Wall Street Journal - 10.21.2004

Wall Street Journal

A Calm Island in Central Asia

Kazakhstan, Despite Absolutist Leader, Sees Relative Success

By HUGH POPE

Staff Reporter of THE WALL STREET JOURNAL

ALMATY, Kazakhstan -- The budding ex-Soviet oil giant of Kazakhstan is pulling rapidly ahead of its Central Asian neighbors, emerging as an unforeseen anchor of calm prosperity in one of the world's tinderboxes of Islamic radicalism.

Many challenges remain for this thinly populated country the size of Western Europe, including its absolutist leadership, much-criticized elections and lingering corruption. But broad growth has lifted the country's output 50% in the past four years. A solid banking system and an oil-revenue windfall are creating the beginnings of a regional financial center in Almaty, Kazakhstan's biggest city.

Of the five Central Asian states, Uzbekistan has the biggest population -- 26 million people, compared with Kazakhstan's 15 million -- and the most credible army in the region. It also is the U.S.'s central ally in the region; since 2001, Uzbekistan has offered the U.S. a vital base on the border with Afghanistan.

But Uzbekistan is stuck in a five-year-old vicious circle of economic stagnation, Islamist terrorism, oppression and growing popular anger with the government. "U.S. policy has largely failed in encouraging reform there," says David Lewis, Central Asia director of the International Crisis Group, an independent conflict-monitoring organization based in Brussels. "Inevitably, Kazakhstan now looks like a more attractive partner."

The other three states of Central Asia are small, with populations of about five million people each, and offer few alternatives. Gas-rich Turkmenistan has cut itself off from the outside world. The Kyrgyz Republic tried to promote tourism with mountain beauty to become a Central Asian Switzerland, but poverty soon made it dependent on Kazakhstan and international goodwill. Tajikistan, even poorer, is prey to violent factions, Uzbek and Russian manipulation, and the drugs and guns that spill over its mountainous borders, especially with Afghanistan.

It wasn't initially obvious that Kazakhstan would pull away from the pack. In the mid-1990s, Uzbekistan maintained its Soviet-era status as a regional industrial powerhouse by hewing to Soviet-style state economic planning. For a while, the country boasted the smallest economic decline of any Soviet state and kept up a creaking minimum of services. Kazakhstan, meanwhile, tried and failed to make free markets work with corrupt, inexperienced leadership and an ineffective Parliament, and was hit by near-economic collapse and hyperinflation.

Shocked out of any illusion that the old system still could work, Kazakh President Nursultan Nazarbayev, the country's communist-era boss, took extra powers in a 1995 constitution. Following Southeast Asian political models such as Singapore, he welcomed foreign investment and installed a well-regulated financial system.

A decade later, the results are impressive, despite pockets of poverty and nontransparency of ownership of assets such as newspapers and casinos. Although ethnic Kazakhs are routinely chosen for top jobs, frustrating and driving away many ambitious members of a 30% Russian Christian minority, Kazakhstan has suffered almost no ethnic or Islamic violence.

The well-lit, handsome main city of Almaty is being transformed by cranes building for a new middle class able to sign up for 20-year mortgages. Kazakh gross domestic product, or the value of all goods and services produced in a nation, has risen to about $2,000 per capita, while that of Uzbekistan lingers around $350 and may fall to $250 this year if its regime sticks to regulations restricting trade and currency dealings, according to the U.S. State Department.

Foreign investment in Kazakhstan, mostly in oil, now exceeds $25 billion, 10 times as much per person as in Russia . U.S. oil companies ChevronTexaco Corp., Exxon Mobil Corp. and ConocoPhillips have been leading the way in the development of Kazakh oil fields, working with companies such as Britain's BG Group PLC, Italy's ENI SpA, Royal Dutch/Shell and Russia 's Lukoil.

Oil exports of 1.1 million barrels a day -- on a par with Libya or Algeria -- are advancing toward a target of three million barrels a day by 2015. The bulk of these exports head to international markets via Russia and the Black Sea, but workers broke ground recently on a first 200,000 barrel-a-day oil-export pipeline over the border into northwest China.

Kazakh bank bonds long have boasted investment-grade status. One state-run and 12 private pension funds manage $3.1 billion in assets. A national fund to store excess oil revenue and protect against price fluctuations has $3.7 billion under management.

The leading Kazakh private bank, Kazkommertsbank, is the largest in Central Asia and has begun to use its cheaper access to funds to perform international trade financing in Russia and Turkey. "We do it better than Moscow. Even in Russia , we'd be one of the top five banks," says Managing Director Aidar Akhmetov.

One of Kazakhstan's advantages, compared with Middle Eastern oil states, is that the Soviet Union bequeathed it a well-educated population, and several industries besides oil, which currently accounts for just one-quarter of the economy. Askar Yelemesov, deputy governor of the National Bank of Kazakhstan, the country's central bank, says oil would probably never be responsible for more than half of economic output because of other major businesses exporting wheat, copper, zinc, titanium, steel and coal.

"The beauty of it is that these industries are geographically spread out. Combined with stability, success and a vision, that's a strong glue," says Douglas Kennedy, country manager of ABN Amro Bank of the Netherlands, which has opened offices in 10 cities across the country.

Yet while Mr. Nazarbayev talks of political liberalization, he retains absolute power. International observers said September's parliamentary elections were slightly freer than previous ones, but still complained of widespread vote-rigging.

The U.S. also is formally accusing Mr. Nazarbayev of corruption. The case, scheduled to start in New York in January, alleges that $78 million was illegally channeled from oil companies into Swiss bank accounts controlled by him and a former Kazakh prime minister. Mr. Nazarbayev declined to be interviewed for this article, but said in an interview last year that he "paid no attention" to the case.

The main Kazakh media still is controlled by the state, while other outlets are owned by the president's daughter, Dariga Nazarbayeva, a former opera singer.

"You can write anything you like, but there are consequences," says opposition activist Andrei Grishin, who in 1999 was beaten and daubed in paint after he wrote an article critical of Mr. Nazarbayev.

Even Mr. Grishin, however, says opposition voices now enjoy wider freedoms. Kazakhstan's only political prisoner appears to be the head of the hard-line opposition, Galymzhan Zhakiyanov, under house arrest in a distant village. By contrast, the U.S. State Department this year counted more than 5,300 prisoners held as Islamist extremists and other political or religious dissidents in Uzbekistan.

"The problem for us is that we don't want to be compared to Uzbekistan," says Oraz Jandosov, an architect of Kazakhstan's success as director of the National Bank and one of several younger Kazakhs who have set up the leading moderate opposition party Ak Zhol. "We want to be compared to Turkey or Eastern Europe."