Natural resource-related country analysis Kazakhstan

The Republic of Kazakhstan possesses deposits of over 72 different natural resources, including oil, gas, gold, coal, iron, uranium, manganese, bauxite, and chromite. Of these, oil and gas comprise 97% of all natural resource state revenues.^[1] All major oil fields in the country are found in western Kazakhstan.^[2]

The Kazakh Mining Law stipulates that as of Q1 2019 the natural resource ownership rights of several projects, such as those in the Caspian Sea, are vested in the Government of the Republic of Kazakhstan (GRK). Subcontractors in these ‘production sharing agreements’ are compensated through a share of processed or raw hydrocarbons.^[3]

In most other cases, subsoil users retain full ownership rights. State control over subsoil use rights has loosened significantly since the passing of the ‘Code on Subsoil and Subsoil Use’ in December 2017.^[4]

Kazakhstan’s resources have contributed significantly to the country’s economic boom, boosting the national income and reducing income inequality, as well as drastically reducing unemployment.^[5]

Socioeconomic concerns

The spill-over effect of foreign direct investment (FDI) inflow into the natural resources industry is relatively low. Productivity growth in oil-extracting regions has been fuelled by large capital investments, while employment creation has been limited, according to the IMF and the Organisation for Economic Cooperation and Development (OECD).^[6]

Partly due to the lack of skilled labour, the jobs that do exist in this industry are increasingly taken by sufficiently trained migrants. Chinese workers and ethnic Kazakhs that were born abroad often earn a significant amount more than local workers, frequently leading to tensions within the natural resources sector itself.^[7][8][9]

While the Sovereign Wealth Fund of Kazakhstan has significantly lowered the country’s economic vulnerability, it needs to be used more efficiently and transparently in order to sustainably develop the private sector and promote macroeconomic development. The public is reported to be dissatisfied with the lack of transparency in the distribution of the National Fund, resulting in a perception that it is not used in an efficient manner.^[10][11]

The combination of weak state management, corruption, and lack of transparency have led to an inefficient resource extraction system; this in turn has contributed to societal polarisation and a large discrepancy in income distribution to the neglect of the services and agricultural sector.^[12]

Health and environmental concerns

Beneath these socioeconomic tensions lie environmental and health concerns of communities that reside in close proximity to resource extraction sites. Since the implementation of the 2007 Environmental Code, local executive bodies are required to hold public hearings in order to consult with these communities in the context of environmental and social impact assessments. ^[13] More often than not, however, key stakeholders are not informed during the various stages of project development.^[14]

As a result, residents are often unaware of any health risks that these companies pose, which has led to long-term health impacts on local communities, such as the village of Berezovka, in north-west Kazakhstan. In this area, 25 children and four adults were poisoned by an unknown toxic substance in 2014 and roughly 45% of the population has been diagnosed with chronic illnesses.^[15][16]

In some cases, communities feel ignored, such as those in Berezovka; in others, they have been displaced, as was the case with the village of Sarykamis, on the north-eastern edge of the Caspian Sea. ^[17] Taken together, these socioeconomic, health, and environmental concerns have occasionally provoked protests that as of now remain limited and under strict control by the Government.^[18]

II. Implications for Foreign Investors

From a fiscal standpoint, due to the extremely decentralised nature of political power in Kazakhstan, local authorities have the power to pressure tax administrators due to their extensive network, resources and expertise, and are thus able to issue tax exemptions for foreign investors in return for access to extra-budgetary funding.^[19]

From an administrative standpoint, local governments are highly decentralised, and dependent on their own ability to generate funds. As a result of their power, revenue-sharing with the central Government is often portrayed as a tug of war with Astana. In oblasts with inflows of foreign investment, i.e. provinces in which the extractive industry operates, extra-budgetary funding is often provided by companies, sometimes through the use of force or legal loopholes. For this reason, fines such as those given for environmental offences generally serve to supplement the budget of these local governments.^[20]

From a regulatory standpoint, national regulations and standards are highly inconsistently enforced. Local governments operate as ‘strongmen’ with unique access to scarce political and economic resources through which they have created powerful patronage networks and strong regional identities. Operating licenses and permits are issued at the sub-national leadership’s discretion. Abiding by local regulations is therefore key for foreign companies if they wish to retain their permits. Regulatory authorities, similar to tax administration agencies, tend to find themselves too dependent on local funding to enforce central regulations over the local rules.^[21]

Finally, Kazakhstan has made strides towards the creation of a more receptive business environment, sitting in 35th place in the 2017 World Bank “Ease of Doing Business” report, out of 190 countries.^[22] However, the lack of transparency and perceptions of corruption remain key issues.^[23] As a result, encouragement of foreign investment by the GRK is offset by its lack of control of local authorities, which interpret policy guidelines in differing ways.^[24]

III. Potential Entry Points

Issues associated with natural resource conflicts are numerous and complex in Kazakhstan, from a local standpoint as in Berezovka and Sarykamis, but also from a national standpoint when considering the State’s powers to collect and redistribute tax revenue. It is essential that all stakeholders work towards achieving mutually agreeable solutions to these issues.

It is also notable that not only is it essential to include all stakeholders in identifying appropriate and long-lasting solutions, it is also firmly within the interests of the private sector, local communities, and the Government, to resolve existing tensions.

Natural resource companies perceive corporate social responsibility (CSR) as a mandatory expenditure, rather than an investment in their operating environment. Often, they pay off fines for environmental offences with no regard for the structural damage that they are causing, underestimating the risks that this will pose for their investments.^[25]

Local Governments tend to use social spending inefficiently, focusing on short-term goals that will benefit their reputation and career prospects, such as the construction of schools. These efforts appear designed to secure short-term licenses to operate rather than demonstrating a commitment to responsible social development.^[26]

As both the Government and the private sector have a role to play in fostering sustainable development and ensuring broad-based and inclusive development, it will therefore be important to foster an understanding of the benefits of a collaborative approach. These issues could potentially be addressed by:

Facilitating coordination between Government, the Extractives Industry, and communities in order to promote sustainable social investment that focuses on the development of the domestic private sector and local growth in order to solve underlying socioeconomic tensions;

Assisting communities and private sector actors with the implementation of a more efficient consulting mechanism in order to prevent environmental, health, and safety tensions from escalating into conflict;

Providing capacity-building programmes to key stakeholders in order to allow them to effectively deal with future conflict situations;

Providing mediation in intra-company and company-community relations where conflict has already arisen.