Kazakhstan has attracted over $40 billion, less than half of which has been invested in oil and gas.

HEn the Soviet Union broke up, Kazakhstan was the least developed republic. For decades, it was tasked with providing Moscow with raw materials. But despite its cosmonauts and engineers, hi-tech industries were virtually unknown. Then came the aggressive reforms of the mid-1990s, and the privatization policy which saw the sale of large steelworks to private groups, such as the Indian company Mittal Steel.

“There was no oil money back then, so we had no other choice,” says Kairat Kelimbetov, the Minister of Economy and Budget Planning. Since 2000, FDI figures have consistently been above five percent of GDP. The private share of the economy reached 76.6 percent five years ago. During its brief trajectory as an independent state, Kazakhstan has attracted more than $40 billion and less than half that sum was invested in oil and gas. “If we compare Kazakhstan with other CIS states today, we have taken first place,” says Mr. Kelimbetov.

Rated 61st in the list of most competitive economies, the status of laggard is long gone. SMEs have easier access to credit than they do in Russia, thanks to the early entry of foreign banks. Out of 200 financial institutions a few years ago, only 35 are left after consolidation. Meanwhile, oil at $65 per barrel continues to be the economic driver. Analysts estimate natural resources are worth $8.7 trillion. But this is just a comparative advantage and officials are focusing on diversification. The goal is to identify the niches in the global economy that prize efficiency- then they will put Kazakhstan’s non-oil sector to the test.

“In terms of technological innovation, which is a pre-condition for competitiveness, it’s definitely our weak point,” says the former Minister of Trade and Industry, Sauat Mynbayev. His economic team hired Michael Porter, a Harvard business school professor, to select seven clusters: metallurgy, food processing, tourism, building materials, petrochemicals, textiles and logistics. For each of these niches, Mr. Mynbayev suggested three measures. Each niche will draft a legislative basis, including R&D and safety standards. The government will help ensure efficiency in budget planning. At the same time, fiscal incentives and international road shows will enhance the investment climate.

Spanning 29 million square feet, Kazakhstan could revolutionize world cargo logistics. A transcontinental railway would slash the delivery time of Chinese goods to Europe from 45 to eight days. Steelworks are doing well, with 85 percent growth at Mittal Steel’s plant in Temirtau since 1995. The government wants more SMEs to transform domestic minerals, though. In cotton, Kazakhstan sees itself as an added-value partner for Uzbekistan, processing and exporting the product globally. There is even talk of wine and cinema clusters.

The U.S. is the top investor with $608 million in the first quarter of 2005 alone. Mr. Mynbayev thinks American IT, pharmaceutical and alternative energy firms will help steer the patterns of growth away from the extractive industries. At a conference in San Diego last September, Mr. Mynbayev spoke about free economic zones that Kazakhstan is setting up within IT parks. Kazakh and American investors have jointly financed the Alatau Free Zone, for example. It has been successful in signing up Microsoft, HP, IBM, Samsung and Sun Microsystems, the company that pioneered Java.

“The aim of cluster development is to bring the government and the private sector together,” says Mr. Kelimbetov. Science intensive and export-oriented, that is what policymakers envision for Kazakhstan. The cabinet is just now beginning to realize the importance of corporate identity. Country branding will help break U.S. perceptions of Kazakhstan as a landlocked post-Soviet oil producer. Instead, U.S. firms will see the potential in transcontinental logistics while tourists dream of mountain climbing in the Tien Shen range.