Russia's sanctions woes could be a shot in the arm for Kazakhstan ... or the kiss of a dead man

Russia's sanctions woes could be a shot in the arm for Kazakhstan ... or the kiss of a dead man
Kazakh President Kassym-Jomart Tokayev seen with Russian counterpart Vladimir Putin in October 2019. / TUBS, cc-by-sa 3.0
By Nizom Khodjayev in Nur-Sultan March 29, 2022

The accepted wisdom is by now that Moscow’s continuing unprovoked waging of war in Ukraine and the resulting Western sanctions punishment of Russia are going to hit Russia’s Central Asian 'backyard' with considerable force. The particular ramifications for the economy of Kazakhstan—which draws 40% of its annual imports, valued at around $14bn, from Russia, and sends exports worth around $6bn yearly to Russia—are expected to be sizable.

The imbalance in mutual trade between the two countries grants Russian goods significant influence on prices in Kazakhstan, fuelling inflation, while empowering the Russian ruble’s potential to drag the Kazakh currency, the tenge (KZT), into oblivion. The tenge has depreciated by around 20% against the dollar since the beginning of the year due to the war in Ukraine.

Kazakh authorities have been advancing measures to put a brake on the depreciation, but ultimately the ex-Soviet state will find itself cutting down on imports from Russia in order to weaken Russia-induced inflation and the decline of the tenge. The rate of the local currency versus the dollar remains a historically politically sensitive issue in the country. 

The difficulty posed to the tenge has even prompted calls from some businessmen and observers in Kazakhstan for Central Asia's largest economy to leave the Russia-led Eurasian Economic Union (EEU) trade bloc. 

"We are a member of the EEU, so our national currency is pegged to the ruble, and our economy is closely integrated with Russia's," Daulet Akhmetov, director of Nur-Sultan StroyService, a construction materials supply company in the Kazakh capital Nur-Sultan, told the Caravansarai news website. 

“This is a big problem,” Akhmetov continued. “All these years, Kazakhstan has been losing from participating in this union, but we have held on thanks to the export of raw materials, and now our economy is in danger of collapsing.” 

“Many of our entrepreneurs have long been disappointed with the EEU, which is actually beneficial only to the Russian Federation,” Akhmetov added. 

Dosym Satpayev, a political scientist and director of the Risk Assessment Group in Almaty, wrote in a March 18 article for that “Russia itself is already … violating many principles of mutually beneficial cooperation — previously, this has produced artificial obstacles to Kazakh producers [wishing] to enter the Russian market.”

“And now, Russia, in the face of severe sanctions, is imposing restrictions on the export of certain goods, including to the EEU countries,” Satpayev added. Satpayev said he believed that Article 3 of the Treaty on the EEU provides a basis for Kazakhstan's withdrawal from the trade bloc, as the article outlines such basic principles as ensuring “mutually beneficial cooperation”, equal-stakes partnerships and the national interests of all the involved bloc members.

A Kazakh gondola railcar on a Russian Railways route (Image: 攝影師, CC0, Wiki Commons).

Moreover, Satpayev noted that by 2025 the members of the EEU must carry out a "harmonisation of their legislation in the field of the financial market", and by that time, in his opinion, Russia will inevitably have secured the status of international pariah. 

“This will also apply to its financial system – [harmonising with it] would be akin to a kiss with a dead man,” Satpayev noted. “The leadership of Kazakhstan now needs to think about how to avoid this kiss.” 

Of course, such calls for an economic divorce with Russia are easier said than done, especially since the EEU's economic leverage is ultimately a tool representing Russia's political leverage over its former colonies.

A positive side to sanctions?

Though fears of Russian sanctions-driven economic turmoil abound, there also appears to be an emerging pool of potential opportunities for Kazakhstan to dip into. And these opportunities may come from Russia itself.

Kazakhstan’s deputy foreign minister Roman Vasilenko told German newspaper Die Welt on March 28 that companies exiting Russia due to consequences of the war in Ukraine were welcome to move production to Kazakhstan.

"If there is a new iron curtain, we do not want to be behind it," he added, referring to the Western term for the dividing line between eastern and western Europe that existed during the Cold War.

Indeed, there are already some reports of Russian firms either relocating or mulling relocations to Kazakhstan. 

Video footage of a press conference posted by the Interfax news agency featured Alexander Tsygankov, a representative of state-owned Nur-Sultan-based export insurance company KazakhExport, saying on March 23 that some Russian firms were looking to use Kazakhstan’s territory as a transit zone for goods and others were looking to move their production facilities to the Central Asian nation. He added that KazakhExport and other development institutions were preparing to provide for such demands. 

The director for logistics at Russian freight company KIT, Kirill Ledentsov, reiterated at the same briefing that Russian businesses had started bringing in goods through Kazakhstan as Russia’s traditional channels for transiting merchandise coming from Europe had completely dried up. 

The information provided by Tsygankov and Ledentsov aligns with earlier suggestions by the former adviser to the chairman of the board of KazTransGas and politician Sanzhar Bokayev. He told Russian newspaper Izvestiya: “I think Kazakhstan can be a transshipment base without violating any international norms. This will need to be done right. Passenger traffic will increase – aviation will be in demand, freight traffic will increase – railway or road transport will be in demand. In any case, the Kazakh logistics sector should win [as a result of sanctions on Russia]. Kazakhstan can become a transport and logistics hub in Eurasia.”

On the other hand, Izvestiya also quoted Rasul Rysmambetov, a financial analyst and director at Kazakhstan-based investment company Freedom Finance, as saying that it is too early to rejoice over newfound opportunities as there were two more rounds of anti-Russia sanctions expected to be issued by the US and these new sanctions “may also affect those who help Russia bypass them,” which would presumably include Kazakhstan.

Kazakhstan's market advantages for Russian firms could be obstructed by secondary sanctions (Image: xfi, Wiki Commons, public domain). 

Kazakh news agency KazTag recently reported with reference to The Washington Post that US officials were looking into the possibility of placing secondary sanctions on countries currently working with Moscow in order to put further pressure on Russia’s economy. The move could include Kazakhstan given how tightly its economy is intertwined with that of Russia. 

'Undesirable' firms

Kazakh news outlet Khabar 24 quoted Kazakh political analyst Andrey Chebotarev as referring to a category of Russian companies that may migrate to Kazakhstan in order to “start delivering goods from abroad [to Kazakhstan], so that later [the goods] can be re-exported via the EEU to Russia.” Chebotarev saw these types of migrating Russian firms as “undesirable”.

”For instance, it is currently impossible to supply a sufficiently large number of goods from the US, such as elite alcohol brands [and] good whiskey to Russia,” Chebotarev continued. “There is a temptation for a company involved in [such business] to open an office here – buy in Kazakhstan and resell to Russia.” 

Kazakh observers fear that due to such grey market schemes, Kazakhstan may receive a 'red light' from the West and come under the direct bombardment of sanctions as a result. 

The mentioned issues, of course, mainly apply to the logistics sector. 

But what else about Kazakhstan could potentially draw in firms from Russia?

Recent reports have revealed that InDriver, a Russian-founded cab-hailing app, is set to move to Kazakhstan’s commercial capital Almaty. Many local media reports suggest that enterprises and individuals moving out of Russia to Kazakhstan are involved in the IT sector.

The Kazakh government has already been attempting to attract such businesses via the Astana Hub, which offers tax breaks as well as other incentives for IT firms. 

Khabar 24 news agency also quoted Russian entrepreneur Vyacheslav Nikulin, who runs a company that produces board games and books, as saying that his company, which buys distribution rights to the products of foreign publishers and translates them into Russian, was forced to relocate to Kazakhstan as sanctions have set limits on ways his company could cooperate with foreign partners.

“We came to Kazakhstan because…SWIFT, VISA, Mastercard were closed and now we cannot pay royalties for our products that we produce for Russia in the Russian language. And we need to start a new company to support our [operations],” Nikulin told the news outlet. 

Nikulin further noted that Kazakhstan’s relatively easy procedure for registering and liquidating businesses, low tax burden and advanced digitalisation of services makes Russia’s neighbour an ideal haven for Russian entrepreneurs. Moreover, Kazakhstan can grant Russian businesses access to major “economic giants” such as Chinese and Western firms, he added. 

Nevertheless, even assuming that Kazakhstan does not get directly hit by US secondary sanctions, it is still unclear whether a major influx of Russian firms can be expected.

Khabar 24 noted that in the first two months of 2022, Russian citizens registered more than 200 new business entities run by individual entrepreneurs from Russia. The same figure was twice as low in the first two months of 2021, the report said. The boost may suggest signs of a potential influx of Russian companies further on in the year.

But those pessimistic about the situation know it is all too possible that Kazakhstan will not see a significant positive effect from sanctions-driven pressures on Russia, with the net impact proving negative.