By Dmitriy Belyanin
Why it pays to hit the road
Kazakhstan's location
between China to the East, Russia to the North, and Europe to the West makes it
an important transit country in transporting goods between these large
markets. Stability and relative trade
openness contribute to Kazakhstan's transit potential. Given declining oil prices, diversifying
Kazakhstan's economy to sustain development becomes crucial. It can diversify into transit, but it faces
hurdles.
Benefits of
developing transportation infrastructure
Improving transportation
yields scale economies and network effects benefiting such industries as
tourism and recreation. Travelers demand
hotels and restaurants. And demand for
transportation infrastructure creates demand for metal and other raw materials,
supporting industries that had sold mainly exports.
Developing transit creates jobs. Over 72,000 workers build roads alone,
covering 2,000 square kilometers, according to Asset Isekeshev, the Minister of
Kazakhstan on Investment and Development, as reported by Primeminister.kz. Through the multiplier effect, this stabilizes an
economy suffering from oil price shocks.
Transit of goods brings
large revenues. According to Berik
Kamaliyev, former Minister of Transport and Communications, Kazakhstan earned
$900 million revenues from cargo shipment in 2010. Of 15 million tons shipped, 14 million were
shipped by railroad, as reported by the News-Kazakhstan Information
Agency. Kazakhstan Temir Zholy, the
national railroad company, was selected for the "people's IPO," a
privatization of 10% of its shares, which will occur this year. This may strengthen the underdeveloped stock
market in Kazakhstan, which, after two IPOs (KazTransOil in December 2012 and
KEGOC in December 2014), still accounts for only 1%, or 899.6 billion KZT, of
overall trades on KASE as of 2015. In
2014, its share was 0.4%, but the increase was due to the purchase of 10% of
KazMunaiGas shares by the National Bank of Kazakhstan from
Samruk-Kazyna for 750 billion KZT total, not due to the IPOs. The transaction was meant to strengthen the
financial performance of KazMunaiGas, according to Berik Beisengaliyev, member
of Samruk-Kazyna, reports National
Business. Given the potential of Kazakhstan Temir Zholy to bring revenues
to Kazakhstan, its IPO needs effective promotion.
Kazakhstan’s logistics
rankings and their relevance to transit
Developing Kazakhstan as a
transit state reflects its commitment to free trade, since transit facilities
can be used to import and export. A
transit state must have a liberal customs regime. If it hinders imports, it is less likely to
have transit.
Kazakhstan belongs to the
Eurasian Economic Union and the World Trade Organization. The country is also taking part in the New
Silk Road, which will be a road network linking China and Europe through the
former Soviet Union and the Middle East.
The first train of the New Silk Road passes through Kazakhstan, Azerbaijan
and Georgia, bypassing Russia.
Before the New Silk Road,
shipments took about 40 days to reach Europe from China. Now, shipments can reach Georgia in 8-10
days, and various European countries in 3-5 days, reports Focht. Quicker transit reduces costs and boosts
demand.
The country still ranks 88th
on the 2014 World Bank’s Logistics Performance Index (LPI), with a score of
2.70. Germany, with a score of 4.12,
ranks first. Russia, a key trading partner, has a score of 2.69, ranking 90th.
China, another key partner, has a score of 3.53 and ranks 28th. Kazakhstan performs worst in customs (2.33)
and best in timeliness (3.24).
The table below presents the
Index for key European countries, countries that participate (or may
participate) in the New Silk Road, and countries affected (because of
embargos). Kazakhstan performs better
than many neighbors but much worse than some European countries. Its infrastructure is average by standards in
the Commonwealth of Independent States, and so is dealing with international
shipments, but it is doing relatively well in logistics competence and tracking
and tracing.
Country
|
||||||||
Germany
|
1
|
4.12
|
4.10
|
4.32
|
3.74
|
4.12
|
4.17
|
4.36
|
United Kingdom
|
4
|
4.01
|
3.94
|
4.16
|
3.63
|
4.03
|
4.08
|
4.33
|
France
|
13
|
3.85
|
3.65
|
3.98
|
3.68
|
3.75
|
3.89
|
4.17
|
Italy
|
20
|
3.69
|
3.36
|
3.78
|
3.54
|
3.62
|
3.84
|
4.05
|
China
|
28
|
3.53
|
3.21
|
3.67
|
3.50
|
3.46
|
3.50
|
3.87
|
Turkey
|
30
|
3.50
|
3.23
|
3.53
|
3.18
|
3.64
|
3.77
|
3.68
|
Ukraine
|
61
|
2.98
|
2.69
|
2.65
|
2.95
|
2.84
|
3.20
|
3.
|
Kazakhstan
|
88
|
2.70
|
2.33
|
2.38
|
2.68
|
2.72
|
2.83
|
3.24
|
Russia
|
90
|
2.69
|
2.20
|
2.59
|
2.64
|
2.74
|
2.85
|
3.14
|
Armenia
|
92
|
2.67
|
2.62
|
2.38
|
2.75
|
2.75
|
2.50
|
3.00
|
Belarus
|
99
|
2.64
|
2.50
|
2.55
|
2.74
|
2.46
|
2.51
|
3.05
|
Tajikistan
|
114
|
2.53
|
2.35
|
2.36
|
2.73
|
2.47
|
2.47
|
2.74
|
Georgia
|
116
|
2.51
|
2.21
|
2.42
|
2.32
|
2.44
|
2.59
|
3.09
|
Azerbaijan
|
125
|
2.45
|
2.57
|
2.71
|
2.57
|
2.14
|
2.14
|
2.57
|
Uzbekistan
|
129
|
2.39
|
1.80
|
2.01
|
2.23
|
2.37
|
2.87
|
3.08
|
Turkmenistan
|
140
|
2.30
|
2.31
|
2.06
|
2.56
|
2.07
|
2.32
|
2.45
|
Kyrgyz Republic
|
149
|
2.21
|
2.03
|
2.05
|
2.43
|
2.13
|
2.20
|
2.36
|
Table 1: Logistics
Performance Index components for selected countries
Opportunities and threats
arising from conditions in neighboring countries
Russia’s role in trade and
transit decreased due to the embargo on its imports of European and Turkish
goods. Goods subject to the embargo that
were being shipped through Russia into other transition countries, could be
destroyed by Russian authorities, since the Kremlin feared that they would be
sold in Russia in violation of the embargo rather than in the intended country
of destination.
Russian policy towards
imports from other countries, too, is subject to greater restrictions than
Kazakhstan’s. For example, when Kazakhstan
joined the World Trade Organization, it was decided that lower duties than the
Unified Customs Tariff of the Eurasian Economic Union would apply for these
imports: Medicines, medical equipment, manufacturing equipment, and
transportation, including personal vehicles, reports Lykova. This factor makes Kazakhstan more attractive,
but it can also create pressures on the country to restrict trade in order to
match the policies of other members of the Eurasian Economic Union.
Kazakhstan and China cooperate
on infrastructure. At the end of 2014, a
joint Kazakh-Chinese Direct Investment Fund was created with a capitalization
of $500 million. The Fund will finance
infrastructure and industrialization projects under the Nurly Zhol
Program. And a potential financier of
the New Silk Road is the Asian Infrastructure Investment Bank, with 57
prospective member states, founded by the Chinese government in response to the
slow pace of reforms of the International Monetary Fund and the World Bank in
developing countries, reports Gaifutdinova from Forbes.kz.
Growing economic cooperation
between Russia and other major players around the region, such as Iran and
India, may involve Kazakhstan more deeply in trade as well as create joint
enterprises. For example, in cooperation
with China and Iran, Kazakhstan is to build a $6 billion oil refinery. Construction begins this year. The project is supposed to overcome fuel
shortages in Kazakhstan and contribute to lower fuel prices, reports
Tonkonog-Daribayeva from BNews.kz. Earlier,
in December 2014, a railroad linking Kazakhstan, Turkmenistan and Iran was
completed. It will eventually be
integrated with other routes of the New Silk Road, carrying up to 10 million
tons of cargo annually, says Dknews.
In December 2015, China
proposed a free trade zone under the Shanghai Cooperation Organization by 2020,
reports Sputnik. Belarus, India,
Pakistan, Iran and Afghanistan, observers in the organization, may become full
members. The free trade zone will expand
transit opportunities.
China may also join the
Trans-Pacific Partnership (TPP), a free trade agreement that includes 12
countries in the Pacific Rim, accounting for 40% of the world’s GDP (United
States, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand,
Canada, Mexico, Chile and Peru), which can make it tougher for China’s
neighbors in other directions to compete for the Chinese market. John Kerry, the US secretary of state, has
invited Russia and China to join the Partnership, which creates the possibility
that Kazakhstan will join someday.
According to Christian Gomez of the New American magazine, “the
plan was to include Russia and China from the start.” Due to geopolitical tensions, however, Russia
is extremely unlikely to accept the invitation soon, since the United States is
the chief party in the agreement. China,
too, is unlikely, but it may join if the economic slowdown there and in Europe
makes trade between them unprofitable.
Following Russia, Kazakhstan is likely to face more barriers if China
joins the TPP.
The Middle East and South
Asia are likely to become more tense and unstable in the next few years. This can undermine the efforts of increasing
transit and result in losses. It can
also aggravate the problem of refugees and illegal immigration into Europe,
inducing tax increases, government spending and unemployment, cutting import
demand and undermining transit there. The geopolitical neutrality of Kazakhstan
may be challenged as well.
Furthermore, the continuing
economic slowdown can impede Kazakhstan’s transit potential. In the October 2015 World Economic Outlook
Database, the IMF projects that the rate of real GDP growth in China will
decrease from 7.3% in 2014 to 6.81% in 2015 and 6.3% in 2016. The growth rate in exports of goods is
projected to decrease from 5.14% in 2014 to 3% in 2015 and is expected to
recover to 3.5% in 2016. This decrease
will reduce exports, including shipments through Kazakhstan. Imports into Kazakhstan are to decline by
12.32% in 2014 and by 1.06% in 2015, with a slight resurgence of 0.83% in
2016.
Trade and GDP have fallen or
are falling for other participants of the New Silk Road. Table 2 forecasts real GDP and external trade
dynamics of the countries that took part in the first New Silk Road route. (Because the October 2015 database was
created before the Russian-Turkish conflict, the table excludes Turkey. But we can easily assume that the conflict
will further decrease trade, since Turkey is an important trading
partner.) Because the Kazakh tenge has
been depreciating relative to the dollar quicker than the Chinese yuan does,
exporters to Kazakhstan will lose.
Coordination of monetary policies may be used to stabilize trade and
transit.
Country
|
Parameter, % change
|
2013
|
2014
|
2015E
|
2016F
|
2017F
|
China
|
Real GDP Growth
|
7.685
|
7.300
|
6.813
|
6.300
|
6.000
|
China
|
Volume of Imports of goods
|
9.702
|
4.580
|
2.471
|
3.532
|
4.164
|
China
|
Volume of exports of goods
|
9.583
|
5.139
|
3.000
|
3.500
|
4.189
|
Kazakhstan
|
Real GDP Growth
|
6.000
|
4.300
|
1.501
|
2.355
|
3.798
|
Kazakhstan
|
Volume of Imports of goods
|
4.852
|
-12.324
|
-1.064
|
0.835
|
2.209
|
Kazakhstan
|
Volume of exports of goods
|
-0.531
|
-4.695
|
-23.152
|
-4.438
|
10.578
|
Azerbaijan
|
Real GDP Growth
|
5.803
|
2.793
|
4.041
|
2.530
|
2.861
|
Azerbaijan
|
Volume of Imports of goods
|
8.696
|
-14.471
|
7.015
|
-9.310
|
3.089
|
Azerbaijan
|
Volume of exports of goods
|
-1.727
|
-4.133
|
-1.921
|
0.151
|
-1.550
|
Georgia
|
Real GDP Growth
|
3.320
|
4.766
|
1.977
|
2.960
|
4.951
|
Georgia
|
Volume of Imports of goods
|
2.862
|
14.604
|
-4.203
|
0.661
|
6.049
|
Georgia
|
Volume of exports of goods
|
29.884
|
-0.272
|
-10.052
|
5.475
|
7.940
|
E-estimated, F-forecasted
|
||||||
Table 2: Actual and
Forecasted Real GDP Growth and External Trade Dynamics of the Main Participants
of the New Silk Road (2013-2017)
Source: International
Monetary Fund, October 2015 World Economic Outlook Database
Domestic Considerations
Modernization of roads,
railroads and railroad stations, bus terminals, airports and sea ports implies
a lot of government spending. Citizens may prefer direct support of sectors
benefiting from improved transportation.
Also, if the government finances their modernization by increasing taxes
or cutting social expenditures excessively, the idea may be unpopular and may
conflict with other worthy projects.
Relying excessively on the money from the National Fund, too, would be
risky, given the turbulent global economy.
(In practice, 686 billion KZT were allocated from the National Fund in
2015 to implement the “Nurly Zhol” Program, including modernization of
infrastructure, as reported by Forbes.kz, but the President later restricted
use of the Fund.) Infant industries,
which may need temporary high trade restrictions, will find it difficult to
compete under the low tariffs necessary for efficient transit. Transition countries like Kazakhstan may want
to imitate Russia’s import substitution with their own trade barriers. The projects must be implemented quickly to
minimize the payback period, but not at the expense of quality. Finally, commitment to free trade and free
enterprise must continue.
Conclusion
By developing as a transit
state, Kazakhstan can earn substantial revenues, develop industries such as
tourism, take advantage of scale economies and network effects, and create
jobs. In international agreements,
Kazakhstan has committed to free trade, which a transit state needs.
Kazakhstan’s logistics must
improve. In the face of recession,
geopolitical turbulence, instability in the Middle East and southern Asia, and
the refugee crisis in Europe, development of Kazakhstan as a transit state may
be challenged. Infant industries may
lobby for trade restrictions which undermine Kazakhstan’s transit
potential. But the payoff to good
transit justifies tackling these knotty problems.
Dmitriy Belyanin
has a Master’s degree of Business Administration in Finance and a Bachelor of
Arts degree in Economics from KIMEP University.
Since 2007, he has been writing on issues in economics and finance
ranging from stock markets to environmental economics. He is the associate
editor of this blog.
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