Forget Borat: WTO puts Kazakhstan on map

Astana, Kazakhstan
STANISLAV FILIPPOV | AFP | Getty Images
Astana, Kazakhstan

Central Asia's largest economy will finally become a World Trade Organization (WTO) member this year, but that alone is unlikely to be a panacea for investor concerns.

After 20 years of discussions, Astana at long last completed negotiations on WTO ascension last month, paving the way for official membership by year-end, in what the international trade body described as "one of the most challenging negotiations" in its history. Following the landmark decision, Kazakh President Nursultan Nazarbayev said WTO acceptance would make the country a more attractive place for both foreign and domestic investors.

The news has certainly made Astana more attractive. Last week, President Nazarbayev travelled to Milan where he signed deals worth $500 million in a range of industries spanning from agricultural machinery to textiles. Meanwhile, Indian Prime Minister Narendra Modi arrived in the oil-rich nation this week, where he is widely expected to announce a slew of mining-related projects.

"Though a noteworthy achievement and step in the right direction, firms should not overestimate the impact of Kazakhstan's WTO accession on the investment climate or on the economy," argued Mark McNamee, central and eastern European analyst at Frontier Strategy Group.

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Under its new membership, Astana will lower import tariff rates, allow foreign firms to distribute pharmaceutical and medical products wholesale in five years' time and eliminate foreign equity limitations in the telecom sector, which currently stand at 49 percent. Such measures could have a positive impact on the corporate operating environment, but only if government takes deliberate steps to diversify and liberalize the economy, McNamee explained.

Risk consultant Verisk Maplecroft echoed that sentiment in a recent report, calling WTO membership "an event that is likely to be a clear reputational win for the government, but bring little additional change for investors."

The WTO agreement also failed to address every key barrier to investment, Verisk Maplecroft pointed out: "Disagreements about the amount of permitted agricultural subsidies, which present foreign agricultural investors with non-tariff barriers, have reportedly not been resolved yet." Meanwhile, most caps on foreign ownership remain intact like the 20 percent ceiling on media outlets and 49 percent limit on air transportation services.

The membership is a boon for the former Soviet satellite, whose economy was hit hard by the recent oil price crash. Crude makes up 25 percent of gross domestic product. The government is now predicting growth to increase just 1.5 percent this year, slowing from 2014's 4.3 percent rise and a 6 percent expansion in 2013.

Moreover, a weaker Russian ruble has also worsened the outlook. Moscow is Kazakhstan's top trading partner and the ruble's 64 percent slide against the greenback has made Russian products significantly cheaper than Kazakh goods, leading the government to launch a 'Made in Kazakhstan' initiative to bolster sales.

The issues at stake

Structural weaknesses of Kazakhstan's undiversified economy will continue to hinder trade and investment, McNamee said.

President Nazarbayev has taken steps to find new growth sources, ranging from green energy projects to information technology, but progress has been slow.

"Though diversification toward non-extractive tradables has been part and parcel of Kazakhstan's development strategy, actual success has so far been limited. The economy was and remains highly resource dependent, with manufacturing accounting for 11 percent and agriculture for 5 percent of GDP," the World Bank said in its April outlook.

Foreign direct investment in the country stood at $132.6 billion last year, with the majority in the oil and gas sector, according to the U.S. State Department.

In order to expand the private sector, the government must do more to create highly skilled human capital, improve the quality of physical capital and strengthen institutional capital, the World Bank added.

Corruption also remains a looming threat for investors. Kazakhstan ranks 129th out of 175 countries in Transparency International's corruption index and 77th out of 189 in the World Bank's ease of doing business index.