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Sunday, 17 July 2022

Diversification should be radical, but not hasty

The war in Ukraine is only one piece of the puzzle. Interest rates around the world are skyrocketing and the cost of living is becoming unbearable for many in central European countries. Global economies are in freefall from the long-term effects of COVID, employee instability persists, and investments are down across the board with major VCs warning of a serious recession on the very near horizon.

All these factors exacerbate the economic debate in Eurasian and Former Soviet Union states, including Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan, Turkmenistan, Armenia, Georgia, and Moldova. These states are still coming to terms with the crippling economic sanctions levied on their largest trading partner, Russia, on top of the wider implications and permutations of an international economic downturn. The prudent response to such economic instability and chaos is diversification – but implemented strategically.

Truly effective diversification does not, and must not, begin and end with branching out into new and different industries. In reality, such efforts are often more costly as they quickly immerse companies in unfamiliar waters. This can result in a mismatch of labor force skills, a misalignment of educational focus at a vocational and academic level, as well as cultural and sociological complications.

While seeking to invest in new sectors can indeed produce innovative streams of income, poorly conceived policies lead nations to do so at the expense of their bread-and-butter economic engines, the long-term ramifications of which can be catastrophic.

Diversification, therefore, is a multi-step process. The relevant questions policymakers in post Soviet Union states must ask, especially the heads of Central Asia’s fragile (and to some extent Russia-dependent) economies, are how can we diversify within our existing industries, what new markets can we open ourselves up to, and what other use is there for our products?

One country grappling with this very debate now is the most affluent Central Asian country of Kazakhstan, with its population of nearly 20 million, and landmass the size of Western Europe. Kazakhstan is a country with exports of $50 billion, and is ranked 25th  in the World Bank’s Doing Business Index, 10th place in Protecting Investors, 34th in the 2021 Index of Economic Freedom, and 29th in the UN e-Government Survey 2020 among 193 countries.

Yet, with more than half of Kazakhstan’s economy based on the export of oil, gas, and metals, the country’s need to diversify is perhaps greater today than ever. 30 percent of Kazakhstan’s economy is dependent on trade with Russia, and amidst the international economic downturn in 2021, Kazakhstan’s foreign trade plummeted by 13 percent to $85 billion (though the downturn was slightly less in the non-commodity space).

Meanwhile, Kazakhstan as a nation is undergoing genuine and systemic change. On June 5, the world’s ninth-largest country passed new sweeping constitutional reforms in a national referendum to embolden democracy and civil society in the country. This referendum indicates a moment of truth for the post-Soviet land-locked country, situated  between China and Russia with the world’s longest land border with the latter, and whose independence is just three decades old.

For the first three decades of Kazakhstan’s independence, the economic agenda was almost solely led by oil and gas exploration, which afforded Kazakhstan economic growth, yet was subject to oil price volatility. This mantle has been picked up by President Kassym-Jomart Tokayev who in an address to the nation in 2020 laid out his vision for economic diversification – a goal that remained steadfast throughout the peak of the COVID-19 pandemic when many global leaders abandoned radical change in favor of stability.

Thus far, Tokayev is unwavering on his path to diversification: radical, but not overly rapid, innovative, but not dismissive of the country’s economic establishment. The head of this naturally mineral-rich state has held high-level meetings and hosted in-depth conferences with tier one international investment groups and major multinational corporations, among them key figures in the energy and oil industry. Tokayev candidly told the potential investors that the country is both exploring new markets for its oil, while also pursuing innovations to produce greener, more sustainable energy production.

“Kazakhstan, as an economic system, cannot rely only on domestic investment, domestic demand, and export of raw materials,” Tokayev recently told a group of investors at a Nur Sultan conference in June. “Our country will continue the policy to ensure the most favorable environment to attract quality foreign investments.”

So what does this mean in practical terms? To start, it means diversification in delivery methods for the nation’s key product – oil. Kazakhstan has fast become a key link in overland transportation between Asia and Europe, and is an important and reliable partner in implementing China’s Belt and Road project. Trade with India and Japan is returning to pre-COVID rates, while trade with countries closer to home in Central Asia has risen by 35 percent in the last year.

The country has dramatically sought to increase the role of the Trans-Caspian international transport route, known also as “The Middle Corridor” route. The acceleration of this ongoing project is crucial not only for Kazakhstan’s earnings, but is also essential for Europe’s future energy supply. Recently, the Russian initiated partial closures of the CPC oil pipeline, which transports around 55 million tons of Kazakh oil to Europe through the Black Sea port of Novorossiysk, demonstrates the importance of enhancing the Middle Corridor’s volume and capacity. Due to the sanctions on Russia, the CPC pipeline can no longer serve as the sole supply channel of Kazakh oil to EU countries.

Diversification, again, arises as the best solution to the challenges in the region. For example, after connecting the Kazakh Caspian seaport of Kuryk to the Middle Corridor, the time for transporting goods from the Khorgos Kazakh-Chinese border hub to Istanbul, Turkey, decreased by five times. Chinese Cargo, which used to take two months, now arrives in Europe in just under two weeks. Additionally, reports suggest Kazakhstan has begun to promote agricultural exports. This sector in particular is crucial to enabling economic growth, as it offers job creation, investment, better food security, and significant economic diversification.

The challenges facing Kazakhstan today are not easy, but they are also not insurmountable. The need to offer high-speed communications infrastructure across Kazakhstan’s massive landscape is vital to ensuring the success of a diverse economy, in which entrepreneurs can act on a global scale. The government has already invested significantly in an e-government platform to improve administrative efficiency and decrease costs and is already considering sizable investments in 5G technology, fiber optics, big data, and smart city technology.

In other words, Kazakhstan is not swapping apples for oranges, but they are determined to sell greener apples and sell them to more markets. If they succeed, their economy will likely emerge as a leading force for the region in the coming decade.

Nathan Bailey
Nathan Bailey
Nathan is a news reporter, covering a range of national and international news stories, with a focus on explaining worldwide issues. He has been at British Journal since 2019. Before joining British Journal, he worked for Fleet Street newspapers for 5 years, where he spent time as a roving foreign correspondent.

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