Economic Relations between Kazakhstan and Russia

competitive environment, were the main sources of inflation in the

republic, a worsening state of the finances of enterprisers, an acute

shortage of turnover capital, a fall in production due to falling demand

and real earnings of the main mass of the population, as well as growing

abuses in trade and banking structures.

The prevailing technological, economic and organizational standards

made a significant impact on the potential of foreign trade relations. “The

cohesion of the economic space of the former USSR was affected through

centralized state planning implemented by command-administrative

management. In the process, the country’s economy worked as a ‘single

workshop’, and not all production and economic links here were rational

from the market point of view. The transition to a market economy

throughout the economic space of the former USSR required a profound

restructuring, and this called for considerable resources and time,” Ex-

Prime Minister A.M. Kazhegeldin stressed.

The policy of liberalization of foreign trade activity and of open

economy did not result in 1993 in any growth of exports. It amounted to

$1.5 billion, thus remaining at the 1992 level. Shifts in the geography of

Kazakhstan export due to the re-orientation of foreign trade links to

industrially developed nations resulted in the strengthening of raw

materials exports. The share of machines, equipment and transport vehicles

in the export dropped to 2 percent, and the share of fuel and energy

complex and that of metallurgy rose to 80 percent. Rising domestic prices

prevented partners from concluding long-term foreign trade deals,

stimulating instead commodity exchanges. The share of barter and clearing

deals in export operations made up more than 26 percent. More than 56

percent of imports were affected through exchange of commodities. Barter

operations were mostly in the nature of structurally unbalanced exchanges.

The republic suffer considerable losses due to inadequate knowledge of the

market conditions and the desire to access foreign markets at any price.

A noticeable feature of Kazakhstan economy is the low level of the

development of machine building, which is not up to present-day

requirements, and this makes an adverse impact on other branches of the

economy, as it results in the common shortage of metal-tooling products.

This aggravates the shortage of spare parts and of products used in several

adjacent branches of industry and adversely affects the standards of

servicing.

Some of Kazakhstan most important tasks in 1994 were the closure of, and

changing production lines at, non-viable enterprises and development of

promising export-oriented ones, which also satisfy domestic demand. This

called for a set of measures to identify enterprises in the state of

depression, closing down unprofitable lines of production in energy-

consuming industries and rehabilitation and reorganization of non-

profitable production lines.

The basis of the development of Kazakhstan, just as of Russia and many

other CIS countries, is export of natural resources. In 1994, the

government introduced regulations for the licensing of natural resources,

and a law was adopted on payments for utilization of natural resources. It

was at that time that efforts were initiated to attract domestic and

foreign investors to develop the fuel and energy complex. The development

began of the Tengiz, Karachiganak, and some other oil yields at oil fields

continued to be introduced. Open – cut coal mining was expanded at

Ekibastuz, Maykubek, and Shubarkul coalfields, with the aim of reducing the

mining of coal underground at low-profit and non-profitable mines of the

Karaganda coalfields.

In the metallurgical industry, the development of production of

ferrous metals and the raw-materials basis of such production continued,

including the revamping of the Karaganda metallurgical plant with the aid

of foreign investment; its re-orientation toward the iron ore pellets of

the Sokolovsko – Saribai mining association; the development of production

of stainless steel and rolled metal and the building of an electric

metallurgical plant for the production of stainless steels in Aktobe;

further development of ferrous alloys in Aktobe and Aksu and of its raw-

materials basis –the Donskoy ore –dressing plant; the re-orientation of

idle production lines of JSC Khimprom to the production of ferromanganese.

Organizational measures were taken in 1994 to develop production of

fireproof materials.

At the same time there was a fall in the production of ferrous

metallurgy due to an aggravation of the raw materials and fuel shortage and

a parlous state of equipment at enterprises of this industry. The decline

in industrial production was to a considerable extent due to non-solvency

of enterprises in view of their insufficient financial resources, non-

payment by the buyers for products delivered, and weak financial

discipline.

The decline in non-ferrous metallurgy continued, as production of

copper, titanium, and manganese fell. To check the decline in this branch

of industry, the production lines at the Chilisai ore-dressing plant

switched to a different product; the Zyryanovsky lead plant was rebuilt,

and its commissioning was brought forward; the raw – materials basis for

the titanium industry was created, as was the Syrymbet tin field, the tin

being produced at the Tselinny chemical plant. The functioning gold mines

and ore-dressing plants were revamped, and work was accelerated to develop

major gold fields at Vasilkov, Bakyrchik, and Akbakai.

In 1994, the share of machine-building industry and machine tooling in

the overall industrial production continued to fall, amounting to six

percent. Low investment activity, non- competitiveness of the Kazakhstan

machine-building industry, limited financial consumer capacity

predetermined an almost twofold reduction volumes in most types of machine

–building branches even compared to the crisis-ridden year of 1993.

The situation was worst in the chemical and petrochemical industries,

whose production capacities far exceeded the republic’s domestic needs.

Considerable share of the product was exported to other CIS countries and

the “far abroad”, but the enterprises suffered from shortage of raw

materials, even shortages of oil, which is produced in Kazakhstan itself.

JSC Polipropilen, AKPO, Khimvolokno production association used imported

raw materials only. In 1994, the decline in most types of petrochemical

products reached 55-60 percent. Oil refining dropped by 20.3percent.

The timber, woodworking, and papermaking industries suffered from

shortage of raw materials. Between the beginning of 1993 and the end of

1994, the production of timber fell by 21 percent, and this had a negative

effect on the state of production at sawmills and woodworking factories.

The production of saw-timber, chipboard, and cardboard fell by 31.9, 59.3,

and 47.5 percent respectively, but the production of paper increased

threefold.

In 1993 and 1994, decline in production also continued in the

construction materials industry. Production of cement declined to the level

of 1973, while production of pre cast concrete products dropped to the

level of 1974. There was a considerable drop in production at enterprises

producing asbestos cement pipes and coupling (by 34.2percent), linoleum (by

40.3 percent), cement (by 61.6 percent), asbestos (by 71.2 percent), bricks

(by 78.8 percent). Production of sanitary wares dropped by 25 percent.

During the last five years, GDP volumes continued to fall, declining

roughly twofold; the greatest decline (by 25.4 percent) was observed in

1994, and in 1995 it was almost nine percent.

However, during the time of the reform considerable changes took place in

the structure of GDP: The share of services grew sharply – from 32 percent

in 1992 to 47 percent in 1995; the share of commodity production declined

by 12 percent. The volume and share of services mostly grew in the trade,

.•.

•3 • ti '

Competitiveness of the Kazakhstan machine-building industry, limited

financial consumer capacity predetermined an almost twofold reduction in

production volumes in most types of machine-building branches even compared

to the crisis-ridden year of 1993.

The situation was worst in the chemical and petrochemical industries,

whose production capacities far exceeded the republic's domestic needs. A

considerable share of the product was exported to other CIS countries and

the "far abroad," but the enterprises suffered from shortages of raw

materials, even shortages of oil, which is produced in Kazakhstan itself.

JSC Polipropilen, AKPO, Khimvolokno production association in Kustanai,

Shymkentshina production association used imported raw materials only. In

1994, the decline in most types of petrochemical products reached 55-60

percent. Oil refining dropped by 20.3 percent.

The timber, woodworking, and papermaking industries suffered from

shortages of raw materials. Between the beginning of 1993 and the end of

1994, the production of timber fell by 21 percent, and this had a negative

effect on the state of production at sawmills and woodworking factories.

The production of saw-timber, chipboard, and cardboard fell by 31.9, 59.3,

and 47.5 percent respectively, but the production of paper increased

threefold.

In 1993 and 1994, decline in production also continued in the

construction materials industry. Production of cement declined to the level

of 1973, while production of pre cast concrete products dropped to the

level of 1974. There was a considerable drop in production at enterprises

producing asbestos cement pipes and couplings (by 34.2 percent), linoleum

(by 40.3 percent), cement (by 61.6 percent), asbestos (by 71.2 percent),

bricks (by 78.8 percent). Production of sanitary wares dropped by 25

percent.

During .the last five years, GDP volumes continued to fall, declining

roughly twofold; the greatest decline (by 25.4 percent) was observed in

1994, and in 1995 it was almost nine percent.

However, during the time of the reform considerable changes took place

in the structure of GDP: The share of services grew sharply - from 32

percent in 1992 to 47 percent in 1995; the share of commodity production

declined by 12 percent. The volume and share of services mostly grew in the

trade] in banking and finances, insurance, and realty, while the share of

everyday services fell. In other words, the main trend in the changes of

macro-economic proportions was a move towards parameters characteristic of

countries with well-developed market economies. The share of consumption of

end products rose to 69 percent of utilized GDP as contrasted with 58

percent in 1993. Investment in 1995 amounted to some 30 percent of GDP.

Beginning in the second half of 1994, certain positive changes began to

occur: a decline in the rate of inflation, a growth in accumulation of

capital, a stabilization in the exchange rate of the national currency, a

decline in the banks' interests rates, and a relative growth in industrial

production.

The rate of inflation steadily declined from 4.9 in June 1994 to 3.2

percent in April 1995. The decline in production, which sharply Increased

in November 1993 through March 1994, practically, ceased in some branches

in 1994. As a result, industry as a whole grew by 0.3 percent in September,

by 1.1 percent in December, and by 1.2 percent in April. As distinct from

the previous years, a certain stabilization of production, which began in

June 1994, was accompanied by a certain slowing down rather than

acceleration of inflation.

The rate of price growth in the production and consumption sectors of the

economy in 1995 slowed down. The highest inflation occurred in January (an

increase of 108.9 percent compared to the previous month), and the lowest,

in August (102.1 percent). The annual index of consumer prices throughout

the republic was estimated at 160 percent (the monthly index, 104.3

percent, whereas the annual index of inflation of consumer prices in 1994

amounted to 1256 percent, which corresponds to a monthly inflation rate of

123.4 percent. (The annual index of production prices was at the level of

141.2 percent).

The positive dynamics in the consumer and wholesale prices was achieved

above all by harsh financial and credit policies and the government's

measures aimed at stage by stage liberalization of prices and tariffs for

commodities and services, which resulted hi a sharp reduction in the range

of regulated prices. At the beginning of 1996, only the prices of electric

power, heating, gas, passenger and freight railway traffic were regulated,

and at the local level, regulation involved prices" and tariffs of communal

services and the services of urban passenger transport.

In 1995, the monetary and credit policies were characterized by changes

in the monetary and credit instruments of the National Bank, its operations

at the inter bank credit, currency, and stock markets, and the development

of the market of state securities. Whereas hi 1994 and January 1995 the

principal instruments were centralized and auction credits, in 1995 the

emphasis shifted from state-apportioned credits to the development of

securities markets and auction credits.

The primary market of state treasury bonds actively began to develop.

The volume of trading on this market is steadily growing, with demand

exceeding supply. Toward the end of 1995, 4.3 billion tenge's worth of

treasury bonds had been issued. In September 1995, pawnshop credits were

introduced, with state treasury bonds as collateral.

The National Bank's average refinancing rate went from 210 percent in

January to 52.5 percent in December 1995. This reduction was made possible

by a considerable alleviation'' of the inflation situation.

The weighted average percentage rate for auction credits amounted in

1994 to 292.61 percent; during ten months of 1995, it went down to 103.29

percent, and in October 1995 it stabilized at the 52.56 percent level.

In 1995, the reduction in production output amounted to eight percent.

Production output fell at 44 percent of enterprises. Of the 220 most

important kinds of industrial products, production of 48 kinds increased

and that of 167, decreased. It should be noted at the same time that hi

1995 decline in production was overcome, and there was an increase in

production compared to the previous year in electric power production,

metallurgy, and in the chemical and petrochemical industries.

In 1995, the policy of liberalization of foreign trade activity

continued; distribution of export quotas was completely eliminated, and the

list of licensed export products was considerably reduced. Kazakhstan

traded with 124 states of near and far abroad.

In the framework of official aid for development, Kazakhstan received a

number of credits to the tune of $1.3 billion from international financial

organizations and individual donor countries.

One of the main types of foreign resources for the republic was direct

investment, in particular the setting up of joint ventures and foreign

enterprises. The rate of establishment of joint ventures in Kazakhstan is

fairly high. Thus, at the end: of 1990 there were just 15 of them, while at

the end of 1995 more than 2000. JVs operated in the republic, of which 500

operated on foreign capital only. Most of these were set up in the;

mining industries.

From the beginning of 1995, steadily increasing numbers of enterprises

were turned over for administration. Toward the end of December 1995,

external administration was introduced at some 20 major industrial

enterprises in various sectors. The necessary legislative basis was created

for the involvement of foreign capital in Kazakhstan.

Thus the implementation of economic policies in 1992-1995 in Kazakhstan

resulted in the liberalization and openness of the economy and the

expansion of private enterprise.

There were significant shifts in the market infrastructure. Trade and

the banking sector developed rapidly, and other financial institutions were

born - in other words, there was, progress in those spheres of the economy

that had previously; been underdeveloped but that were vital for the

functioning of the market economy.

The liberalization of foreign and domestic trade resulted in a slight

reduction of export in 1994 and early 1995 compared to the decline in the

volume of GDP. The export of commodities, mostly to CIS countries, amounted

to $13 billion in 1994 and $4.97 billion in 1995. The greatest share of

exports went to the Russian Federation — 47 percent, or $1.4 billion's

worth in 1994; in 1995, the exports amounted to $2.8 billion, including

$2.1 billion to Russia.

Russia's share in Kazakhstan's imports from CIS countries at the

beginning of 1995 was the largest - 70 percent; Turkmenistan's, 10 percent;

and Uzbekistan's, 9 percent. Of considerable significance is the fact that

more than 50 enterprises securing Russia's defense interests work on

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