It’s now been a bit more than 2 weeks since I spent a few days in Almaty, largest city and economic capital of Kazakhstan. I’m still trying to process it all. When people think of Kazakhstan, they naturally think of Borat, but that is simply a mistake. Almaty is such a sophisticated and cosmopolitan city with the unfortunate residue of Soviet architecture. Even here, they’ve put the buildings to fine use by cleaning them up and making them presentable. Before we go into the current economics, I think it’s good to look at a bit of recent Kazakh history.
The Russians began a colonization effort in the 1800s which saw the population mix shift substantially towards ethnic Russian even before the Soviets took over in 1920. Soviet rule was brutally implemented over the next two decades which saw mass starvation, political killings and generalized Soviet style repression against the traditional nomadic society before a Soviet style governing apparatus was eventually put in place. During the next few decades, Kazakhstan became a dumping ground for politically unpopular minority groups within the Soviet Union, dissidents and nuclear bombs. At the same time, the Soviets did put some effort into educating the people and building infrastructure to access the rich natural resources inside of the country. The fall of Communism saw the Soviets pull out and leave behind seven decades of inefficient rule, a Russian ethnic majority and one very efficient ruler-Nursultan Nazarbayev.
Nazerbayev is lots of things to lots of people. However, he has guided Kazakhstan to tremendous prosperity during his 21 years of uninterrupted rule since the breakup of the Soviet Union. This growth has been on the back of sizable exports of oil and to a lesser extent, other commodities. Of course, this growth has not come without the allegations of corruption and insider dealings of those close to the President. What is fascinating is just how much further advanced Kazakhstan is than many of the other Central Asian Republics, and this is mainly due to the stability that two decades of enlightened one-person rule brings to a country.
Looking quickly at Kazakh economic history following the collapse of Communism, you see the usual story of anarchy and privations with a select few being able to game the system to create some initial wealth. This wealth was then used to loot the system as state assets were “privatized” in a somewhat haphazard and chaotic manner, mainly to those connected with the government. However, the real boom started as oil production nearly doubled in the last decade at the same time that oil prices increased many times over. This wealth swelled the coffers of an economy that was only $18 billion in 2000 and saw the economy grow to $135 billion by the end of 2008.
While the economy was booming, the “oligarchs” got very rich, but the average Kazakh also did well and millions were able to buy cars and luxury goods. Of course, the majority of this wealth flowed into the largest city, Almaty and led to some very luxurious surroundings. As I walked the streets, I could not help but notice, chic cafes, fancy retailers and luxury cars. Everyone we talked to had a story about someone buying a 2 bedroom Soviet Apartment for $5,000 and a decade later, selling it for over a million. Of course, what goes up, also goes down and no story about Kazakhstan is complete without talking about the epic real estate washout that was experienced over about a two week period in 2008.
In the next segment, I will talk about the build-up and crash. Finally, we’ll get to look at Kazakhstan today and why it may be a very interesting place to invest (hint: the economy is still booming, oil production is expected to increase materially in the next few years and it is one of the cheapest global stock markets on a price to cash flow basis).