Kazakhstan's Construction Collapse

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Kazakhstan's neighbors Kyrgyzstan, Tajikistan, and Uzbekistan are also getting nervous. Their economies are heavily dependent on remittances from people working abroad. In Tajikistan alone, money sent by labor migrants in 2007 made up 36 percent of country's GDP, according to the World Bank. Many migrants do construction work in Russia and Kazakhstan; job cuts have already begun, with immediate effects in their impoverished homelands.

The poorer states of the region may be hard hit by the crisis, but through indirect routes that they can do little to control. In Kazakhstan, far more closely integrated into the global financial system, the government decided in October to intervene and, like a number of other countries, try to bail out the economy. Fifteen billion dollars in total will be released: $10 billion will be drawn from the National Oil Fund, and the central bank will provide major banks another $5 billion to increase their liquidity.

One analyst believes that the money the government is spending is not enough to rescue the economy. Aitolkyn Kurmanova of the Central Asian Institute of Economic Strategies said the main purpose behind the $15 billion bailout is to display strength and calm the population – an effort that may not succeed given that banks owe three times that much to foreign creditors.

The four largest banks – BTA, Kazkommerzbank, Halyk, and Alliance – are to be partially nationalized. The state will use $5 billion from the oil fund to buy up 25 percent of newly issued stocks to inject the necessary cash to deal with their bad debts and free up credit to business. This will be overseen by a fund newly created through the merger of two major state holdings, Samruk and Kazyna.

The fund itself will be capitalized with the other $5 billion of oil fund money, which will then be used to finance state projects.

BANKING ON OIL

Petroleum resources and rising oil prices helped the state accumulate almost $28 billion in the oil fund, money that will form the keystone of the rescue package. The 2009 state budget forecasts oil prices at $60 per barrel. If prices go lower than that for any length of time – oil is currently at about $54 a barrel, compared with over $140 at the peak last summer – Kazakhstan's economy will be in trouble, experts say.

"If prices stay low for a long time, the Kazakh government would have to spend more of its savings to stabilize the economy," Salimov said. "This would lead to the reduction of [currency] reserves and the reduction of the national oil fund, which in fact reduces the stability of the system."

However, the impact of low prices on the economy could be eased by other factors. Kazakhstan could increase the volume of oil for export to keep revenues up despite lower prices. More importantly, the government is counting on a continued high level of investments by foreign energy companies into its oil fields.

Led by Eni of Italy, a consortium that also includes Exxon Mobil, Total, and Shell has invested more than $12 billion into preliminary work at the Kashagan oil field, Reuters reported. The consortium plans to invest tens of billions more in the coming years. With so much riding on the exploitation of its petroleum resources, Kazakhstan's economy would suffer severely if the biggest foreign investors' interest cools. This is seen as highly unlikely, though, given the continued demand for oil and the potential for profits from the vast Kashagan field, once the challenges of extracting the oil from under the Caspian seabed are overcome.

"Committed FDIs into a single project – the Kashagan oil field – are estimated at $140 billion, which exceeds Kazakhstan's current GDP," Salimov said. "And this country, which could see [the equivalent of more than one year's GDP] injected through FDIs over the next five years, has a chance to come out of the crisis earlier than many others."

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