DISCUSSION PAPER SERIES

IZA DP No. 14554

The Political Economy of Kazakhstan:

A Case of Good Economics, Bad Politics?

Simon Commander
Ruta Prieskienyte

JULY 2021
DISCUSSION PAPER SERIES

IZA DP No. 14554

The Political Economy of Kazakhstan:

A Case of Good Economics, Bad Politics?

Simon Commander
Altura Partners, IE Business School and IZA
Ruta Prieskienyte
University of Bath

JULY 2021

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IZA DP No. 14554 JULY 2021

ABSTRACT
The Political Economy of Kazakhstan:
A Case of Good Economics, Bad Politics?*
Can autocracies and their associated institutions successfully implement economic policies
that promote growth and investment? Can ‘good economics’ somehow offset the effects
of ‘bad’ politics? Kazakhstan is a case where an autocratic regime has actively projected
market-friendly policies and attracted significant amounts of incoming investment. These
policies are to some extent reflected in the country’s governance ratings, although there has
been a significant amount of investment disputes that question the attachment to the rule
of law. Moreover, the political regime remains strongly personalized around the founder
President, his family and associates. This is reflected in the economics of the autocracy
whereby a large public sector and a set of privately held businesses coexist to mutual
benefit. The latter have been formed around a very small number of highly connected
individuals whose initial accumulation of assets allows them also to act as necessary
gatekeepers for entrants. Competition as a result remains limited in both economic and
political domains. Yet, uncertainties over the future leadership, along with latent rivalry
over access to resources and markets, make the political equilibrium quite fragile. In short,
‘bad’ politics both squeezes the space for, and distorts the benefits from, ‘good’ economics.

JEL Classification: D72, H11, L14, P26

Keywords: political networks, autocracy, investment

Corresponding author:
Simon Commander
Altura Partners
E-mail: [email protected]

* This paper forms part of a wider research programme on the political

economy of autocracies.
Introduction
Investors routinely have to weigh up the balance between political and economic risks.
Autocratic political systems, particularly where entrenched nodes of power and
economic interest have been formed around the autocrat, family and selected
associates, will tend to carry some particular, and often accentuated, risks. Those may,
for example, relate to succession or turnover but also to the behaviour of key players
and government. What happens when that risk is seemingly abated by economic
policies that promote domestic and inward investment and are supported by ratings
from international and commercial organisations that suggest market-friendly
institutions and safeguards are in place? Can the economic and financial context trump
the risks that can be traced to its political and governance arrangements? In other
words, does ‘good’ economics dominate ‘bad’ politics?

Although the question is obviously highly simplified, the choice – albeit with many
nuances – is one that is common for both investors and policy makers. Indeed, many
autocratic regimes have sought actively to motivate investment, particularly when their
domestic resource base has been limited. In some contexts, even when domestic assets
– such as natural resources - have been significant, autocratic regimes have pursued
policies that are commonly deemed to be market-friendly, not least to tap into
technology and skills that are unavailable domestically.

There has long between debate about the relationship between political systems and
economic performance and the channels by which they are connected. What is clear is
that autocracies can, and do, grow rapidly but over longer periods of time, they struggle
to maintain momentum. Moreover, autocracies are given to imploding under the weight
of internal disputes arising from the ways in which power is held and deployed.
However, much of comparative analysis has shifted away from a broad focus on the
types of political regime to a focus on institutions. Economic performance is considered
to depend on having appropriate institutions which, in turn, tend to be associated with
particular political systems. For example, in their widely read book – “Why Nations Fail”
- Acemoglu and Robinson (2012) draw a contrast between inclusive and extractive
institutions. The former includes the rule of law and an independent judiciary,
established property and contracting rights, the provision of public services, as well as
incentives and constraints on economic actors of a market-based nature. The executive
is accountable, there is political turnover and there are safeguards for civil and other
rights. In contrast, extractive institutions lack all or some of these attributes and tend to
be associated with political systems where turnover is either absent or occurs outside
of a predetermined and constitutional framework. Although countries with extractive
institutions can succeed in generating substantial growth, they are unlikely to be able to
sustain this due to the nature of their institutions.

Despite scepticism about the longer run benefits of varieties of autocracy, some
autocracies have tried to square the circle by promoting more transparent economic
governance and by providing incentives for investment, including by foreigners. In fact,
attracting foreign investors has often been an important motivation for trying to
improve the wider business environment, triggering changes to some institutions.
Another common response has been to simplify the procedures and lower the costs of
establishing a company, even if changes to the broader legal and political framework
and rights have not necessarily been implemented. An obvious question that then arises

2
is whether selective measures to establish a more market-friendly and transparent
framework for businesses and investors can adequately substitute the risk that is
inherently associated with political regimes that are based on unaccountable, or weakly
accountable, power and where institutions provide few safeguards? And, if they can,
under what conditions?

In answering this broad set of questions, the example that is used most commonly to
make the case that economic growth can occur even with autocracy and an absence of
sound institutions is, of course, China. That country has successfully attracted foreign
investment averaging $130 billion per annum over the past 20 years while – if official
numbers are to be believed - achieving double digit growth rates. Further, due to its size
and complementary investments – such as in infrastructure and human capital – it has
created advantages that most other autocratic regimes lack. It might be argued that
these combined features make it an almost exceptional case. Yet, many other economies
that lack the same advantages of scale and scope for policy have nevertheless put in
place codes of behaviour and institutional features aimed at limiting the scope for
discretionary action either by governments or regulators.

In this paper, we look closely at one such example – Kazakhstan. A political system
dominated for three decades by one man with a now entrenched, largely family-based,
autocracy has co-existed with an economic system that has quite deliberately aimed to
make the country an attractive place to invest. In the past decades, a series of
government programmes have given priority to encouraging investment. The most
recent example has been the so-called “100 concrete steps” programme launched in
2015 with the objective of making the country one of the top 30 most competitive
countries2. Indeed, significant inward investment has been attracted and the country
has also devoted time and resources to enhancing its image abroad. A commonly cited
metric has been the World Bank's Doing Business which presently ranks the country
25th out of 190 countries, putting it as high as 7th for protection of minority investors
and 4th for contract enforcement.

Despite such improved ratings, the strategy of combining autocracy - with its web of
connections and preferences flowing from the political set-up - with an apparent
openness to investment and trade has had mixed results. A series of recent analyses
have noted the persistence of distortions and unfair practices that ultimately result
from the political system3. Further, despite selective attempts at improving governance
and investor rights, when conflicts arise with the ruling elite (including within that
elite), such constraints can be toothless or irrelevant. That this is the case is ultimately
attributable to the nature of the political system and the organisation of power in the
country. In common with experience from other autocracies, it suggests that there will
always be binding limitations on the ability to introduce better governance when it runs
into conflict with the interests - and even the whims - of powerful incumbent families
and interest groups. However, even if this is the case, a more complex and critical
question concerns the dynamics of the set of political and economic institutions. In
particular, will an entrenched elite that has grown out of its connections to political

2 As of December 2020, it was reported that 71 out of 100 steps had been completed. Yet, according to the

World Economic Forum’s Global Competitiveness Report, Kazakhstan’s ranking of 42nd in 2016 slipped to
59th in 2017-2018 and 55th in 2019
3 For example, Chatham House (2019)

3
power maintain the same type of behaviour that it has pursued in the past, placing asset
accumulation, rent seeking and the avoidance of institutional and market-based
disciplines as the central pillars of their strategy. Or will that elite evolve in ways
whereby a combination of self-interest and longer-term survival leads naturally to a
diminution of discretionary and arbitrary behaviour? It is these questions about the
organisation of political and economic power and their likely dynamics that this paper
addresses.

The paper is organised as follows. The first section sets the scene by considering how
the economy has fared in the thirty years since the state was created out of the ruins of
the Soviet Union. The focus is on economic performance, as measured by growth in GDP,
income per capita as well as productivity, including with respect to comparator
economies in the region and elsewhere. In addition, there is a short discussion of
broader measures, including for education.

The second section then looks at how Kazakhstan stacks up in terms of many, widely
used, measures of institutions, governance and political systems. We also see how the
country lies relative to other countries in the region, at similar levels of income and with
similar political systems. Country-wide measures or indices of governance are used.

The third section looks at Kazakhstan’s ability to attract investment, especially foreign
direct investment as well as the sectoral disposition of that investment. It also focusses
on the environment facing investors. Whilst the country has undoubtedly managed to
attract a fairly significant inflow of foreign direct investment, it has also managed to
engender a number of significant disputes with investors. The reasons for those
disputes have varied but a common feature has been the use of arbitrary or
unconstrained decision-making which can, ultimately, be traced back to the political
system.

The fourth section then proceeds to look directly at the nature of political power in
Kazakhstan and the likely dynamics for the regime. It is clear that power has been
highly personalised being formed around the ex-President and his family. There is a
surrounding elite that has benefitted from the regime. However, the scope for future
disputes, especially given underlying succession issues, is very much present. Although
attempts to ringfence or limit the scope for the exercise of arbitrary power have helped
improve Kazakhstan’s country risk ratings, the nature of political power and decision
making has left the door wide upon to arbitrary actions. As such, it demonstrates very
clearly the limits of partial, selective reforms in a context where political power is still
highly concentrated and where dynastic and other considerations continue to play a
major role.

The fifth section examines the economics of the autocracy. The large size of the public
sector and the state and the way its governance is arranged testifies to a persistent
politicisation of decision making. These arrangements have implications for the
treatment of private business including those specific businesses that are favoured by
politicians and government. What has resulted includes large concentrations of wealth
and assets in those closely connected to the regime by birth, marriage or otherwise.
Indeed, the power of connections that link political individuals and business is shown to
be a defining feature of the regime. There are, as a consequence, relatively few new

4
entrants into those parts of the economy that benefit from such connections while
entry, when it does occur, requires accommodation or outright partnership with one or
more of the incumbent players. The consequence is that the extent of rivalry and
competition is attenuated as large state-owned enterprises (SOEs) and connected
private businesses dominate the formal part of the economy. The rest of the economy is
populated by smaller firms most of whom operate at low levels of productivity and with
little or no access to formal finance.

1. Economic performance
There is no doubt that in the past thirty years, the Kazakh economy has seen very
substantial growth. At present, Figure 1 shows that the country’s economy is roughly
two and a half times larger than it was when the state was founded. Figure 2 also shows
that after the stagnation of the 1990s, per capita growth accelerated to nearly 10% per
annum between 2000-2009. In the subsequent decade, growth has been more volatile
but has still averaged around 4.5% pa. What this has meant is that per capita incomes
have doubled between 2000-2009 and increased by a further 30% between 2010 and
2019. Labour productivity also nearly doubled between 2000 and 2009 and increased
by a further 40% in the following decade.

The dramatic improvement in Kazakhstan’s economic performance has been linked to
its ability to attract investment which we discuss in more detail below. Indeed, most of
Kazakhstan’s growth – as well as incoming investment - has been attributable to oil and
gas. In recent years, oil’s share in total GDP has been around 20-25%,4 with oil exports
comprising 55-60% of total exports and oil-based revenues around 35% of total fiscal
revenues. Non-oil revenues have remained stable at around 13-14% over the last
decade. As such, the economy remains squarely based on extractive industries with oil
and gas and some mining as the main pillars. Despite a variety of announced policies
aimed at promoting diversification, the results have been both slow and limited in the
coming.

How does Kazakhstan’s performance compare to other successor states to the Soviet
Union? Figure 3 shows that at its birth, Kazakhstan was actually one of the richer Soviet
territories. Per capita incomes were considerably larger than its neighbours elsewhere
in Central Asia or the Caspian region and were at a similar level to Ukraine, although
slightly poorer than Russia. Presently, the gap with its immediate neighbours has
widened further, while the country’s per capita income level is more than double that of
Ukraine and still similar to that of Russia. In short, Kazakhstan has largely outperformed
countries that had some similar institutional and other initial conditions carried over
from the Soviet period.

Given their common dependence on natural resources and a similar, long-term
dominance of the political system by one autocratic family, Kazakhstan’s neighbour -
Azerbaijan - provides an interesting comparator. The latter’s per capita income was
roughly 25% lower than that of Kazakhstan at the time of the Soviet Union’s
disintegration. That gap has now expanded to over 45%. Other indicators – such as
educational enrolment, poverty rates and income disparities – also suggest that

4 An alternative measure using natural resource rents from the World Bank Development Indicators

shows a peak of nearly 26% of GDP in 2000 falling to around 18% in 2019/20

5
Kazakhstan has performed significantly better. Even so, Kazakhstan displays many of
the characteristics of autocracies; a centralisation of decision-making and the
accumulation of income and wealth in limited numbers of families and businesses, the
common feature of which is their close connection to power.

Finally, Table 1 looks at how the country has fared in terms of indicators other than
GDP. Using the UNDP’s Human Development Index which brings in health and
education as well as income, Kazakhstan comes out roughly comparable to Russia and
better than the wider regional average. Concerning education, both the index relating
expected and actual years of schooling, as well as the PISA scores for mathematics and
science also show that the country has performed relatively well. Although the scores
fall below Russia and the OECD average, they are generally superior to the regional
average. Poverty rates remain low.

2. Governance and its measurement
Kazakhstan has seen significant institutional improvements. For example, the EBRD’s
transition indicators or qualities show that Kazakhstan scores better on competition
and governance than its Central Asian neighbours, although it still sits well within the
frontier.5 However, in making assessments of institutions, the possible gap between
theory and practice needs to be taken into account. For example, despite having a well-
framed Presidential Constitution with a clear delineation and separation of powers, the
judiciary presently lacks independence and a weak parliament exerts little effective
oversight over the executive. Political competition is very limited as the ruling party
faces almost no real challenge from a small number of tame parties. New political
formations are effectively excluded. At the same time, constitutional arrangements have
often been modified when required. For example, power that was earlier concentrated
in the Presidency has been subsequently qualified as – most recently - parallel
organisations, such as the Security Council, have become alternative loci of decision
making. Such changes in the balance of powers and to the constitution have almost
exclusively been driven by the interests and objectives of the former President,
Nazarbayev. With regard to political risk, despite the changeover in President in 2019 –
following Nazarbayev relinquishing the Presidency – there are obvious succession
issues not so far beneath the surface; issues that could potentially open the doors to
future political turmoil. As such, they reflect the challenge of transferring power that
afflicts almost all autocracies, particularly those where incumbents and their
connections have large resources to protect.

Some recent reviews of Kazakhstan’s political and legal institutions have concluded that
instead of addressing institutional failings, such as with regard to the judicial system
and rule of law, the government has followed instead a strategy of setting up islands or
enclaves of relative transparency6. Prominent examples are the Astana International
Financial Centre and the International Arbitration Centre that were established in 2018
with a view to boosting investor confidence and safeguards7. In addition, the country

5 EBRD (2020)
6 See, for example, Chatham House (2019); 9 Bedford Row (2021);

https://astanatimes.com/2017/07/samruk-kazyna-ranks-among-worlds-most-transparent-sovereign-
wealth-funds/
7 The AIFC is a form of special economic arrangement with companies locating in it exempt from taxation

until 2066. It has its own court which is independent of the Kazakh legal system and is based on English

6
had earlier signed up to the Energy Charter Treaty, as well as a host of bilateral
investment treaties8. In all instances, the aim has been to signal compliance with
international norms in helping attract inward investment, notably to its oil and gas
sectors, as well as mining and telecoms. Yet - as we shall see in Section 3 - there have
been a number of cases where foreign investors have been expropriated or had their
interests materially impaired or diluted. Such commercial disputes have often become
protracted and, in some cases, the government has chosen to ignore arbitration
decisions and international legal judgements.

Improving the rule of law and institutions outside these islands or enclaves has made
limited progress, although civil and commercial courts appear to function quite
effectively, particularly when high-level interests are not involved. Arbitrary behaviour
and abuse of authority, alongside significant levels of corruption across public agencies,
are, as a result, enduring features. One indicator of high-level corruption is the issuance
of unexplained wealth orders in excess of 100 million pounds in the UK against
members of Nazarbayev’s family. Perhaps most fundamentally, it has been argued that
there is one set of rules for the country’s elite – notably the family and associates of the
former President – and one for other citizens9. In sum, the available evidence suggests
that despite selective improvements and the frequent declarations of intent for
improving the quality of institutions, there is still very substantial scope for action.

2.1 Governance ratings
How has the country been judged to perform? An obvious way to answer this question
is by recourse to the ratings that international financial institutions, such as the World
Bank, as well as other research and commercial agencies, assemble precisely with a
view to rating the country and to facilitating comparison over time and place or other
countries. We now draw on a variety of these ratings to look at how Kazakhstan is
evaluated in terms of some key economic-cum-institutional criteria as well as in terms
of political stability. Those criteria are (A) the rule of law; (B) government effectiveness;
(C) regulatory quality, (D) corruption, (E) voice and accountability and (F) political
stability. Using a number of different sources also permits assessing the degree to
which these ratings offer converging or diverging assessments. In addition, we place
Kazakhstan’s ratings in a comparative context set against other countries in the region,
as well as relative to those with similar levels of income per capita10. Figures 4-9 start by
plotting the evaluations of these six components over time using the available sources.

For the rule of law, Figure 4 shows that there has been gradual improvement over time -
since 2006/7 in the case of the World Bank Governance indicator, as also with the Doing
Business Enforcing Contracts measure. The two other measures – the Global Innovation
Index and the World Justice Project – show small improvements since 2014. In contrast,
the additional Doing Business indicators for the quality of judicial processes and
strength of legal rights suggest that there have been particularly sharp improvements
over the last five years. Using the World Bank Governance indicator and when placed in

common law and language. The IAC is an independent entity set up under New York arbitration rules
with a panel of international arbitrators.
8 These are listed on UNCTAD’s website: https://investmentpolicy.unctad.org/international-investment-

agreements/countries/107/kazakhstan
9 9 Bedford Row (2021)
10 Figures reporting scores for comparator countries are available on request

7
a comparative regional context, Kazakhstan ranks highest of the six countries and has
seen the strongest improvement since the early 2000s11. However, other former Soviet
countries (excluding the Baltics) – such as Georgia or Moldova - have attained a higher
level and seen more improvement. Compared with other autocracies, Kazakhstan’s
score of around 40/100 is significantly lower than either China or Vietnam. Relative to
countries with similar income levels, it is also much lower, notably with respect to some
democracies.

Figure 5 now plots scores for government effectiveness. These show a clear
improvement across all indicators over the last 5 years. Put in comparative context,
Kazakhstan – along with Russia – has seen the strongest improvement, although
significantly less than either Georgia or China, for that matter. Again, this improvement
has brought the score to around the mid-point which obviously indicates considerable
scope for further improvement. Placed against other countries with similar income
levels, Kazakhstan is one of the weaker performers.

Figure 6 looks at regulatory quality. This also reports a clear improvement since 2015 in
the case of the World Bank and Global Innovation Index (GII). Other measures are
mostly consistent. However, some indicators – notably the GII and Doing Business
starting a business scores – show quite a sharp improvement that started even earlier.
Although Kazakhstan scores better than its immediate neighbours and a bit lower than
some other FSU states, when compared to countries at similar income levels, it lies
substantially below the best performers, such as Latvia.

Figure 7 reports information about corruption using three indicators. The World Bank
and Transparency International ratings mirror each other and show a slight
improvement since 2013. The Doing Business measure which covers the extent of
corporate transparency – a somewhat different but relevant measure – shows, however,
a very sharp improvement after 2015. Again, relative to its Central Asian neighbours,
Kazakhstan comes out strongest with the largest improvement. In terms of a wider set
of FSU countries, it lies in the middle of the distribution as it does relative to other
autocracies. Compared with countries at similar income levels, although both the World
Bank and Transparency International measures show that it lies above Russia,
Kazakhstan remains very much near the bottom of the distribution.

Figure 8 is for Voice and Accountability where the World Bank indicator shows a
deterioration pre-2012 followed by a subsequent stabilisation. The Freedom House
indicator gives a small uptick after 2019. Relative to its neighbours and other FSU
states, Kazakhstan sits in the middle of the distribution, although slightly better than
other autocracies. However, when scaled in terms of income, Kazakhstan sits at the
bottom of the stack and very substantially below other countries at the same level of
income per capita.

Finally, Figure 9 for Political Stability reports some increase in instability post-2008 or
earlier when using the World Bank and ICRG measures. The IHS Markit score suggests
an improvement in stability since 2014. Compared with its Central Asian neighbours
and other FSU states, Kazakhstan displays greater stability throughout most of the last

11 The other regional countries are Kyrgyzstan, Russia, Uzbekhistan, Tajikistan and Turkmenistan

8
twenty years. Placed against other autocracies, it lies near the middle of the
distribution, falling to near the bottom when compared to countries with the same
income per capita.

What can we conclude for these summary measures? Certainly, when held up against its
neighbours and most other FSU states (excluding the Baltics), Kazakhstan appears to
perform better, both with respect to the level of the scores and also with respect to their
evolution over time. However, for certain measures there has been a deterioration,
particularly relating to political arrangements and their consequences. Further, when
placed against other countries with similar income levels – including new and
established democracies – Kazakhstan emerges with significantly poorer scores for
most of these indicators. The overall picture that emerges is that while the broad tenor
of the political system has remained unambiguously autocratic (of which more later in
Section 4 below), there have been partial improvements to other indicators but to levels
that are very substantially within the frontier. To the extent that this is a case of stable
‘bad’ politics but ‘better’ institutions or economics, the scale of increment in the latter
has not been that impressive.

There is a further feature that emerges from these figures that deserves some comment.
The World Bank's Doing Business scores generally offer a more positive evaluation than
the other indicators and are something of an outlier. Why might this be the case? Part of
the explanation lies with the way Doing Business compiles its rankings. The results are
drawn from responses to surveys sent to around 10,000 law firms in participating
countries. The survey covers a set of topics including, inter alia, starting a business,
getting electricity, registering a property and enforcing contracts. The data are based on
a reading of the laws and regulatory arrangements. To allow comparison across
countries, the data are collected for a hypothetical enterprise: a private, limited liability
firm that is domestically owned, with exporting accounting for no more than 10% of
sales and at least sixty employees located in the country’s largest business city12. In
other words, what is being measured are lawyers’ judgements rather than a survey of
actual firm-level respondents. This gives rise to a discrepancy between hypothetical
and actual situations. For example, although the administrative costs of starting a
business are relatively low in Kazakhstan – itself perhaps a conscious response to the
way in which Doing Business focusses on this dimension – other evidence suggests
there are still significant barriers to entry for both domestic and foreign firms, with
those barriers being particularly pronounced in network sectors, such as electricity.
Further, the operative regulatory setting is actually complex. Although procedures
governing exit of companies appear well designed and efficient on paper, the fact
remains that there is a highly differentiated approach to insolvency with state-owned
companies, large firms and financial institutions all being able to access bailouts. A true
measure of insolvency would reveal a big gap between the notional framework and
actual application13. A further reason probably lies with the way in which the survey is
designed and the likely bias that is imparted14.

12 The method is described in Besley (2015) as also on the Doing Business website –

www.doingbusiness.org
13 See OECD (2018)
14 See Commander and Tinn (2007) for a critique

9
3. Attracting investment - but also disputes
Since 2000, Kazakhstan has managed to attract on average around $7 billion per annum
and foreign direct investment has accounted for a substantial share of total investment
in the economy. Most parts of the economy are in principle open to foreign investors
with the exception of mass media, fixed-line telecom, agriculture and forests where
limits on foreign equity are in place15.

Figure 10 provides rolling five-year averages for the period from 1995-2017 for the
stock of foreign direct investment (FDI) relative to the size of the economy (GDP) and
also relative to Gross Fixed Capital Formation (GFCF). It shows a sharp increase – from a
very low base – in the 1990s followed by a similar spurt after 2007, at least relative to
GDP. Relative to GFCF, there has actually been a downward trend since the early 2000s.

As regards composition, natural resources – mainly oil and gas - have accounted for
around three quarters of foreign direct investment. Production Sharing Agreements
(PSAs) have been the principal vehicle used for the main fields. This is an approach that
has also been pursued by its neighbour, Azerbaijan and, at an early stage, by Russia.
PSAs are, of course, one way of dealing with country-specific risk through limiting the
extent to which national laws and regulations can affect an investment and associated
activity. One consequence is that the terms of most PSAs also tend to favour the foreign
investor. However, it might have been expected that over time with an improvement in
the business environment that PSAs would have given way to other investment modes.
In fact, the government had announced that there would be no new PSAs as far back as
2012. Even so, the three largest, majority foreign-owned PSAs have remained in place
and have successfully mobilised substantial rounds of investment. However, these three
massive PSAs effectively exist as enclaves in the economy and are hence subject to
different treatment from other – mostly smaller – investors. Nevertheless, PSA investors
in recent years have complained of growing bureaucratic hurdles and procedures along
with the imposition of wider obligations on the main projects, including local content,
labour and other regulations16. In another important sector - mining – there has also
been very limited investment resulting in less than 15% of reserves being presently
exploited17. Further, for both fossil fuels and mining, the environment for smaller
investors has remained far less favourable and more arbitrary.

3.1 Investment disputes
Clearly, there has been a significant mobilisation of investors, but it is also striking that
a significant number of investments have soured. Between 1996 and 2021, 21 investor
state disputes covered by treaties have been filed with over 75% being posted since
200718. The largest number (eight) have been adjudicated in favour of the investor with
nearly the same number (seven) in favour of the state. In the 70% of cases where
judgement is neither pending nor confidential, nearly 60% of the total disputed
investment amount was adjudicated in favour of the investor19. Most of these disputes

15 See OECD (2017)

16 Chatham House (2019), pp26ff
17 ibid.,
18 Clearly, there have been other disputes – mostly smaller and involving domestic players – which are

not covered under treaty-based disputes procedures

19 In seven cases, the case has been settled in favour of the state and in eight cases in favour of the

investor. The former amount to 41% of total claims with the latter accounting for 59%

10
have taken at least 3-4 years to settle with some stretching on for over a decade, mostly
due to the sovereign refusing to conform with the various legal judgements20. The total
value of all the claims posted since 1996 has approached $12.5 billion. Expressed
differently, at the peak in 2009 and 2010 the investment under dispute amounted in
both years to between 4.1-4.7% of the total stock of FDI. In 2008 and 2013 the
equivalent ratio was between 1.5-2%.

The two largest claims have been in a case involving Anatolie Stati and others – also
referred to as Tristan Oil - relating to an investment in the oil sector with a claim of over
$2.6bn and, secondly, World Wide Minerals (WMM) - a uranium miner - with a claim of
$1.6bn. Awards of >$500m 21and $53m22 respectively have been handed down. Aside
from the length of time taken to get judgement (22 years in the case of WMM), the
Kazakh government has also refused to settle, despite judgements passed in foreign
courts. In the case of Stati et al., a Swedish tribunal found in favour of the plaintiffs in
2013 and this was upheld by the Swedish Supreme Court in 2017 and again in 2020.
Further proceedings for enforcement in US courts have also led to judgements in favour
of the plaintiffs. Failure to settle has then led to the seizure of Kazakh government
assets, the value of which is several multiples of the judgement23. Defying judgements
issued through established arbitration procedures raises obvious questions about
Kazakhstan’s commitment to the terms of the Energy Charter Treaty, as well as other
bilateral investment treaties. Clearly, commitment to the rule of law retains a
discretionary – hence undermining - aspect.

What have these disputes been about? The extended details of each dispute are
provided on the UNCTAD and ICSID websites24 and discussed at more length in 9
Bedford Row (2021). However, there are some common themes that run through these
various disputes. In over 50% of cases and in all the largest disputes, expropriation has
been the main, cited cause. In a further 20% of cases, the principal reason has been a
lack of fair and equitable treatment (FET), sometimes in common with expropriation. In
other words, most disputes have involved some form of action by government aimed at
taking away assets or rights to activity from investors, as well as treating them unfairly.

How does Kazakhstan’s history of publicly known, treaty-based investor-state disputes
compare to other countries with similar resource bases or in the same region? Looking
at Russia, of the 26 acknowledged cases, nearly two thirds are either related to the
invasion of Crimea and consequent loss of assets or to the infamous Yukos case. In
Ukraine, there have been 26 cases and in Azerbaijan, there have been five cases.
However, neighbouring Kyrgyzstan has registered seventeen but mostly of smaller scale
and associated with its persistent political turmoil. This suggests that it is not

20 The size of the amount in dispute is strongly and positively correlated with the length of time to

settlement
21 See: https://www.kslaw.com/news-and-insights/king-spalding-client-prevails-in-swedish-appeal-of-

500-million-arbitration-award-against-kazakhstan
22 See: https://www.jonesday.com/en/practices/experience/2019/10/world-wide-minerals-achieves-

right-to-arbitrate-its-expropriation-and-international-law-claims-against-republic-of-kazakhstan
23 See: https://www.prnewswire.co.uk/news-releases/swedish-court-rejects-kazakhstan-s-second-

challenge-to-arbitral-award-blocks-further-appeal-803634486.html. 9 Bedford Row also provides a

detailed discussion of these disputes
24 See: https://investmentpolicy.unctad.org/country-navigator/110/kazakhstan and

https://icsid.worldbank.org/cases/case-database

11
necessarily in the amount of cases that Kazakhstan stands out, but more in relation to
the nature of the disputes and, in particular the exercise of arbitrary actions by the
state.

What can we conclude? Kazakhstan has undoubtedly managed to attract a substantial
amount of investment from abroad. Most of it has been for natural resource
exploitation.25 The largest investments flowing to the three major oil projects in the
country have continued to operate on a PSA basis, suggesting that country-risk is still a
factor. Some of the investments that have been attracted have also soured. The total
value of all claims launched is equivalent to at least 8% of cumulative FDI up to 2020.
Reading the narratives of these cases, the reasons for these disputes have mostly been
attributable to expropriation or dilution of interests by the state or, even – sometimes in
byzantine fashion - by persons closely connected to political power. For example, an
agricultural project – Ruby Roz – pitted its initial owner against the family of the ex-
President’s son-in-law. When the latter himself fell out of favour, his relations who had
forced out the original owner then alleged that they in turn had been forced into a sale,
this time to the eldest daughter of Nazarbayev26. In short, it is clear that both the scale
and the nature of those disputes need to be understood in the context of the political
system and the ways in which that system functions, notably with respect to the scope
for discretionary influence and differences in treatment.

4. Political system and dynamics
Figure 11 provides assessment of the political system in Kazakhstan over time. The
Polity V database, which has the longest temporal dimension, indicates that the country
has actually become more autocratic over time with a clear increase in autocracy in the
early 2000s27. The Freedom House score also rates the country as a stable and highly
autocratic country since 2015 while the Economist Intelligence Unit evaluates it as
becoming slightly more autocratic post 2006. These summary judgements clearly do not
suggest a shift towards greater democracy.

Looking inside the summary ratings, aside from the attenuation – and periodic
downright suppression – of political opposition and rivalry, the country’s autocracy has
also acquired strong dynastic dimensions. Children and other relations of the former
President hold prominent positions, both of a political and business nature. The elder
daughter was, until 2020, Speaker of the Parliament and has been touted as a future
President. Complementary to this has been the system of oligarchic control that has
been carefully constructed over the past three decades. As we shall see in the next
section, this has allowed individuals to acquire valuable assets and to leverage, either
directly through ownership or through access to public and financial sector resources,
the very significant levels of natural resource rents that have been generated. Aside
from preferential finance, public resources have also funded periodic bailouts that
connected parties have received. When coupled to the dilution of competitive pressures,
this has conferred enormous advantages on those with connections to power. Such
access has come through consanguinity but also through other links, including
partnering with relatives or others close to power. Further and persistent features of

25 According to data from National Bank of Kazakhstan as of 31st July, 2020.

26 9 Bedford Row (2021) summarises the series of actions
27 In the original scaling employed by Polity V, the scale for autocracy runs from -10 (Saudi Arabia or

North Korea) to -1. In the 1990s, Kazakhstan was between -3/4 but since 2003 it has been rated at -6

12
Kazakhstan’s political arrangements include the ways in which government agencies,
such as the security services, have played a role in structuring the returns to
connections. At the same time, participation in government or the ruling party has been
able to confer privileges, even if these might be more transitory in nature.

This system of decision-making continues to reflect the interests of a relatively small
group of players, whether counted in terms of individuals or their business vehicles or
holdings. Moreover, these features have impeded movement in the direction of a more
open, competitive society with supportive institutions. It has preserved instead a
system of narrow elite dominance and rent extraction. Even so, autocracies of the
Kazakh variety often struggle to remain stable under the combined pressures of the
inefficiencies they create, as well as the many points of tension that arise from dynastic
succession (an increasingly pressing issue) and maintaining the political equilibrium.
This is because the succession problem potentially opens the door wider with respect to
intra-elite conflict, as well as conflicts with the wider population.

The growing preoccupation with the succession problem is mirrored in several recent
actions. For instance, the election of a new President – Tokayev - in 2019 not only set off
open political debate28, but has also been accompanied by the powers of the Presidency
being trimmed or qualified. At the same time, the former President has set about
agglomerating a series of leadership positions – often for life – in other institutions,
such as the Security and Constitutional Council, as well as the ruling political party. A
decree in 2019 gave Nazarbayev, by virtue of being head of the Security Council, a
consultative role in the appointment of regional governors, heads of the security
services and, indeed, most cabinet positions.

An obvious interpretation is that these changes have been introduced with a view to
constraining the scope for policy changes by the current leadership. What is blindingly
obvious is that, despite some nuances, Nazarbayev’s role is still pivotal. Perhaps the best
way to summarise it is to think of him acting as the main arbiter for the main elite
groups. Now that many of the rights to resources – mostly natural resource assets but
also finance - have been allocated, his role is largely to try and ensure that there is no
threat to those rights and hence to the stability of the system that has been crafted over
the past thirty years. Threats to that stability could, in principle, come from any
successor outside his immediate family who might wish to build his or her own network
of connections and clients. But it can also come from conflicts within the elite - conflicts
that have so far been quite successfully contained.

Part of the reason for the success in limiting intra-elite conflict can be traced to the way
in which the arbiter’s power has been deployed to dampen competition among the elite.
In some of the neighbouring autocracies - Azerbaijan and previously Uzbekistan -
control has been exercised through a highly vertical structure with very substantial
concentration of powers in the hands of the President. In Kazakhstan, the system has
been less vertical in its own organisation but in many key dimensions, both the ability
to make decisions, as well as arbitrate, has also been concentrated in, and around, the
former President. At this juncture, with a relatively stable allocation of rents and

28 https://www.project-syndicate.org/commentary/kazakhstan-protests-demand-political-reform-fight-

corruption-by-kassymkhan-kapparov-2019-08

13
control rights having been established, this has also facilitated the preservation of the
political equilibrium.

Nevertheless, the substantial value of those rents and control rights will always make it
attractive for others to try and secure those privileges. This has the potential for
unleashing forms of elite rivalry that can be highly disruptive. At the same time,
attempts at partial reform that improve inclusion and limit rent appropriation also
carry risks of a political backlash from powerful vested interests. Perhaps not
surprisingly, the new President and Government have signalled few substantive
departures from the policies inherited from their predecessor. Further, experience in
other similar political settings suggests that when elite groups are faced with
uncertainty, they mostly try to consolidate their privileges rather than broaden access.
Consequently, threats to - or even elimination of - an elites’ rents may not give birth to a
competitive market economy but lead, rather, to disorder and, possibly, violence. To
avoid that, North et al (2009) have argued that certain preconditions or thresholds –
including the rule of law for elites and ‘perpetual life for both organisations and the
state’ – have to be met. To the extent that they are, impersonalized transactions can
come to dominate. This can allow the transformation of highly personalised privileges
into impersonal rights for the elite. But such transformation occurs when elites believe
that their privileges will be more secure by allowing intra-elite competition29. As yet,
the evidence as to whether these conditions are being gradually met is actually quite
ambiguous. As we shall see, the well-entrenched local elites that were formed in the
first decade after independence - still appear focussed on exercising privileged access to
public and other resources. To the extent that entrants and rivalry are permitted, it
appears that this is occurring through partnerships or business associations with those
entrenched interests. Whilst this may be quite effective in co-opting potential
competitors and limiting intra-elite rivalry, it also has consequences for market
structure and market power and, hence, ultimately for efficiency, let alone innovation.
Finally, the ways in which businesses and wealth have been acquired make them
vulnerable to expropriation or dilution by new administrations, not least to free
resources for reallocation.

This context leads us to an obvious question - how durable is the current political
configuration likely to be? There is, of course, no straightforward answer but rather a
set of factors that are likely to be of material significance. Perhaps the most significant
concerns the continuing availability of the resources that effectively fund much of this
dispensation. These – as we have already noted – primarily originate with natural
resources, both oil and gas, but also the various mining assets that the country
possesses. These are of critical importance not only because they are the main source of
funding for the budget but also because they lie in sectors and activities that sustain
many of the businesses where connected individuals are present. Diminished resources
in this sort of political economy are likely to provoke greater rivalry among the elite,
thereby raising the chance of more disruption. Absent such resources, it would also be
very problematic to sustain the public spending programmes, along with the large
public sector, that Kazakhstan presently maintains. The aggregate size of government is
now around 20% of GDP whilst, in recent years, outlays on social assistance have

29 North et al., (2009), pp192ff

14
approached 2% of GDP - a level roughly the same as that of Russia30. And, as we shall
shortly see, much of the economy is still dominated by public enterprises.

We now turn in the following section to looking in more detail at the ramifications of
the political system and, in particular, to the intersecting webs of influence and
connections that link public and private interests and form a significant feature of the
economic landscape.

5. The economics of autocracy
The country’s continuing dependence on natural resources and the associated ways in
which its political system has developed place a heavy imprint on the structure of the
economy. Not only is there a large public sector but the way in which some of the
privatisations have been carried out has also left an enduring mark, not least the
accumulation of sizeable assets – mostly in natural resources – by a combination of
politically-connected local businessmen and politicians. Outside of these parts of the
economy, there exists a private sector which, however, operates mostly at relatively
small scale and without the same access to finance or other inputs that the state and
connected parties enjoy.

The most striking - and persistent - feature is the size and scope of the state sector.
Despite some privatisation of a few large and many smaller entities in earlier decades,
continuing attempts to privatise the larger SOEs have mostly stalled. 31The reasons for
this can be traced to a variety of factors including opposition by incumbents, the
international context and weak demand for those assets, whether from domestic or
foreign investors. What this means is that the economy is still dominated by the
remaining state-owned enterprises. This is especially true for larger companies32.
Between 2016-19 the share of SOEs in gross value added (GVA) averaged 16.5%, albeit
on a slightly declining trend. This share was particularly substantial (>40%) in health,
mining, information and communications and transportation33. Aside from pervasive
deficiencies in governance, including lack of transparency regarding financial
performance34, SOEs have benefitted from easier access to credit and financing
arrangements that are largely not available to the private sector35. This has included
amassing significant foreign exchange denominated debt facilitated by government
backing36.

Many of the SOEs are grouped into a number of holding companies, the most prominent
of which is Samruk-Kazyna or the National Welfare Fund. This encompasses, inter alia,
the rail and postal services, the state-owned oil and gas company – Kazmunaigaz - the

30 IMF (2020)
31 https://www.dentons.com/en/insights/alerts/2021/january/21/what-kazakhstan-will-sell-until-

2025-the-new-privatization-plan-is-already-in-effect
32 OECD (2017)
33 EBRD (2021)
34 https://www.eureporter.co/frontpage/2020/10/29/ethical-concerns-raised-at-kazakhstans-63bn-

samruk-kazyna-fund/
35 Recent measures including the “National Project on the Development of Competition” have the

intention of eliminating competitive advantages for SOEs along with a further programme of privatisation
for 2021-25 that includes some of the large companies in the energy and transport sectors
36 https://www.centralasiaprogram.org/blog/2016/07/19/the-invisible-public-debt-the-case-of-

kazakhstan/

15
uranium company - Kazatomprom - and Air Astana. Some of these companies were
meant to be privatised in 2020 but, once again, this has been pushed back to future
years. As a consequence, Samruk-Kazyna and the other holding companies still control
assets that averaged 53% of GDP between 2016-19. 37Expressed differently, Samruk-
Kazyna’s revenues in 2019 amounted to over two-thirds of the total revenues of the top
10 listed and unlisted companies in the country. As regards composition, roughly 40%
of Samruk-Kazyna’s assets are in oil and gas, metals and mining, a further >20% in
financial services with the remainder being stakes in transport, energy,
communications, chemicals and real estate. 38In recent years, the fund has reported a
return on equity (ROE) of nearly 10% with its ROCE, a measure of the allocative
efficiency of the capital employed, at 6.5% in 201939.

Another holding group is JSC Baiterek National Management Holding, one of whose
aims is to promote diversification of the economy. Its assets, which amount to roughly
7% of GDP, include the Development Bank of Kazakhstan, an entrepreneurship
development fund and a savings bank for housing construction. These are among the
nine subsidiaries of the holding which also has some ownership interest in nearly 50
other companies. It is financed by the government through low interest credits. Yet,
despite its objective of promoting diversification, the bulk of its activity involves
financing state-owned companies and commodity producers. It appears that the fund’s
return on equity (ROE) has hovered around 4/5% in the five years up to 2017 while its
ROCE has ranged between 0.4% and 1% in the same period.40 There has been a slew of
corruption scandals around the top management with successive board chairmen and a
deputy chair being charged and jailed for corruption.41 A further holding – JSC National
Management Holding Kazagro - has focussed on agribusiness, comprising over 50
companies with ownership rights assigned to the Ministry of Agriculture. However,
Baiterek and Kazagro were merged in March 2021.42

Whatever the configuration of the holding companies and their individual firm
components, it is absolutely clear that decision-making in, and governance of, the SOEs
is heavily influenced by politicians. This extends also to the top management of the
holding companies where relatives of the ex-President or close political associates have
held those positions - such as Chairman of Samruk-Kazyna - for most of their history. In
addition, the Management Boards are dominated by politicians with ties to Nazarbayev
and the government. Perhaps unsurprisingly, the performance of these holding groups
has been very mixed, although a deficit of transparency makes detailed assessment of
their performance difficult.

The use of these holding companies carries further implications. One is that the SOEs
that they contain effectively operate outside of the budget process and the scrutiny of
the Parliament. In fact, control seems to have been devolved to a mix of incumbent

37 https://www.fitchratings.com/research/international-public-finance/fitch-affirms-kazakhstan-

sovereign-wealth-fund-samruk-kazyna-at-bbb-outlook-stable-30-12-2020
38 https://sk.kz/investors/portfolio-companies/?lang=en
39 https://kase.kz/en/news/show/1438814
40 See ABD (2020)
41 For further details, see articles from The Diplomat, kiar.center, kaztag.kz, acca.media and kazpravda.kz
42 https://www.fitchratings.com/research/international-public-finance/fitch-withdraws-kazagro-

ratings-on-merger-completion-19-03-2021

16
managers and the management of the holding companies. As already noted, the latter
are highly politicised. Second, they ensure that the absence of a centralised ownership
structure weakens oversight and helps sustain the underlying system of discretion and,
with it, the opportunity for connections to be leveraged. In addition, ministries with
ownership functions are also regulators of their respective sectors. This means that
ministers hold influential positions on the boards of directors of the holding companies
which they are also charged with regulating.

Outside the state-owned part of the economy, there is a dualistic structure. On the one
hand, there is a numerous SME sector that, however, contributes a relatively low share
of value added – around 26% - while accounting for nearly a third of total
employment43. There is also a sizeable and small-scale informal sector which may itself
account for around a further 20% of employment. Both informal and formal SME
components tend to be composed of low productivity entities with labour forces that
lack skills and have limited access to credit. In contrast, there is the universe of a
limited number of privately held larger firms, the most important of which tend to be
contained in a business group. It is in this segment where considerable market power
has been acquired and where insiders – family or associates of the former President –
have established a presence and where connections are paramount. Insiders have
benefitted from preferential access to assets and finance, as well as favourably priced
inputs. Regulatory actions have also provided further and selective advantage to
connected entities and/or individuals on the basis of their proximity to power.

A final point at this stage. The large and persistent size of the state sector is not just a
function of constraints on the speed and scale of privatisation. After all, both facets are
ultimately choices about the design of economic policy as well as its timing. A more
fruitful way of thinking about this is to consider the dynamics of the economy. In this
context, there is a symbiotic coexistence of significant numbers of SOEs occupying
valuable economic space – notably in natural resource sectors – and the parallel holding
companies or business groups assembled by connected individuals and politicians.

There are also business vehicles that have been explicitly formed as partnerships
between government and connected parties, such as Kazchrome, an integrated mining
and metals business, 40% of which is owned by the Ministry of Finance and 60% by the
Eurasian Resource Group, whose founders have close connections to power. These
facets of the economy knitting together government, the public sector - notably the
SOEs – and connected parties form the cornerstones of the broader system. One
prominent feature in this symbiosis is the transfer of resources and contracts from
publicly owned assets – and in some instances from the government budget directly – to
companies controlled by connected individuals or families. In short, the dilatory pace of
privatisation is no accident. To date, the main players have seen sufficient advantage in
keeping major assets in public ownership. Whilst sometimes presented as a political
choice, in reality this is more about a confluence of economic and financial interests.

5.1 Connections and networks
The size and scope of the public sector obviously ensures that the role of politicians
remains central. This is reflected in numerous ways, not least their governance. In

43 OECD (2019)

17
addition, despite the use of holding companies and targets, the degree to which financial
and other discipline binds has tended to be compromised by the pervasive interference
of politicians and political objectives.

But what about the private sector that has emerged since 1991? Here, the difference
with the state sector is less pronounced than might have been expected. Among the
larger, formal sector firms that comprise an important component of the private sector,
proximity to government and politicians has been a key ingredient for success. As a
result of the political system, along with the aim of building an independent state and
economy post-1991, as well as the dynamics resulting from the ways in which transfers
of ownership and control through privatisations occurred, pervasive (and, often, highly
rewarding) connections by larger businesses to politicians and power have been a
defining feature.

How should we think about connections? Clearly, there may be a connection between a
businessman or company and a politician or SOE that is effectively bilateral in nature.
However, comparative analysis suggests that connections commonly tend to form part
of a wider set of links and form strands in what, in effect, are networks. Networks are, in
fact, ubiquitous, providing foundations for how societies function, both for good and
bad44. Think of cooperative societies but also think of the mafia. As such, networks not
only represent relationships but also provide some form of structure for those
relationships.

It is also clear that political regimes exert a powerful influence on the ways in which
networks are organised and function. Among autocracies, networks not only tend to be
less integrated but are commonly formed around individuals and families, and their
associated interests. These in turn tend to revolve around, or emanate from, some
strong central hubs, whether the unique political party or the autocrat himself. Such
arrangements result not only from the structure of power but also the way in which,
almost by definition, autocracies try to subvert the formation of networks that might
provide a challenge to their system of power45. And, of course, the ways in which
networks in autocracies are configured will often be informative about the sort of
opportunities that exist and the sorts of individuals or entities able to gain access to
those opportunities.

When measuring connections and networks, the main descriptive elements are nodes -
denoting individuals or entities - and edges or links between those nodes. Networks are
also commonly represented in terms of degree (the number of links sent to a node) and
density (as indicated by the ratio of ties in a network to the total possible number of
ties). What sorts of network exist in Kazakhstan? One way is to use information
collected about politically exposed persons or PEPs and their connections. A PEP is
defined as an individual in a politically exposed position, as well as their close relations
and associates, whether they be people or businesses. Using one such dataset46, Figure
12 provides a mapping of Kazakhstan’s network of connections for the largest
component (which is defined as a subset of nodes where all its members are connected
with at least one other node of the same subset). The largest component is an indicator

44 Putnam (2021)
45 Commander and Poupakis (2020)
46 For a detailed description of the dataset and its properties see Commander and Poupakis (2020)

18
of the extent of integration of a network and has been found to be positively associated
with a country's level of democracy47. Not surprisingly, because of its political system,
Kazakhstan’s largest component is significantly smaller than in established
democracies. In this network map, politicians are shown in red and all other individuals
in black, while political parties are shown in dark red, SOEs in blue, and private firms in
green. The size of the nodes is scaled by degree or the number of edges. Figure 12 shows
that there is effectively a unique political party with a relatively small cluster of
politicians linked to it. The main characteristics of the network space are the large
number of state-owned enterprises, many of which have a significant number of links or
edges (as denoted by the size of the node). There are also links between them and
politicians, as well as other individuals. In addition, we can observe a reasonable
number of private firms, although they have far fewer links than the SOEs.

Although the network map provides a useful overview, it is almost certainly a partial
representation. That is, because it does not adequately represent the way in which
connections have been concentrated in, and around, a very limited number of political
actors and their relations and/or associates. One way of visualising the groups of
influential persons and their networks is to think of a large web composed of a series of
circles with differing degrees of overlap and connection. At the centre of this web lies
the circle belonging to Nazarbayev and his immediate family. Aside from exerting
influence, members of this circle are themselves, as we shall see, major owners of assets
on and off-shore. Their interests straddle the economic and financial but also have some
explicit political dimensions, whether through holding positions in the main political
party or by sitting on strategic bodies, such as the Security Council. At the intersections
of this core circle are various individuals who have established and maintained close
connections to the family circle over the past decades. These include businessmen but
also advisers and figures with sinecures in major public institutions. Among them are
regional interests whether formed by common interest or through historical -
sometimes clan-based, links – and including the various akims or heads of local
government appointed by the Presidency. Further circles of influence include other
businessmen and businesses including those belonging to individuals with non-Kazakh
roots or other foreigners.

5.2 Emergence of business groups and role of connections
The non-SME part of the economy contains a number of industrial holdings which
combine the assets – mostly in extractive industries as well as finance – of a small
number of rich and connected businessmen. These holdings were often put together in
the 1990s, including through some of the privatisations that were then conducted. One
feature that stands out is that all of the main figures from this epoch have moved in and
out of government – often holding ministerial or other high-level positions – and have
built their fortunes on their close connections to power. For the most part, once assets
have been acquired, the main characters have stepped back from visible involvement in
government or politics to concentrate on managing their portfolios.

Further, as assets have been accreted, most owners have set up, or subsumed their
interests into varieties of business groups, sometimes termed Financial and Industrial

47 Kazakhstan’s largest component comprises 0.4 which is higher than its neighbouring autocracy,

Azerbaijan (0.2), but smaller than a mature democracy, such as the UK (0.6)

19
Groups. These are diversified holdings and they have arisen across many former Soviet
economies in the past couple of decades. Their diversified structures have normally
been composed of a finance entity - mostly a bank - along with industrial and other
assets. The latter tend to include a mix of real estate, construction, telecoms, retail and,
occasionally, utilities, as well as oil and gas and mining interests. While they bear some
relation to the Japanese keiretsu model, in reality they suffer from even less
transparency and opacity of governance. They do, however, resemble in many respects
the business groups that are pervasive throughout Asia, not least because some of them
are effectively founder and/or family-based business groups, even if increasingly they
have recourse to non-family members for management positions48.

Why do a number of the larger and more entrenched groups own financial institutions,
principally banks? The answer appears to lie in the way that ownership facilitates
access to finance for the groups' projects. As such, there is limited competition among
the main banks as their main function is to fund their connected corporates. It is
sometimes argued that the advantage of this relationship is not primarily about the cost
of capital but more about the terms of access, notably the ability to avoid, or lower, the
amount of collateral that is required.

Among the different business groups, there are variations in the extent to which they
are connected to political power. Such connections confer a range of benefits. These
include getting access to contracts and business with state owned enterprises and/or
government, but also, crucially, the ability to leverage bailouts. This has been clearly the
case for banks. Most of the major banks have, at some point, been in receipt of public
bailouts49. In 2017 alone, bank bailouts amounted to more than a quarter of the total
government budget50. The main beneficiaries of these transfers are those institutions
owned or controlled by politically connected persons. In fact, repeated bank failures,
often accompanied by bailouts, have been a persistent feature of the business
landscape.

5.3 The connected – some major examples
Probably the most visible example of a first-generation – and now very well entrenched
– connected person is Timur Kulibayev and his wife, Dinara - the younger daughter of
Nazarbayev. Their primary business vehicle is Almex LLP, a pillar of which is their
majority stake in Halyk Bank, the twelfth largest entity in the country51. But Almex also
contains a number of other entities with exposure to a wide range of sectors and
activities, including oil and gas, as well as mining and metallurgy. Although Kulibayev
has not held explicit government positions for at least a decade, he is still Chairman of
some of the most significant SOEs, remains the head of an energy lobbying group,
Kazenergy, and sits on the board of Russia’s Gazprom52. He is widely understood to be a
major – if not the main - domestic player in the oil industry and has been the partner for
a variety of foreign companies’ investments – such as that by Vitol53. Perhaps not

48 Commander and Estrin (2022)

49 They include Halyk, BTA, ATF and Tsesna
50 Chatham House, p30/1
51 https://forbes.kz/ranking/50_bogateyshih_biznesmenov_kazahstana_-_2021
52 https://peoplepill.com/people/timur-kulibayev
53 https://www.publiceye.ch/en/media-corner/press-releases/detail/how-vitol-became-king-of-oil-in-kazakhstan

20
surprisingly, there have been a litany of allegations about his business practices54. For
example, recent reporting has suggested that Kulibayev received a share of the profits
from pipeline contracts granted to ETK, a company owned by a Russian businessman,
Alexander Karmanov55. Those contracts were granted as part of the Asia Gas Pipeline, a
large project between Kazakhstan and China put together at a time when Kulibayev was
head of the country’s Sovereign Wealth Fund (Samruk-Kazyna). Among other facets of
the deal, ETK bought pipes from plants in Ukraine and Russia but first sold those same
plants the steel to make the pipes at a huge mark-up from the price it had paid for the
metal56. It has been alleged that the corporate structure was designed to facilitate the
bulk of these profits being channelled not to ETF, but to Kulibayev through an offshore
entity57.

Consider also the case of another leading first-generation oligarch and now one of
Kazakhstan’s richest individuals with a net worth of $3.5 billion in 2021 - Bulat
Utemuratov58. His rise from little or no wealth has been rapid and mirrors very well the
nexus between political power, connections and business opportunities59. In particular,
his close ties to Nazarbayev appear to be the main factor behind his ascent60. At various
times, he has held positions in government, including as a diplomat, along with acting as
an adviser to the then-President61. Indeed, several Wikileaks documents have a US
diplomat describing him as Nazarbayev’s “personal financial manager” and a
“billionaire who has never had a business”62. An early return from this connection was
the acquisition of co-ownership of KazZinc; one of the mining and natural resource
companies privatised in the late 1990s63. Other close associates of Nazarbayev also
acquired interests through major privatisations of the time. For example, Vladimir Kim -
another billionaire and former Assistant to Nazarbayev - became co-owner of
Kazakhmys64, while ENPC, which consolidated plants and mines in the chrome,
aluminium and ferro-alloy industries in Kazakhstan, also fell into the hands of other
close associates of Nazarbayev.

Utemuratov now holds a very diversified portfolio of interests but his early business
model appears to have been to acquire ownership over public enterprises and then
resell them to foreign corporations. In the mid 1990s, he also set up, in collaboration
with a Dutch company, the Almaty Merchant Bank (ATF). The first Chairman of the
bank was Timur Kulibayev. In 2007 the bank was sold to UniCredit for $2.1 billion.

54 A criminal investigation has been launched against Timur Kulibayev in Switzerland for money laundering to the

approximate tune of US$600 million. See: https://en.odfoundation.eu/a/29,criminal-investigations-against-timur-

kulibayev-in-switzerland/
55 http://stories.publiceye.ch/vitolinkazakhstan/index.html#group-Welcome-to-Kazakhstan-5wog5bxK4Z
56 https://www.ft.com/content/80f25f82-5f21-4a56-b2bb-7a48e61dd9c6
57 https://eurasianet.org/financial-times-kazakh-leaders-son-in-law-skimmed-millions-from-chinese-loans
58 https://www.forbes.com/profile/bulat-utemuratov/?sh=7093da4617ed
59 http://gtarchive.georgiatoday.ge/news/10524/Family-of-Bulat-Utemuratov:-from-Cinema-to-Burger-King and

https://www.oligarchsinsider.com/the-man-who-sold-kazakhstan-for-his-own-independence/
60 For more details, see articles by euranet.org and kiar.center contained in the references list
61 https://kz.linkedin.com/in/bulat-utemuratov
62 https://wikileaks.org/plusd/cables/07ASTANA1848_a.html and

https://wikileaks.org/plusd/cables/09ASTANA1762_a.html
63 This interest was later sold and the company is now 60% owned by Glencore and 40% by Samruk-

Kazyna
64 https://forbes.kz/ranking/50_bogateyshih_biznesmenov_kazahstana_-_2021

21
UniCredit had to write down its value by $500 million within a year, subsequently
selling ATF in 2013 for just $500 million65.

Currently, Utemuratov’s main business vehicle is Verny Capital which was founded in
2006 as a private equity firm managing around $4 billion in assets. 66The portfolio
includes 15 firms in a variety of sectors; real estate and hotels, transportation, mining,
telecoms and media, retail as well as a controlling stake in Forte and, previously, Kassa
Nova Banks. It has been alleged that some of the deals that have been done through
Verny have been to the detriment of other shareholders due to large, undeclared
transfers by foreign investors to their politically connected sponsor in Kazakhstan.67

Kulibayev and his wife, along with Utemuratov, as well as Vyacheslav Kim and Vladimir
Kim are the principals of the most visible, but also the most clearly connected, groups of
companies. In 2021, the combined wealth of these five individuals was estimated at
over $18 billion. 68Yet, even if there is considerable concentration in wealth, they are far
from alone. The fruits of connections to politicians and power – and notably to the ex-
President – have been harvested by a broader – albeit not that large - constituency of
businesses and individuals.

To get a better sense of this landscape, the list of the fifty wealthiest individuals in
Kazakhstan compiled by Forbes over the past four years (2018-2021) is a good starting
point. To give some sense of the value of the assets held by these fifty individuals, their
total wealth in 2021 was estimated at nearly $38 billion or around 20% of GDP (after
averaging $26 billion between 2018-20). Just over 50% of these assets were held by
other than the five individuals already mentioned. The businesses that they own and
that are represented in this list are mostly diversified (c45%) with a further 20%
mainly involved in either oil and gas or metals, sometimes both. The others have their
main interests in finance, retail, construction, transport or pharmaceuticals.

Although the fact that the top tier of individuals and businesses is still dominated by the
group of first-generation oligarchs, it is of interest to understand whether the enlarged
list is mainly a fixed group or is there some churning, with entry and exit from the top
ranks. Further, it is of obvious interest to understand what part of this group has
benefited from connections to politicians and power. With respect to the first question,
between 2018 and 2021 there has been only very limited change in the list and ranking.
For example, in the top 10 there were 2 new entrants in this period; in the top 25 the
number was 5 and in the whole 50, there was a maximum of 13 entrants. In 2021 the
combined wealth of these entrants amounted to around 22% of the total wealth of the
top 50 but, again, there is considerable concentration as nearly three quarters of that
22% is held by just two persons. Moreover, in nearly half of the cases of entrants since

65 http://www.talk-finance.co.uk/economics/bulat-utemuratov-atf-unicredit-uwo/ and

https://www.reuters.com/article/us-unicredit-kazakhstan-idUSBRE90U0O220130131
66 https://vernycapital.com/en/portfolio
67 The most high-profile partnership is with Glencore. Prior to the IPO launch, several politicians,

journalists and activists sent an open letter to Glencore’s investors to express their concerns, claiming it
was a process of money laundering by high-ranking Kazakhstan civil servants. See:
http://kazakhstanvoice.blogspot.com/2011/05/to-investors-of-glencore-on-kazakhstan.html and article
covering Glencore Report: https://kiar.center/bulat-utemuratov-and-glencore-report-the-truth-about-
glencores-business-in-kazakhstan/
68 https://forbes.kz/ranking/50_bogateyshih_biznesmenov_kazahstana_-_2021

22
2018 there are clear links to politicians including some of the main, first generation
players.

Consider, in particular, the case of Mikhail Lomtadze, the current CEO of a fintech
company – Kaspi – that through its mobile payments and banking apps has rapidly
gained market share. 69Kaspi and Kaspi Bank presently are the eighth and ninth ranked
by revenues among listed companies in Kazakhstan. Kaspi has nearly 70% market share
of electronic transactions in the country. It has also developed strong links to
government, becoming a major conduit for settling tax claims and even distributing
benefits payments for the state during the COVID 19 pandemic. In 2021 – the first year
in which Lomtadze entered the list as the third richest businessman - his wealth was
estimated at $3.9 billion. Yet investigation has revealed that most of this wealth has
come from his association with Vyacheslav Kim, who also happens to be the Chairman
of Kaspi70. Indeed, it appears that the 23% ownership stake that Lomtadze holds in
Kaspi has been accumulated through transfers of shares from Kim. Moreover,
Nazarbayev’s nephew – Keirat Satybaldy – originally held up to 30% of Kaspi prior to
late 2018, at which point he exited, possibly to facilitate Kaspi’s future IPO on the
London Stock Exchange. As someone unambiguously politically connected, Satybaldy’s
continuance as a major shareholder might have compromised the IPO. However, some
observers have suggested that the exit may be more cosmetic than real with others,
including Lomtadze, in effect becoming placeholders for Satybaldy’s interest in the
company. 71In other words, although the company in question is certainly relatively
new and increasingly successful, its ownership is firmly in the hands of very well-
entrenched, first-generation politically connected individuals.

Another new entrant in 2021 is Timur Turlov, whose >$2bn wealth can be traced to his
ownership of Freedom Flame, a retail brokerage based in Kazakhstan that taps the
wider post-Soviet market. It has also acquired Kassa Nova bank from Utemuratov at the
end of 2020. In this instance, it appears that the company has offered a new range of
financial services to Kazakh and other consumers in the former Soviet space, even if on
terms that would sometimes not be sanctioned in more regulated economies. It has
been alleged, however, that Turlov has links to Satybaldy, who remains a key player in
the financial sector. 72Whether that is the price for staying successful or was, in fact, one
of the reasons for the business’ success is unclear.

In short, there has been some entry, along with a limited amount of exit. But looking
closely at the persons and businesses that have entered, the majority still have clear
political connections, mostly to first generation oligarchs, to members of the
Nazarbayev family or to other political interests, including at a regional level.73 It is
difficult to avoid the impression that the most common and potent connections from
individuals and their businesses continue to flow into, and out of, no more than ten

69 https://forbes.kz/ranking/object/1061
70 Dawkins (2020) and https://www.forbes.com/sites/daviddawkins/2020/11/25/the-two-billion-

dollar-mystery-behind-the-ownership-of-london-listed-kazakh-fintech-kaspi/?sh=6d1c391d4a39
71 https://kz.expert/en/news/analitika/1284_on_satybaldy_and_his_exit_from_kaspi_bank
72 https://kz.expert/en/news/analitika/2190_the_beneficiaries_of_the_independence_
73 For details on other Kazakh billionaires and their connections see articles by kzexpert, ebusiness.com,

talk-finance.co.uk, oligarchs.eu, independent.co.uk, the moscowtimes.co.uk and voanews.com listed in

references

23
highly connected individuals. As indicated earlier, the network structure that this
suggests is therefore one where these few individuals and their business vehicles
possess very considerable centrality in the network and hence, a powerful ability to
exploit their strategic location. Those central nodes in the network can exploit their
access to political power and government to derive advantage, let alone assets.

To summarise, there has been a significant accumulation of wealth in the hands of a
limited number of persons and businesses, most of which operate as diversified
business groups. Most of those individuals and their business vehicles owe their origins
and success to the connections that they have had with politicians. Indeed, in earlier
years, the overlap of politics and business was explicit and highly visible. Once assets
were acquired, however, the main focus has shifted to their preservation which, in turn,
has required continuing access to power through connections. Those connections help
sustain their market position. Moreover, that most of these businesses are quite
diversified reflects not just an opportunistic process by which assets have been
acquired, but also a strategy for abating risk; a way of ensuring that a group’s assets are
not too concentrated and hence potentially susceptible to expropriation or dilution. The
latter risk remains, of course, present given the political system and the scope for
discretionary actions. Finally, this has made Kazakhstan a country with severe
inequality in its wealth distribution. In fact, its distribution is quite similar to that of
Russia with just 3-3.5% of adults holding wealth in excess of $100,000. This is very
different from the group of advanced economies where the same share ranges between
40-50%74. Expressed differently, in Kazakhstan only 162 persons account for around
half of total wealth75.

5.4 Market structure and power
What does the combined presence of a large state-owned sector and influential
privately held business groups imply for market structure? A useful starting point is
provided by the OECD which compiles indicators on competition and regulation across
a number of economies and sectors, both in advanced and emerging economies,
including Kazakhstan76. This also allows comparison with other countries. The
indicators are constructed by using the responses of governments themselves to a
structured and closed questionnaire. They do not constitute judgements of experts or
outside observers. As such, if the responses were to betray a bias, it seems more
plausible that the bias would be to improve their rating.

What emerges from this detailed, self-reporting exercise is that Kazakhstan’s regulatory
context creates significant barriers to competition when compared to the OECD
average, although the situation appears comparable to some other emerging markets,
such as Turkey, Brazil and Argentina. Part of the reason for why Kazakhstan has these
competition-limiting features can be traced – as we already noted in Section 5 - to the
pervasive role of the state in the economy and in particular, the large state-owned
enterprise sector. State ownership cuts across manufacturing and financial services and
also includes all the network sectors, such as water, gas, electricity and transport, where
the government has equity stakes in the largest companies. Further, the extent of direct

74 Credit Suisse Databook (2020)

75 https://assets.kpmg/content/dam/kpmg/kz/pdf/2019/09/KPMG-Private-Equity-Market-in-

Kazakhstan-ENG-2019.pdf
76 OECD (2018)

24
public control over SOEs – and hence the level of political interference – is high and
contributes to the manifest weaknesses in their governance. SOEs are mostly not
covered by the same laws as private firms and hence benefit from preferential
treatment. At the same time, other dimensions of government behaviour, particularly
public procurement, have major shortcomings. In Kazakhstan, direct procurement is
commonly used, as against the use of tenders which could allow a more transparent
process.

The OECD attempts to summarise the scope of the state’s involvement with judgements
about the extent of distortion such involvement introduces. This is expressed in a range
from 1 to 6 where the latter is the most distortionary. Most Western European
economies fall between 1 and 1,5 with an OECD average of 1.7. Kazakhstan is placed
near the top of the scale at 2.7, roughly equivalent to Brazil and South Africa and only
below Indonesia. (Figure 13)

Concerning competition, the evidence suggests that there is also a persistent bias
towards state-owned companies but, in addition, the lack of an independent
competition agency – competition policy is the remit of individual ministries – means
that incumbents and well-connected companies tend to have advantages. At the same
time, the instruments of competition policy are far from best practice, notably with
respect to network related services.

When it comes to barriers to trade and investment, the picture is mixed. In general,
Kazakhstan ranks worse than the great bulk of OECD economies, the extent of its
restrictiveness compares to South Korea, Argentina, Brazil and Mexico. Breaking down
the dimensions, barriers to FDI along with tariff barriers show that Kazakhstan is not
very different from most OECD economies. It is more with regard to the treatment of
foreign suppliers and trade facilitation that the country does less well.

The implications for the structure of the economy can also be observed in the extent of
concentration. To get a better sense of this, we calculate some concentration ratios,
specifically for the 5, 10 and 25 largest firms in the country. These ratios (CR5, CR10,
CR25) represent the total revenues of a specific company in 2019 expressed as a share
of the country’s GDP. As some of the companies are not listed, either because they are
state owned or because they are privately held, the concentration level is calculated for
both listed and un-listed companies.

Table 2 shows that economic concentration is indeed significant. For example, the share
of the top five and ten firms (CR5 and CR10) - listed and unlisted – is between 10-13%
and 15-20% of GDP respectively77. For only listed companies, that share is 10% and
13%. Taking the top 25 companies, the share rises to 25-28% and 16%, respectively.
These are quite high levels of concentration when placed in a comparative context. For
example, compared to other Asian economies, they are higher than in China or India,
comparable to Malaysia but far lower than South Korea or Thailand78. They are also
significantly higher than in the USA. What this confirms is that there is major
concentration not only in the large state-owned companies but also in those private,

77 The larger estimate is when including an estimate of those parts of the Samruk-Kazyna holding that are

not individually listed

78 Commander and Estrin (2022) contains similar calculations for the main Asian economies

25
often listed, companies that are linked to prominent, connected business persons. One
outcome has been to limit the extent of competition and rivalry.

Finally, to understand the nature of market structure also requires understanding how
political considerations feed through. Competition among the main business groups and
their components is not intense. In fact, it appears that the main oligarchs try and avoid
competition either by electing cooperation with other main players or working in an
environment where market segmentation is significant. This is not as blatant as in
neighbouring Azerbaijan where a highly vertical structure allows the President to
ensure that rivalry is radically abated or absent among elite groups79. In Kazakhstan,
this centralising or vertical dimension has been more rather more nuanced and
qualified. But it is far from absent and many of the same motivations exist, principally
the aim of limiting or nullifying the likely disruptive consequences of greater rivalry
among the elite. Of course, rivalry has several dimensions, economic and political. With
regard to the former, the result has been to limit competition, with regard to the latter,
those individuals that have dissented and tried to challenge the political equilibrium
have ended up in exile or worse.

Conclusion
It is widely assumed that successful countries mesh together political competition and
open societies with economic policies that similarly prioritise competition and the rule
of law and adequate redress. These attributes are also commonly subsumed under
judgements about the nature of institutions and the extent to which these enable or
restrict competition and transparency, among other attributes. Autocracies – defined as
countries where political competition is absent or attenuated – are generally thought to
create and sustain institutions that offer unfair advantages to those in and around
power and flout – often flagrantly – the rule of law and associated civil, political and
economic rights.

Yet, this dichotomous way of viewing the world can obviously obscure nuances. More
importantly, the underlying regularity that is asserted – that ‘good’ politics and
economics are necessarily complements – appears to fall down when considering which
countries have performed best over the last half century. Certainly, the rise of China,
Vietnam and other countries in Asia with autocratic regimes has been used to suggest
this complementarity is not a necessary precondition, at least when considering
economic performance. This discrepancy has, indeed, been quite commonly cited
elsewhere to promote the merits of autocracy. More significantly, a number of
autocratic regimes have effectively pursued a strategy of maintaining a lack of political
competition and openness while promoting economic policies aimed at stimulating
investment and some degree of economic competition. Kazakhstan is one such example.
Unlike a number of its neighbours, the country has adopted an explicit strategy of
advertising its openness to investors along with measures providing some degree of
protection or ring-fencing, albeit in a way that appears to have created islands or
enclaves rather than more generalised protections80.

79 Commander and Ramazanov (2015)

80 Even so, the Ministry of Investment and Development pilot project in 2015 of a one-stop-shop for

investors giving assistance with information, permits, licences and starting administrative procedures
failed to become widely known to both domestic and foreign investors. See OECD (2016)

26
The paper has examined the impact of these attempts at creating ‘good’ economics and
associated institutions whilst keeping an autocratic political system. Indeed, a closer
examination of how that approach has played out reveals a complex and ambiguous set
of outcomes. For a start, the scale of improvements in institutional and economy-related
measures is quite patchy and, in some areas, has actually deteriorated. Compared with
countries at similar income levels, Kazakhstan almost invariably falls at or near the
bottom of the distribution. In addition, using the measure with the longest temporal
aspect, Kazakhstan’s extent of autocracy has actually increased. Expressed differently
(and simply), measures for Kazakhstan’s politics have got worse and those covering its
institutions and economy have mostly registered some - but hardly dramatic or
sustained - improvement.

On a positive note, Kazakhstan’s economic performance and associated investment in
infrastructure – physical and human – has been relatively strong. Much of its growth has
been driven by the large oil and gas projects that have attracted the great bulk of the
investment entering the country. The economy as a whole, along with the budget,
remains highly dependent on revenues from its natural resources. Diversification has
been limited. Whilst the ability to attract investment has been impressive, some part of
that has soured, mostly on account of expropriations and/or unfair treatment. Although
a signatory to the Energy Charter Treaty and other bilateral investment treaties, in
some cases – notably Stati/Tristan Oil - the government has refused to settle despite
judgements against them in international arbitration tribunals and courts. In fact, the
legacy of investment disputes can be traced to the country’s political system and the
high degree of discretion that has resulted and which has undermined the avowed
commitment to the rule of law and protection of investor rights.

Although power has not been as vertically organised as in some other neighbouring
countries, the place and role of the ex-President has been persistently central. This
centrality was initially critical in the allocation of resources and assets in the first fifteen
years of the country’s existence. Subsequently, it has remained critical in preserving the
system that had been created. Despite a recent handover to a new President, along with
constitutional and other features that might on the surface suggest otherwise, the ex-
President remains the central figure in the political equilibrium and acts, in effect, as the
arbiter. Around him have developed clusters of dependents and associates, some
related by birth or marriage, others formed through common interest, sometimes fealty.
These political arrangements – marked as they are by the importance of connections to
power – have materially influenced the shape of the economy. Specifically, there has
been a combination of a large – and politicised – public sector including many strategic
SOEs alongside the private holdings – often contained in varieties of business group – of
those close to, and often dependent, on power. These symbiotic groupings have
themselves been fuelled – quite literally – by revenues from the country’s natural
resource wealth. The pace of privatisation of SOEs has in part reflected the common
interests of their management and politicians as well as the private businesses that
transact with them.

The emergence of substantial private business holdings has been accompanied by a
large accretion of wealth in the hands of a relatively small number of individuals and
their business vehicles. At the same time, this elite has exhibited considerable stability
in its composition with relatively few new entrants. Those that are new have, in effect,

27
formed very close connections to the cohort of first-generation oligarchs and their
business interests. Indeed, it is unlikely that new business can thrive – and certainly
grow to scale – without having links to, and the approval of, both business and political
incumbents. Not surprisingly, this has translated into a high degree of concentration
and a lack of rivalry. Indeed, a driving feature of the political system is precisely to limit
both economic and political rivalry and in these aims it has, so far, been largely
successful.

An enlightened policy agenda would, as a consequence, have to focus on breaking down
the substantial barriers to political and economic entry that presently exist. Facilitating
political competition would, at a minimum, presuppose the right to form new political
parties and movements and for them to function freely. Facilitating economic
competition would be aided by limiting the substantial benefits flowing to connections
and incumbency, including through the establishment of more independent regulatory
and competition authorities. At the same time, a transparent privatisation of parts of the
large state-owned sector would be beneficial. However, none of these steps seem likely,
or even feasible, under the current system. The pattern of signalling more openness,
better governance and improved transparency has clear limits that are imposed by the
imperatives of preserving the core of the current arrangements.

Yet, without such changes, the costs of the current system in terms of economic
efficiency – static and dynamic - are far from trivial. Whilst the current system has been
able to raise mean incomes and radically limit the incidence of poverty, it provides weak
foundations for a more innovative, human capital-based growth model. Further, the
scope for disruptive contests among the elite – not least because of the obvious
uncertainties about the succession problem – remains present, even likely. As such,
autocracy’s habitual challenge of how to organise the orderly passage of power and
influence, let alone sustain economic growth and development, has not been solved. The
massive centralisation of power, influence and economic assets in such limited hands
opens the door to future disputes.

The paper started by asking whether improving institutions – promoting ‘good’
economic policy – could offset the continuing presence of ‘bad’ politics; autocracy by
name. On closer inspection, the question turns out to be somewhat mis-directed. Not
least because ‘bad’ politics has so conditioned the underlying disposition of resources
that the ability to press home institutional and other policy improvements remains
radically circumscribed. This is something that is directly reflected in the configuration
of the economy, let alone something that numbers of expropriated or thwarted
investors have come to rue. In sum, ‘bad’ politics both squeezes the space for, and
distorts the benefits from, ‘good’ economics.

28
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35
 Figures and Tables


Figure 1: Kazakhstan GDP, 1990-2019

Kazakhstan GDP (PPP, constant 2017 international $)
600

500
Billions of dollars US

400

300

200

100

-
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Source: World Bank




Figure 2: Kazakhstan GDP per capita growth

Kazakhstan GDP per capita growth
(PPP, constant 2017 international $)
15%

10%

5%

0%

-5%

-10%

-15%
1991 1996 2001 2006 2011 2016

Source: World Bank

36
Figure 3: GDP per capita for Former Soviet Union (FSU) economies & OECD

Cross-country comparison according to GDP per capita (PPP,
$50,000
constant 2017 international $)

$40,000

$30,000

$20,000

$10,000

$0
1990 1994 1998 2002 2006 2010 2014 2018
Kazakhstan Azerbaijan
Russia Turkmenistan
Uzbekistan Georgia
OECD Ukraine
Europe & Central Asia (IDA & IBRD countries)
Source: World Bank

Figure 4: Rule of Law indicators for Kazakhstan

Rule of Law indicators for Kazakshtan
0 (weak performance) to 100 (strong performance)

100

90

80

70

60

50

40

30

20
1996 2001 2006 2011 2016 2021
World Bank World Justice Project
Global Innovation Index Doing Business Enforcing contracts
Doing Business Strength of legal rights index Doing Business Quality of judicial processes index
Heritage Foundation Judicial effectiveness
Sources: World Bank, World Justice project, Global Innovation Index, Doing Business and The
Heritage Foundation

37
Figure 5: Government effectiveness indicators for Kazakhstan

Government effectiveness indicator for
Kazakhstan

0 (weak performance) to 100 (strong

55
50
45
performance)

40
35
30
25
20
1996 2001 2006 2011 2016 2021
World Bank
Global Innovation Index
Heritage Foundation Government Integrity
Sources: World Bank, Global Innovation Index and The Heritage Foundation



Figure 6: Regulatory quality indicators for Kazakhstan

Regulatory Quality indicators for Kazakhstan
0 (weak performance) to 100 (strong performance)

100

90

80

70

60

50

40

30
1996 1999 2002 2005 2008 2011 2014 2017 2020

World Bank Global Innovation Index, regulatory environment

Global Innovation Index, requlatory quality Doing Business, ease of doing business
Doing business, starting a business Global Innovation Index, ease of starting a business

Sources: World Bank, Global Innovation Index and Doing Business

38
Figure 7: Corruption indicators for Kazakhstan

Corruption indicators for Kazakhstan
90

0 (weak performance) to 100 (strong

80
performance) 70

60

50

40

30

20
1996 2000 2004 2008 2012 2016 2020
World Bank
Corruption Perceptions Index
Doing Business Extent of corporate transparency index
Sources: World Bank, Transparency.org and Doing Business





Figure 8: Voice and Accountability indicators for Kazakhstan

Voice and Accountability indicators for
Kazakhstan
0 (weak performance) to 100 (strong

34
32
30
performance)

28
26

24
22
20
1996 2001 2006 2011 2016 2021

World Bank Freedom House Global Freedom Score

Sources: World Bank and The Freedom House

39
Figure 9: Political stability indicators for Kazakhstan

Political stability indicators for Kazakhstan
100

0 (less stability) to 100 (more stability)

90

80

70

60

50

40

30
1996 2000 2004 2008 2012 2016 2020
World Bank IHS Markit Country Risk Scores ICRG

Sources: World Bank, IHS Markit and The PRS Group




Figure 10: Kazakhstan: FDI stock relative to GDP and GFCF - % year rolling
averages

5 year rolling average of Kazakhstan's FDI stock relative to GDP
and GFCF
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1993-1997 1998-2002 2003-2007 2008-2012 2013-2017

GDP GFCF

Source: UNCTAD

40
Figure 11: Political system indicators for Kazakhstan


Political system indicators for Kazakhstan

0 (strongly autocratic) to 100 (strongly

80
70
60
50
democratic)

40
30
20
10
0
1991 1996 2001 2006 2011 2016 2021
Polity5
Freedom House
Heritage Foundation Economic Freedom Index
EIU Democracy Index

Sources: Systematic Peace, The Freedom House, The Heritage Foundation and Economist Intelligence
Unit (EIU)

Figure 12: Network map for Kazakhstan

Source: Commander and Poupakis (2020)

41

Figure 13: Distortions induced by state involvement, 2018 (Index scale 0 to 6 from
least to most restrictive)

Source: OECD (2018)




Table 1: Cross country comparison using human development indicators

Kazakhstan Russia Azerbaijan Georgia Europe &
Central
Asia
HDI 0.819 0.823 0.754 0.805 0.779
Population living below 4.3 3.7 5.1 20.1 11.6
income poverty line, national
poverty line (%)
Urban population (%)
57.4 74.4 55.7 58.6 63.2

Education
Education Index 0.822 0.823 0.711 0.851 0.743
Programme for International 423 488 420 398 -
Student Assessment (PISA)
score in mathematics i
Programme for International 397 478 398 383 -
Student Assessment (PISA)
score in science ii
Literacy rate, adult (% ages 99.8 99.7 99.8 99.4 -
15 and older)
i OECD average is 489
ii OECD average is 489

Source: United Nations Development Programme

42
Table 2: Economic Concentration in Kazakhstan (5, 10 & 25 firm Revenue/GDP
Concentration Rations): 2019/20


UNLISTED & LISTED
LISTED
CR5 10 – 13 10
CR10 15 – 19 13
CR25 25 – 28 16
Source: Orbis

43