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America in Kazakhstan :
Backyard Nuisance or
Unappreciated Asset?

“Break the paradigm and stop worrying about the Americans being in Kazakhstan as part of the great game. You will be lucky if they stay.”

By David C.M. Lucterhand

The author is a Trustee of the Foreign Policy Institute in Philadelphia and has continuously lived and worked in Russia and Kazakhstan for the past eight years - implementing USAID funded projects through The Pragma Corporation. Currently, Mr. Lucterhand is Chief of Party of the Financial Sector Initiative, a Pragma Corporation project in the Republic of Kazakhstan. Mr. Lucterhand wrote the article in a private capacity at the request of Feld Post, a Russian weekly newspaper. The abbreviated version of the article was published in the newspaper as part of Notes to the President of Russia on March 1, 2004. It was published in full in English in Johnson’s Russia List of the Center for Defense Information on March 17, 2004. It is reprinted here according to the Russia List.


During this Year of Russia in Kazakhstan, the Bolshoi Ballet and numerous cultural events are scheduled in Kazakhstan.  Yet, it will take more than performances or even good will to change Kazakhstan’s long lasting attitude towards Russia. Even as an independent nation, Kazakhstan’s perception of Russia is still tarred by the Soviet legacy of empire when famine killed thousands through forced collectivization and forever changed the nomadic culture of an independent people.  Interestingly, it is hard to argue some of the benefits of colonization: an educated work force that uses Russian as its main language, universal health care, and perversely, a secular legacy that helps to mitigate the ugly side of Muslim fundamentalism. Add a large (approximately 40%) ethnically Russian population and the pre-requisites for considering Kazakhstan as Russian seem to be in place. But all is not as it seems.

The break-up of the Soviet Union offered the U.S. opportunities to make the transition from communism to capitalism and democracy irreversible. In the early nineties, the United States Agency for International Development (USAID) and other international organizations conducted widely dispersed activities throughout Russia and former client states including Kazakhstan.

In many ways, given their common Soviet heritage, both Russia and Kazakhstan started their developmental journeys at the same time. However, the specter of a communist victory in 1996 and a precipitous decline in overall production and unemployment that surpassed the U.S. depression of the 30’s deeply affected Russia. This coupled with draconian IMF policies designed to fight what was thought to be inflation rather than a re-pricing of an overvalued ruble resulted in the August 17, 1998 disaster - effectively destroying the banking system.

Meanwhile, Kazakhstan, a beneficiary of similar USAID technical assistance during the same period, struck out on a different path. Reform minded individuals and USAID began the arduous task of building Kazakhstan’s banking system and financial institutions. It helped that Kazakhstan was smaller and easier to govern. Key decisions to establish confidence in the banking system were underwritten with a commitment to develop international standards of best practice, including the establishment of deposit insurance.  This helped to secure a functioning banking system

The National Bank also combined its responsibility for monetary policy with regulation of banks, the securities market, insurance companies, and pension funds. The Bank exercised this authority carefully ultimately benefiting from the experience to set up wholly owned subsidiaries that could nurture the development of further financial infrastructure.  Perhaps the single most important decision taken in developing Kazakhstan’s financial institutions was to establish a private pension fund system funded by employee contributions that could replace the “pay as you go” state system. Using the Chilean model, the evolution of the private pension fund system created institutional investment capacity that facilitated development of a corporate debt market and the primary and secondary mortgage market. And the next level of financial innovation is underway.

Soon, an asset securitization market that uses the Italian securitization law (considered the best in Europe by practitioners) as its legal basis will be established - offering  Kazakhstani domestic issuers, as well other issuers throughout Central Asia and Russia, the benefits of an offshore center normally seen in the British Virgin Islands, Guernsey or the Cayman Islands.

Arguably, this makes Kazakhstan’s financial system the best in the former Soviet Union. Establishment of the Oil Fund, the Kazakhstan Development Bank, and the Kazakhstan Investment Fund gives further testimony to Kazakhstan’s long-term vision.  The recent visits by the heads of the Central Bank of China, Ukraine, senior economic advisors to President Putin and numerous others with the Governor of the National Bank of Kazakhstan to discuss “how Kazakhstan did it” adds substance to the argument.  Simply put: Kazakhstan’s financial infrastructure is better than Russia’s. The net result is that Kazakhstan is poised to become a regional financial center that may marginalize what otherwise should be the natural influence of Russia in regional capital markets.

Certainly, President Putin’s recent visit was portrayed by the media in Kazakhstan as an important event, but no more so than a recent visit of German Chancellor Schroeder. For in many ways, Kazakhstan regards itself as European in its new iteration as a nation-state. Management of its relationship with Russia, however, remains its number one priority thanks to history, geography, and oil. China is important but governmental elites are realistic. They understand Kazakhstan operates in Russia’s direct sphere of influence.  Any military threat to the territory of Kazakhstan is a threat to the very heart of Russia. Russia is hardly likely to tolerate any security threat to Kazakhstan when its Baikonur Space station is located in the middle of Kazakhstan. This realization tempers much of Kazakhstan’s behavior to other countries, namely Europe and the United States. Yet, any diplomatic, economic, political, or military ties, however small, appear to some in Russia’s foreign policy elites as opportunistic to some, unacceptable to others, and counter to Russian interests. It should not be a surprise that Kazakhstan has used its relationship with the U.S. to exert a more independent foreign policy towards Russia.  Kazakhstan’s decision to rid itself of nuclear weapons shortly after the Soviet Union broke up was good statesmanship. Russia could not countenance a nuclear power on its southern flank any more than the U.S. would tolerate a nuclear Mexico. This very act showcased Kazakhstan as a prudent power and model for how to stop the spread of nuclear weapons, earning high marks from U.S. policy makers and donor money for development of its economy and democracy.

For the U.S., Kazakhstan represents a reliable alternative to mid-east oil - for its allies and itself - while Russia goes about the business of establishing its reputation as a reliable supplier of natural gas and oil to Europe. It is also the economic model to replicate for regional stability in Central Asia.  For Kazakhstan, the U.S. is a counterbalance to Russian influence to be employed when convenient. The recent announcement that Kazakhstan would pursue alternate distribution of oil through the Baku-Tbilisi-Ceyhan pipeline is a reminder. Economic interests now drive Kazakhstani policy decisions and add to Kazakhstan’s independence. The pipeline provides a distribution hedge against Russia upping transit charges and offers leverage in negotiation.

Before September 11, the U.S. enjoyed significant leverage in Kazakhstan’s development and the pay back was attentiveness to U.S. requests for implementation of reform and some political commitment to an alternative pipeline for delivery of oil to international markets via Turkey that bypassed Iran. Private sector investment (much of it American) in oil exploration was key to extraction and wealth creation for the future. USAID technical assistance helped the Government improve heath care, legal reform, expansion of the press and media, and economic growth to provide the necessary pre - requisites for democratic process. At present, however, is the question of just how much longer the U.S. will stay engaged in Kazakhstan through its donor activities (USAID) that give much leverage per Dollar spent. For the level of future commitment will soon be decided by performance indicators and State Department committees.  The risk for Kazakhstan is that the U.S. will leave pre-maturely and create a vacuum that Russia may find inconvenient or too expensive to fill.

For Kazakhstan, maintaining regional order has been the key to its security objectives and motivation for joining the Collective Security Treaty Organization (CSTO).  After all, Kazakhstan is a buffer state for Russia separating the Muslim south, the Christian north and Confucian east. When the U.S. set up its Manas airbase in Kyrgyzstan to support operations in Afghanistan, many military analysts in Russia saw this as an unwanted or even unacceptable expansion of U.S. influence in Central Asia even though support was limited to KC 135 tanker aircraft and C 130 cargo aircraft, and pressed for a Russian counter response. Months later and thirty-five kilometers away, Russia now has its Kant airbase. The question that should be considered by Russian strategic planners is whether this base was necessary at all, at least if the objective were to balance U.S. interests. The reason is simple. The day after September 11, U.S. foreign policy became captive to the war against terrorism, and added not just containment but eradication of all such threats wherever they might exist and, for the time being, whatever the cost.

Yet, for the first time in its history, the U.S. faces financial limitations on its ability to exercise influence worldwide regardless of its desire to stay in Central Asia.  The implications are profound and present U.S. policy makers with some very hard choices. If the past is any indication of future behavior, Russia will have to respond accordingly.


Conclusions

For an American to suggest what Russia should do to promote its interests in Kazakhstan is a losing proposition at best. Perhaps the most effective way in suggesting such approaches is to step back and view them within the context of mutual security interests. There is a significant risk that the U.S. will not have the staying power to eradicate terrorism in Afghanistan.

There are simply too many domestic security and budgetary concerns (the Department of Homeland Security, for example, is a new black hole of expense) for the U.S. to fund a thirty years war in multiple theatres that may be necessary to defeat terrorism. If America goes, it is not a given that Kazakhstan’s social, political and economic development continues or stability stays. Countries with oil are inherently unstable because they have something others want. Russia may have to plug the hole and increase military spending at the expense of strategic modernization, necessary social expenditures and replacement of decaying infrastructure.

Meanwhile, the U.S. presence gives breathing space for Russia to address domestic priorities. The extreme military sensitivity to any American presence in Kazakhstan runs counter to practice; is unnecessary but understandable. The specter of Russian economic and military advisors operating in Mexico and around Central America would cause immense anxiety at the Pentagon. Yet, nearly all Kazakhstani exchange programs for training military officers occur in Russia and are likely to continue – further cementing institutional ties. Russia can and should continue to promote the necessary security architecture with Kazakhstan that will facilitate inter-operability of equipment and command and control to fight highly mobile terrorist incursions  in the event the U.S. tires of its commitment or even succeeds in eradicating terrorism in Afghanistan and decides to leave. Just as the U.S. rediscovered Central Asia after the Soviets left Afghanistan in 1989, it can leave again. Sooner or later, America will discover a viable substitute for fossil fuels that re-orders its diplomatic priorities. Interest in Kazakhstan as an oil power will wane but the nexus of Russian-Kazakhstani interests, driven by trade and common security objectives, will continue to strengthen.


Recommendations

Since Kazakhstan’s historical and economic ties to Russia won’t change, take advantage of Kazakhstan’s ability to finance Siberian regional development. Import the best of the Kazakhstani financial system and push the banking system to comply with international standards of best practice. Unify your regulators. Privatize your pension system.  And let the regions have enough reverse revenue flows to finance municipal repairs. Lower your air transport user fees and encourage Kazakhstan to do the same.  Facilitate trade by preferential lowering of tariffs. Promote joint ventures using tax relief. Encourage investment into Kazakhstan’s growing private sector. Continue dubbing Western movies into Russian and offer Kazakhstani students scholarships to Russian universities. Expect that Kazakh and English will assume separate but equal value with Russian.  Don’t resist but promote the use of each in school as electives. Sending more Russian orchestras and some Russian movies would help too. Most important, be patient and never take your eyes off China. Break the paradigm and stop worrying about the Americans being in Kazakhstan as part of the great game. You will be lucky if they stay.

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For news and information about Kazakhstan visit us at www.kazakhembus.com
Embassy of Kazakhstan to the USA and Canada
1401 16th Street, N.W. Washington, DC 20036
Phone: (202) 232- 5488 ext. 104, Fax:  (202) 232- 5845
Contact person: Roman Vassilenko



Kazakhstan's Echo

A monthly publication of the Embassy of Kazakhstan
to the USA and Canada with views and comments on developments in and around Kazakhstan
www.kazakhembus.com
April 6, 2004                                               No. 9