On the Way to Joint Eurasia
On May 21–22 in Astana the 7th Astana Economic Forum, attended by over 3,000 delegates from around the world, was held. By tradition, the chief newsmaker of this major event was the President of Kazakhstan, which announced the initiative for the establishment of the Joint Eurasian Economic Space, as well as a new multi-modal route "Eurasian Transcontinental Corridor". In his opinion, these are infrastructure projects which in these challenging times for the global economy can become the drivers of its sustainable growth.
Hyper crisis is coming?
Speaking at the plenary session, President Nursultan Nazarbayev reminded that the Astana Economic Forum was created as a response to the global financial and economic recession of 2008. According to him, the cataclysm affected about 80% of the global economy, which has not been able so far, for as much as seven years by now, to fully recover and return to the previous growth rates. "Fundamental problems, such as high unemployment and rising debt, are still topical. Many experts now speak of a gradual recovery, but the signs of growth are scattered. Many countries still cannot get out of stagnation."
However, Nursultan Nazarbayev seems inclined to the opinion of other economists, who believe that the 2008 recession was systemic, acyclic and will end only when its key reason — the accumulated deep imbalances, in the first place those in the currency and trading markets, is eliminated. "They believe that the phenomenon which is perceived by the many as turbulence, in fact, is a hidden, latent form of the emerging next phase of the global recession. This next phase is now shifting from the financial sector to the sphere of currency and economic wars in the form of illegal sanctions, as well as socio-political wars, resulting in shaking many countries of the world. This phase generates the increased confrontation between the East and the West, as well as the USA – NATO and Russia – China."
According to the President, we cannot exclude the possibility that in the near future the crisis can go from its latent phase into the open one, taking the form of a hyper crisis. The economic science could give responses to the question what should be done by the world community to prevent such a possibility. "For this exactly we gather people for the forums, including the Astana Economic Forum. We must together with the best experts of the world scientific community find ways on how to rescue our countries (CIS) and people from a possible future catastrophe. For the advanced search of answers to such questions, we created the worldwide expert and analytical network G-Global. But it seems so that this was not enough," – he stated.
Also, the situation is aggravated in such a way that on a global scale a number of challenges, which are a big threat to future prosperity, are now emerging and developing. "Firstly, it is the fragmentation of the world order: we are witnessing the collapse of the previous constraining factors and counterbalances throughout the world, the loss of trust between the leaders of the leading countries in the world and the corrosion of international law. Moreove, international institutions cannot guarantee peace and stability. Secondly, it is the natural disasters: climate change and pandemics. Climate change is happening faster than expected. This results in the severity of natural disasters. Thirdly, food shortages continue to grow. Under the pressure of the three parallel factors — population growth, urbanization and income, it will require to double food production in the next 30 years, although this will have to be done at a time when the resources of the Earth come to depletion."
The President stressed that Kazakhstan from its side is also looking for a response to these global challenges. For this, the strategies Kazakhstan-2030 and Kazakhstan-2050, as well as the program of industrial and innovative development and the Nurly Zhol program were developed. According to him, the implementation of the latter will make it possible by 2019 to reduce by one third the travel time between major cities, providing access to the neighboring countries. A unified energy system that fully meets the demand for electric power will be created. "At the same time, the program will create half a million new jobs. The same was in the United States and South Korea. As a result of the implementation of the industrial and innovation program and the Nurly Zhol program, a new economy and a new infrastructure framework of the country will be built in the country."
In order to fulfill such an ambitious task, and to enter into the category of developed countries, we cannot do without improving the institutional environment. In this regard, in his election campaign, President set out five areas for reforming. They include improving the system of governance, the rule of law, promoting economic growth, strengthening of Kazakhstan's identity, as well as increasing transparency and accountability of the state. "For the implementation of these reforms, there was adopted and published the Action Plan — 100 Particular Steps "Modern Country for All." As part of the reforms, the most advanced tools and standards of public administration from the most developed countries will be adopted. To this end, we signed the country program with the OECD".
However, the President of Kazakhstan emphasized that the efforts of one country to address global challenges is not enough — it is possible only by combining efforts. In this regard, from the rostrum of the AEF, he announced a proposal for the creation of the Joint Eurasian Economic Space. "We need to adopt uniform rules which will take into account the national interests of all the participants and at the same time will be directed to remove barriers and enhance mutually beneficial integration. The rules shall apply to, first of all, trade, transportation and movement of resources."
According to Nursultan Nazarbayev, in the framework of such a space it is necessary to create a permanent platform to discuss and work out proposals on the future directions for the continent development, increasing the level of integration between all the members. The Astana Economic Forum could become such a platform.
The Eurasian Transcontinental Corridor Go!
Further the President noted that the theme of the forum, "Infrastructure as a Driver of Sustainable Economic Growth", is consistent with the logic of development of such a Eurasian union. Creating an economic belt as part of the current revival of the Silk Road could be a base project for the Joint Eurasian Space. "Joint initiatives in the field of transport are a good platform of cooperation, which should give an impetus to profound interaction and integration of the countries and regional associations." This is especially in the light of the fact that investments in infrastructure today are at the head of the economic agenda in many countries, regardless of the extent of their development.
"Great hopes are pinned on the Asian Infrastructure Investment Bank. The bank is already established, as you know. The Chinese party contributed $50 billion, the Russian party promised $30 billion. More than 50 countries, including the countries of Western Europe, expressed their desire to participate in activities of the bank. Of course, Kazakhstan was amongst the first founders of the project." According to the President, the creation of such a specialized bank is especially important in view of the fact that the existing sea routes cannot meet the growing needs of international trade. Today, the trade volume between China and the European Union is about $600 billion and is projected to increase to $800 billion by 2020.
Thus, development of an overland route to Europe plays an important role for the growing Asia. We see new opportunities for ourselves there. Of particular importance is the initiative of the President of PRC "Silk Road Economic Belt", which was first announced in Astana. We were amongst the first countries that supported this initiative and are already making our own contribution."
Construction of the Kazakh section of the Western Europe — Western China highway with length of 2,700 km, which is expected to be accomplished this year, can be regarded as the first contribution by our country in this project. It is expected that the volume of traffic in our section will amount to 30 million tons per year.
"The route will connect not only China, Kazakhstan, Russia and Europe. The Central Asian counties — Kyrgyzstan, Uzbekistan, Tajikistan, will also get access to it. In parallel, construction of new railways and logistics facilities is underway. Kazakhstan’s logistics terminal was recently opened in the port of the Yellow Sea — Lianyungang. Transportation of containers began. This is a direct way from Europe through Russia and Central Asia to the Asia-Pacific region and back by rail. For the first year the volume of cargo from China to Europe rose by 80%. These are cargoes from the eastern and central regions of China. Construction of the railway Zhezkazgan — Beineu, which connected China through Kazakhstan with the Caspian seaports, is completed. This enables the transportation of goods via Kazakhstan and the Caucasus to Europe. The highway was connected to the already built route Kazakhstan — Turkmenistan — Iran and further to the Persian Gulf, the port of Banderabas. This allows us to have access to the West Coast of India and the south of Pakistan. This road provides access of our products to the Middle East. Already this year, Kazakhstan is likely to increase by 5 times the supply grain to Iran. The volume of freight traffic on this road in the coming year will reach 10 million tons," — Nursultan Nazarbayev stated, listing the possibilities for new routes.
According to him, all these projects are aimed at increasing the transit potential of both our country and the EAEU, in general. About 40 countries expressed their interest in free trade with the Eurasian Union. Moreover, according to our President, "extremely beneficial" for both sides would be to conclude a free trade agreement between the EAEU and the European Union. "I think we will come to it, because it is mutually beneficial, but we should not stop on this: I propose to create a new high-speed, multi-modal transport route "Eurasian Transcontinental Corridor". It will run throughout our country and allow carrying out an unimpeded transit of goods from Asia to Europe and back. This is much shorter than the path through the ocean, makes our nations closer and gives security, because stability of the countries through which this corridor runs is important for all of us. Transport artery will give impetus to the development of productions."
The words of the Kazakh President about the interest expressed by European countries in establishing close relations with the EAEU and the revival of the Great Silk Road, were endorsed by the Minister of Transport and Communications of Lithuania Rimantas Sinkevičius. He said that his country intends to become a part of the transport corridor between China and Europe. "The Great Silk Road played a very important role in development of the civilization, both in Asia and Europe. Its revival, of course, would help all countries and entrepreneurs in further development. It is good, in my view, that politicians and civil servants are united in their opinion that the Silk Road should be reinstated and must serve for the benefit of the nations. We are taking particular steps to make the Silk Road run through the Baltic countries, Lithuania and the sea port of Klaipeda"— he said.
In his turn, the Ex-Prime Minister of Israel, Ehud Barak, believes that a new phase of integration between Europe and Asia is emerging at the moment. "Now we are trading in a variety of goods, machines and technologies. This is due to the fact that a cheaper labor is attracted, for example, in China." Along with that, a growing interest of Asian companies and banks in investing in European countries is being currently observed, because for them it is cheaper than to do it in the United States. Mr. Barak acknowledged that for Kazakhstan as a country which lies between Europe and Asia, the revival of the Silk Road is of great importance. However, in his opinion, for further development of this project, "political solutions" and promotion tools are needed which have not been created so far.
Financial hub for the Silk Road
Redirecting the transit traffic flow through Kazakhstan, which Astana desires to come true, of course, will require financial services of the definitely new quality level. To do this, the government intends to set up two international financial centers in Almaty and Astana. "I signed a decree for the establishment of the Astana Interna-tional Financial Center on the platform of the World Exhibition EXPO-2017. We held talks with representatives of the Dubai Centre and agreed that we will completely adopt experience in Kazakhstan. Thus, the operation of our center will be governed by the English law and will have a preferential tax regime and an independent financial court. We are confident that the Astana Financial Center will be the core of the financial infrastructure of Kazakhstan, and in the future the financial hub for the entire Central Asian region. With this, Almaty, where the majority of Kazakhstan’s financial institutions are located, continues to be the center of concentration of financial services and financial intermediation in the country. All these measures are designed to ensure long-term sustainable development for us," — Nursultan Nazarbayev shares his plans in this area.
During the AEF, the National Bank Chairman, Kairat Kelimbetov, told more about the future of the international financial center in the capital of Kazakhstan. According to him, the center will operate in a special economic zone. "The government and the National Bank developed a road map… Part of the plan is the creation of relevant infrastructure, based on the principles on which international financial centers operate. You know that we thoroughly studied the international financial centers such as London, Singapore, Dubai and, by order of the President we concluded relevant agreements of cooperation with the Dubai International Financial Centre, Dubai International Financial Court, as well as the Dubai stock exchange."
As part of the project we plan to adopt the principles of the contract and common law. This will require modification of the relevant legislation. The financial center will use English as the working language. It is possible that a simplified visa regime will be introduced for foreign participants of the financial center. Another solution related to the development of the new financial center will be a future stage-by-stage relocation of the National Bank from Almaty to Astana, to be done by January 1, 2017. "For the two years by now, we have been preparing to move the relevant infrastructure, IT-infrastructure and the headquarters… Nevertheless, Almaty remains the largest national financial center. I think that for the Almaty and Astana as the metropolitan areas, the complementing each other in the above way, will serve the development of the financial sector in our country, in general", — Kairat Kelimbetov added.
In her turn, the member of the Board (Minister) of the Eurasian Economic Commission Karine Minasyan raised the issue of the need to create a single market of hand-off financing in the EAEU to ensure investment in SMEs. According to her, at the moment, small and medium enterprises of the EAEU member countries are ousted in the most risky areas as a result of increased competition and standardization in the traditional markets of goods and services, as well as the growing demand for innovation. As a consequence, they need new sources of investment.
Traditionally, venture funding is intended for investments in start-ups, those new, growing or struggling for a place in the market. Therefore, it involves a high or relatively high risk. In the EAEU member countries the public strategies of risk financing are mainly focused on the development of innovative projects. Meanwhile, not only innovative companies need venture capital today — the cost of lending is too high even for ordinary SME projects. According to Karine Minasyan, expansion of funding sources will reduce the risks, while the participation of institutional investors in SMEs will make the access to traditional sources easier for them. Thus, businesses will be initially created with the potential to enter external markets and the stock exchange.
To endorse the correctness of such an approach, she gave the example of the EU where, according to data for 2013, the financing of SMEs takes almost 42% of total lending. In the EAEC member countries, this figure is a few times lower, for example, 22.3% for Russia, and 10.1% for Armenia.
According to the expert, the creation of the single market of risk financing in the EAEU will be the first effective step towards the integration of the financial markets with minimal risk for the regulators. This will provide access to a wider resource base for SMEs and will increase a range of projects for venture funding entities. Cooperative ties will be established at early stages of development of the enterprises, giving rise to incentives for the implementation of joint cross-border projects. In addition, institutions of risk financing can become broadcasters of local business projects within the EAEU, and the accumulated experience of funding will be spread quicker and more efficiently.
Advices from international experts
In conclusion, we want to cite a number of recommendations and forecasts made at the forum by foreign speakers. The famous American businessman and politician, the Forbes magazine Editor-in-Chief, Steve Forbes, recommended Astana to attain the stability of their national currency. "Kazakhstan is now under huge pressure from possible currency devaluation. What we have to remember in this situation? It should be necessary, following the example of other countries, to organize currency unions that should set stable targets for their currency." As an example, he cited the United States, China and Germany, which focus on the stability of their national currencies. On the other hand, he drew attention to the problems of some European countries that "their governments not only perform internal structural reforms, as Kazakhstan did, they even make mistakes in their monetary policy." At the same time, Mr. Forbes made a special focus on the success of our country in the area of reforms in taxation, privatization and creating the conditions for entrepreneurship. "It remains to eliminate a small number of barriers in doing business, especially in construction projects. — In terms of setting up a new business, you also have significantly improved the conditions. Investors expect the commercial stability, the ability to perform commercial contracts, and to do this, the relevant legislative framework is created. Money, in its essence, is of no value; products, services are of the value. Money measure the value in the same way as centimeters measure the length, and kilograms measure the weight. It is neces-sary to stimulate the economy."
Highly appreciating the prospects of Astana as a financial center of the region, the expert also believes that Kazakhstan could do the promotion of innovation. "We saw the example of Estonia, which became the center of high-tech development, and I see no reason why you should not develop it here. You can also build a chain of production and export of foodstuff".
Richard Dobbs, McKinsey Global Institute Director, supported the last thesis. "Oil prices will always fluctuate, but, in view of the fact that the country grows a huge amount of crops, for Kazakhstan it is important that it can position itself as a supplier of food products. I think that exactly this kind of companies and this kind of investors Kazakhstan should attract." To do this, it is necessary to create hubs for the processing of agricultural products. "That is, instead of just selling grain, why not grow poultry, such as chicken. It will be a huge source of growth for the country and will attract your neighbors. For example, poultry can be supplied to the markets of East China; you have a great opportunity to play this game here in Kazakhstan. Then you will ensure a steady growth for a period of 5–7 years".
Professor at New York University, Chairman of the Consulting Group Rubini Global Economics, Nouriel Rubini, believes that the accession of Kazakhstan to the EAEU was not premature. "Russia is one of your main allies, so the Eurasian integration will bring more benefits. I would advise Kazakhstan after joining the EAEU not to stay closed from other countries. Kazakhstan pursues a very wise multi-vector policy. You have good relationship with the USA, Europe and China; so it is important not to change this policy for the policy of the regional importance and you should not stay closed in the Eurasian Union".
Speaking about the problem of dependence of our country on the prices of resources, he advised, for the price reduction, to develop the own production and work to strengthen contacts with the international community and especially the countries that have the technology of the future. "We see that the countries that are dependent on the situation in the global energy market, suffer losses in the current situation, and we are observing a rising inflation in some of them." In his opinion, as part of anti-crisis measures, Kazakhstan should make efforts to avoid inflationary pressures. To do this, you should modify the fiscal policy, to develop a certain plan of actions of the stabilizing nature, to carry out major structural changes in this area.
At the same time, Mr. Roubini gave a positive appraisal to the decision of the National Bank on the establishment of the exchange rate band, which allows the "currency to move when there are problems with the economy." "With a smooth transition from the one to the other policies, when the currency slowly comes to its real value, the economic costs will not be so large," — said the expert.
In her turn, the member of the Community of Global Strategic Foresight, Kristel Van der Elst, told about possible development scenarios for both Kazakhstan and the entire world in the 21st century. According to her, in that world which experts predict, the countries will cease competing with each other, satisfied with the benefits of the resources available. "You've probably cease to extract natural resources, because many of the technologies will not need their consumption. Strategies and programs that are implemented in the country, give us an idea about Kazakhstan as a country to be innovative." According to forecasts of futurologists, soon there will be new technologies in education, which will use the connections of interfaces of the brain; there will be of no importance in the future whether the country has access to the sea or not — it does not influence its development and potential. There will be new biotechnology, neuroscience and many other changes. "On the whole, the future of the world will be associated with the diminishment of the goal of economic development; more and more people will come back to the basic needs; the understanding of the importance of nature, ideas of happiness will increase. Also, the development of Kazakhstan will include taking care of nature, the welfare and happiness of the people", — the expert believes.