In the years following financial liberalization, Kazakhstan has seen a spectacular construction boom and an inflation of real estate assets, driven by internal and external investment. The country has boasted the highest per capita foreign investment and the most developed banking system in the CIS. From 1999 to 2007, the economy displayed steady GDP growth of about 10 percent per year. However, the country’s achievements in attracting foreign capital and developing its financial sector are now seen as a mixed blessing. The banking sector of Kazakhstan, which is in a deep structural crisis, has been accused of inflating the housing bubble through extensive external borrowing and aggressive lending policies.

Background: For Kazakhstan, the privatization of the real estate market surprisingly did not bring the stability with which home ownership is associated. During Soviet times, people lived in one place for decades even though they did not own their homes. After privatization, people could suddenly sell and buy real estate, which had tremendous effects on people’s mobility and caused attitudes towards housing as something rather temporary. People could invest and capitalize on their property. They could rent it, make choices about where and how to live, and make any kind of remont (renovation). In one sense, this was a freedom from the previously authoritarian distribution system. However, since prices on the post-Soviet real estate market, especially in the capital cities, grew much faster than salaries and wages (from its lowest point in 1999 to its peak in 2007 the housing price index has grown more than 25 times), this freedom brought more anxiety than liberation. People were in constant motion trying to improve their housing situation, renovating, calculating the best housing options, seeking loans and investment opportunities in housing. The capitalization of the real estate market affected not only Astana, Almaty and Atyrau, where the bulk of construction projects were concentrated, but also the provinces. The boom instilled in people a sense of opportunity and urgency to “do something” with their assets.

Today, big players like banks are routinely criticized for pumping money into the housing bubble and construction. The big players should not be acquitted of the responsibility they bear. However, it should be noted that although the real estate and construction boom was economically a result of the influx of capital and banks were instrumental in channeling it, it was also culturally and socially a result of the desires for buying new and different types of housing unimaginable under socialism.

The government hoped the construction boom could become a locomotive for the country’s development, improving people’s living and housing standards, creating jobs, and even stimulating industrial output in related spheres such as construction materials production. Today, all of these hopes are in question due to the volatile connection between construction and short and medium-term foreign capital.

According to the Kazakh National Central Bank, the increase in the country's external debt in previous years (from 2003 to 2007) was mainly due to the banking sector's borrowing, which by the end of 2008 had totaled US$40 billion. A significant part of the capital invested in construction came from international financial institutions, lending money to Kazakh commercial banks, which in turn lent it as home, consumer, and SME (small and medium enterprise) loans. The global financial environment of cheap credit and competition among national banks encouraged dependence on short- and medium term borrowing through the bond market, rather than dependence on banks’ own internal deposits and savings. In this quantity-driven environment, the way to success was through more borrowing abroad and more lending at home while quality became a secondary matter.

“These cities smell of money,” visitors from other Central Asian republics used to say when describing the urban boom in Almaty and Astana. But this was before the bust. Today, the skyline of both capital cities features unfinished construction and idle cranes. The largest bank, Bank TuranAlem, with foreign liabilities of over US$15 billion has been taken over by the government and the three next banks have received “stimulus” packages worth US$3 billion. The “national character” of the real estate and construction boom in Kazakhstan in 2002-2007 was that many people had invested in so-called “share-holding participation” (dolevoe uchastie) agreements in housing projects that would have to be built in a period of 1-2 years after the investment was made. However, when the financial crisis hit Kazakhstan, many of these investors/buyers were left with unfinished housing as many construction companies went bankrupt before completing their projects. The government was forced to urgently design mechanisms to bail out construction companies and complete the unfinished housing projects.

Implications: Today, Kazakhstan displays all signs of a full-fledged banking crisis. The ratio of non-performing loans in the banking system has reached 10 percent; the bank rescue operation has already cost US$4 billion of public funds (about 4 percent of GDP). In addition, the government has had to increase generalized deposit guarantees from 700,000 to 5 million tenge (about US$ 33,500) to avoid self-fulfilling bank runs when people en masse start withdrawing their deposits from the banks. At the same time, the government refused to exchange commercial banks’ debt for sovereign debt, even for BTA bank in which the state now holds a 75 percent majority stake, and recently the foreign investors have agreed to restructure debt payments in three leading banks, including BTA.

Apart from rescuing the largest banks – a measure which provoked strong criticism in the country – the government has adopted a comprehensive support plan for the whole economy. The plan, announced in November 2008, promised US$4 billion to support the banking system, US$3 billion to prop up the real estate market (1 billion of which will go to refinance mortgages), US$1 billion to support small and medium businesses, US$1 billion to develop agriculture, and US$1 billion to implement infrastructural and industrial projects.

The three billion dollars allocated for stabilization of the real estate market demonstrate the importance of the “housing question” for both the market and social well-being. The program is intended to complete unfinished construction, let municipal authorities buy surplus housing, and refinance struggling homeowners. Interestingly, the criteria for mortgage refinancing and bailout is based on a differentiation between people who had a “real need” for buying an apartment and using it for their own consumption, and people who use newly purchased homes for personal investment, rent seeking, and possibly speculation purposes. This type of public policy is not at all surprising, taking into account the socialist heritage when housing was distributed on the basis of need and merit and was not for capitalization. The government pledged to refinance the home owners who own only one apartment/house of a size less than 120 square meters.(ca. 1200 sq.ft.)

The future of the stimulus plan is dependent on whether Kazakhstan has enough money to stimulate demand throughout the economy and sustain credit supply while the global credit crunch continues. Before the crisis, the country maintained the National Oil Fund of oil revenues accumulated since 2000 as a safety cushion. Together with Kazakhstan’s Foreign Exchange Reserve, these reserves were worth US$47 billion in November 2008. In the short period since then, however, the country has lost US$4 billion of the Foreign Reserves while trying to protect the national currency against devaluation and has used US$10 billion of the National Oil Fund for the stimulus package.

So far, Kazakhstan is managing to spend its way out of the crisis. If worse come to worst, the country can always apply for the IMF emergency loans, which have generously been helping Central and East European countries in similar distress. This has not happened so far, despite the predictions of international experts. Instead, both Kazakhstan and Russia have turned to China, indicating the shifting alliances and tarnished trust in the Western financial system in this part of the world.

CONCLUSIONS: As the Kazakh government and people reckon with the excesses of the boom period, the question of how to differentiate between real development, addressing real human needs, and the speculative “bubble” feeding on a combination of predatory financial schemes and groundless expectations, becomes increasingly important for policy-makers and regulators all over the world. Although the bubble and its burst indicate that fraud and speculation is involved, the construction boom in Kazakhstan is not just a ponzi scheme. In the end, constructions and infrastructure will be produced which will serve the needs of the people living there. As the Prime Minister of Malaysia once remarked in response to a question concerning the speculative nature of the Malaysian economy after the South-East Asian financial crisis, “What you see are very solid buildings, roads, harbors, airports. It cannot be a mirage.”

AUTHOR’S BIO: Alima Bissenova is a Ph.D. Candidate at the Department of Anthropology, Cornell University, and News Digest Editor of the Central Asia-Caucasus Analyst.