Kazakhstan’s economic reform efforts are also progressing. GDP growth proved stable between 2000 and 2005 (the most recent year for which figures are available) when it hit 9.2 percent. Beginning early this decade, surging oil prices, coupled with new offshore oil discoveries and improved pipeline access, brought many changes to Kazakhstan. In 2000, engineers discovered the Kashagan oil field in the northern Caspian Sea. With an estimated 45 billion barrels (of which 8 billion to 13 billion are recoverable with existing technology), Kashagan is the world’s largest new find in the past 30 years. In 2001, the CPC pipeline, which links the Tengiz oil field to the Black Sea, provided the first cost-effective alternative to the Transneft monopoly. In 2005, the completion of the Ceyhan pipeline and a link to China’s pipeline network gave Kazakhstan a range of non-Russian sales and distribution options for the first time.

Business also seems easier for foreign companies today, partly because Kazakhstan supports a new elite class that, having grown prosperous, favors strong property rights. The president and the ruling elites can ill-afford any grabs for power in business or politics that remind the world of Russia’s modus operandi. Foreign investors can find a useful barometer in the way the Kazakhstan government goes about its creeping attempts at renationalizing the oil industry. Authorities have kept their record relatively clean so far. The state oil company, KazMunaiGas, which went public in London last October and has seen its share price rise by some 30 percent since the IPO, is acquiring privately owned oil and gas projects, both foreign and domestic, with government encouragement. As long as the government does not attempt to break up private companies and harass their CEOs (à la the Yukos debacle), the ambitious growth of Kazakhstan’s oil and gas industry may prove impossible to resist for Western companies. New projects will need the expertise of large, foreign operations.

Kazakh oil wealth is trickling through the economy, spurring new opportunities in industries catering to the boom in consumer demand.

Kazakh oil wealth is also trickling through the domestic economy. This spurs new investment opportunities in industries that cater to the boom in consumer demand and in providing services to the expanding upper and middle classes. The financial sector has evolved from a post-Soviet cesspool of nontransparent banks that made shady deals to a booming and self-confident industry centered in Almaty.

Power Plays
The second significant episode to watch, and the one that potentially holds greater long-term concern for investors, involves how the country’s reigning autocrat—who (by his own laws) plans to hold on to the presidency until 2013—will handle the power and influence he has gained from a booming economy that relies largely on a strong oil market. Prospective investors will witness a test of this influence in December. Nazarbayev has made the audacious move of attempting to align himself with Europe’s pro-democracy coalition, the Vienna-based Organization for Security and Cooperation in Europe (OSCE). (The fraction of Kazakhstan’s territory west of the Ural River lies inside Europe; in total, the nation of 15 million people covers more than 1 million square miles.) As the head of an ever-so-slightly European state, Nazarbayev has made a bid to become the 2009 chair of OSCE, which monitors elections across the ex-Soviet region and performs border management and conflict resolution duties.

Nazarbayev’s campaign involves more than a touch of irony for a president who was appointed first secretary of Kazakhstan when it was a Soviet republic and has handily won both post-independence elections—both of which OSCE claims fell short of international standards for fairness. Two opposition leaders were found shot to death around the time of the 2005 election, which Nazarbayev won uncontested. The crimes remain unsolved. Germany, France, the Netherlands and Poland originally supported his 2009 bid based on the notion that it created incentives for both democratic reforms and future gas pipelines under the Caspian Sea. But these countries wavered after the 2005 election. Transparency International ranks Kazakhstan 116th in corruption out of 166 countries, and, since the fall of Indonesia’s President Suharto, has suggested that Nazarbayev is the world leader with the largest sum of corruptly acquired wealth.

The EU member states will vote in December on Kazakhstan’s efforts to take over the OSCE chair; they may opt to give the country more time to work on political reforms and instead grant the chair in 2011. That carrot might serve as an incentive for democratic improvements, but it remains to be seen if the Kazakhstan government will develop, for the first time, a tolerance for the opposing voices inherent in a true democracy. The West has already turned away from a former friend in Central Asia—Uzbekistan—because of the country’s human rights abuses. As the region’s most populous country, and one that gamely stood up to Russia during the 1990s, Uzbekistan was the West’s preferred partner from the mid-1990s until 2005. During that time, Westerners held their collective noses and ignored the abuses, especially after 9/11, when the United States and its allies needed a forward base for military operations in Afghanistan.
 
But in May 2005, the Uzbek city of Andijan witnessed a human rights tragedy. After gunmen stormed the local prison and freed 23 businessmen accused of Islamic extremism, their supporters—scores of other inmates and demonstrators numbering in the thousands—flooded the city center. Most media accounts reported the protesters as vocal but peaceful. Uzbek security forces eventually stormed the demonstrators, killing at least 180 civilians. Western powers and human rights organizations condemned Uzbekistan; the country reacted to this criticism by closing the U.S. military base and shifting its sights toward Russia and China.

Nazarbayev praised Uzbekistan’s actions in Andijan, calling for military cooperation against “international terrorism.” While Western governments and investors alike thought otherwise, Uzbekistan turned to its neighbors for trade and investment. The lesson for Kazakhstan is clear enough: If a true test of democratic tolerance were to occur in Kazakhstan, its future would depend on the lure of oil, a powerful incentive for many friendships.

Richard Pomfret is a professor of economics at the University of Adelaide in Australia and a visiting professor in international economics at the Johns Hopkins University Bologna Center in Italy.