The view from Astana: Funding growth in tough times

Summarising focused discussions at the Sustainable Cities Workshop in Astana, Kazakhstan, this post investigates some of the threats and opportunities surrounding economic resources in Kazakhstan.

Keywords: Kazakhstan, Astana, green growth, finance, infrastructure

Andrew Sudmant

Graham Thrower

Carla-Leanne Washbourne

Economic clouds on the horizon

Kazakhstan’s centrally driven economic policy ‘Nurly Zhol’ (which has echoes of Roosevelt’s 1930s New Deal) includes a 5 year economic and social infrastructure plan aligned with the 2nd 5 year Programme of Accelerated Industrial and Innovative Development (PAID). This envisages spending of 6 trillion Tenge ($33bn) of which 85% is targeted to come from private investors. This figure includes economic (transport, energy and logistics) and social (health, education etc.) infrastructure. In addition to Astana, Almaty and inter-regional connective rail, road, air, and energy systems; other key areas of spend are the Khorgos economic zone (Kazakh-China gateway) as well as industrial petrochemicals at Atyrau and Taraz.

There is a vulnerability to the economic slowdown in the EU, China and Russia, and the recent (and likely enduring) softening in oil price. This may manifest in depressed government revenues (from oil exports), reduced Foreign Direct Investment (FDI) appetite, and a slowdown in economic growth; all negative factors on the Kazakh sovereign credit rating (currently at BBB+) and hence impaired access to international capital markets. At the least it might imply increased borrowing costs at the sovereign level.

Structural mitigation provided by the Kazakhstan National Fund (modelled on Norway’s Petroleum, and other ‘rainy day’, Funds) currently stands at $76bn and, according to President Nazarbayev in a speech made in November 2014, aims to shield the economy against external shocks, including protracted depressions in key export commodity prices. Disbursements are being made already from this fund to provide broader economic stimulus, execute specific projects (e.g. Astana EXPO-2017), and to provide for previous bad loans in the Kazakh banking sector (another structural concern). Further sources of developmental finance include the World Bank, European Bank for Reconstruction and Development (EBRD), Asian Development Bank, and Islamic Development Bank particularly in the area of public utility systems.

Choices to be made

The threats and opportunities in Kazakhstan’s economic policy are perhaps nowhere more evident than in the new capital, Astana. Since being made capital in 1997 (and renamed in 1998), Astana, located in the North central plains of the Kazakh steppe, has grown from a town of 280,000 in 2000, to a city nearing one million inhabitants in 2015. Modern apartment blocks ring tree lined squares, glass skyscrapers modelled to recall the northern lights parallel the river and new more impressive buildings are rising on every corner. Foreigners here are surprised to find references, and complete reproductions, of The White House, the Arc de Triomphe, The Brandenburg Gate and light displays from Las Vegas mingling with the National Mosque, a pyramid of glass (the Palace of Peace and Reconciliation) and the Bayterek Tower – a monument and observation tower at the centre of the city designed in Turkic folkloric reference to look like a poplar tree holding a golden egg.

Bayterek Tower Night © Xiu Gao.

The Bayterek Tower at Night © Xiu Gao.

The economic logic underpinning these investments in Astana is clear: Astana is earmarked to become the cultural and economic centre of a new Kazakhstan. But the opportunities foregone for investments in new infrastructure and striking architecture in Astana rather than other regions or other sectors of the economy – the ‘opportunity cost’ of this investment – is not insignificant. Although the economy boomed in the 2000s, 42% of the population, primarily in industrial towns in the west of Kazakhstan, remain in poverty (World Bank, 2014). And the risks of major investment projects, built on the assumption that oil prices would remain high, are now a drain on Astana and the nation’s finances. With oil prices having more than halved over the last 6 months, Kazakhstan’s balance of payments and budget (which are based on an assumed oil price of $90 USD per barrel) will, according to the International Monetary Fund (IMF, 2014), turn negative.

There is also a multiplier effect to consider here. Expenditure on an project ineligible or unattractive to private investment creates an equal amount of economic impact. Were that sum to be deployed as equity in Public Private Partnership (PPP) type structures we could reasonably expect that to be able to leverage in significantly more FDI type capital and result in an accordingly greater economic impact. In the context of the Kazakh economy this could amount to billions of dollars of vitally needed external investment at a time when endogenous public finances cannot alone meet projected infrastructure demand.

Growing the green economy

Focused initially on the ‘Green Bridge Partnership Programme’ of investments, initiated in response to the Rio +20 Earth Summit conference and supported by the United Nations Division for Sustainable Development (DSD), the Kazakhstan Government developed, and in 2014 adopted, its own Green Economy Concept, providing a policy context for development of the country’s green economy. This plan outlines Kazakhstan’s ambitions, and recognition, of greening their economy. Plans include spending $3.2 billion on green investments each year, achieving 3% of energy supply from renewables by 2020, and cutting carbon emissions by 40% by 2050 from 2012 levels (World Bank, 2014).

In a speech in January 2014 President Nazarbayev vocally affirmed his government’s commitment to integrating the green economy agenda into national development, with particular focus on ‘mainstreaming’ the green economy in to economic policy decisions. This has important implications not only for the Kazakh economy, but offers the potential for regional and international cooperation in technology and finance, including setting policy precedents for green economy practices across European, Asian and Pacific regions (IIED, 2011).

Evidence of these plans, however, is sometimes hard to see in Astana and one wonders if the benefits of green investment have been overlooked. New multi-lane avenues have been built without infrastructure for mass transit, apartment buildings have air conditioning units on their windowsills (suggesting that centralized air conditioning has not been included), and smoke and dust from nearby low-grade coal power plants are a significant health issue. There is also concern that a restructuring within Kazakhstan’s government, and specifically the closure of the Ministry of Environmental Protection and Water Resources in August 2014, has the potential to affect the implementation of plans related to the Green Economy Concept as some important topical areas such as ‘ecosystem services’ no longer clearly sit within the policy purview of the remaining Ministries (IIED, Oct 2014).

The opportunity, however, is substantial. Research suggests that cities in the developing world, and especially those that live with extreme weather conditions, can spend more than 10% of city GDP on energy alone (NCE, 2014). With a focus on energy efficiency and efficient transport this expenditure can be turned inwards to the local economy, generating jobs and sustainable growth.

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Sources:

Bloomberg, 2014. “Kazakhstan Sets Prices for Energy From Renewable Sources”. http://www.bloomberg.com/news/articles/2014-06-13/kazakhstan-sets-prices-for-energy-from-renewable-sources

Gouldson, A., Colenbrander, S., McAnulla, F., Sudmant, A., Kerr, N., Sakai, P., Hall,S. and Kuylenstierna, J. C. I., 2014. Exploring the Economic Case for Low-Carbon Cities. New Climate Economy contributing paper. Sustainability Research Institute, University of Leeds, and Stockholm Environment Institute, York, UK.

IIED, 2011. Next steps for a Green Economy Working Group in Kazakhstan Notes from the Astana Green Economy Dialogue, 24-26 November 2011.

http://pubs.iied.org/pdfs/G03489.pdf

IMF 2014. Regional Economic Outlook Update: Middle East and Central Asia. Available from https://www.imf.org/external/pubs/ft/reo/2014/mcd/eng/pdf/menapst0514.pdf

Ospanova, S., 2014. Assessing Kazakhstan’s policy and institutional framework for a green economy. IIED Country Report. IIED, London.

Ospanova. S., Oct 2014. Are Kazakhstan’s plans for a greener future at risk? IIED, London. Available from <http://www.iied.org/are-kazakhstans-plans-for-greener-future-risk&gt;

World Bank 2014. Kazakhstan Overview. http://www.worldbank.org/en/country/kazakhstan/overview

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