Kazakhstan Addresses Challenges of International Trade

ASTANA – In 2014, the Kazakh government will continue to work on improving its World Bank Doing Business ranking, following a comprehensive plan. The country’s biggest stumbling block is in international trade, where it is ranked 186.

The Doing Business rating, which assesses the ease of conducting business in 189 countries, is called a pilot chart for global investment capital.

Kazakhstan, as a landlocked country, has no direct access to European markets, though it does enjoy proximity to two major markets: China and Russia. But high transport costs in the final price of exported products hamper not only the country’s competitiveness in the international market but also the expansion of investment in non-primary sectors of its economy.

Landlocked countries account for 12.5 percent of the planet’s land and 4.1 percent of the world’s population, and have the lowest proportion of participation in global trade processes. Every year, Kazakhstan’s trade turnover with other countries has grown in proportion to the growth of business activity and the investment attractiveness of the economy, but Kazakhstan’s international trade ranking remains the same.

Meanwhile, as practice shows, the transport component in the structure of foreign trade in landlocked countries is 5-6 times higher than in sea-faring developed countries, because landlocked countries have to spend much more than the actual cost of the transported goods to actually bring them to market. Therefore, domestic companies in Kazakhstan are particularly sensitive to fluctuations in transport service rates. The growth of transportation rates by at least 1 percent means the share of transport costs in the goods’ costs respectively grows from 5 to 9 percent.

Together with other expenditures, this adds its share of negative specificity to Kazakhstan’s foreign trade, so that when entering world markets, domestic exporters are always more likely to remain non-competitive in pricing because of the high cost of their products.

That’s why they are given preferential treatment, including tax breaks. The rationality of certain forms of export support, particularly the partial reimbursement of the transportation expenses of commodity sector, is often criticised by nongovernmental organisations and parliamentarians, who say that “policies aimed at promoting exports, actually become a funding policy for exporters.”

It is understandable that subsidising and investing in business from national or pension funds is not ideal. But in the absence of long-term funding and given the slowing influx of investment in the economy there is no other way to promote business. In this regard, one of the important tasks set by the head of state to the government and the National Chamber of Entrepreneurs is to organise systemic work on attracting foreign investment and creating effective principles of export promotion. This implies improving the Doing Business ranking.

Kazakhstan is studying the Turkish experience, and the chamber has invited the former head of the Turkish Investment Agency, who is credited with attracting investment and technologies from major global companies to Turkey, as a consultant. Turkey’s annual export volume is about $130 billion, 19th place among all countries in terms of exports. In the medium term, Ankara intends to enter the world’s top 10 exporters with a volume of no less than $500 billion.

Kazakhstan already has created a structure, Kaznex Invest, to promote exports and establish business bridges, including through attracting investment.

The head of the National Chamber of Entrepreneurs believes that the chamber is comparable to the Turkish Investment Agency, but with a staff three times larger and a much smaller effect of activity. He also believes that it is more logical to reconstruct the work of the existing organisation in keeping with new challenges and demands rather than create a new quasi-public structure.

Meanwhile, an analysis of the problematic aspects of Kazakhstan’s foreign economic sphere shows that much is determined by the spontaneous nature of the process. Each sector and company individually operates at its own risk, sometimes without a clear understanding of the possibilities and prospects of the market. And, as Finance Minister Bakhyt Sultanov noted at a recent government meeting, it seems that some participants in foreign economic activity are not aware of the reforms that were implemented in the past year.

The recent economic period, with its widespread slowdown in business activity and lower demand for resources in world markets, was not favourable for many participants of foreign trade. According to preliminary data, in 2013 Kazakhstan’s foreign trade turnover, taking into account its mutual trade with Russia and Belarus, amounted to about $108.5 billion, 1.5 percent less than in 2012. The level of exports also decreased by 4.9 percent to $69.1 billion, while imports increased by 5.1 percent.

It is noteworthy that in the last year, the share of processed products increased slightly in Kazakhstan’s total exports and reached 24.1 percent. Nevertheless, in general, the volume of processed exports decreased by 4 percent. This was explained by decline in exports of semi-finished products: from iron by 82 percent, gold by 54 percent, titanium by 48 percent, ball bearings by 42 percent, flat stock by 41 percent and unrefined copper by 34 percent. Intermediate goods, the volume of which also decreased by 7 percent to $11.1 billion, traditionally occupy a significant share in the structure of processed export goods.

Currently, about 135 WTO member countries are trade partners of Kazakhstan. However, while Kazakhstan remains outside the international trade alliance, it is difficult for domestic exporters to speak about any trade parity with their partners, because each of them has a specific “immunity,” including the right of anti-dumping investigation. For years, domestic companies have been dealing with hurdles like these in exporting ferrous and non-ferrous metals, uranium and other goods to the United States, the EU, India, Mexico, Brazil, Colombia and Venezuela. Trade advantages are always in WTO countries’ favour.

Today, 53 percent of Kazakhstan’s exports go to the EU. China accounts for 17 percent of total exports, and the countries of the Customs Union account for 8 percent. About 6 percent of commodities are exported to the rest of the world. According to experts, the geographical structure of processed exports has changed slightly. During the first nine months of 2013, processed products were supplied to 105 foreign countries. The lion’s share of processed exports, 69 percent, was also delivered to the EU, China and the countries of the Customs Union.

With structural problems in the economies of the EU, market volatility and the high cost of current export destinations, it is expedient to reorient Kazakh exports to other markets. For example, representatives of the National Chamber of Entrepreneurs speak about a strategic expediency to increase exports to China. Exporting more to China rather than the EU would get rid of many of the headaches associated with the EU market. But to promote domestic business to the Chinese market requires an appropriate strategy with principles and mechanisms to ensure growth. Reaching a consensus with China to reduce transport costs in mutual trade turnover is one of the measures that will help boost trade in this direction.

In order to reduce the transport costs of Kazakh exporters and importers, the government-developed comprehensive plan envisages the reduction of coefficient charges to tariffs on guaranteed transit goods, including negotiations with China on the application of uniform tariffs for railway transportation from the Chinese port of Lianyungang. In terms of reducing bureaucratic barriers, the state agencies this time have sacrificed two documents belonging to the portfolio of foreign economic activity: forwarding accounts for transportation and terminal handling.

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