Kazakhstan has tremendous energy potential, but the persistent Russian influence could hinder its full development
Kazakhstan is the world largest landlocked country, the dominant nation in Central Asia, and it shares many features with its fellow neighbour countries.
First of all, as others in the region Kazakhstan is a resource-rich country, with proved oil reserves equal to 30 mb/d and natural gas reserves equal to 85 Tcf as of January 2017 (EIA).
This first element leads to a second feature shared by other countries in region, that is the heavy dependence on natural resources. Despite the efforts to diversify their economies, they remain mostly based on hydrocarbon production and exports, and are therefore very vulnerable to commodities prices fluctuations, external shocks and changing energy requirements of importing countries.
A third element that Kazakhstan shares with its central Asian neighbours is the past as a Soviet Republic and consequently the fact of having achieved political independence from Russia only in 1991. This makes these countries politically speaking immature and still under the Russian sphere of influence.
These features characterize many of central Asian countries, often impairing their ability to evolve and strengthen their economies.
Kazakhstan however, does not seem willing to accept the current state of things, but is actually engaged in multiple efforts to achieve its goals, that can easily be summarized in one word: independence.
Kazakhstan is the second-largest liquid fuels producer among the former Soviet republics. About 50% of the oil production in 2016 came from two giant onshore fields, Tengiz and Karachaganak (Energy Intelligence, 2017).
The offshore Kashagan field started production in late 2016 but it is still under development. When at full capacity Kashagan will join Tengiz and Karachaganak as the three largest producing fields in Kazakhstan (EIA).
Most of the oil exported by Kazakhstan goes to the European market. In fact the EIA estimated that in 2016 the 76% of the total oil production reached OECD Europe.
Having exports concentrated in one region is already a source of vulnerability per se, but it is especially risky to have the big part of national wealth coming from only one source.
As the economy is so little diversified – and the other sectors largely under developed – the Kazakh economy is highly dependent on the revenues generated by hydrocarbons
Kazakhstan is not an example of the resource curse – according to which countries that are rich in natural resources have a poor overall economic performance, low democratic standards and low development rates. The revenues generated by the hydrocarbon sector have allowed Kazakhstan to reach a very high level of wealth, to invest in infrastructures, welfare, education, skills and high-tech. In 2016 gross national saving was equal to 25.9% of GDP and foreign reserves equal to $ 30.1 bn (CIA estimates).
The economy is overall strong, however, it is boosted by hydrocarbon money and that makes it vulnerable. As soon as prices of hydrocarbons collapse of fluctuate, the national economy will not be diversified enough to have other sectors to compensate and rebound.
This was the case of the economic downturn that Kazakhstan experienced since the decline of global commodity prices from 2014 and that, although partially recovered, struggle to reach higher levels.
In 2014, the collapse of the oil price brought Russia to devaluate the ruble, followed by many in Eastern Europe and Central Asia. Kazakhstan was one of them. In 2015, since oil prices did not seem to recover and the losses hit the national economy pretty hard, it replaced its currency band with a floating exchange rate, leading to a sharp fall of the national currency, the tenge.
Conscious of the weakness deriving from having one leading economy sector and all the other being underdeveloped, the government has set a series of rather ambitious goals to strengthen the national economy.
Renewable energy. It has been a few years now since when Kazakhstan started building up a strategy for the development of the renewable energy sector. Given its vast territory, low population density and access to water Kazakhstan has significant potential in the renewable energy sector.
In 2009 the Law on Support of Renewable Energy established a legal basis for the promotion of renewable energy sources for electricity and heat production and it provides investment preferences for the implementation of projects.
The Kazakhstan-2050 Strategy and the Concept for Transition of Kazakhstan to Green Economy approved in 2013 illustrate the goal of the government to bring the share of renewable energy in domestic electricity generation up to 50% by 2050.
Kazakhstan launched the Green Bridge Initiative, that was adopted by the United Nations Conference on Sustainable Development with the aim of strengthening national and international governance, develop informational infrastructure, encourage green business and related technologies, introduce effective financial and economic mechanisms, and the create unified standards for the green economy.
Kazakhstan is the most proactive country in the region regarding green energy, and to demonstrate that it is at the forefront of future energy development it is hosting in Astana the Future Energy Forum as part of the Astana EXPO 2017. The forum that started on June 29th and will finish on September 5th is the occasion to promote international cooperation in many fields to accelerate the energy transition.
Nuclear power. Kazakhstan’s natural resources are not limited to oil and gas, the country is also rich in minerals, such as uranium, copper and zinc.
With the world second largest uranium reserves –12% of global total (World Nuclear Association) – Kazakhstan has the potential – and certainly the ambition – of becoming at the forefront of nuclear civilian power.
In 2015 the International Atomic Energy Agency signed an agreement to set up a low-enriched uranium (LEU) fuel ‘bank’ in Kazakhstan, located in Oskemen. The Bank will hosts a reserve of LEU and it will have the function of a last resort supplier for Member States in case of supply disruptions. Thanks to the LEU Bank they have the confidence of knowing that if there is a disruption due to exceptional circumstances that makes fuel supply hard or impossible, LEU will still be available through the Bank.
Although Kazakhstan has currently no active nuclear power, it never hid its ambitions of installing nuclear capacity on its soil given the abundance of nuclear fuel. The establishment of the LEU Bank can be seen as a first move to that end.
The energy dimension of Kazakhstan is highly affected not just by the law of supply and demand, importers’ energy needs and the rules of the international community, but also by the influence of the most important regional player and one of the key actors of the international energy sector, Russia.
As a former Soviet Republic and having gained independence not even 30 years ago Kazakhstan is still under the Russian sphere of influence. Strong economic, political, cultural and even demographic relations run between the two countries.
On the one hand Kazakhstan has not much choice but joining Russia in institutional frameworks and international accords. One example is the Eurasia Economic Union (EAEU), that Kazakhstan joined with very little benefit just for political and strategic reasons of affiliation with Russia. Again, Kazakhstan joined the OPEC oil cut deal in November 2015 to align with Russia in its oil strategy.
On the other hand, Kazakhstan seems determined to loosen the ties with the former Soviet leader. From a demographic point of view the Russian presence in Kazakhstan, although declining, is still very strong, with about 23.7% (CIA factbook) of the population belonging to the Russian minority.
Given the precedent of the annexation of Crimea by Russia to allegedly protect its Russian minority, the Kazakh government certainly sees this ethnic minority as a possible liability. Even though Russia does not have an immediate strategic interest in intervening in Kazakhstan – which should be reassured by this reality – things might change, especially if Kazakhstan perseveres in its will and strategy to loosen the ties with Russia and reduce its influence.
Right now the government is trying to diminish the cultural and linguistic Russian heritage by gradually replacing Russian with Kazakh in many sectors. The proactivity it has shown in recent years in trying to develop independent relations with international institutions, starting from the energy field, is another clear sign of the will of Kazakhstan to emancipate from the Russian authority.
Free to grow
Kazakhstan has the resources, the economy and the ambition to become the leading country in Central Asia.
Internal and external factors could impair its ability of doing so.
As its neighbours Kazakhstan lacks a mature political establishment, transparent institutions and a strong rule of law. These elements are strongly linked with the one external factor that could impair its capacity of growing independently, namely the Russia influence.
It remains to be seen if Kazakhstan will manage to get rid of the Russian yoke and become a regional leader and an outstanding interlocutor of the international community.
Its energy potential could certainly be instrumental to this end.