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12 January 2022

Kazakhstan pursues development from both West and Russia-China

Population: 19.17 million (+1.16% vs 2020)

GDP Per Capita (PPP): $25,700 (+3.2% vs. 2020)

Annual Electric Power Consumption Per Capita: 5,500 kWh

Government Debt: 25.18% (-1.13% vs 2020)

Kazakhstan is sparsely populated, has an authoritarian government, and it is thousands of kilometers removed from the world’s ocean trade routes. But the country does have significant fossil fuel, heavy industry and mining sectors, and its railways provide an overland route from China to Europe.

The country is wealthier than its central Asian neighbors, as reflected by the fact that there are less than a million Kazakhs living and working in Russia. In fact, Kazakhstan itself has become something of a destination of Uzbek and other migrant labor of late in its farming and fossil fuel industries.

A surprise entrant to the field of green hydrogen promises

The country has come onto our radar in the course of the past year with a smattering of solar projects many of which are backed by the UAE’s Masdar, a trend it shares with Armenia, Georgia, and its Central Asian neighbors. Then in the second half of 2021 large-scale green hydrogen developments began to be proposed for the country – quite remarkable for a remote country next to Russia, the world’s biggest source of cheap gas.

Kazakhstan’s grid is coal-dominated at 70%, with another 20% coming from natural gas, with the rest coming from hydropower and small amounts of cross-border imports, wind, and solar. It adopted a 2060 net-zero goal in 2020, which puts it on the same schedule as its coal and gas customer China. We have since heard early plans for its energy transition strategy, of which the most noteworthy aspect is a wholehearted endorsement of green hydrogen with 30 GW planned to be built by the end of the decade.

President Tokayev has also stated a need for “reliable basic generation” and so there’s interest in nuclear power – a branch of the government has signed an MoU with NuScale, an American private company pursuing Small Modular Reactors (SMRs). A 2019 proposal involving the Russians was unpopular, with many remembering the Soviet past in which their country was used for nuclear weapons tests.

Kazakhstan needs more power in the short term as well – since China’s ban on cryptocurrency mining, many miners shifted their operations next door from China’s north to Kazakhstan, with the result that the country has had to increase power imports from Russia, has suffered some adverse grid events from excessive load. The country has become the source of a large fraction of global cryptocurrencies’ supply, with the recent unrest causing a fall in the value of several.

So far solar development amounts to a smattering of projects on the 50 MW to 200 MW scale, with 500 MW added in 2019 and 570 MW in 2020. By the end of 2020 the country had 1.7 GW of solar and 500 MW of wind.

Still not fully aligned with China-Russia

Since the fall of the Soviet Union a big question for Russia’s neighbors has been how friendly they should be to their former imperial master. When Ukraine’s pro-Russian establishment party fell to anti-Russian forces in 2014, invasion and secession followed: Armenia’s 2021 territorial losses to Azerbaijan, halted only by Russian intervention, were preceded by the fall of its established, corrupt, pro-Kremlin party to a democratic faction which sought to strengthen ties with the West.

But the best comparison to Kazakhstan’s recent events, the gasoline price protests which turned into riots with some shadowy groups apparently breaking into weapons depots and putting those guns to use, is the Belarus mass protests last year.

Both Belarus and Kazakhstan have pursued a policy of maintaining sovereignty distinct from Russia, without throwing their caps entirely in the ring with the West either. For Belarus that ambiguity came to an end in 2021, but Kazakhstan will try to persist with ambiguity and will probably succeed.

At the leadership level, one comparison is that the Belarusian President Lukashenko once hoped to lead Russia instead of Putin, who was an upstart figure in the 1990s and 2000s. Like Lukashenko, Kazakhstan’s Nazarbayev – who ruled the country for almost three decades – must have been aware of his own seniority in age and in the USSR hierarchy compared to Putin. The Kazakh President, Nazarbayev’s former protégé Tokayev, who finally broke Nazarbayev’s grip on power during the chaos of the past week, does not have that kind of baggage.

One explanation for the violent elements of the insurrection could be Nazarbayev, from his position of semi-retirement, trying to take power back from his appointed successor. Perhaps with Nazarbayev being the Western-backed option and Tokayev Russian-backed. Islamist-style mass prayers were also seen in the protests which is noteworthy in a country that spent a century under authoritarian secularism. Even the abrupt lifting of the LPG price cap, which sparked the protests and has since been reinstated, was peculiar since the country is a net exporter of fossil fuels with low government debt.

A further comparison is that Western liberal democratic values may always find fertile ground in Belarus, a First World European country even if not the wealthiest, so Lukashenko had to turn to Russia to defend his regime. This ideological threat is something Kazakhstan’s government does not have to worry about so much, and the country is further from the West physically as well. Perhaps that is why the West has not yet bothered to put the kind of sanctions on Tokayev’s government which it has put on Lukashenko’s – it realizes its prospects are weaker there, although more importantly it does not want to harm the activities of Western corporations there.

As long as pandemic-era economic chaos can be smoothed over, Tokayev doesn’t need the Kremlin as much to protect himself against internal opposition compared to Lukashenko, and there are also no Central Asian analogues to the EU and NATO to force a binary choice of patron on Russia’s neighbors there.

The Russian-led intervention was larger and more obvious in Kazakhstan than it was in Belarus last year. But it is precisely the size and explicit military nature of the CSTO peacekeeping operation which will motivate Tokayev to not be too pro-Russian right now. Kazakh nationalist sentiment has an anti-Russian aspect going back to the famines and displacements of the USSR and the Empire, so Tokayev cannot afford to be seen as just the man who remained in power because of Russian military action.

One of Tokayev’s appointments since sacking the entire cabinet has been an infamous xenophobe, Askar Umarov, to be Minister of Information. Umarov advocates the elimination of the use of the Russian language, so he is a threat to the Russian population – 18% of Kazakhstan with a valuable economic role – and even a nuisance to the many Kazakhs who speak Russian. Hopefully this appointment merely appeases nationalist sentiment without rewarding it.

Kazakhstan is a member of several Russian-led organizations such as the Collective Security Treaty Organization and the Eurasian Economic Union, but its geopolitical stance has been to take a middle road between the West and Russia while trading with both. Inevitably Kazakhstan will shift towards China-Russia after the recent suppressed insurrection, which both Russia and China have implied was supported by US including the violent elements.

Tokayev was educated in Moscow, was a Soviet diplomat in the 80s posted in Singapore and China, and speaks both Russian and Chinese. But his position is not so weak that has has to prostrate himself before Russia-China, and in the end the country’s strategy of non-committal has most likely only been dented – it still wants to receive Western investment.

If the long-planned conversion of the Kazakh written language from the Cyrillic to the Latin alphabet is cancelled, then we will know that Kazakhstan has decided to return to the Russian fold entirely, but that is unlikely.

For their part China-Russia will be content as long as the biggest country that lies between then is stable and open for trade along its expanding railways and its Caspian Sea port infrastructure, not to mention that it holds some Russian space launching infrastructure. China-Russia have had a victory against the revolt but they don’t need a vassal state as long as the place is not chaotic or hostile. With 1.8 million Kazakhs living in Xinjiang, so China definitely doesn’t want Kazakhstan descending into a civil war with Islamist factions.

Foreign investments into energy sector

So for all these political concerns, the biggest motivation for now is still trade and foreign investment. Since 2008 Kazakhstan has received a consistent $24 billion or so a year in Foreign Direct Investment (FDI), aside from a dent to $16 billion in 2020. The top five investing countries in 2021 were – in order – the Netherlands with $3.3 billion, then the US and Switzerland, and only then Russia and China with $1.2 billion combined.

For now the leading target for this FDI is still oil and gas in the Atyrau region and elsewhere. But there is plenty of investment being lined up for that national hydrogen plan of 30 GW by 2030 – especially Svevind Energy’s planning with Kazakh Invest National Company for 30 GW of electrolyzers and 45 GW of supporting wind and solar capacity. Germany’s Svevind is an investor and project developer. Recent months have seen other such agreements such as Linde and KazMunyGas discussing their own large-scale hydrogen and ammonia projects, which have not yet decided between green electrolysis or working off natural gas.

Kazahkstan may not need hydrogen in the most immediate direct sense when it’s a gas producer and is next door to Russia, but perhaps one motivator for all of this green hydrogen being produced so far from Europe is to fuel its domestic metalworking industries for export to the West in the future with its carbon border taxes. Kazakhstan will also be able to supply China with hydrogen although it will have to contend with Xinjiang’s hydrogen production to do so.

With Western oil majors already present in a big way in Kazakhstan, they could switch to green hydrogen using much of the same infrastructure, while having all the space the sunny, windy desert affords for renewable energy. Kazakhstan has reached a fairly high status in global ease of doing business rankings, with The Heritage Foundation putting the country at number 34, between Cyprus and Bulgaria.