Previous Quarterly Editions
Expropriation Risk: 52 52 52 56 ▲ Political Violence Risk: 48 48 48 49 ▲ Terrorism Risk: 32 30 32 34 ▲ Exchange Transfer and Trade Sanction Risk: 64 55 55 55 ► Sovereign Default Risk: 47 47 47 57 ▲
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Kazakhstan has committed to several climate goals. As part of its Paris Climate Accord pledge, it plans to reduce emissions by 15% from 1990 levels by 2030. In December 2020 at the UN Climate Ambition Summit, President Kassym-Jomart Tokayev announced that Kazakhstan intends to reach carbon neutrality by 2060. A plan, known as the doctrine on carbon neutrality, is currently under development.
Kazakhstan faces various challenges in its climate transition. As the ninth largest oil producer globally, it contributes a huge amount of oil exports to the global economy. Domestically, it is also dependent on coal power generation, with approximately 70% of all electricity and thermal power generated by coal, a difficult inheritance from the Soviet period. Kazakhstan has also struggled to develop new power generation of any kind since the collapse of the Soviet Union, creating severe pressure on its existing infrastructure. Already, huge demands on the power network are causing blackouts, as was seen in January 2022.
As part of its energy transition strategy, Kazakhstan has begun to develop renewable energy sources (RES) and the share of RES in the country’s energy basket has reached 3%. The government intends to accelerate this programme, doubling the current volume of RES generation by 2023. In October 2021, Tokayev announced a target of reaching 80% renewable energy generation by 2060, a highly ambitious goal.
Kazakhstan is conducting this transition at a time of considerable socioeconomic stress. In recent years, inflation, devaluation of the currency, and the COVID-19 pandemic have seriously damaged living standards across the country, making the population very sensitive to changes in the cost of utilities. In January 2022, the government completed a programme of liberalisation of liquid petroleum gas (LPG), a fuel used in cars in the southwest of the country. In response to the inevitable price hike, residents came out to protest. This local protest triggered a national protest movement across the whole country, with protestors demanding improvements to their socioeconomic conditions. Given the tension within the country, the government will be extremely
careful before taking further measures that could increase the cost of utilities for consumers.
Kazakhstan is also extremely vulnerable to the impacts of climate change. In 2021, it suffered a devastating drought in the west and south of the country that seriously affected livestock farmers in the region. The damage caused has contributed to socio-economic tensions owing to the higher cost of food products in the region. The country is also dependent on several rivers that flow from outside its borders, including from Russia and China, as well as from glaciers in other areas of Central Asia. Levels of many of these rivers have been falling severely due to both overuse of water and the melting of glaciers in recent years.
Upon seizing power from the Nazarbayev family, President Tokayev has launched several attacks on Kazakhstan’s oligarchs. He has called on them to pay money into a so-called ‘Fund for the People’ charitable fund and opened investigations into a number of companies linked to senior elite figures, including members of the Nazarbayev family.
This has created the possibility of assets changing hands in Kazakhstan as a result of government investigations. However, there is so far no evidence that the government is planning to use such investigations to target foreign investors. Recognising that the January unrest and the crisis in Ukraine have weakened investor sentiment, Tokayev has sought to reassure investors that the government will create a welcoming business climate and has suggested pro-investment reforms are forthcoming.
Protests seen in Kazakhstan in January 2022 demonstrated that there is significant potential for political violence, not least due to the presence of armed groups linked to elite groups. While the majority of the protests were peaceful in nature, there was a serious outbreak of violence in Almaty. It appears that, as the protests erupted in the city, a number of politically connected armed criminal groups sought to sow chaos across the city and destabilise the government.
The government’s response, which involved a ‘shoot to kill’ order from President Tokayev, also demonstrated that the state is also prepared to use lethal violence to crack down on unrest. With socio-economic conditions still a major concern for the population, it is very possible that Kazakhstan could be subject to further political violence in the short to mid-term.
During and after the unrest of January 2022, President Tokayev referenced the participation of terrorists in the violence in Almaty. While many of the claims by the government regarding terrorism have not been borne out by fact, there is strong evidence to suggest that the armed groups present on the street contained adherents to Salafism, a conservative form of Sunni Islam. However, their participation in the unrests appears primarily linked to the political infighting among their elite masters rather than a desire to progress a religious political agenda.
While Kazakhstan has typically not been subject to domestic terrorism threats, the takeover of Afghanistan by the Taliban in late 2021 has raised the prospect of new avenues for radicalisation in Kazakhstan. However, the Taliban have so far pledged not to export their ideology, in an attempt to secure international recognition.
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Kazakhstan has been negatively affected by the Russia/Ukraine crisis starting in February 2022. It has declared neutrality in the crisis and not recognised the breakaway Ukrainian republics of Donetsk and Luhansk, a similar position to that taken during the Russian annexation of Crimea in 2014.
While Kazakhstan is not subject to sanction (the subsidies of several Russian banks in Kazakhstan have been sanctioned) it is already feeling the impacts of the crisis and its economic fallout. The national currency, the tenge, has fallen more than 15% since the crisis began and the government is preparing for a significant spike in inflation, an already serious challenge for the country. Kazakhstan is also likely to feel disruption in supply chains, not only due to its trade with Russia, but, also for most of its imports and exports, given that the majority travel via Russian territory.
The economic fallout from the crisis will have heightened concerns about living standards in Kazakhstan. In recent years, living standards among the poorest have consistently fallen, in part a result of a weakening currency and growing inflation. In 2020 and 2021, the coronavirus pandemic and a severe drought exacerbated this trend, likely creating the conditions for the unrest in January 2022. While the government has set out numerous economic reforms, none of these measures have yet to have an impact. The negative economic impact of the crisis in Ukraine is likely to heightened socio-economic tensions across the country.
Reacting to the currency effects, the government has introduced restrictions for foreign currency trading on the local currency exchange and ordered state-owned enterprises to convert their foreign currency reserves. During a state of the nation address in March, President Tokayev also called on ‘private subsoil users’ to convert their foreign currency income into tenge. While it is not clear how this request will be enforced, investors should be prepared for the threat of severe capital controls.
Significant improvements in Kazakhstan’s macroeconomic management in recent years have meant that the country is able to absorb a short external shock to its economy without the risk of default. Kazakhstan has a National Fund with reserves equivalent to nearly one-third of gross domestic product and, at under 30%, relatively low national debt.
Given the current ability of Kazakhstan to service its debt, international ratings agencies, including Fitch, have so far not taken any ratings action concerning Kazakhstan’s sovereign debt. However, with the onset of the coronavirus pandemic in 2020, all these indicators began a slow but steady decline, suggesting that Kazakhstan will see a deterioration in its debt position, especially should the crisis in Ukraine continue for the longer term.
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