Country Risk Profile – Kazakhstan
Overview
Kazakhstan is a landlocked country in Central Asia covering about 2.7 million km². It is bordered by Russia, China, Kyrgyzstan, Uzbekistan, Turkmenistan, and the Caspian Sea. Kazakhstan has a population of about 19 million. Most Kazakh live in the country’s three main cities: Almaty, Astana, and Shymkent. Its capital is Astana, known as Nur-Sultan from 2019 to 2022. Most of the country is semi-arid to arid steppe, with the exception of the south-east. Kazakhstan often experiences severe weather conditions, especially in the winter when temperatures can drop below -30°C. Kazakhstan is exposed to natural hazards, including floods, drought and earthquakes.
Since its independence from the Soviet Union in 1991, Kazakhstan has been governed by a semi-authoritarian presidential system. Freedom House categorises Kazakhstan as a consolidated authoritarian regime, with a score of 5/100.
Kazakhstan generates 60% of Central Asia’s income from its oil and gas industry; it also has vast mineral resources, enabling it to dominate the region both economically and politically. Nevertheless, its economy faces a number of problems, including its lack of diversification, its lack of attractiveness to foreign direct investment, and its low economic competitiveness.
Political Risk
Domestic politics
Kassym-Jomart Tokayev is the incumbent president. He was previously chairman of the Amanat party, formerly known as the Nur Otan party, which has held a majority of the country’s parliamentary seats since the dissolution of the Soviet Union. Tokayev is the hand-picked successor to the country’s long-serving former president, Nursultan Nazarbayev, who resigned in March 2019 after three decades in power.
Tokayev called early elections in November 2022 in response to the deadly January 2022 protests, which he won with 81.31% of the vote. He ran against five government-approved candidates, and independent candidates were not allowed to run in the presidential election.
The electoral environment is seen as highly restrictive and intolerant of strong opposition. A number of political movements and parties have announced their formation in 2019, including “Oyan, Qazaqstan” (OQ), Respublika, Democratic Party of Kazakhstan (DVK), Nashe Pravo (Our Rights), and Haq. However, no new political parties have been officially registered in the country since 2006, and restrictive legislation and bureaucratic pressure make it impossible for most new parties to register.
The year 2022 was marked by constitutional reforms aimed at ending former president Nursultan Nazarbayev's stranglehold on power in the country. These reforms included strengthening the parliament, reducing presidential powers, limiting the presidency to a single seven-year term, and banning the president's relatives from holding government positions. 77.17% of voters voted in favour of these reforms during a referendum held in June 2022.
Freedom of expression and media freedom
There is a general intolerance of political dissent and repression of media freedom is commonplace in Kazakhstan. Freedom of expression remains restricted, with Freedom House awarding the country a score of 23/100. Defamation is punishable by criminal penalties, and journalists are obliged to verify all published information and obtain the consent of those they report on. Journalists are threatened, prosecuted, and attacked by the authorities and individuals, often with impunity. As a result, media critical of the regime are virtually non-existent, while self-censorship is widely practised by the media and Internet users.
Corruption
Corruption remains one of the main obstacles to good governance in Kazakhstan. The country ranks 101st in the 2022 Corruption Perceptions Index. Although the government claims that fighting corruption is an absolute priority, private interests continue to influence decision-making, while political processes remain opaque and highly centralised.
Economic Risk
Since the 2000s, Kazakhstan has experienced an impressive economic growth as the result of the first generation of market-oriented reforms, the extraction of abundant mineral resources, and significant foreign direct investment (FDI). Sustained economic growth has transformed the country into an upper middle-income economy, raising living standards and reducing poverty.
Despite the challenges posed by declining oil production and supply chain issues arising from the country’s economic ties with Russia, Kazakhstan recorded GDP growth of 3.2% in 2022, according to World Bank data. Growth was driven by non-oil exports to neighbouring countries and investment growth, mainly in the resource sectors. Growth was also supported by the influx of Russian tourists and immigrants. On the supply side, agriculture, manufacturing, construction, and services all contributed to growth. Consumer demand weakened as real incomes fell under the weight of high inflation.
According to World Bank forecasts, Kazakhstan’s economy is set to experience a moderate increase in growth, reaching 3.5% in 2023 and to 4% in 2024, led by the hydrocarbons sector as oil production rises. Continued FDI in the mining sector and the government’s affordable housing programme will support investment. However, growth in household consumption is likely to be held back by high inflation, rising borrowing costs and increasing indebtedness. Inflation is expected to ease but will remain high for the remainder of 2023 due to the prolonged impact of high food prices.
Business climate
A 2022 OECD survey of foreign firms, businesses and trade organisations in Kazakhstan found that while the Kazakh government has made significant progress in digitalising public service delivery, the digitalisation of the private sector remains hindered by underinvestment in infrastructure and skills; that the government has simplified the operating environment for business, including by streamlining licensing and permitting processes, but that problems remain with trade facilitation and contract enforcement; and that although Kazakhstan has significantly increased the statutory openness of the economy, challenges with competition and transparency persist, constituting de facto barriers to investment.
Furthermore, as the World Bank points out, the economic progress recorded by Kazakhstan since the 2000s masks vulnerabilities and inequalities in the country’s development model. Slowing economic growth, rising inequality and elite capture, and weak institutions reflect shortcomings in the state-led, resource-based growth model and increase the risk of Kazakhstan falling into the ‘middle-income trap’.
Overall, the current business climate presents a high risk for investors.
Security Risk
Demonstrations and social unrest
Demonstrations can occur in Astana, Almaty, and other major urban centres, particularly during election cycles, and can turn violent. Civil unrest usually focuses on labour or sectarian issues and demonstrations must be approved by local authorities.
Fuel price protests in January 2022 escalated into widespread anti-government demonstrations, which were eventually quelled by a major crackdown by the security forces, which received a shoot-to-kill order from Tokayev, and the intervention of the Collective Security Treaty Organisation, resulting in the death of 225 people, including 19 members of the security forces.
Human rights
There were reports of excessive force and torture by the security forces during the January 2022 protests, resulting in the death of some detainees. The Coalition Against Torture, a Kazakhstani non-governmental organisation, had received 172 reports of torture and other ill-treatments by 11 July 2022.
Border security
Kazakhstan’s border and customs units are systematically underfunded and poorly trained, making it difficult for the country to secure its borders. Following Russia’s war in Ukraine, the government increased its defence budget in order to preserve its territorial integrity.
Organised crime
Its geographic location, at the heart of cross-border trafficking flows, makes it vulnerable to organised crime. Kazakhstan has received training and support from its international partners, but more needs to be done to combat drug trafficking, wildlife crime and human trafficking.
Inter-state conflict
The country enjoys cordial relations with all its neighbouring states and, although there are border disputes, there is no significant threat of conflict.
Geopolitical Risk
Russia
Putin considers Kazakhstan to be Moscow’s “closest ally.” However, Kazakhstan is ambivalent in its relationship with Russia, calling for its support through the Collective Security Treaty Organisation to quell the January 2022 protests, while at the same time distancing itself from the Kremlin. On the one hand, Tokayev criticised Russia’s invasion of Ukraine and refused to grant diplomatic recognition to the breakaway Ukrainian regions of Luhansk and Donetsk. On the other hand, Kazakhstan has not adhered to Western sanctions, but has ceased to export over a 100 products to Russia due to these sanctions, including drones, specialised electronics, chips, and similar items, and has reportedly prevented the illegal shipment of drones from Kyrgyzstan to Russia.
Kazakhstan's economy is heavily dependent on Russia. In particular, Kazakhstan’s energy export routes remain highly dependent on Russia since the country is Kazakhstan’s main gateway to Europe, with 80% of its oil exports to the European Union (EU) passing through Russian territory. This means that Astana can ill afford to antagonise Moscow or turn its back on it altogether, although the Tokayev government is seeking to become more independent of Russian influence by forging closer political and economic ties with the West and China.
China
Given Kazakhstan’s geographical position, President Xi Jinping chose to launch the Belt and Road Initiative there in 2013, ushering a new era of economic ties between the two countries. China is one of Kazakhstan’s largest trading partners, and Kazakhstan is its largest trade partner in Central Asia. In 2022, Beijing and Astana traded a record $31.2 billion. Xi Jinping and Tokayev agreed to increase trade turnover to $35 billion by 2030.
The two countries are also founding members of the Shanghai Cooperation Organisation, which cooperates on a host of issues ranging from trade and education to military exercises and counterterrorism.
Xi Jinping described China as Kazakhstan’s “trusted friend and reliable partner” and said he wanted to deepen relations with Kazakhstan in times of “prosperity and adversity”. He also mentioned China’s support for Kazakhstan “in protecting its independence, sovereignty, and territorial integrity” as well as its support for the reforms carried out by Tokayev, and expressed his opposition to interference in Kazakhstan’s internal affairs. Furthermore, according to Tokayev, Kazakh-Chinese relations have reached the pinnacle of an eternal comprehensive strategic partnership, with regular high-level meetings laying the foundation for further enhancement of good neighbourly relations.
European Union
In 2015, the EU and Kazakhstan signed an Enhanced Partnership and Cooperation Agreement (EPCA), which entered into force in 2020. This new Agreement, the first of its kind with a Central Asian partner, brought EU-Kazakh relations to a new level and represented a milestone. The EPCA enables the EU and its Member States to advance and strengthen cooperation with Kazakhstan in key policy areas such as the promotion of mutual trade and investment, cooperation in justice and home affairs, economic and financial cooperation, energy, transport, environment and climate change, employment and social affairs, culture, education and research.
The EU is Kazakhstan’s most significant trading partner, accounting for almost 30% of its external trade in 2021. Kazakhstan’s exports to the EU are almost entirely in the oil and gas sectors, alongside minerals, chemicals, and food products. From the EU, Kazakhstan imports machinery (32% of total Kazakh imports), chemical products (25%) including pharmaceuticals (15% of total imports), transport equipment (12%) and agricultural products (7%). In 2022, trade turnover between the parties reached $39.9 billion, 38% more than the previous year. The EU is also the leading foreign investor in Kazakhstan, accounting for 48% of total gross FDI flows and approximately 60% of total net FDI stocks in 2019.
Conclusion and forecast
It is unlikely that major political change will happen in Kazakhstan in the coming months. Tokayev won the November 2022 elections with a landslide, receiving over 80% of the vote. Despite the introduction of institutional reforms in 2022 in response to the January 2022 protests, the regime remains hyper-presidentialised. Furthermore, the lack of opposition and the suppression of political dissent remain, meaning that the current government will remain unchecked for the time being.
On the economic front, there are still concerns that some of the underlying economic causes of the unrest in January 2022 will not be addressed and that sanctions against Russia will exacerbate existing structural weaknesses by causing high inflation, currency devaluation and logistical barriers to imports and exports. Additionally, due to the current high inflation hitting the country, further protests similar to the January 2022 ones could be witnessed and could be violently cracked down on by security forces, leading to further human rights abuses.
Due to its porous borders and untrained and poorly founded security forces, Kazakhstan will remain at risk of transnational organised crime. The threat of inter-state conflicts remains low.
The war in Ukraine has given new meaning to Kazakhstan’s multi-vector foreign policy: to reduce Astana’s dependence on Moscow. Although Russia’s influence in Kazakhstan remains significant and has not really been replaced by other powers, the government has adopted a clear hedging strategy to maximise its geopolitical benefits and strengthen its own sovereignty.