Economic changes in Kazakhstan: from oil to industry

Recently, the first vice-prime minister of Kazakhstan, Roman Sklyar, discussed the development of industry and economic growth of the country in an interview with the press service of the prime minister.

Below are questions and answers with Roman Sklyar.

Why is our economy no longer primarily oil-based, but rather industrial?

Indeed, this question is of primary importance. Manufacturing now accounts for 12.3% of gross domestic product (GDP), while mining and metals accounts for 12.6%. We observe that the share of the processing industry and the mining and metallurgical complex in the GDP has almost equalized. Last year, the manufacturing industry showed a growth of 4.1%. This year, we should set ourselves the goal of at least 6% growth in the processing industry. For this, our existing enterprises must work, reinvest in their production and increase production volumes. It is critical to attract foreign capital to ensure investment flows into our export-led economy. We cannot rely on the domestic market alone for growth.

We have enterprises of a high level of the processing industry and the mining and metallurgical complex. For example, in the Pavlodar region there is the Almaty Fan Plant, the Kentau Transformer Plant, and Railway Systems, which produce six types of products. The construction of the seventh production is underway. Currently, 72% of railway engineering products are produced in Pavlodar region. In June, the largest ferroalloy plant near the GRES-1 site will become operational. Kostanai has a cast iron foundry, the most modern in the world, without a carbon dioxide pipe. In general, this is a sterile environment.

Any state supports all sectors of the economy to one degree or another. The main priority is the processing industry. We will continue to work in this direction. It is about increasing the share of local content and attracting investment, which will create high-performance, high-paying jobs for our youth. This is the main task. Everything else will fall into place: export potential, import substitution, taxes paid by enterprises, and the creation of appropriate jobs. This is a whole locomotive that will pull everything along.

What are the main problems and challenges in the manufacturing industry? Why does it not develop faster and why does it rely on state aid?

The main problem we face is landlocked. Today, Kazakhstan has become the main transport and logistics hub of Central Asia. Over the past 12 years, more than 32 billion dollars have been invested in the development of infrastructure: roads, railways, airports. After gaining independence, we faced a huge challenge: we had to build new railways, ports, and establish logistics chains. Now we have a different situation, but there is still a lot of work ahead in terms of diversifying these routes. Transport is, in fact, a service. It should serve the industry, primarily the economy. The third Bakhty-Ayagoz railway crossing, the construction of which begins this year, with a length of 286 kilometers, provides access to China.

In 2019, the railway border crossing and the Altynkol dry port worked at 25%, and the Dostyk crossing was 80-90% loaded. Both of these transitions are currently 100% loaded. Therefore, the need for a third crossing should have been thought of earlier. Now that we have launched the third crossing, we are thinking how to build the fourth not only for transit cargo, but primarily for our processing industry.

Even though we are landlocked, we have huge markets of our neighbors, so we need to tap into them. It is expensive and a burden on the state budget. In part, we use the public-private partnership (PPP) mechanism, but most of it comes from the state budget. This is justified: the processing industry must have sales markets. Unfortunately, we are only 20 million people. We have long distances. It would be wrong to rely solely on industrial development for such a small market. I see this as the main challenge.

If we talk about what is a priority for us, then, in my opinion, it is the lack of access to the sea. Second, it is often difficult for us to provide quality electricity infrastructure. Unfortunately, we are currently dependent on external supplies. We have a lot of work ahead of us for the rapid development of the energy industry. We cannot develop industry without having a sufficient supply of energy capacity.

How to balance the use of railways for both economic and transport needs?

Balancing industry and transport is difficult. Industry is our priority, and transport must serve it. Railway workers need a decent salary, safe travel must be ensured. Investments in rolling stock and trunk railway lines are necessary. We currently have 11 tariffs for various goods, including socially significant goods, transportation of coal, grain, etc.

Although our fares are lower than neighboring states, the railway must be self-sustaining, with some government-backed infrastructure investment.

Aren't we Russia's competitors in the Eurasian Economic Union (EAEU)? We produce many similar products, which are then exported. Will this gap widen in the future?

We do not have a customs border with the five EAEU countries, so we should not distort the economy with preferences for certain objects.

In 2019, the Ministry of Industry and Trade of the Russian Federation refused to build a new wheel factory in Russia, because a new innovative enterprise with the most modern European equipment is operating in the Pavlodar region, which produces 300,000 wheels per year. The production itself does not differ from the best world standards. They rightly calculated that other niches should be occupied in the same railway engineering. Instead of a factory for the production of railway wheels, they decided to build something else. There should be competition between goods produced in our country or neighboring countries that are members of the EAEU. This stimulates our producers.

When it comes to procurement, either an exemption from the national regime is introduced, or producers receive certain subsidies so that their products are competitive and in demand in the domestic market. Even within the framework of the single economic space, we must take care of national interests. Our priority is to preserve production, save jobs and create new ones.

Will our regions thrive on the industrial spine ten years from now?

Despite the challenges, we must develop petrochemicals, coal, oil and gas chemistry. We launched a $2.8 billion polypropylene plant in 2022 and aim to be carbon neutral by 2060. I am sure we will achieve it.

We explored coal reserves of about 30 billion tons. At least another 30 billion tons are subject to exploration. But such a competitive advantage as the presence of large reserves of coal should encourage us to more actively develop coal chemistry.

Doubling GDP by 2029 is ambitious but achievable with proactive efforts. Each region must strive for self-sufficiency, and the country must achieve food and industrial independence.

There is a huge unrealized potential in the industry, in production for the domestic market, import substitution. But it is necessary to strive more for export: it brings foreign exchange earnings and a new high level of production. Over the next ten years, these processes will take place systematically, and we will achieve our goal. Each region will be able to provide for itself. The country as a whole should achieve food independence in some commodity groups. We must also achieve self-sufficiency in the main industrial products.

How do you strike a balance between what manufacturers and the public want in terms of scrap collection?

The issue of scrap metal collection is politicized. The collection of scrap metal itself is, in fact, an indirect tax. Previously, a 30% duty on cars was introduced in our country, which was later reduced to 15% after joining the World Trade Organization (WTO). But as part of the EAEC with Russia and Belarus, where a disposal fee was introduced, we introduced a similar disposal fee of 15%. Initially, this collection was managed by a private operator in accordance with the Environmental Code. However, in 2022, this responsibility was transferred to the state joint-stock company Zhasyl Damu, which uses the funds to support environmental programs.

In addition to the environmental benefits, the funds received from the disposal fee also contribute to economic development. For example, we allocated 100 billion tenge (US$223 million) to the Industrial Development Fund (IDF) to provide cheap loans, encourage the purchase of domestically produced cars and stimulate the economy without harming the environment.

Funds that go to the implementation of environmental programs — the construction of waste processing plants, the development of forest protection — have a significant impact on the ecological situation.

Critics argue that only car manufacturers benefit from scrap collection, but this ignores the wider economic impact. Investing in local manufacturing creates jobs, increases tax revenue and fosters skills development, benefiting various sectors of the economy.

Absolutely all branches of our economy receive tariff, non-tariff, investment, institutional and other preferences to one degree or another. If we talk about the automobile industry – exemption from VAT, the regime of free warehouse or free economic zone – this is clear to everyone. There are no direct subsidies from this, but without such a barrier it is impossible to force leading large automobile companies to build factories and produce equipment. Would a well-known West German company come to manufacture its combines? No, they did not come for 15 years. Only one Korean company is building a plant for 70,000 cars in Kostanay. Now entrepreneur Nurlan Smagulov is building a factory for 90,000 multi-brand Chinese cars using the small assembly method.

China practically does not import cars, which are subject to huge tariffs, only domestically produced. If a company is interested in a large market, it should set up production there. Although our market is small, we cannot stimulate it otherwise.

Funds from the disposal fee are distributed transparently, and Jassil Damu annually reports on their use. These funds not only support state and public needs, but also contribute to the development of local production and related industries.

Our goal is to increase localization and get maximum benefit for the country, which is manifested in such initiatives as Hyundai Trans Kazakhstan, Daewoo Bus Kazakhstan and other domestic manufacturing enterprises. Last year, our automakers produced 142,000 cars, and buyers did not bear the burden of disposal fees. These initiatives stimulate production and economic growth in various sectors, ensuring that every citizen benefits from industrial progress.

What about localization and industry support?

This is a complex process because our subsurface users need top-class equipment to develop various deposits. This applies to oil production companies and enterprises for the extraction of solid minerals. They often give reasons.

We support all industries, including the mining and metallurgical complex. Different industries receive preferences, which gives us the right to encourage cooperation. We want to avoid a situation where we only have a monocity, as seen in other regions of the world, where large subsurface companies stimulate small and medium-sized businesses. The Kazakh Institute of Kazindustria works on this every day. We have compiled a list of goods that subsoil users import and purchase domestically. We create new enterprises for import substitution. While the results may not be immediate, there is understanding from both large and mid-sized companies.

Another task set by the Prime Minister is for large companies to develop their production with further processing. We have made progress, as evidenced by the fact that the Kazakh Electrolysis Plant produced its first products in 2008, producing 250,000 tons of aluminum per year. Previously, all aluminum was exported, which led to absurd scenarios where Kazakh companies purchased aluminum ingots from neighboring countries through export contracts. Adopting regulations and persuasion managed to reduce prices for domestic producers by 5%, according to the London Metal Exchange.

Last year, we processed 51,000 tons of aluminum domestically, creating new jobs and increasing added value. Large companies provide raw materials at a small discount, which allows profitable production. We continue to work with them on the processing of their products, which is beneficial given the current state of the commodity market. They also ask for cheap long-term loans at relatively low interest rates, which we use to the best of our ability.

And what about the quality of roads that people often complain about?

We are the ninth largest country in the world by territory, but our population is 20 million. Our road network covers 95,000 kilometers, of which almost 25,000 kilometers are designated as roads of national importance. The remaining 71,000 kilometers are roads of local importance, including district, regional and city streets. Maintaining this sprawling network is a daunting task.

To address the funding gap, we are introducing motorway tolls. Currently, our funds cover only winter and summer maintenance, as well as repair of paid areas. Our goal is to achieve self-sufficiency in maintaining these routes within regulatory limits in the coming years.

Unlike European countries with high vehicle taxes and expensive toll roads, we face limitations in meeting standards. However, projects such as the Western Europe-Western China highway, completed in 2015 and with some sections completed as early as 2012, meet international standards.

Funding constraints mean that we mainly carry out minor repairs. To address quality issues, in 2019 we created a Quality Center that oversees the inspection and maintenance of roads and street sections. Utility breakdowns also create problems, requiring immediate repairs and causing public complaints.

Since the end of the 1990s, international financial organizations have required us to comply with global standards for road reconstruction and overhaul. We adhere to similar design standards as those in Europe and the United States, striving to continually improve the quality of our work.

In our pursuit of excellence, we support each industry in a variety of ways, and we look forward to continuing these efforts.