Kazakhstan Needs Stability And Economic Institutions To Develop Energy Resources

By Ariel Cohen, Alum of The Fletcher School of Law and Diplomacy at Tufts Univeristy

The current global energy crisis dwarfs that of the 1970s, warns the director of the International Energy Agency, Fatih Birol. He may be understating the gravity of the price rise: a barrel of oil in 1974 cost $7 – worth $40 today.

Prices have skyrocketed since the fall of last year, as supplies of hydrocarbons lagged behind surging demands. Costs have only continued to spike after Russia’s invasion of Ukraine upended international energy markets. These shortages arise amidst projections that global energy demand is set to increase by 47% over the next 30 years, driven by rising standards of living, and population and economic growth.

However, a few fortunate countries are strategically positioned to benefit from the rapid evolution of markets, policy, and technology created by this crisis.

While the transition to less carbon-intensive energy mix in the West is subject to frequent analysis, developing countries are often ignored. To understand the international agonies and opportunities that rising energy supply costs, exogenous shocks, increasing interest in renewables, and Russia’s invasion of Ukraine present, there is no better example than Kazakhstan. It is singularly damaged by the current crises while simultaneously having so much potential to benefit from the global need for energy.

Over the last thirty years, this resource-rich country the size of western Europe, built robust relationships with Western investors, including ChevronCVX -2% and Exxon Mobil. These relationships have allowed Kazakhstan to avoid total dependency on Russia, giving the country fiscal autonomy and freedom of action. Unfortunately, Kazakhstan’s overexposure to the Russian economy still presents challenges. Russia is the transit country for the majority of Kazakh energy exports, meaning western sanctions levied against Russia inadvertently hinder Kazakhstan’s economy and can reinforce Kazakhstan’s dependency on Moscow.

Thankfully for Kazakhstan, when a window closes, a door opens; the meager comforts Russia affords pales to what the West offers. For its part, the West must also recognize the benefits Kazakhstan offers. Its ability to balance Russian and Chinese inroads in Central Asia combined with formidable energy reserves make it a critical part of solving the world’s energy crisis.

Kazakhstan is home to the world’s largest uranium producer, Kazatomprom. With McKinsey forecasting tripling power consumption by 2050 and total decarbonization of energy production via renewables still forthcoming, nuclear energy is a highly effective low-pollution energy source. Kazakhstan has identified its own comparative advantage in meeting growing uranium demands, with Kazatomprom already working towards establishing new nuclear fuel cycle production facilities. With Bulgaria, Czechia, Finland, Hungary, and Slovakia relying on nuclear fuel from Russian state-owned company Rosatom, and the European Commission already pledging to help member states find alternative energy sources, Kazakhstan is the obvious solution.

While nuclear energy is a worthwhile investment for countries looking to ensure adequate baseloads, it is costly and has long build times. Consequently, global increases in energy consumption will necessitate the developing world’s natural gas, oil, and coal use. As a significant energy exporter, Kazakhstan must simultaneously expand energy exports, diversify its trade partnerships, avoid dependency on China, and prevent Dutch disease – overreliance on a single type of export.

Thankfully Kazakhstan appears to already be adeptly juggling these requirements. Innovative financial institutions such as The Astana International Financial Center (AIFC), which serves as a regional financial hub to connect investors to projects requiring financing, can play an important role in nurturing new energy investments with carbon capture.

Kazakhstan’s existing relationships with companies like ExxonMobilXOM -2.2% began shortly after its independence and are utilized for larger joint energy projects. ExxonMobil established its Low Carbon Solutions division to commercialize low emissions technologies and focus on carbon capture. Kazakhstan and Exxon are natural partners for new ventures while increasing western energy security.

Regardless of what energy resource or technology is being exported, there is still the issue of transit routes. There is a sharp demand increase for shipments through Central Asia and the Caucasus, including the Trans-Caspian International Transport Route known as The Middle Corridor. But, because transportation through the Middle Corridor is more expensive, regional financial hubs must ensure adequate financing while encouraging innovation to make cargo transport more efficient and ultimately cost-effective. Hence, Kazakhstan has multiple opportunities to develop its own hub direct and structure infrastructure investment, trade finance and offer financial instruments like insurance or factoring using the AIFC environment.

However, the AIFC cannot attract finance and improve efficiency alone. The Government of Kazakhstan needs to prove that the country is a reliable investment partner to attract investors and liberalize the economy. President Kassym-Jomart Tokayev presented a series of reforms to strengthen fair competition, protect private property, and break up monopolies. These reforms and broader efforts to liberalize the government are critical to attracting investors.

This past weekend on June 5th, voters in Kazakhstan voted in a referendum on constitutional amendments aiming to loosen up its political system after it experienced its most intense protests since the collapse of the Soviet Union. If the changes are implemented, the increased stability will improve investor confidence and attract more business to the country, for which AIFC would play a key intermediary role.

Kazakhstan needs political stability and a stable hand on the tiller of economic policy to develop its massive energy reserves further and provide more food to the global markets. Last Sunday’s referendum is a key step on its way to becoming a pivotal energy and economic axis on the Eurasian continent.

This piece is republished from Forbes.