Kazakhstan’s Economic Shift: From Oil to Industry

ASTANA – Recently, Kazakh First Deputy Prime Minister Roman Sklyar discussed the country’s industrial development and economic growth in an interview with the prime minister’s press service.

Below is the Q&A with Roman Sklyar.

Kazakh First Deputy Prime Minister Roman Sklyar. Photo credit: Screenshot from thе interview primeminister.kz.

Why is our economy not predominantly oil-based anymore, but rather industrial?

Indeed, this question is of paramount importance. The processing industry now contributes 12.3% of the country’s gross domestic product (GDP), while the mining and metallurgical industry accounts for 12.6%. We observe that the share of the processing industry and the mining and metallurgical complex in the GDP have almost equalized. Last year, the processing industry demonstrated a growth rate of 4.1%. This year, we should aim for at least a 6% growth rate in the processing industry. To achieve this, our existing enterprises must operate, reinvest in their production, and increase production volumes. It is crucial to attract foreign capital to ensure investments flow into our economy, leading to exports. We cannot rely solely on the domestic market for growth.

We have high-level enterprises in the processing industry and the mining and metallurgical complex. For instance, there are the Almaty Fan Plant, the Kentau Transformer Plant, and Railways Systems in the Pavlodar Region, which produce six types of products. The construction of a seventh production facility is underway. Currently, 72% of railway engineering products are produced in the Pavlodar Region. In June, the largest ferroalloy plant near the GRES-1 site will start operating. In Kostanai, there is a cast iron casting plant—the most advanced in the world, with no pipe emitting carbon dioxide. Overall, it is a sterile environment.

Any state supports all sectors of the economy to some extent. The processing industry is the main priority. We will continue to work in this direction. It is about increasing the share of local content and attracting investments, which will allow us to create highly productive, well-paying jobs for our youth. That is the main task. Everything else will fall into place: export potential, import substitution, taxes in the budget paid by enterprises, and the creation of related jobs. It is an entire locomotive that will pull everything along with it.

What are the main problems and challenges in the manufacturing industry? Why is it not growing faster, and why does it rely on government help?

The main issue we face is the lack of access to the sea. Today, Kazakhstan has become the main transportation and logistics hub in Central Asia. Over the past 12 years, more than $32 billion has been invested in infrastructure development: roads, railways, and airports. With independence, we faced a huge challenge: we needed to build new railways, and ports, and establish logistics chains. Now we have a different situation, but we still have a lot of work ahead in diversifying these routes. Transport is essentially a service. It should serve the industry, primarily the economy. The third railway crossing, Bakhty-Ayagoz, the construction of which is starting this year, is 286 kilometers and provides access to China.

In 2019, the Altynkol railway border crossing and dry port were operating at 25% capacity, and the Dostyk crossing was loaded at 80-90%. Currently, both of these crossings are operating at 100% capacity. So, we should have thought about the need for a third crossing earlier. Now that we have started the third crossing, we are considering how to build a fourth crossing not only for transit cargo but primarily for our processing industry.

Even though we do not have access to the sea, we have our neighbors’ huge markets, so we need to reach out to them. This is costly and puts a burden on the state budget. Partly, we use the public-private partnership (PPP) mechanism, but the majority comes from the state budget. This is justified: the processing industry must have sales markets. Unfortunately, we are only 20 million people. We have large distances. Relying solely on industrial development with such a small market would be wrong. I see this as the main challenge.

If we talk about what we prioritize, in my opinion, it is the lack of access to the sea. Secondly, it is often challenging for us to provide quality electricity infrastructure. Unfortunately, we are currently dependent on external supplies. We have a lot of work ahead of us to rapidly develop the energy sector. We cannot develop an industry without having sufficient energy capacity reserves.

How can we balance the use of railways for both economic and transportation needs?

Balancing industry and transportation is difficult. Industry is our priority, and transportation must serve it. Railway workers need decent salaries, and safe travel must be ensured. Investments in rolling stock and main railway lines are necessary. Currently, we have 11 tariffs for various goods, including socially significant goods, coal transportation, grain, and so on. 

While our tariffs are lower than neighboring states, the railway must be self-sustaining, with some infrastructure investments supported by the state.

Are we not competitors with Russia within the Eurasian Economic Union (EAEU)? We produce many similar goods that are later exported. Won’t this gap only increase in the future?

We have no customs borders with the five EAEU countries, so we must avoid distorting the economy with preferences for certain facilities. 

In 2019, the Ministry of Industry and Trade of the Russian Federation abandoned the idea of building a new wheelset plant in Russia because, in the Pavlodar Region, there is a new innovative enterprise with the most modern European equipment producing 300,000 wheels annually. The production itself is no different from the best global standards. They rightly calculated that other niches need to be filled in the same railway engineering industry. Instead of building a railway wheel production plant, they decided to build something else. Competition among goods produced in our country or neighboring countries, EAEU member states, should exist. It stimulates our producers.

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

Will our regions thrive on the industrial backbone in ten years?

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

We have explored coal reserves of about 30 billion tons. At least another 30 billion tons are subject to exploration. However, such a competitive advantage as having large coal reserves should prompt us to develop coal chemistry more actively.

 Doubling the GDP by 2029 is ambitious but achievable with active efforts. Each region should aim 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. However, we should strive more for export: it brings in foreign currency revenue and a new high level of production. Over the next ten years, these processes will systematically occur, and we will achieve our goal. Each region will be able to provide for itself independently. The country as a whole must achieve food independence in some product groups. For the main industrial products, we must also achieve self-sufficiency.

How do you find a balance between what manufacturers and the public want regarding scrap collection?

The scrap collection issue is politicized. The scrap collection itself — essentially, it is an indirect tax. Previously, our country imposed a 30% customs duty on cars, which was later reduced to 15% after joining the World Trade Organization (WTO). However, as part of the EAEU with Russia and Belarus, which introduced a recycling fee, we adopted a similar 15% recycling fee. Initially, this fee was managed by a private operator as per the Environmental Code. However, in 2022, this responsibility shifted to the Zhassyl Damu, the state-owned joint-stock company, which utilizes the funds to support environmental programs.

In addition to the environmental benefits, funds generated from the recycling 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, encouraging the purchase of domestically produced cars and stimulating the economy without compromising the environment.

The money that goes towards implementing environmental programs — building waste recycling plants, and developing forest conservation — has a significant impact on the environmental situation.

Critics argue that only car manufacturers benefit from the scrap collection, but this overlooks the broader economic impact. Investments in local production create jobs, increase tax revenues, and foster skill development, benefiting various sectors of the economy.

Absolutely all sectors of our economy receive tariff, non-tariff, investment, institutional, and other preferences to some extent. If we talk about the automotive industry—exemption from VAT, free warehouse regime, or free economic zone, everyone gets that. There are no direct subsidies from this, but it is impossible to get leading large automotive companies to build plants and produce equipment without such a barrier. Would a well-known West German company come to produce its combines? No, they didn’t come for 15 years. Only one Korean company is building a plant for 70,000 cars in Kostanai. Entrepreneur Nurlan Smagulov is currently building a plant for 90,000 multi-brand Chinese cars by small-scale assembly.

China practically does not import cars, which are subject to giant customs duties, only domestic production. If a company is interested in a large market, it must set up production there. Although we have a small market, we cannot stimulate it in any other way.

Funds from the recycling fee are transparently allocated, with Zhassyl Damu annually reporting on their usage. These funds not only support state and public needs but also facilitate the development of local production and related industries.

Our goal is to increase localization and extract maximum benefit for the country, evident in initiatives like Hyundai Trans Kazakhstan, Daewoo Bus Kazakhstan, and other domestic production enterprises. Last year, our car manufacturers produced 142,000 cars, with purchasers not bearing the recycling fee burden. These initiatives stimulate production and economic growth across various sectors, ensuring that every citizen benefits from industrial progress.

What about localization and support for the industry?

It is a complex process because our subsoil users need top-tier equipment for developing various deposits. This applies to oil companies and enterprises extracting solid minerals. They often cite reasons.

We support all sectors of industry, including the mining and metallurgical complex. Various industries receive preferences, giving us the right to urge cooperation. We aim to avoid the situation of having only monocities, as seen in other regions worldwide where large subsoil user companies stimulate small and medium-sized businesses. The Kazakh Institute Qazindustry works on this daily. We have compiled a list of products subsoil users import and what they purchase domestically. We are establishing new enterprises for import substitution. While results may not come quickly, there’s understanding from both large and medium-sized companies. 

Another task set by the Prime Minister is for large companies to develop their production with subsequent processing. We have made progress, as seen with the Kazakh electrolysis plant releasing its first products in 2008, producing 250,000 tons of aluminum annually. Previously, all aluminum was exported, leading to absurd scenarios where Kazakh companies purchased aluminum ingots from neighboring countries due to export contracts. By adopting regulatory acts and persuasion, we managed to lower prices for domestic producers by 5% based on the London Metal Exchange.

Last year, we processed 51,000 tons of aluminum domestically, creating new jobs and higher added value. Large companies provide raw materials with a small discount, allowing profitable production. We continue working with them to further process their products, which is advantageous given the commodity market’s situation. They also request cheap loans for long terms at relatively low interest rates, which we address to the best of our ability.

What about the quality of roads that people often complain about?

We are the ninth-largest country globally by territory, yet our population stands at 20 million. Our road network spans 95,000 kilometers, with nearly 25,000 kilometers designated as national roads. The remaining 71,000 kilometers consist of local roads, including district, regional, and city streets. Maintaining this extensive network is a formidable task.

To address funding shortages, we are implementing tolls for highways. Currently, our funds only cover winter and summer maintenance, along with patching on toll sections. Our goal is to achieve self-sustainability 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 maintaining standards. However, projects like the Western Europe-Western China highway, completed in 2015 with some sections finished as early as 2012, meet international standards.

Funding constraints mean we primarily perform minor repairs. To address quality concerns, we established a Quality Center in 2019, overseeing road and street sections’ control and maintenance. Utility accidents also pose challenges, necessitating immediate repairs and generating public complaints.

Since the late 1990s, international financial organizations have required us to meet global standards for road reconstruction and major repairs. We follow similar design standards as Europe and the United States, striving to enhance work quality continuously.

As we pursue perfection, we support every industry in various ways, and we are committed to continuing this effort.

The article was originally published in Primeminister.kz

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