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Kazakhstan: Deputies Draft Plan To Reverse Capital Flight

The problem of capital flight -- taking cash out of a country's local economy and depositing it in banks abroad -- has afflicted many of the world's nations in transition. The Central Asian nation of Kazakhstan is no exception. RFE/RL correspondent Bruce Pannier looks at that country's novel proposal for dealing with its problem of vanishing cash.

Prague, 15 March 2001 (RFE/RL) -- Oil-rich Kazakhstan is "disastrously" cash-poor. That was the diagnosis made Monday by the country's trade and economy minister, Zhaksybek Kulekeyev, while speaking to a group of Kazakh entrepreneurs.

Part of the problem, according to the country's Finance Ministry, is that as much as 40 percent of Kazakhstan's gross domestic product is in illegal circulation outside the country -- smuggled out by wealthy businessmen and others looking to secure their cash abroad. By some estimate, at least $1 billion -- and possibly much more -- in Kazakh cash is currently sitting in Western banks.

Politicians in the Central Asian nation, however, have proposed a novel solution to the country's capital-flight dilemma. Last week (7 March) the Mazhlis, the country's lower house of parliament, approved a draft law that would grant amnesty to all the money carried out of Kazakhstan -- and the people who carried it. For a single 20-day period, the dates of which have yet to be announced, the money can be brought back into Kazakhstan and deposited in local banks -- no questions asked.

The creative solution has gotten a mixed reaction in Kazakhstan. Some say the plan will help, others believe it's geared to help corrupt government officials, and still others say simply the idea is crazy.

Parliament member Khairullo Erezhep, who spoke at the Mazhlis session when the draft law was passed, is among those who favor the plan, albeit with reservations:

"Dear colleagues, we see clearly now that this sort of law is very necessary. We have problems here -- who are the owners of this money? The first group is those who have left the country. The second group is still here. The third group is representatives of the shadow economy. Those who are here, in the country, should have an opportunity to legalize their money. But those who have left the country may legalize their money, come back to Kazakhstan and then wiping their feet on our country may leave again."

Kazakh Finance Minister Mazhit Esenbayev said as much as $500 million could return to Kazakhstan's state treasury if the amnesty law is adopted. The country's National Bank more modestly estimated $300 million could be brought back.

The law would also require a tax to be levied on the so-called "shadow capital" that is returned, with the percentage decreasing the longer the money is kept in Kazakhstan.

If successful, the plan could inject a healthy dose of cash into the country's depleted coffers. But some questions remain: Why was the money taken out to begin with and why would anyone want to bring it back?

Ben Slay of the Washington-based international economic consulting group EconPlan explained why so much money may have left Kazakhstan.

"Transition economies and developing economies are characterized by lots of capital that the owners don't know what to do with. If you look at the Central European transition economies, what you find in the first years of transition, say in the first half of the 1990s, is a lot of money left these countries and went abroad. The exporting companies didn't trust the government and kept their working capital abroad."

Likewise, Slay said, a lack of trust in Kazakhstan's government continues to infect companies dealing in oil and metals, the country's two main exports.

Mark Katzman, an EconPlan consultant specializing in Kazakhstan, explained what might induce those holding cash abroad to return their money to Kazakhstan.

"One of the things that may add to additional funds being brought is the fact that the financial sector in Kazakhstan is much more stable, there's a lot more confidence in the banking system."

Stability in Kazakhstan's banking sector may come as news to some, who note that debate over the draft law began in 1999 -- just as the so-called "Kazakhgate" scandal broke. The scandal centered around American citizen James Giffen, who allegedly was involved in placing millions of U.S. dollars in Swiss bank accounts belonging to Kazakh government officials. Giffen was once a financial and economic adviser to Kazakhstan's President Nursultan Nazarbayev.

Katzman said people who may have money in these alleged accounts -- which are assumed to hold profits from the country's 1994-97 privatization period and major oil contracts -- stand to gain from the proposed amnesty.

"There probably will be a lot of people who wish to solidify their gains and under this plan will be able to do so."

But Mazhlis deputy Valerian Zemlian said last week it is more than just money from corrupt officials which could end up in Kazakhstan's banks. Zemlian pointed out that Kazakhstan lies at the start of the trafficking route that carries 90 percent of the West's heroin supply from Afghanistan. The country's mafia groups profiting from this illegal venture may also be depositing their money abroad. Zemlian said such "dirty money" could also be returned under the amnesty law and could potentially "damage the political prestige of the country." Still, he said, Kazakhstan should work to return as much as the vanished cash as possible.

Government visions of hundreds of millions of lost dollars flooding back into the country may prove overly optimistic. But EconPlan's Slay noted that Central European countries, less than a decade ahead of Kazakhstan in terms of economic transition, did indeed foster confidence in banking systems and regulations and saw a return of capital.

There are signs of returning stability in Kazakhstan. The national currency, the tenge, was allowed to float in April 1999. It dropped from about 88 to the dollar to 138 to the dollar in days. But almost two years later it is holding steady at around 145 to the dollar.

Kazakhstan produced more oil last year than ever, a fact which helped it achieve the highest industrial growth in the CIS. More export routes are being built and more, potentially huge, oil fields are being found and developed.

The amnesty law now needs only to pass through the Senate, a move that is seen largely as a formality. Then the experiment in returning the country's shadow capital would begin, with many sins being forgiven, and all at a profit.

(Merhat Sharipzhan of the Kazakh Service contributed to this report)