Economic Relations between Kazakhstan and Russia

In the metallurgical industry, the development of production of ferrous metals and the raw-materials basis of such production continued, including the revamping of the Karaganda metallurgical plant with the aid of foreign investment; its re-orientation toward the iron ore pellets of the Sokolovsko – Saribai mining association; the development of production of stainless steel and rolled metal and the building of an electric metallurgical plant for the production of stainless steels in Aktobe; further development of ferrous alloys in Aktobe and Aksu and of its raw-materials basis –the Donskoy ore –dressing plant; the re-orientation of idle production lines of JSC Khimprom to the production of ferromanganese. Organizational measures were taken in 1994 to develop production of fireproof materials.

At the same time there was a fall in the production of ferrous metallurgy due to an aggravation of the raw materials and fuel shortage and a parlous state of equipment at enterprises of this industry. The decline in industrial production was to a considerable extent due to non-solvency of enterprises in view of their insufficient financial resources, non-payment by the buyers for products delivered, and weak financial discipline.

The decline in non-ferrous metallurgy continued, as production of copper, titanium, and manganese fell. To check the decline in this branch of industry, the production lines at the Chilisai ore-dressing plant switched to a different product; the Zyryanovsky lead plant was rebuilt, and its commissioning was brought forward; the raw – materials basis for the titanium industry was created, as was the Syrymbet tin field, the tin being produced at the Tselinny chemical plant. The functioning gold mines and ore-dressing plants were revamped, and work was accelerated to develop major gold fields at Vasilkov, Bakyrchik, and Akbakai.

In 1994, the share of machine-building industry and machine tooling in the overall industrial production continued to fall, amounting to six percent. Low investment activity, non- competitiveness of the Kazakhstan machine-building industry, limited financial consumer capacity predetermined an almost twofold reduction volumes in most types of machine –building branches even compared to the crisis-ridden year of 1993.

The situation was worst in the chemical and petrochemical industries, whose production capacities far exceeded the republic’s domestic needs. Considerable share of the product was exported to other CIS countries and the “far abroad”, but the enterprises suffered from shortage of raw materials, even shortages of oil, which is produced in Kazakhstan itself. JSC Polipropilen, AKPO, Khimvolokno production association used imported raw materials only. In 1994, the decline in most types of petrochemical products reached 55-60 percent. Oil refining dropped by 20.3percent.

The timber, woodworking, and papermaking industries suffered from shortage of raw materials. Between the beginning of 1993 and the end of 1994, the production of timber fell by 21 percent, and this had a negative effect on the state of production at sawmills and woodworking factories. The production of saw-timber, chipboard, and cardboard fell by 31.9, 59.3, and 47.5 percent respectively, but the production of paper increased threefold.

In 1993 and 1994, decline in production also continued in the construction materials industry. Production of cement declined to the level of 1973, while production of pre cast concrete products dropped to the level of 1974. There was a considerable drop in production at enterprises producing asbestos cement pipes and coupling (by 34.2percent), linoleum (by 40.3 percent), cement (by 61.6 percent), asbestos (by 71.2 percent), bricks (by 78.8 percent). Production of sanitary wares dropped by 25 percent.

During the last five years, GDP volumes continued to fall, declining roughly twofold; the greatest decline (by 25.4 percent) was observed in 1994, and in 1995 it was almost nine percent.

Competitiveness of the Kazakhstan machine-building indus­try, limited financial consumer capacity predetermined an al­most twofold reduction in production volumes in most types of machine-building branches even compared to the crisis-ridden year of 1993.

The situation was worst in the chemical and petrochemi­cal industries, whose production capacities far exceeded the republic's domestic needs. A considerable share of the product was exported to other CIS countries and the "far abroad," but the enterprises suffered from shortages of raw materials, even shortages of oil, which is produced in Kazakhstan itself. JSC Polipropilen, AKPO, Khimvolokno production association in Kustanai, Shymkentshina production association used imported raw materials only. In 1994, the decline in most types of pet­rochemical products reached 55-60 percent. Oil refining dropped by 20.3 percent.

The timber, woodworking, and papermaking industries suffered from shortages of raw materials. Between the begin­ning of 1993 and the end of 1994, the production of timber fell by 21 percent, and this had a negative effect on the state of production at sawmills and woodworking factories. The pro­duction of saw-timber, chipboard, and cardboard fell by 31.9, 59.3, and 47.5 percent respectively, but the production of pa­per increased threefold.

In 1993 and 1994, decline in production also continued in the construction materials industry. Production of cement declined to the level of 1973, while production of pre cast con­crete products dropped to the level of 1974. There was a consid­erable drop in production at enterprises producing asbestos cement pipes and couplings (by 34.2 percent), linoleum (by 40.3 percent), cement (by 61.6 percent), asbestos (by 71.2 per­cent), bricks (by 78.8 percent). Production of sanitary wares dropped by 25 percent.

During .the last five years, GDP volumes continued to fall, declining roughly twofold; the greatest decline (by 25.4 percent) was observed in 1994, and in 1995 it was almost nine percent.

However, during the time of the reform considerable changes took place in the structure of GDP: The share of services grew sharply - from 32 percent in 1992 to 47 percent in 1995; the share of commodity production declined by 12 percent. The volume and share of services mostly grew in the trade] in banking and finances, insurance, and realty, while the share of everyday services fell. In other words, the main trend in the changes of macro-economic proportions was a move towards parameters characteristic of countries with well-devel­oped market economies. The share of consumption of end products rose to 69 percent of utilized GDP as contrasted with 58 percent in 1993. Investment in 1995 amounted to some 30 percent of GDP.

Beginning in the second half of 1994, certain positive changes began to occur: a decline in the rate of inflation, a growth in accumulation of capital, a stabilization in the ex­change rate of the national currency, a decline in the banks' interests rates, and a relative growth in industrial production.

The rate of inflation steadily declined from 4.9 in June 1994 to 3.2 percent in April 1995. The decline in production, which sharply Increased in November 1993 through March 1994, practically, ceased in some branches in 1994. As a result, industry as a whole grew by 0.3 percent in September, by 1.1 percent in December, and by 1.2 percent in April. As distinct from the previous years, a certain stabilization of production, which began in June 1994, was accompanied by a certain slow­ing down rather than acceleration of inflation.

The rate of price growth in the production and con­sumption sectors of the economy in 1995 slowed down. The highest inflation occurred in January (an increase of 108.9 per­cent compared to the previous month), and the lowest, in August (102.1 percent). The annual index of consumer prices throughout the republic was estimated at 160 percent (the monthly index, 104.3 percent, whereas the annual index of inflation of consumer prices in 1994 amounted to 1256 per­cent, which corresponds to a monthly inflation rate of 123.4 percent. (The annual index of production prices was at the level of 141.2 percent).

The positive dynamics in the consumer and wholesale prices was achieved above all by harsh financial and credit policies and the government's measures aimed at stage by stage liberalization of prices and tariffs for commodities and ser­vices, which resulted hi a sharp reduction in the range of regu­lated prices. At the beginning of 1996, only the prices of electric power, heating, gas, passenger and freight railway traffic were regulated, and at the local level, regulation involved prices" and tariffs of communal services and the services of urban pas­senger transport.

In 1995, the monetary and credit policies were charac­terized by changes in the monetary and credit instruments of the National Bank, its operations at the inter bank credit, cur­rency, and stock markets, and the development of the market of state securities. Whereas hi 1994 and January 1995 the prin­cipal instruments were centralized and auction credits, in 1995 the emphasis shifted from state-apportioned credits to the de­velopment of securities markets and auction credits.

The primary market of state treasury bonds actively began to develop. The volume of trading on this market is steadily growing, with demand exceeding supply. Toward the end of 1995, 4.3 billion tenge's worth of treasury bonds had been issued. In September 1995, pawnshop credits were introduced, with state treasury bonds as collateral.

The National Bank's average refinancing rate went from 210 percent in January to 52.5 percent in December 1995. This reduction was made possible by a considerable alleviation'' of the inflation situation.

The weighted average percentage rate for auction credits amounted in 1994 to 292.61 percent; during ten months of 1995, it went down to 103.29 percent, and in October 1995 it stabilized at the 52.56 percent level.

In 1995, the reduction in production output amounted to eight percent. Production output fell at 44 percent of enterprises. Of the 220 most important kinds of industrial products, produc­tion of 48 kinds increased and that of 167, decreased. It should be noted at the same time that hi 1995 decline in production was overcome, and there was an increase in production compared to the previous year in electric power production, metallurgy, and in the chemical and petrochemical industries.

In 1995, the policy of liberalization of foreign trade ac­tivity continued; distribution of export quotas was completely eliminated, and the list of licensed export products was con­siderably reduced. Kazakhstan traded with 124 states of near and far abroad.

In the framework of official aid for development, Kazakhstan received a number of credits to the tune of $1.3 billion from international financial organizations and individual donor countries.

One of the main types of foreign resources for the repub­lic was direct investment, in particular the setting up of joint ventures and foreign enterprises. The rate of establishment of joint ventures in Kazakhstan is fairly high. Thus, at the end: of 1990 there were just 15 of them, while at the end of 1995 more than 2000. JVs operated in the republic, of which 500 operated on foreign capital only.   Most of these were set up in the; mining industries.

From the beginning of 1995, steadily increasing numbers of enterprises were turned over for administration. Toward the end of December 1995, external administration was introduced at some 20 major industrial enterprises in various sectors. The necessary legislative basis was created for the involvement of foreign capital in Kazakhstan.

Thus the implementation of economic policies in 1992-1995 in Kazakhstan resulted in the liberalization and openness of the economy and the expansion of private enterprise.

There were significant shifts in the market infrastructure. Trade and the banking sector developed rapidly, and other financial institutions were born - in other words, there was, progress in those spheres of the economy that had previously; been underdeveloped but that were vital for the functioning of the market economy.

The liberalization of foreign and domestic trade resulted in a slight reduction of export in 1994 and early 1995 compared to the decline in the volume of GDP. The export of commodi­ties, mostly to CIS countries, amounted to $13 billion in 1994 and $4.97 billion in 1995. The greatest share of exports went to the Russian Federation — 47 percent, or $1.4 billion's worth in 1994; in 1995, the exports amounted to $2.8 billion, includ­ing $2.1 billion to Russia.

Russia's share in Kazakhstan's imports from CIS coun­tries at the beginning of 1995 was the largest - 70 percent; Turkmenistan's, 10 percent; and Uzbekistan's, 9 percent. Of considerable significance is the fact that more than 50 enter­prises securing Russia's defense interests work on Kazakhstani territory. All principal roads of Russia leading east and south­east, Yuzhsib and Transsib railways included, pass through Kazakhstan. Major Russian high voltage power lines, com­munications lines, and pipelines are also connected with Kazakhstan.

As before, Kazakhstan's exports to Russia are raw materi­als, oil and petrochemical products, as well as products of ferrous and non-ferrous metallurgy.

Deliveries of ferrous metals (35.2 percent), copper and items made of copper (15.1 percent) make up a considerable share of exports. Russian enterprises are also the main consum­ers of Kazakhstan oil and petroleum products, which amount to 40 percent of the exports of mineral products.

In 1994, Kazakhstan's imports of industrial and techni­cal goods and of consumer goods from the far and near abroad amounted to $3.4 billion; in 1995, the figure was $3.7 billion. The largest share of imports fell on Russia - $1.3 billion and $1.8 billion respectively. Imports from Russia covered 30 per­cent of the demand of households and the republic's enter­prises for raw materials, 70 percent of the demand for indus­trial manufactured products (including 90 percent of the de­mand, for complex household appliances), and more than 70 percent of the * demand for products of the chemical and tim­ber industries. Kazakhstan's imports from Russia are domi­nated by electric; machines, equipment, mechanisms, and, transport vehicles. Their share in over imports amounts to 70-percent. There are also imports of considerable amounts of raw materials for the foodstuffs industry and the foodstuffs themselves (10.2 percent), mineral products and metals (10.1 percent), and other consumer goods (7.8 percent). More than half of imported mineral products and non-ferrous metals come from Russia.

The share of deliveries against convertible currency in the export-import operations between Kazakhstan and Russia amounted to 6.5 percent of the total volume of exports; the share of baiter operations was 32.6 percent; and the share of clearing and similar operations, 60.9 percent. In this process, baiter deals did not as a rule result in a balanced and equivalent exchange. Analyses of export-import barter deals in 1993-1995 shows that total exports were twice as large as imports of com­modities. As a result of these operations, considerable funds of Kazakhstan Commodity producers annually stay in Russia.

On the whole, the results of economic development show that the republic was close to achieving macroeconomic stabilization, that the impact of market incentives increased, and that a new system of reference points and motivations devel­oped. The main problems of the critical period of development were partially solved, but new ones emerged.

Harsh monetary and credit policies, liberalization of the domestic and foreign markets promoted the formation in the republic of market mechanisms for the regulations of the economy and for ensuring equal possibilities and guarantees for all the agents of economic activity. In this situation the possibility appeared of creating a common economic space cov­ering Kazakhstan and Russia, in which free circulation of com­modities, capital, and labor would be made possible.

The development of Kazakhstani-Russian relations be­tween 1991 and 1995 showed that the two states adopted a great many documents covering a wide range of economic issues.

The implementation of these agreements created favor­able conditions for establishing economic links between eco­nomic agents and for the development of a common market that would be advantageous for the economic interests of both Kazakhstan and Russia.

The relations between the two countries in the economic sphere developed, against the background of improving multi­lateral cooperation: within the CIS framework. The legal basis for this, process was the treaty on the jetting-up of the CIS Economic Union signed on September 24, 1993.' This docu­ment proclaimed as the main goal a voluntary, stage-by-stage re-creation, on new, market principles of unified economic space, or common market, with free circulation of commodi­ties, services, capital, and labor. On the basis of the treaty, a solid legal groundwork was created. On October 21, 1994, an interstate economic committee was set up at a-session of the council of CIS heads of state, and a memorandum on the main directions of integration development of the Commonwealth of Independent States was signed. These documents envisaged a stage-by-stage formation of a customs union and the possibil­ity of movement of different countries at different speeds to­ward a unified economic space within the Economic Union.

A characteristic feature of the situation in the CIS is uni­versal recognition of the need for stepping up integration pro­cesses in the economic interaction of CIS countries. It should be noted that, among CIS countries, economic relations were most intense between Russia, Kazakhstan, Ukraine, and Byelorussia, with 80 percent of commodity circulation within the CIS taking place within these countries.

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