THE DEVELOPMENT OF THE KAZAKHSTAN'S ECONOMY UNDER THE CONDITIONS OF A SPECIAL MILITARY OPERATION IN UKRAINE AND THE TIGHTENING OF ANTI-RUSSIAN SANCTIONS

РАЗВИТИЕ ЭКОНОМИКИ КАЗАХСТАНА В УСЛОВИЯХ СПЕЦИАЛЬНОЙ ВОЕННОЙ ОПЕРАЦИИ НА УКРАИНЕ И УСИЛЕНИЯ АНТИРОССИЙСКИХ САНКЦИЙ

Разумнова Людмила Львовна

д-р экон. наук, доц., Российский экономический университет им. Г.В. Плеханова,

РФ, г. Москва

THE DEVELOPMENT OF THE KAZAKHSTAN'S ECONOMY UNDER THE CONDITIONS OF A SPECIAL MILITARY OPERATION IN UKRAINE AND THE TIGHTENING OF ANTI-RUSSIAN SANCTIONS

Lyudmila Razumnova

PhD, Associate Professor, Plekhanov Russian University of Economics,

Russia, Moscow

АННОТАЦИЯ

Целью данной статьи является исследование особенностей экономического развития Республики Казахстан, как государства-члена ЕАЭС, в условиях обострения российско-украинского конфликта в первой половине 2022 года. На основе анализа количественных оценок и сопоставления экспертных мнений, выявлены и обобществлены ключевые факторы и риски, определяющие направление макроэкономических показателей в экономики Казахстана в среднесрочной перспективе. Рассмотрены сценарии экономического развития страны в ближайшие два года. Среди прочих cделан вывод об определяющем значении динамики внешних цен для поддержания устойчивости экономического роста Республики.

ABSTRACT

The purpose of this article is to study the economic development features of the Republic of Kazakhstan, as a member state of the EAEU, in the context of the aggravation of the Russian-Ukrainian conflict in the first half of 2022. Based on the analysis of quantitative estimates and comparison of expert opinions, the key factors and risks that determine the direction of macroeconomic indicators in the Kazakh economy in the medium term have been identified. Scenarios of the country's economic development in the next two years are considered. Among other things, a conclusion was made about the decisive importance of the external prices dynamics for maintaining the sustainability of the economic growth in the Republic.

Ключевые слова: Республика Казахстан, Россия, ЕАЭС, ЕАБР, антироссийские санкции, макроэкономическая динамика

Keywords: Republic of Kazakhstan, Russia, EAEU, EDB, anti-Russian sanctions, macroeconomic dynamics

Introduction

The Republic of Kazakhstan (RK) has been a member of the Eurasian Economic Union (EAEU) since its foundation in 2015. Among the participants in this economic grouping, the Republic ranks second after Russia in terms of GDP per capita ($10.2 K) and international reserves ($32.8 bln) and second after Belarus in terms of poverty (5.2%). It should be noted that the primary tasks that any integration association sets for itself are to ensure the economic growth of national economies, increase the level and quality of life, ensure the maximum efficiency of the single market, which allows creating favorable conditions for doing business. According to experts, the main external risks for deepening integration processes within the EAEU are associated with a slowdown in global economic growth, an increase in protectionist trends in world trade, and the uncertainty of the world commodity markets conjuncture. The internal risks are in the different levels of economic development of the member countries, export-oriented model of the economy of the three countries of the Union - Russia, Kazakhstan and Kyrgyzstan, as well as a generally low level of competitiveness of products, trade and investment cooperation [1, p.55-57].

Since the start of the special operation in Ukraine in February 2022, the economies of the EAEU have been developing in the context of large-scale and ever-increasing anti-Russian sanctions, which leads to the formation of new various risks for Russia's economic partners. Thus, Belarus is the same as Russia is under direct sanctions pressure, so the decline business activity in them is a direct consequence of the application of sanctions. On the contrary, during the five months of 2022in the economy of other members of the Union - Kazakhstan, Armenia and Kyrgyzstan - there is a positive trend, which is determined by the multidirectional impact of external and internal factors on various sectors and spheres of the national economy. As a result, according to the Eurasian Development Bank (EDB) estimates, the growth of the aggregate GDP of the EAEU states during this period amounted to only 0.9% in annual terms^[1]. Thus, the specific factors and emerging risks of economic development in relation to each country within the EAEU are of interest for further study.

Methods

The starting point for the study was a EDB experts July Review on the macroeconomic indicators dynamics of the Bank's member countries for five months of 2022. In order to identify the factors that determine the medium-term development of Kazakhstan, methods of quantitative and comparative analysis of government statistics indicators and the National Bank of Kazakhstan analytics, expert opinions of Russian and Kazakh scientists, as well as the method of generalization and graphical presentation of data were used.

Economy of Kazakhstan in EABR estimates

An analysis of the macroeconomic indicators of Kazakhstan, conducted by the experts of the Eurasian Development Bank in July 2022, makes it possible to identify both positive and negative trends in their dynamics. The GDP growth of the Republic of Kazakhstan in January - May 2022 amounted to 4.6%, which is facilitated by the expansion of activity in the service sector (10.8% of growth rate) construction (8.9%) and industry (4.4%).

Another important indicator is the PMI index in the manufacturing industry, which has reached a maximum since March 2019 (53 in June). The number of new orders, employment and purchasing activity in the industrial sector increased, as well as export prices, despite the decrease in production in the metallurgy, pharmaceuticals, light industry, rubber and plastics production and the energy sector. Investments in fixed capital were up by 2.5%. Foreign trade turnover increased significantly -by 40.8%. The main increase in exports fell on mineral products, metals and products of the chemical industry due to the favorable price situation in the raw materials world markets. Inflation rose by only 0.5% (from 14.0% to 14.5%), primarily due to increased demand for food products and growing logistics costs. According to EDB experts, domestic prices are under pressure from high world food and raw materials prices, as well as the uncertainty of the geopolitical situation. In response to rising prices, the National Bank of Kazakhstan (National Bank) in the first half of 2022 raised the interest rate three times: on January 24 - from 9.75% to 10.25%, on February 24 - to 13.5%, on April 25 - to 14%. The next decision on the base rate will be announced on July 25. The expansion of business activity and the increase in world prices for the main export goods ensured the growth of tax revenues and a budget surplus of KZT 213.2 bln, while there was a deficit a year earlier. The country raised wages for educators and social support.

The unprecedented strengthening of the Russian ruble against major currencies (see Fig. 1) had a negative impact on the Kazakhstan’s economy. Let us clarify that in June 2022, the ruble was trading at a rate of approximately 51 RUB/USD, which was the result of a contraction of domestic business activity in the Russian economy, foreign exchange restrictions and the forced refusal of the Russian regulators from the fiscal rule. If in the first quarter of this year the nominal exchange rate of the ruble against the USD fell by 13%, then in the next three months it strengthened by 11.7%. This resulted in a 40% reduction in Russian imports. Measures taken to ease foreign exchange restrictions and the Russian authority’s statements about foreign exchange market interventions contributed to the temporary weakening of the ruble in the first half of July to 60-63 RUB/USD.

Figure 1. Nominal exchange rate of the RUB/USD, January-June 2022, RUB

An important consequence of the strengthening of the Russian ruble was a strong discrepancy between the dynamics of the exchange rates EAEU states and the Russian currency. Since the beginning of the year, the Kazakh tenge (KZT) exchange rate has fallen by more than 30%, while the Belarusian ruble has sank by almost 40%. From March 10 to July 1, the tenge was diminished from the annual maximum of 0.23 to 0.11 KZT/ RUB that is, two times (see Fig. 2).

The weakening of the Kazakhstan national currency can lead to a significant decrease in the Russian imports and growing inflation in the Republic. Experts predict not only a rise of food prices from Russia, but also the emergence of their shortage. At the same time, the competitiveness of Kazakh export in the Russian market will increase, which will positively affect the foreign trade balance of Kazakhstan [2, p.11-12]. However, at present, the exchange rate difference leads to the fact that Russians are massively buying up relatively cheaper goods on the Kazakhstan market.

Figure 2. KZT/ RUB exchange rate dynamics, 07/29/2021-07/22/2022, RUB

In June 2022, Fitch International Rating Agency Ratings has affirmed Kazakhstan's sovereign credit rating at 'BBB' with a 'stable' outlook, which indicates the resilience of the economy to external shocks. The impact of anti-Russian sanctions, according to Fitch analysts, was mitigated by a favorable price environment in the global oil market, which was characterized by an upward annual trend until mid-June 2022, and the expectation of oil production increase at the Tengiz field in 2023 (see Fig. 3).

Figure 3. Brent price dynamics in July 2021-2022

Let’s specify that Russia's credit rating is at the same level that Kazakhstan's, which reflects its sound macroeconomic policy, stable level of external fiscal balance and the lowest public debt (relative to GDP) in the group of similar countries. At the same time, the rating agency admits the risk of imposing new anti-Russian sanctions, excluding new wide-ranging restrictions on the Russian banking or energy sector that could affect the country's fundamental credit indicators [3].

Forecast of the Kazakhstan’s economy development

According to EDB experts, in the second half of 2022, economic activity in Kazakhstan will be supported by fiscal policy and high prices for key export commodities. The crucial driver of investment growth throughout the year will be the mining industry due to Tengiz field development. The factor of foreign trade surplus pressure on the ruble towards its strengthening will remain, however, experts sweat out its gradual depreciation to 70 RUB/USD by the IV quarter of 2022, which will contribute to the Kazakhstan’s currency adjustments. At the same time, a decrease in demand for the Kazakh exports out of a recession in the Eurozone and the United States may have a negative impact on the economy. Fiscal policy easing and high inflationary expectations will not significantly slow down price growth in the country, which will drop to 13.2% by the end of the year. According to the EDB, GDP growth rate may drop to 3%–3.5%, which is a relatively high indicator for the Kazakh economy [2].

Experts of the National Bank of Kazakhstan predict that inflation will remain at the level of 13%-15% and note that price growth will be supported by capital outflows and external inflation, in particular imported from Russia, as well as supply-side risks and an excess of budget expenditures over planned in the republican budget for 2022-2024. The risks of a sharp rise in prices for public utilities are also high due to the end of the moratorium on their increase, even taking into account the implementation of government measures aimed at reducing inflation. Therefore, the National Bank will make further decisions on changing the base rate in consideration of actual inflation rates and the emerging balance of external and internal risks. A gradual reduction in external inflationary pressures and the government's application of a counter-cyclical fiscal rule could bring inflation down to 7.5%-9.5% in 2023 [4].

The Kazakh economy growth in 2022, according to the forecast of the National Bank, can range from 2.8% to 3.8%. Thus, the greater uncertainty of this forecast compared to the EDB is explained not only by the geopolitical crisis, weakening of external demand and restructuring of supply chains, but also, possibly, by new problems of exports access to international markets. Therefore, the Bank 's experts do not rule out a revision of estimates of GDP in 2022 towards lower growth rates. At the same time, more optimistic forecasts are given for 2023 as it is expected a return to 3.5%-4.5% of GDP growth, primarily due to the reduction of the economy development uncertainty, the growth of domestic demand, the normalization of export and import supply chains, increasing extraction of energy resources and weakening or even complete removal of oil production restrictions under OPEC+ [4].

Discussion

In March 2022, the Government of Kazakhstan launched its joint action plan with the National Bank to mitigate the adverse impact of the consequences caused by the Russian-Ukrainian conflict. The financial regulators of Kazakhstan are planning to maintain a floating exchange rate and continue active interventions in order to maintain the national currency since February this year. Together with the National Bank, the Government is implementing a depositor protection program that provides for 10% accruals on national currency deposits in the second-tier banks. For cross-border transactions, alternative settlement mechanisms are used. The base rate is consistently raised, and funding for state regions development programs has been increased [5].

At the same time, it should be noted that regulators, realizing the great danger of a weakening of the national currency for the economy, have very limited opportunities to maintain its stability and reduce the economy dependence on the ruble. This is due to the decision of Russia to abandon the fiscal rule and buy dollars and euros for international reserves, which previously led to a constant depreciation of the Russian currency.

Is it possible to assume that attempts will be made to replace Russian imports by diversifying foreign suppliers or domestic production? Let us clarify that the trade turnover between Russia and Kazakhstan in 2021 amounted to about $25.6 bln, which is 34% more than a year earlier. Kazakhstan supplies goods to Russia for about $7 bln, in 2021 their volume increased by 41%. It is noteworthy that in 2021, the trade turnover of Kazakhstan for the first time in 7 years, after the introduction of the floating exchange rate regime, exceeded $100 bln, but did not reach the level of 2014. At the same time, two-thirds of exports are provided by mineral products, 40% of imports are equipment and machinery [6].

For the government of Kazakhstan, which has been trying for a long time to diversify exports and increase the share of non-commodity goods and high-value products, the Russian market is of great importance, since almost half of the supplied goods sold are manufacture. Approximately the same amount imported into Kazakhstan from Russia falls on raw materials and low-added goods - metals, mineral and chemical products, wood, etc.; 26% - for machinery, equipment and transport. The share of Kazakhstan in Russian exports is only 3.8%, in imports - 2.4%, while the share of Russian products in the Republic's imports exceeds 30%. The turnover of Kazakhstan is poorly diversified geographically, as 74% of its international trade falls on 10 countries. Therefore, the government of the Republic will pursue a policy of diversifying trade relations regardless of the situation in the world or in the Russian economy, which is confirmed by the words of the President of Kazakhstan Kassym-Jomart Tokayev: “Now it is absolutely impossible to follow a self-reliance policy... import substitution does not exist in its pure form. We need to actively look for opportunities in other markets and interact” [7].

At the same time, the main factor that puts pressure on the country's exchange rate is outside factor, on which the government of Kazakhstan cannot exert a significant influence. It should be noted that in the Russian-Ukrainian conflict, Kazakhstan took an ambivalent position. On the one hand, Kazakhstan does not rule out its limited involvement in schemes of parallel imports in order to circumvent the anti-Russian sanctions. At the same time, a number of adopted decisions, in fact, reflect the accession of Kazakhstan to the anti-Russian sanctions. So, Sberbank and Alfa-Bank, which fell under the sanctions, were forced to sell their Kazakh subsidiaries. After completion of the transaction, Alfa-Bank Kazakhstan will change its brand to Eco bank. The procedure for obtaining plastic cards in Kazakhstani banks for Russians has become more complicated. Kazakhstan has banned flights of its largest air carriers over the territory of Russia. Officially, Kazakhstan announced its refusal to participate in parallel imports.

In June 2022, speaking at an international economic forum in St. Petersburg, Kazakh President Tokayev refused to recognize the Donetsk and Luhansk People's Republics, calling them "quasi-states". The subsequent decision of the Russian court to ban the activities of the Caspian Pipeline Consortium (CPC) for a month for environmental reasons (later replaced by an administrative fine of RUB 200 K) [8], which exports 80% of Kazakh oil, came as a shock to businessmen and politicians. Head of Eurasian Expert Council Chingiz Lepsibayeva assessed the court's decision as exclusively political and having negative consequences for Kazakh-Russian relations. In the current situation of confrontation between Russia and the EU, Kazakhstan expects to support oil supplies to Europe by diversifying its own export routes, given that European countries account for 70% of its export earnings. However, according to Mikhail Krutikhin, a partner at the consulting company RusEnergy, Kazakhstan’s current capacities are not enough, and the reorientation of oil transit around Russia may take several years. An alternative route for Kazakh oil exports can only partially compensate for deliveries via the CPC, which can ship in small tankers via the Caspian Sea to Azerbaijan, then to Georgian ports via small oil pipelines or by rail, then by sea or via Makhachkala to Novorossiysk through the Russian oil pipeline [9]. According to Stanislav Pritchin, senior researcher at the Center for Post-Soviet Studies at IMEMO RAS, Russian-Kazakh relations are moving into the stage of searching for points of reciprocal pressure, realizing the accumulated conflict potential [10].

The analyst at Esperio Nurbek Iskakov points out that the consequences of the sanctions crisis in Russia for Kazakhstan are of lesser importance than the world oil market price situation. This is proven by the fact that all major economic downturns in Kazakhstan - in 1998, 2008, 2015-2016 and 2020 - were accompanied by a significant drop in oil prices (by 50-80%). Iskakov points out suggests the possibility of implementing two scenarios. According to the optimistic baseline, the decline in Kazakhstan's GDP growth by the end of the year will be no more than 1%, that is, up to 2.0% -2.5%, since Brent oil prices will remain above $100 per barrel and high oil revenues from exports will offset most of the losses associated with the cost of restructuring the Kazakhstan's import and export logistics. However, he also does not exclude the impact of another factor noted by other experts - the fall in business activity in world economic centers, which will lead entire world economy to the slide into recession, which, in turn, will cause a collapse in oil prices in the second half of 2022, perhaps by 50-80%. In this case, the economy of Kazakhstan will receive a double blow, including losses associated with the restructuring of logistics and a drop in oil revenues. In this case, the combined effect of these two factors can reduce GDP growth rates by 2%-3%, as well as increase the unemployment rate from 4.9% to 5.5%-6.0% [11]. An updated forecast of the dynamics of the world economy, which will allow us to judge the likelihood of this scenario, will be published by the IMF on July 26, 2022.

Therefore, it is no coincidence that many Kazakh experts have high hopes for the reforms of President Tokayev, which will be announced in July 2022. It is likely that its focus will be not only on the political sphere, but also on the problems of increasing the competitiveness of the economy, which have been actively discussed by Kazakh scientists for many years: growth in the volume of production of the non-oil sector, manufacturing and agriculture; increased spending on R&D and innovation; demonopolization and the business climate improvement; a modern financial infrastructure creation; developing a more dynamic and innovative private sector; attracting foreign direct investment (FDI); moving away from raw material specialization and reducing the dependence of budget revenues on the energy sector; improving the efficiency of financing state programs and employment; ensuring inclusive growth, etc. [12]. The government of Kazakhstan pays special attention to attracting FDI, which has a positive impact on the country's economy in terms of reducing unemployment and developing certain sectors of the economy. However, as studies by Kazakh scientists show, their impact on economic growth is very insignificant, almost two times less than, for example, in Russia [13].

Conclusions

The study proves that the sustainable growth rates of the Kazakh economy in the initial period of the development of the Russian-Ukrainian military confrontation were supported by the growth of industrial production, construction volumes and the service sector, an increase in commodity exports and consumer demand, as well as high world oil prices, due to which the negative effects of rising food products prices, supply chain restructuring and weakening of the national currency were smoothed out. At the same time, it is highly likely that in the second half of 2022, against the backdrop of a slowdown in global economic growth, there will be a decrease in demand for Kazakhstani goods, both in the external and domestic markets.

If high world oil prices persist, Kazakhstan will be able to overcome the projected decline in the economy as early as next year. However, a possible decline in business activity in the main centers of the world economy may lead to a drop in energy demand and, as a result, in oil prices, which will reduce Kazakhstan’s export earnings and sources of growth. Therefore, in the medium and long term, moving away from specialization in raw materials and increasing the innovativeness of the economy remain the most urgent tasks of the government.

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