Kazakhstan’s Eurasian Union Gloom

Speaking at a discussion at Columbia University’s Harriman Institute earlier this month, Tatiana Valovaya, the minister for integration and macroeconomics of the Eurasian Economic Commission, one of the primary bodies within the Eurasian Economic Union (EEU), outlined the EEU’s primary motivations, its macroeconomic effects, and its regional implications. Her attempts to gloss over the EEU’s troubles, however, fell short.

As one of the Commission’s primary ministers, and as someone with more stake in the EEU’s success than anyone outside the participating presidents, Valovaya attempted to paint the EEU in the most positive light possible. Not only did she state that no external bodies had pressured Armenia into the union – despite the fact that Moscow’s cajoling served as Armenia’s main motivation in joining – she claimed EEU membership had not delayed Kazakhstan’s accession to the World Trade Organization (WTO), despite public WTO notices otherwise. Valovaya further added that she was “really happy” with the myriad issues that have continued flaring up within intra-EEU trade, including customs checkpoints that have helped stall potential commercial growth within the union. She claimed the EEU’s sole purpose was to further the region’s economic integration – despite Moscow’s numerous attempts to expand integration into parliamentary and defense realms, with consequent pushback from Kazakhstan at each juncture.

Indeed, if there was one nation whose travails Valovaya attempted to spin into a “growth through adversity” narrative, it was Kazakhstan. As Valovaya correctly noted, the original notion for regional economic integration belonged to Kazakhstan, with President Nursultan Nazarbayev first lobbying for a Eurasian Union in 1994. However, after the Eurasian Economic Union came into effect earlier this year, it’s clear no nation within the four-member bloc has suffered as much through the EEU’s machinations as Kazakhstan.

To be fair, not all of Kazakhstan’s economic struggles – which began in earnest last year, and have only accelerated through the Eurasian Union’s formal formation in January – stem from the EEU. For instance, the EEU played no role in the remarkable unraveling of the super-giant Kashagan oil project in the Caspian Sea. When originally discovered in 2000, Kashagan stood as the largest find since the Alaska’s Prudhoe Bay over thirty years prior. Ever since, however, Kashagan has existed as Astana’s white whale – a project whose production stands just beyond the horizon, near enough to provide excitement, but just far enough that no profits come. Originally slated to come online in 2005, Kashagan has seen delay upon delay, sunk costs combining with continued disappointment. Kashagan received a spark of hope in 2013, finally seeing its first flow – only to be shut down indefinitely a few weeks later, with cracked pipes stalling the project indefinitely. As it currently stands, the project is over a decade behind schedule and a remarkable $50 billion over budget.

The recent slump in global oil prices has helped soften some of the rampant disappointment emanating from Kashagan. But what silver lining can be found in the price sag is more than offset by the reality that the drop will hammer Kazakhstan’s economy across the board. Considering hydrocarbons comprise over 60 percent of Kazakhstan’s total exports, the fact that Kashagan’s bungling will only be slightly less painful hasn’t resulted in much back-slapping.

Just as in Azerbaijan, Russia, and Venezuela, Kazakhstan has already begun shouldering the burden of sagging oil prices. The country is currently projecting the lowest GDP growth rate it has seen since 2009, at 1.5 percent – though, given the continued drop in both prior projections and price per barrel, this rate may yet prove optimistic. The country’s industrial output is also projected to drop alongside, likely seeing the lowest rate in nearly 20 years.

So, yes, there are exogenous factors that have hammered Kazakhstan’s economic outlook moving forward. But Kazakhstan’s potential growth in 2015 has also been slammed by the actions of Astana’s EEU partners – primarily, Russia’s lurch into self-defeating economic policy. While much of Russia’s recent and forthcoming recession – which may yet see the nation’s GDP shrink by 5 percent, if not more – stems from the oil drop rattling Kazakhstan, such a decline also stems from the sanctions policy Russia brought upon itself through its continuing disregard for international law in Ukraine. Kazakhstan’s economy, unfortunately, has suffered too, as collateral damage from this Russian policy. (Such sympathy, however, should extend only so far, as Kazakhstan was one of the few nations that continues to recognize Russia’s Crimean “referendum.”)

Russia’s weakened ruble is a prime example of its economy’s general malaise.. Not only has a sapped currency wrought regional devaluations – with Kazakhstan likely seeing its second devaluation in as many years in the near future – but, moreover, a declining ruble has allowed Russian business, in conjunction with loosened border controls as a result of the Eurasian Union, to swamp local Kazakhstani industry. Citizens along the Russian-Kazakhstani border have managed to swing northward for cheaper goods for months, while those same cheaper Russian goods have begun crowding out Kazakhstani offerings elsewhere. Russian business has battered Kazakhstan’s local industry and manufacturing sufficiently that Astana recently debated initiating formal customs checks along the border, a remarkable step back from the economic integration pledged under the EEU’s rubric. While official checks such as the kind that have reemerged along the Belarusian-Russian border have so far not appeared, Russia will nonetheless be holding off on grain and petroleum shipments to Kazakhstan for the foreseeable future.

The political fallout from this economic slide has already begun: Astana has opted to hold snap presidential elections at the end of April, rather than at the end of 2016. Nazarbayev will take the election with little opposition, blocking any form of nascent opposition both within and outside the elite. But a reaffirmation of his hold on Astana’s political machinery does not connote an economic salve. Whichever way you examine Kazakhstan’s economic outlook, there’s little silver lining. Pledges from Astana – Nazarbayev’s new “Nurly Zhol” fiscal policy, for instance – show no sign of stemming the slide. Oil prices will likely remain low through the year. And the Eurasian Union continues to act as a net negative on Astana.

When asked what she believed Kazakhstan had gained from the EEU, Valovaya paused, and responded, “The automobile industry.”

According to Valovaya, Kazakhstan’s automotive production and sales have benefited from the EEU’s structure, though she didn’t specify quite how this was the case. And perhaps that was for the best, as Kazakhstan’s leading automotive union head said that 2015 sales were likely to be worse than those last year. Russian imports, meanwhile, have forced Kazakhstani dealers to cut prices by almost 30 percent. These numbers apparently didn’t figure into Valovaya’s calculation – but help serve as one more indication of what Kazakhstan’s already dealt with, and what remains to come.