Russia’s war on Ukraine, plans to grow the Middle Corridor must be prioritized and will require logistic improvements. Kazakhstan for obvious reasons remains reliant on Russian economic infrastructure. Any new Russian offensive would likely mean new sanctions against Moscow and further stress Kazakhstan’s situation. Hence the crucial need to develop the trans-Caspian international trade route (TITR).
The government must drill down hard on structural economic reforms. Growth has faltered since the 2008 banking crisis, down from a 10 percent average yearly rate of growth during 2000 to 2007. As the World Bank report suggests, “One of the structural deficiencies of the resource-oriented economy is declining human capital, which has been worsened by the pandemic. The closure of schools and disruptions in teaching have likely erased previous gains made by investing in education.” One way in which the US government could most effectively impact countries in the Caspian region would be to bolster educational exchange programs with the countries of Central Asia and the South Caucasus.
Two Senior Law Enforcement Officials Sentenced for Role in January Events
Taldykorgan municipal court has passed sentence on the former head of the police department of the Almaty region, Serik Kudebaev, sentencing him to 10 years in prison. At sentencing the Prosecutor General's office reported that Kudebaev had previously fled the country, was detained in Turkiye, and then extradited to Kazakhstan. He was charged with abuse of power, as well as complicity in torture of detainees during the January events, known as Kantar, which is Kazakh for January. During his original trial, Kudebaev violated the conditions of his bail by hiking through the Alatau mountains into Kyrgyzstan and from there traveled to Turkiye.
Almaly District Court in Almaty has sentenced Nurlan Mazhilov, former head of the municipal KNB (committee for national security), to six years in prison for abuse of power. “By verdict of the court, Mazhilov was sentenced under article 362 part 4 of the Criminal Code to 6 years in prison, is hereby deprived of the right to hold positions in public service, local government or financial organizations for a period of 10 years, and is stripped of the rank of major general of the KNB,” according to a press release of the court.
Following Kantar, numerous heads of regional and national law enforcement agencies have been held accountable for criminal actions. Former Defense Minister Murat Bektanov was sentenced to 12 years in prison, former head of the KNB for the Almaty region, Sabit Kurmanaliev, was sentenced to 6 years, and more recently the former chairman of the KNB, Karim Masimov, was sentenced to 18 years, while three of his deputy chairmen received from 3 to 16 years in prison.
Targeted Development in Mangistau
On October 27, 2022, an important investment agreement was signed between the government of Kazakhstan and Hyrasia One, a subsidiary of German-Swedish Svevind Energy Group, to create an enterprise for the production and distribution of green hydrogen and renewable energy in Mangistau Region, home to Kazakhstan’s Caspian Sea ports of Aktau and Kuryk. Project cost is estimated at 22 billion Euros. Geological and geophysical surveys are underway on plots of land with the requisite natural resources and other favorable characteristics. At the signing, Svevind CEO Wolfgang Kropp commented that “Kazakhstan and especially its Mangystau Region, with its vast prairies, strong winds and above average solar radiation, fit the criteria perfectly.” According to information released by Hyrasia, construction will commence in 2026 and be completed by 2032. The plant is expected to have a capacity of 40 GW and is intended to supply green energy to Europe, according to a MoU signed by Kazakh Prime Minister Alikhan Smailov and European Commission President Ursula von der Leyev at the 2022 UN Climate Change Conference (COP27) on November 7, 2022, in Egypt.
The next day at COP27 Prime Minister Smailov and Australian Fortescue Future Industries signed a Framework Agreement on the implementation of green hydrogen production projects in the Atyrau and Mangystau regions. Smailov stated that implementation of the agreement is expected to contribute significantly to Kazakhstan’s ambitious targets to reduce greenhouse gas emissions by 15% before 2030 and achieve carbon neutrality by 2060. "As part of developing alternative energy sources, the production of green hydrogen is an important priority for us. According to international experts, Kazakhstan could become one of the 10 largest exporters of this environmentally friendly fuel. To achieve this goal, we need the support of strategic partners," Smailov stated at the time. "Our approach to encourage decarbonization will be based on the maximum use of market mechanisms and private investment," the Prime Minister added.
Last week on May 5 the Mangistau region Akimat announced plans to implement large projects worth more than 900 billion tenge ($2.02 billion USD) over the next nine years that will create more than 2500 jobs, including eight projects to be launched in 2023 worth more than $292 million USD and 17 new projects worth more than $440 million USD planned for commissioning in 2024. In 2025, nine new enterprises are expected to startup, including the multifunction export terminal Sarzha at Kuryk Port being established by Kazakh Semurg Invest and Emirati AD Ports, a project whose estimated cost is $225 million USD. The Akimat also announced that between 2019 and 2022 land grants were awarded for projects totaling $72 million USD that will create approximately 2000 jobs. Of these, six projects are related to tourism, four to education, three are for warehousing and transport, three are for healthcare, and 13 relate to other sectors of the economy.
In the oil and gas sector, in February of 2023, following negotiations between Kazakhstan’s Ministry of Energy and national oil company KazMunaiGas (KMG), a contract was signed for development of the Kalamkas-Sea, Khazar and Auezov fields with aggregate reserves of 81 million tons of oil. The project is expected to attract $6 billion USD in direct investment. 2000 jobs are expected to be created at the initial stage of the project, with production to commence in 2028 at 4 million tons of oil per year. Construction of offshore platforms will begin at the end of 2024 at a location 64 km from the coast at the Kalamkas-Sea structure. Russian oil company Lukoil will be KMG's strategic foreign partner. It was also noted that Kazakh shipyards at Aktau and Kuryk will be involved in the production of metal structures for the offshore platform.
Turning to industry and metallurgy, a second project aimed at attracting investment will produce polypropylene. The regional Akimat is negotiating with potential investors to join domestic company PetroChem, a subsidiary of KMG, in the $1 billion USD project. Launch of the plant is targeted for 2026, with up to 3000 local workers involved in the construction phase and 800 permanent jobs created. A third major project currently being developed in Mangistau is for construction of a $980 million USD iron ore smelter by Turkish YDA at the Aktau port special economic zone. First production could come as early as 2026, and it is planned that the new plant will employ 2,500 people, with 6,000 jobs created for the construction stage.
These three projects should attract almost $8 billion USD to the region's economy while creating 4,000 permanent and 9,000 temporary ones.