A DECADE AGO, Kazakhstan looked like a classic basket case, with inflation at 2,000% a year darkening a landscape replete with shuttered factories and fallow farmland.
Today, growth has totalled some 40% over the past four years – the fastest expansion in the world after Equatorial Guinea, which is in the midst of its own oil boom. Inflation is 6%, the budget surplus was 2% in 2003 and this vast country stretching from Europe to China is a net creditor to the world. Last year, Moody's upgraded the sovereign to investment-grade Baa3.
At independence in 1991, Kazakhstan had a per-capita GDP that was 40% of Russia's. It has now caught up with its neighbour to the north, which colonized it for nearly two centuries, and expects to exceed it on a GDP-per-capita basis in 2004.
Though crude oil sales account for only 18% of GDP, petroleum is the locomotive of the economy. Production has risen past 1 million barrels a day and is expected to triple in 15 years or so – the fastest increase expected of any country, at a time when oil prices are nearly double what they were as recently as the late 1990s.
"These results are not just due to increased oil production and high oil prices," says Kadyrzhan Damitov, a former governor of the central bank, "but also to reforms that began nearly 10 years ago."
Last summer, Geoffrey Oestreicher, the IMF's representative in Almaty, the economic capital, left and was not replaced – testimony to the IMF's faith that Kazakhstan won't need to borrow money anytime soon. "It's a measure of their success," he says.
After lending the country over half a billion dollars and being repaid early, the IMF's role in Kazakhstan lately has been, as he puts it, "very unusual". Instead of advocating belt-tightening, the IMF – along with other organizations such as the World Bank – has acknowledged that most of the post-Communist reforms have been carried out and has been urging the government to reform and improve health, education and social services.
In these sectors, spending is lower than among its neighbours or even than in Latin America, World Bank figures show. Life expectancy is among the lowest in the region, anaemia is rampant and there is an epidemic of tuberculosis in the prisons.
"There's a lack of concern for the common man in Kazakhstan," says Ray Webber, head of HSBC's Almaty branch. "The infrastructure needs a lot of attention, particularly the roads."
But the government of president Nursultan Nazarbayev has been steadfast in squirrelling away part of oil revenue in case oil prices fall. He is determined to avoid the example of Nigeria, which squandered its oil revenues, and to follow Norway's model of producing wealth for future generations. He therefore set up an offshore oil fund that has amassed $3.1 billion, and he plans to keep the cash flowing into it until it reaches $4 billion.
Even so, the economic boom is showing results even in the more disadvantaged tiers of the country's 14.7 million people, roughly half of whom are ethnic Kazakh and half ethnic Russian.
Since 1997, infant mortality has fallen from 25 deaths per 1,000 births to 18, a World Health Organization official says. The number of people living below the subsistence level has dropped from 34% in 1999 to 24% last year, according to the United Nations Development Programme office in Almaty.
But Timur Issatayev, chairman of ATF Bank, points out that the factors behind this growing prosperity are mostly external, such as high prices in not just oil, but also in metals and wheat.
"There is less to be proud of in terms of internal supply stimulation," he says. "Unfortunately, the process of structural reform is slowing down. The land ownership law - a very important component - has been passed but the instructions on implementation are still not clear." And the privatization of the power industry has been delayed, he notes.
Nina Zhusupova, KKB's chairwoman and CEO, says she is worried that Kazakhstan's rising oil income – it now accounts for 32% of fiscal revenue – is making it too dependent on its valuable light crude from the Caspian region.
"Our growth will depend too much on oil prices unless the government focuses on developing non-raw-materials sectors of the economy," she says.
Marchenko at the central bank disagrees. He says that "while oil production is only 12% of GDP, if you add all related services, it's 20%, and that proportion is sure to grow as our production triples.
"I think we need to build up the services and supplies industry for the oil sector," he says. "Now Ispat Karmet (a successful Indian-owned steelmaker) is constructing a pipe mill in Aktau that requires steel from another Ispat plant. That's the kind of thing we need – a whole pyramid, tens of thousands of companies creating millions of jobs. If we can follow the example of [Scottish oil industry centre] Aberdeen, there will be $150 billion invested in services, supplies and infrastructure, so our GDP would double in 10 years."
Tempting promises of riches
But local businessmen say it is the enormous size of Kazakhstan's oil deposits, not the business climate, that draws investors to the country, and that magnet is absent for non-oil investment.
Corruption, and particularly the predatory tactics of the tax police, is a chronic subject of complaint by local and foreign businessmen. Transparency International ranks Kazakhstan 103rd out of 133 countries surveyed for the level of corruption. An EBRD study found that management had to spend an average of 36 days a year dealing with tax authorities, and it takes an average of 107 days to set up a business.
Allegations by US prosecutors that a US adviser to Nazarbayev, James Giffen, funnelled $60 million in oil company kickbacks to the secret bank accounts of senior government figures have aroused little indignation in Kazakhstan, where it is expected that government officials will take bribes. Giffen has denied charges of wrongdoing, is due to be tried this year, and continues to advise the government in negotiations with oil companies.