Economic Relations between Kazakhstan and Russia

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.

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,

.•.

•3 • ti '

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.

One of the basic documents on economic integration was an agreement on

a customs union between the Russian Federation, the Republic of Kazakhstan,

and the Republic of Belarus.1 Let us recall that on January 20, 1995 the

presidents of Kazakhstan and Russia, in their joint declaration on the

expansion and deepening of Kazakhstani-Russian cooperation, instructed

their governments to sign an agreement on the customs union. The heads of

governments of Kazakhstan, Russia, and Belarus signed this document.

The formation of the customs union was preceded by extensive

preparatory work aimed at harmonizing the legislative systems of the two

countries. A number of governmental and interdepartmental agreements,

protocols, and joint normative acts were signed, including those on free

trade, on a unified procedure for regulating foreign trade, on the re-

export of commodities, on the introduction of a unified procedure for non-

tariff regulation of trade with a coordinated nomenclature and volumes of

licensed and quoted commodities, on the establishment of a free trade zone,

on the unification and simplification of customs procedures, on

collaboration between customs services, on combating illegal drugs

trafficking, on the terms of maintenance of military facilities on the

territories of the two sides, and on joint security measures for the

protection of the external borders of the Customs Union. These agreements

covered a sufficiently wide range of issues, and they formed the basis for

further action.

The agreement on the setting up of the Customs Union was based on the

principles of unified customs territory of the member states of the Customs

Union and the existence of a uniform mechanism of economic regulation. It

is proposed to form the Customs Union in two stages. At the first stage,

tariffs and quantitative restrictions on mutual trade are lifted that are

envisaged in the agreement on a unified procedure for regulating foreign

trade activity of April 12, 1994; fully identical systems for regulating

foreign economic links, identical trade regulations, common customs tariffs

and non-tariff measures for regulating relations with third countries are

introduced. At this stage, work is envisaged on the unification of

legislation on foreign trade, customs, currency, finances, tax, and of

other laws bearing on foreign trade activities.

Agreements on the Customs Union envisage the possibility of

introduction of coordinated time restrictions on mutual trade in case of

shortages of commodities on the domestic market, acute payment deficit, and

other circumstances.

The countries assumed the obligation to establish unified control over

their customs organs and organize joint supervision of the movement of

commodities and transport vehicles on the borders. The procedures for such

supervision are regulated by agreements between the customs organs of the

states involved.

The agreement on the Customs Union is open to all other CIS member

states that will recognize the provisions of the agreement and express a

readiness to fulfill them in their entirety.

The joint statement was in effect an agreement on coordinated moves for

further realization of economic reform and creation of a uniform mechanism

for regulating the economies based on market principles. It set the task of

unification of legislation on foreign trade, customs, currency, finances,

prices, taxes, and other economic laws ensuring free development of

production links and of enterprise, as well as equal possibilities and

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