by Dmitry Belyanin
Introduction
On November 24, Turkey shot
down a Russian war plane, the SU-24, which conducted military operations in
Syria. Turkey claimed that the jet had
encroached on Turkish airspace. Earlier,
Russian President Vladimir Putin had accused Turkey, Saudi Arabia and Qatar of
supporting ISIL terrorists. Russia
responded to the shooting incident by prohibiting tourist flights into Turkey
and imports of such Turkish goods as fruits, vegetables and chicken. This prohibition, in addition to the American
and European embargo on food imports from Russia, is expected to affect
Russia's major trading partners, particularly members of the Eurasian Economic
Union. Kazakhstan’s opportunities for
economic diversification are also affected by the persisting decline in oil
prices and by prolongation of the operation against ISIL, which can be
attributed to disagreement among the participants, including Russia, Turkey and
the United States. This article analyzes
these factors in detail.
Opportunities for
Kazakhstan's agriculture
The Russian embargo on Turkish
agricultural imports may help Kazakhstan to boost farm exports. As of 2014, agriculture accounted for only
2.8% of Kazakhstan's overall exports and 14.2% of its exports to the Commonwealth
of Independent States, well below the corresponding shares of oil exports,
according to Kazdata. Plummeting oil prices weaken the tenge, which may work in
favor of exporters to Russia, unless the price decline weakens the ruble more
than it does the tenge. But periods
of depreciation have been disturbed by interventions of Kazakhstan’s central
bank in the foreign exchange market. Exporters
cannot count on tenge depreciation over the long run.
Moreover, any rise in oil
prices is likely to induce the National Bank to temporarily fix the tenge
exchange rate, since allowing it to appreciate would offset the gain in tax revenues
from oil. (The National Bank says its
prime goal is to cut inflation; but given that its chair serves at the pleasure
of the president of Kazakhstan, political goals are not impossible.) Also, it
may be less risky to export to countries with more stable national
currencies.
Opportunities for hedging
are extremely limited, since the market for derivative securities is underdeveloped. In 2014, futures accounted for less than 0.1%
of trade on the Kazakhstan Stock Exchange, estimated KASE. Furthermore, agricultural producers depend on
imports of seeds and equipment. And they
face stiff competition from other transition countries, like Uzbekistan,
Azerbaijan, and the separatist region of Abkhazia in Georgia. Kyrgyzstan is a
particularly powerful rival, since it belongs to the Eurasian Economic Union
and has low labor costs.
Additional revenues from
Kyrgyzstan, as it takes advantage of the situation in Russia, may benefit
Kazakhstan indirectly. Kazakhstan
accounts for about 8% of migrant workers from Kyrgyzstan, with the remaining
92% going to Russia. According to the
Eurasian Development Bank, a 1% decline in GDP per capita of Kyrgyzstan will raise
labor migration by 0.7%. Increases in the
average income of Kyrgyzstan decrease migration, leaving more jobs for citizens
of Kazakhstan. Also, economic growth in
Kyrgyzstan stabilizes the country politically, reducing the chance of another
color revolution which could spread throughout Central Asia. The same logic is true for Uzbekistan. It does not have a history of color revolutions
but may experience one, given the old age of the President, its closed,
underdeveloped, and remittance-dependent economy, and its lack of participation
in regional alliances such as the Eurasian Economic Union and the Collective
Security Treaty Organization.
Nevertheless, in 2014, Kyrgyz
exports to Russia fell 20%, due to declining demand, estimated the World Bank
Group. Since the share of Russia in
Kazakhstan’s trade is relatively small, only significant changes in government
policy could foster export diversification into agriculture and increase farm
exports to Russia. In 2014, Russia
accounted for only 8% of Kazakhstan’s exports and 34% of Kazakhstan’s
imports.
High gasoline prices, too,
impede transportation of agricultural products for export. In spite of decreasing oil costs, gas prices
in Kazakhstan remain high, due to the country's dependence on Russia for crude
oil and due to politics. Kazakhstan has only three refineries: In Atyrau, created
in 1945 and processing 5.2 million tons per year, and in Shymkent (6.2 million
tons) and Pavlodar (8 million tons), both built in the 1970s. The Pavlodar refinery processes only crude
oil from Siberia, while half of the oil used by the Shymkent refinery is from
Russia, reported Osmanov. In Kazakhstan, the government sets gas prices; changes
in them lag changes in oil prices by more than three months. The government fixes gas and diesel fuel
prices during crop cultivation and harvesting, and then lets them increase,
according to Issayev.
Diversification is also
hindered by increasing interest rates on extended credits. Interest rates on tenge loans to non-banking
legal entities rose from 10.6% at the end of January 2013 to 14.8% at the end
of November 2015. Loans in foreign
currency are cheaper in terms of interest rates but riskier due to tenge
depreciation. Their extension may be
restricted in the future, said the National Bank of Kazakhstan.
At the same time, Turkish
citizens who no longer feel comfortable in Russia may prefer Kazakhstan. As long as Kazakhstan remains neutral about
the Russian-Turkish conflict (or at least does not resort to economic
measures), Turks may take more jobs here. Unlike Kyrgyz guest workers, Turks
will work primarily in high-paying jobs or run their own businesses. Their willingness to work in Kazakhstan will surely
be directly proportional to the stabilization of the exchange rate regime of
the tenge, relative to the exchange rate of the Turkish lira.
The new regional transportation
network, The New Silk Road, can enable more efficient transportation of
exported goods. Nevertheless, its first
route bypasses Russia, and it is unclear when the Road will go there, according
to Politforums.net. The Road can also benefit China by expanding its exports –
which may benefit Kazakhstan, too. Though its economy is fast-growing, and though it is portrayed in the
Russian media as an alternative to the West, China is usually neutral in geopolitical
struggles. So Kazakhstan will try to
strengthen relations with this large player, since this won’t compel it to
choose sides in most international disputes.
As a member of the World Trade
Organization, Kazakhstan cannot subsidize exports or much agriculture. Farm
subsidies are restricted to 8.5% of the gross value of the product. Only 3% of agricultural producers are
classified as large, and smaller producers are much less likely to survive the
tough competition, said KazakhZerno.
Furthermore, the need to balance its budget during the current crisis
implies that the government will weaken its support of agriculture.
On the domestic market,
agricultural producers will face increased imports from Turkey. From the prohibition of the export of
tomatoes alone, Turkey is expected to lose about $300 million. Turkey will attempt to substitute other CIS
markets, like Kazakhstan, for the Russian market, noted Kazdata.
Most important, however, is
that the economy of Russia remains in recession. And while the Kremlin favors
importers from the Eurasian Economic Union over other importers, it favors
domestic producers over importers.
Smuggling of falsely labeled products may induce Russia to restrict
trade again. For these reasons, export
diversification into agriculture appears extremely risky.
Impact on Tourism
Tourist sites in Kazakhstan
may benefit from Russia’s prohibition on visiting Turkey, but they face tough
competition from Kyrgyzstan (mainly Issyk-Kul Lake) and from Russia
itself. Together with recession in
Kazakhstan, this rivalry may compel Kazakhstani sites to provide discounts. The GDP share of tourism in Kazakhstan is only 0.3%,
much less than the potential share.
Nevertheless, the sector has been growing. In 2012, income from tourism
amounted to 151.7 billion tenge, almost double that of 2008, and there were 641,300
tourists, compared to 630,600 in 2011 and 485,600 in 2010, estimated Adilet. The depreciation of the tenge may attract tourists
not only from Russia, but from other CIS countries, whose currencies have not weakened
as rapidly. Relative political stability
in Kazakhstan, which is likely to persist throughout Nazarbayev’s reign,
attracts tourists. However, hotels and other facilities in Kazakhstan are
inferior to those in Turkey, at comparable prices. The dollar prices of traveling to Turkey for
Kazakhstanis, too, may fall, but this may be offset by tenge depreciation.
Having lost Russian tourists, Turkish facilities
will try to appeal to Kazakhstanis but will probably fail, due to declining
dollar incomes of clients -- and to some loss of reputation, to the extent that
they believe Russian claims that Turks support terrorism.
Production of military equipment
The conflict between Russia
and Turkey, along with other regional conflicts, creates demand for arms. This can be satisfied by such producers as
the joint enterprise LLP “Kazakhstan Paramount Engineering,” whose new factory
produces armored wheeled equipment. But diversifying
into military equipment may diminish Kazakhstan’s geopolitical neutrality and its
reputation for being peaceful.
Other sectors and industries
While the Eurasian Economic
Union favors textile producers from Kyrgyzstan over those of Turkey by
definition, the worsening of Russian-Turkish relations precludes accession of
Turkey into the Union soon, and it creates the threat that Kazakhstan may
prohibit some Turkish imports. At the same time, Turkish producers may discount
their goods for Kazakh importers.
Nevertheless, though Turkish clothing has not fallen under the Russian
embargo, demand for it may plummet throughout the region. Importers might replace it with Chinese- and
Kyrgyz-made clothing. In addition, consumers
who believe that Turkey backs the ISIL may buy goods from other countries.
Since clothes from Turkey
cost more than those from China and Kyrgyzstan, recession would especially cut demand
for the former. The emerging textile
industry of Kazakhstan may take advantage of this. As with agriculture, false labeling of products
as being made in Kazakhstan is an issue, though tenge depreciation makes this practice
more expensive for the scofflaws.
Consumers are likely to be
less sensitive about such Turkish-made products as detergents and packaged food
products, since these are aimed at low-income consumers who don’t always read
product labels.
Conclusion
Worsening Russian-Turkish
relations create opportunities for Kazakhstan to diversify its economy. But these are limited by competition,
primarily with Kyrgyzstan, Uzbekistan and Russia; a decline in consumer demand
due to falling income; and by geopolitics.
The decay in relations will weaken the tenge, lowering the cost of
Kazakhstani exports and raising the cost of imported inputs. Finally, the worsening of Russian-Turkish
relations may well strengthen Kazakhstan’s economic relations with China and
Kyrgyzstan.
Dmitriy Belyanin
has a Master’s of Business Administration degree in finance and a Bachelor of Arts degree in
economics from KIMEP University. Since
2007, he has been writing on economics and finance issues ranging from stock
markets to environmental economics. He is the associate editor of this blog.
References
Adilet. “On the project of the decree of the
President of the Republic of Kazakhstan ‘On ratifying the conception of development
of the tourist industry in the Republic of Kazakhstan Until 2020.’" 2015.
Eurasian Development Bank.
“Labour migration and human capital of Kyrgyzstan: Impact of the Customs
Union.” 2012.
Kazakh Zerno. “How will WTO accession affect agriculture of Kazakhstan? An analysis of the situation.” 2015.
Kazdata. “Parameters of
foreign trade and the structure of imports and exports of the RK.” 2014.
Kazdata. “Kazakhstan and
Turkey: Imports and exports, trading relations after the imposition of sanctions
in 2015.” 2015.
National Bank of Kazakhstan.
“Interest rates of banks on extended credits.” 2015.
Politforums.net. “The first
train on the New Silk Road bypassing Russia arrived in Georgia. Russia walked again.” 2015.
http://www.politforums.net/eng/world/1450021330.html
http://www.politforums.net/eng/world/1450021330.html
Z. Osmanov. “Competitiveness
of the oil and gas industry of the Republic of Kazakhstan.” Oil and Gas Journal. 2012. <http://old.group-global.org/ru/storage-manage/download-file/21246>
World Bank Group. “Kyrgyz
Republic: Adjusting to a challenging regional economic environment.” 2015. <http://www.worldbank.org/content/dam/Worldbank/Publications/ECA/centralasia/Kyrgyz-Republic-Economic-Update-Spring-2015-en.pdf>
