Kazakhstan’s Parliamentary Elections Affect Energy Flows From Eurasia

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by Forbes

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Kazakhstan’s Parliamentary Elections Affect Energy Flows From Eurasia

I cover energy, security, Europe, Russia/Eurasia & the Middle East

On March 19, 2023, Kazakhstan held competitive elections for its lower house - the Mazhilis - to decide the political direction of the young democracy established after the collapse of the Soviet Union. Despite some reported problems, the parliamentary elections were the freest in the country's history and a vital step forward for Kazakhstan's democratization and political pluralism.

These election results are not only domestically important, serving to boost President Kassym-Jomart Tokayev's reform agenda, but vital internationally, for their geopolitical and economic impact. Yet, the great powers, China and Russia, and even the Central Asian neighbors, were less than enthusiastic about Kazakhstan democratic progress, as their internal vectors are pointing in the opposite direction.

Kazakhstan is important strategically and economically. It is the size of Western Europe and spans three times zones East to West. It borders Russia and China, and two Central Asian neighbors: Kyrgyzstan and Uzbekistan

It is a major producer of oil, gas, uranium, and certain rare earth elements vital for green energy. Sparsely populated, landlocked, and with no defensive geography, Kazakhstan must walk a careful diplomatic tightrope balancing liberalizing aspirations of the younger, more educated, more urban voters, as unfriendly or skeptical neighbors wearily observe.

It is in a race to distance itself from an increasingly isolated, sanctioned, and hostile Russia while simultaneously avoiding provoking China or empowering Beijing to fill the Moscow-created vacuum. It must carefully walk the tightrope as it deals with mass economic dislocation caused by Covid and then Russia's war in Ukraine and ensuing sanctions.

These elections have shaken the political pattern that set in the first three decades of the country's independence when then-ruling party Nur-Otan (Light of the Fatherland) enjoyed a massive and unchallenged majority.

Sunday's elections resulted in a narrow victory for the ruling centrist big-tent Amanat Party (the successor to Nur-Otan) with only 53.9% of the vote. Most importantly for energy and financial markets, the elections saw the emergence of a centrist Majillis dedicated to accelerating Kazakhstan's de-oligarchization, privatization, decoupling from Russia, and further liberal economic reforms.

This centrist voting bloc was split between the traditional values-oriented Auyl People's Democratic Patriotic Party (10.9%) with its rural-based social democratic platform, the newly founded urban market-centric Respublica Party (8.59%) which promises 21st-century marketization and digitalization for a new Kazakhstan, and the socially-conservative, mostly rural Ak-Zhol Democratic Party of Kazakhstan (8.4%) which promises land reform and agricultural modernization. The remainder of the votes were split between the People's Party (6.8%), and the National Social Democratic Party, representing a more vocal opposition. with the remainder for independent candidates or spoiled ballots.

Although turnout in the elections was lower than hoped for (54%), it is still safe to say that these elections will have a decisive impact on Kazakhstan's policy and the international energy situation. While this centrist coalition broadly supports President Tokayev, the opposition voices of both left and right broadly criticize the government for the sedate pace of reforms.

With Tokayev no longer holding an unassailable majority and having to rely on the support of the other centrist parties, it is likely that Kazakhstan will pursue several policies soon to reverberate in global energy markets.

Firstly, Kazakhstan can be expected to begin trimming its State-Owned Enterprises (SOEs) through privatization. These relics of the Soviet planned economy have long been identified as a drain on the economy and an impediment to business efficiency, but they are not easily dislodged.

The government already began pushing back against SOEs in areas outside of the economy, specifically limiting their ability to compel their employees to vote, influence whom they vote for, or participate as election officials. Nevertheless, wholesale economic liberalization has been difficult and controversial due to Kazakhstan's reliance on oil exports and fears that mismanaged privatization could inadvertently strengthen oligarchs.

We likely won't see the total dissolution of state-owned enterprises in Kazakhstan for some time, but we can expect energy giants such as KazMunayGas oil and gas conglomerate and Kazatomprom nuclear industry holding to continue their stock market flotation. Air Astana, Kazakhstan's national airline, has already announced its privatization with an IPO due in 2024. Kazakhstan Temir Zholy, Kazakhstan's national railway operator, also has plans for privatization for 2024-2025 along with over 600 other public and quasi-public companies and properties.

We should also expect Kazkahstani companies to become more open and transparent, with better compliance that fits international standards, and more openness to investors, to joint ventures, and partial liberalization.

Secondly, we can expect Kazakhstan to accelerate its economic disengagement from Russia, albeit gradually. The economic realities of sharing the longest border in the world with Russia mean that Kazakhstan, even as it complies with sanctions and redoubles efforts against smuggling, will always trade with Russia while attempting to reduce its dependency. These attempts will mostly rest on ensuring the Trans-Caspian Energy Corridor, also known as the Middle Corridor, over the Caspian Sea to the West via Azerbaijan and Georgia is expanded so Kazakhstan is no longer vulnerable to Russia strangling Kazakhstan's imports or exports. In that framework the recently announced construction of an oil pipeline to the Caspian is the right step forward. The pipeline would allow Kazakhstani oil exports via Azerbaijan, Georgia, and Turkey to the Mediterranean, or through the Georgian ports via the Black Sea.

Lastly, we can expect Kazakhstan to attempt to further diversify its economy. Many of the center-right opposition parties draw from the ideals of the local entrepreneurial class, most of whom were shut out of SOEs, and are sensitive to issues of currency strength, export dependency, and the weakness of local aggregate demand.

The road towards democracy and the meaning of these elections, much like democracy itself, is messy. Diversification will not come overnight and not result in a significant change in energy exports, although we could see higher capital goods and high-tech imports aimed at realizing some of the centrist voting bloc's computerization, gasification, agrarian reform, and liberalization agendas.

The opposition is disjointed: for example, the capital Astana had over 40 separate candidates for single-member seats running for election. The near-universal enthusiasm for the opening of civil society is necessary, but not sufficient, for Kazakhstan to build a working democracy, but other Asian countries have achieved that: Indonesia, Korea, Malaysia, Taiwan, Singapore are examples of the difficult path to political and economic freedom. Anybody interested in the interplay of energy and democracy should root for Kazakhstan's nation-building enterprise to succeed.

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