Independence, dependence, and interdependence- a case study of rent seeking, tax reform, and Kazakhstan’s multi-vector foreign policy

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Independence,

Dependence, and

Interdependence

A CASE STUDY OF RENT SEEKING, TAX REFORM, AND

KAZAKHSTAN’S MULTI-VECTOR FOREIGN POLICY

S2097141

TIM NOBEL

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1

Contents

List of tables ... 2

List of figures ... 2

Introduction ... 3

Political economy perspectives on Kazakhstan’s multi-vector policy ... 4

The realist perspective ... 4

The liberal perspective ... 6

The rentier state perspective ... 9

State effectiveness ... 13

Methods ... 15

Analysis of Kazakhstan’s foreign rents and tax incomes ... 15

Kazakhstan’s decreased dependence on foreign resource rents ... 16

Kazakhstan’s increased tax incomes ... 20

Inequality in Kazakhstan ... 24

The duality of Kazakhstan’s multi-vector foreign policy ... 24

Concluding remarks and the significance and limitations of this study ... 28

Bibliography ... 31

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2

List of tables

Table 1: Kazakhstan's Exports of Crude Oil (Observatory of Economic Complexity, 2019) ... 37 Table 2: GDP of Kazakhstan (The World Bank, 2019) ... 38

List of figures

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3

Introduction

While it is widely known that Kazakhstan is at the center of regional and global competition, the challenges this presents for Kazakhstan itself are not widely understood. Presently, Kazakhstan is in the aftermath of its national elections after the resignation of its first president, Nur-Sultan Nazarbayev. Although they are generally not perceived to have been free or fair (The Guardian, 2019). Indeed, it was commonly expected that the country’s next leader would be the outgoing leader’s loyalist and protégé Tokayev, previously the chairman of the Senate and prime minister, before his eldest daughter, who now holds the position of speaker of the Senate after Nazarbayev resigned, would follow to become the country’s leader (Reuters, 2019; Financial Times, 2019). After Tokayev became the second president of Kazakhstan he subsequently renamed the capital Astana Nur-Sultan, honoring the first name of the first president of Kazakhstan; Nur-sultan Nazarbayev. The Kazakh state has received criticism on its opaqueness and lack of domestic economic development, however, a popular slogan by Kazakh authorities in response on criticism on the state is ‘first the economy, then politics’ (Satpayev & Umbetaliyeva, 2015). Although the country is the most prosperous country of all former Soviet states based on output per capita inequality has been prevailing. The country does not have democratic political institutions and is not expected to develop these any time soon. Nonetheless, in this context, important questions are arising as to how, going forward, the country and its state agencies can best manage the country’s international relations, particularly its international economic relations, and especially its oil and gas sector. In this context, Kazakhstan is at the center of a global race for resources featuring major regional and world powers, including Russia, China, the U.S., and even several European countries. Within Kazakhstan’s emerging oil market, these nations continue to be interesting and different players that present different sorts of opportunities and challenges for the Kazakh state.

Once regarded as a backwater, Kazakhstan has attracted wide attention from regional and global investors including, especially, China and Russia, two regional and global superpowers intent on developing ties with Kazakhstan that can best serve national and business interests. Indeed, Kazakhstan often appears to be viewed as a prize, an object of desire at the center of a high-stakes competition, one to which the EU and US are also a party.

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4 The EU represents the largest investor in the energy sector of Kazakhstan. Followed by the US, China, and Russia (OECD). China is steadily growing its investments in Kazakhstan, as well as building additional infrastructure which is needed to transport the oil towards China, e.g. new pipelines and refineries in Xinjiang province.

Energy security is an important factor for the development and sustaining of economies. It does not only look at supply & demand, efficiency, but also at source diversifications, the impact of rapid economic growth in developing countries, and complex relations between energy trading nations. The strategy of the Kazakh state to manage its interest by means of a multi-vector foreign policy is explained in three major streams in academia.

Whilst several scholars present plausible arguments reviewing Kazakhstan’s multi-vector foreign policy, the scope of these arguments often remains limited and narrowly focused. Therefore, this essay presents a wider argument concerning Kazakhstan’s foreign policy and its implications by combining both the realist and liberal argument presented in this thesis.

Political economy perspectives on Kazakhstan’s multi-vector policy

In this section, three academic perspectives on Kazakhstan’s multi-vector policy are introduced. First, the realist perspective is discussed. Following the realist perspective is the liberal perspective, which focusses on international cooperation and organizations, on Kazakhstan’s multi-vector policy. Finally, the rentier state perspective, which focusses on the dependence of the state on foreign rent, is introduced in this section.

The realist perspective

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5 standards as legalistic and moralistic approaches to international politics do. In the pursuit of power, to maximize state power, statesman and government make rational decisions to maximize the power of their state (Morgenthau, 1954). Furthermore, moral laws and principles are acknowledged by political realism, however, political actions should not be measured against them without looking at the concrete circumstances present at the time something occurs (Morgenthau, 1954). The concept of power is not a static concept but is compromised with the use of multiple factors which include geographical location, national resources, national character, economic stability, etc.

After the dissolution of the Soviet Union in 1991 Kazakhstan became independent. The newly independent state had to formulate independent policies on all fronts of government. As a newly established independent state, Kazakhstan main national interest, in an international context, was to change the status quo from being largely dependent on Russia, and formerly the Soviet Union, to increasing its sovereignty and independence. Kazakhstan also has to establish its international relations with virtually all countries in the world. Following political realism, the main interest for the Kazakh state would be to establish its sovereignty and limit its dependence on a single foreign actor, in this case Russia. In its foreign policy, Kazakhstan would be able to use its power to promote these national interests, and able to increase its national power by implementing fitting foreign policy. It is argued that Kazakhstan’s ‘multi-vector’ policy is based on the rational thought which is incorporated in political realism, Kazakhstan’s inter-state relationships with other nations are based on the potential costs and benefits for Kazakhstan, self-interest and self-preservation are primary motivators for the inter-state relations (Hanks, 2009, p. 259). State security and economic development are two overarching policy goals in the foreign policy of Kazakhstan (Hanks, 2009). As early as in 1992 Nazarbayev identified five strategic areas to be incorporated in its multi-vector foreign policy in his ‘Strategy for Formation and Development of Kazakhstan as a Sovereign Government’ (Nazarbayev, 1992). These five regions were the CIS (Commonwealth of Independent States) countries, Europe, Asia, North America, and the Pacific Basin, whilst Russia, China, and the USA were specifically named as important partners for the future of Kazakhstan (Nazarbayev, 1992).

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6 international recognition and status of the nation of Kazakhstan itself (Ipek, 2007). However, in doing this is has largely prevented the creating of domestic political interest due to the authoritarian nature of the Kazakh state (Ipek, 2007). The authoritarian characteristics of the Kazakh state enable it to be a more effective state to deal with outside systemic pressures since foreign policy processes are vastly simplified in authoritarian states with less intervening variables, therefore states controlled by a small elite are more capable to reacts appropriately to foreign threats (Schweller, 2004).

The vast natural resources in Kazakhstan have been vital to the formation of its multi-vector foreign policy and have influenced Kazakhstan’s foreign policy since independence. Oil-led development and the geopolitics of exporting oil from its landlocked location are the important national interest, part of economic development (Ipek, 2007). A prime example of Kazakhstan’s multi-vector foreign policy is the development of the Tengiz and Karachaganak oil fields in western Kazakhstan, in the development of these two large oilfields three governments, and eight oil companies based in different states were involved, including Russia, the UK and the US, which integrated the different interests of the foreign actors in Kazakhstan with the end to help the domestic economic development of Kazakhstan (Ipek, 2007, p. 1184). Nazarbayev himself clearly stated in 2003 that ‘as far as pipelines are concerned, our policy is clear and simple: have as many export routes as possible’ (Hanks, 2009), this statement is a clear derivation from the principles of a multi-vector foreign policy.

The liberal perspective

Criticizing political realism, political liberalism provides another perspective on the international relations of Kazakhstan. Two of the founding fathers of liberalism are Robert Keohane and Joseph Nye. In their article named ‘Power and Interdependence’ they first argue for political liberalism (1973). Since halfway the second half of the twentieth century, a shift in international relations has occurred from force occupying the most important role in international relations to the increasing importance of economic power. For international relations between non-nuclear developed countries force is a rather insignificant element of the state to state relation, economic power has become increasingly important with the aim to influence each other’s policies. Moreover, economic power can more easily be applied gradually and increasingly then military force threats (Keohane & Nye, 1973).

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7 do this thought Eurasian integration in the form of the Eurasian Union in 1994, just 3 years after the dissolution of the Soviet Union, nevertheless, this proved to be unsuccessful (Nurgaliyeva, 2016). Creating closer ties with Turkey, for example with the BTC (Baku – Tbilisi – Ceyhan) oil pipeline through Azerbaijan, Georgia, and Turkey proved more successful to balance out Russia’s dominance in the region since it would provide an alternative export route other than the Caspian Pipeline Consortium which transits through Russia (Nurgaliyeva, 2016). Doing better than in the past is more important than doing better than other countries economically, relative gains have become more important than absolute gains and balance of power as is the case under political realism.

Nye and Keohane identify four factors behind this shift from force to economic power. These factors are (1) the increasing diversity of types of actors, particularly non-state actors, (2) the broadened foreign policy agenda, (3) increasing difficulty with creating coherent foreign policies, and (4) the increased possibilities for linkages between different issues and sectors (Keohane & Nye, 1973, p. 162). Most important in the increased diversity of types of actors in foreign policy is the fact that international, trans-national, and intergovernmental institutions, as well as multi-national enterprises, have become significant actors in world politics. These actors do complicate relations between states directly. Organizations such as the IMF, the UN, and the World Bank have obtained a certain degree of autonomy, which leads these organizations to be able to exercise leadership in several international sectors. Multinational corporations and other international companies, such as oil firms way use increased connectivity to lobby to build a trans-national coalition that supports their interests (Keohane & Nye, 1973, p. 164).

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8 (United Nations Human Rights Council, 2019). Moreover, Kazakhstan is member of the United Nations (The Permanent Mission of the Republic of Kazakhstan to the United Nations in New York, 2019), Euro-Atlantic Partnership Council (North Euro-Atlantic Treaty Organization, 2015), Turkic Council (Turkic Council, 2019), Organisation of Islamic Cooperation (OIC) (Organization of Islamic Cooperation , 2019) and an active participant in the North Atlantic Treaty Organization Partnership for Peace program (North Atlantic Treaty Organization, 2019).

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The rentier state perspective

The liberal approach to cooperation with foreign actors, however, has had a significant impact on the goal of the multi-vector foreign policy. Whilst this policy was mainly created to become an independent sovereign state, it could be argued that due to the liberal approach in the natural energy sector as promoted by the multi-vector foreign policy Kazakhstan has (partially) lost its independence and sovereignty (Aidarkhanova, Aminjonov, McLennan, & Kolesnikova, 2017, p. 164). Dependencies have emerged that threaten the national interest of Kazakhstan. Firstly, Kazakhstan’s national oil company only owns one-fifth of the energy extraction industry in the country, over half of the industry is owned by Chinese and American oil corporations. Due to liberal production sharing agreements dating back to the 1990s, the Kazakh state has lost much control over the extraction and transportation of its natural resources, new agreements with China do increase this dependency. Secondly, the entire Kazakh economy has become dependent on the natural resource industry, which accounts for around 80% of Kazakhstan’s total exports (Trading Economics, 2019). Next, Kazakhstan is largely dependent on a single customer, European countries import 69% of all Kazakhstan’s oil, with the biggest export destinations being Italy (18%), the Netherlands (9,8%), Switzerland (6,4%), and France (5,9%) (Trading Economics, 2019). China is the only significant non-European importer of energy resources from Kazakhstan with 12% of the total exports (Trading Economics, 2019). Lastly, infrastructural dependencies still persist, all oil exported to Europe has to transfer through Russian pipelines, the most important pipelines are the Atyrau-Samara pipeline and the Caspian Pipeline Consortium (Aidarkhanova, Aminjonov, McLennan, & Kolesnikova, 2017). Other problems resulting through the dependency on the resource extractive industries are (1) it generally provides ‘growth without development’, meaning that economic growth is not followed by socio-economic development, (2) a high level of corruption which leads to weak institutions and state management by a small group of political elite, and (3) the persistence of poverty and the increase of inequality (Satpayev & Umbetaliyeva, 2015).

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10 resources such as oil and gas are determined in the international market, based on external factors. The government is thus dependent on revenues originating from outside the country. In such a resource dependent country, control over the natural resources determines political power and influence. In an attempt to minimize the impact of fluctuations in international resource markets, Kazakhstan has established a sovereign wealth fund, the National Fund of the Republic of Kazakhstan, in 2000 (Satpayev & Umbetaliyeva, 2015). The function of this fund is to save financial resources for the future and for times of economic downturn (Satpayev & Umbetaliyeva, 2015). The fund, however, is a prime example of the low transparency in the management of the state. The fund Is managed by a special management council which is chaired and formed by the president of Kazakhstan, the council further includes the heads of the two chambers of government, the prime minister, the head of the national bank and the finance minister. The fund is managed by the National Bank, whilst the council had a merely advisory role to the president, who issues directives related to the National Fund of the Republic of Kazakhstan that is binding to the National Bank, the Council, and the government (Kalyuzhnova, 2012).

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11 In Kazakhstan, after its independence, the government was in a weak negotiating position with foreign oil corporations since the country’s economy was in a bad state and its oil production facilities outdated, the state needed additional income. Therefore, foreign oil corporations negotiated favorable agreements. The Kazakh state lost most of its control over its extractive industries in return for rents (Palazuelos & Fernández, 2012). However, since the 2000s reforms and renegotiations by the Kazakh state have changed the situation in the extractive industries in Kazakhstan. These reforms were achieved based on two factors, these are (1) the consolidation of power by a smaller oligarchic political elite, and (2) the entrance of new actors in the oil and gas industries in Kazakhstan, namely China and Russia. President Nazarbayev and his family members and other close allies became the most important people in different areas of the countries, they managed to gain control of the main tools for economic power, the media, and other parts of the state. Nazarbayev together with his family and unconditional allies created an authoritarian repressive state. This strong central power presented a better position to renegotiate agreements with transnational oil corporations. Besides this, the increased interest of Russian and Chinese oil corporations in investment and participation in the Kazakh natural resource sector provided a way for Kazakhstan to play different foreign parties to each other in changes and reforms of the extractive industry.

Three main results of these changes were (1) the successful renegotiation of oil agreements, (2) the emergence of KazMunaiGas as Kazakhstan’s central state-owned oil company, and (3) the enhancing and expansion of rents received by the state. During the forced renegotiations of oil agreements with foreign oil corporations, Kazakhstan was able to enlarge its influence and decision making power in the oil and gas industry. KazMunaiGas was able to increase its share in multiple oil and gas fields and concerning consortium. For example, in the Kashagan consortium, KazMunaiGas ended up with 16.81% of shares, this is more than any other oil corporation. KazMunaiGas became the central player in Kazakhstan’s natural resource sector, it came to be by merging several smaller state-owned oil corporations into KazMunaiGas. KazMunaiGas hold shares in all gas fields in the country, in fields explored or starting operation after the reforms KazMunaiGas holds at least 50% of the shares, significant fields are Kazgemunai, Karazhamnbasmunai, Zhambai, and Kazakhturkmunai (Palazuelos & Fernández, 2012, p. 32).

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12 in 1999 to 44% in 2008 (Palazuelos & Fernández, 2012). Oil revenues and the reforms in the sector have thus contributed to the consolidation of its ruling oligarchy and have sustained the rentier structure of the Kazakh state (Palazuelos & Fernández, 2012).

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State effectiveness

In the existing literature, it is widely discussed how the multi-vector foreign policy by the Kazakhstan state has impacted its dependence on foreign actors, primarily in the form of rents through its extractive resources. The lack of democratic and independent institutions has been widely criticized as the source of many of the problems in Kazakhstan. State institutions and decision-making processes remain opaque and a small political elite is in charge. What is less understood is how the lack of democratic institutions has impacted the effectiveness of the Kazakh state in managing its extractive industries, and how an effective state could be created in order to provide inclusive economic development for all people within the nation. Notwithstanding the fact that Kazakhstan has made effort to form a more responsible and sustainable strategy in the management of its extractive industry, for example, the establishment of the National Fund of the Republic of Kazakhstan to ensure financial resources for the future comprised from foreign rents.

The literature reviewed in the sections above contributes strongly to the debate concerning Kazakhstan’s multi-vector foreign policy. The realist argument provides a strong foundation for the start of the policy and the reasons behind the policy. It introduces the realist motivation from which the policy originates, namely the drive to become less dependent on a foreign nation, to become more sovereign, and then be able to play foreign actors against each other in a zero-sum game which benefits the Kazakh national interest. However, in this realist conviction, this argument does not take into account the fact that through this policy Kazakhstan has become thoroughly embedded in the international community, it has become a participant in many international organizations, institutions, and initiatives. The hypothesis that can be generated from the realist perspective is that the multi-vector policy has led Kazakhstan to become more independent, sovereign, and less dependent on foreign nations. Through this policy, Kazakhstan would have achieved its own interest of economic development and state security.

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14 Lastly, the rentier state perspective argues that the involvement of oil companies in the domestic oil sector in Kazakhstan has resulted in the fact that the Kazakh state has become dependent on foreign oil rents generated from these foreign actors. The hypothesis that can be generated from the rentier state perspective is that through the multi-vector policy more oil corporations from different nations would enter the Kazakh oil sector, these additional oil corporations would bring additional rents to Kazakhstan thus increasing the dependence of the Kazakh state on foreign rents. These new oil corporations could have two effects on the dependence on foreign rents of the Kazakh state, it could increase the rent incomes and dependence on them, at the same time it would diversify the sources of the foreign rent income. It could also only diversify the source of foreign rent income, thus taking share away from the already established oil corporates in the Kazakh oil sector.

Based on the reviewed literature, several questions on how the Kazakh state could successfully and effectively manage the foreign actors, rents, and its involvement in the international community. Authors concerned with state capacity and development have stated that it is important to implement a taxation system that can provide income to the state and could thus decrease the dependence on resource rents (Masi, Savoia, & Sen, 2018; Acemoglu, Ticchi, & Vindigni, 2011). A sold and reliable taxation system is key in overall state effectiveness. Since regular and stable income to the state is vital for the state to implement different policies that could promote inclusive development. Dependence on foreign rents is not stable and sustainable, and would thus not provide a suitable basis for the Kazakh state to increase its effectiveness.

Another determinant under which states can develop a higher capacity is inequality (Engerman & Sokoloff, 2002). An inverse relationship between inequality and effective institutions exists (Easterly, 2007; Engerman & Sokoloff, 2002). This means that when inequality increases the capacity of state institutions does decrease. The notion that decreased inequality would increase the capacity of state institutions can also be derived from this. Therefore, in the case of Kazakhstan, if inequality would be decreasing, state capacity and effectiveness would increase. Reduced inequality indicates that the state is relatively effective since it does improve the domestic situation. In addition, reduced inequality shows inclusive development.

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Methods

In this short section, the research methods used in this paper and connected sources are discussed and motivated. The research in this paper primarily relies on secondary and primary sources. Firstly, primary data provided by international institutions, such as the World Bank, the Observatory for Economic Complexity, and the Organization for Economic Co-operation and Development is used extensively concerning tax and rent incomes to the Kazakh state. Secondly, an important part of this paper is the use of secondary sources. Academic research by established researchers, or published in established journals or by known publishers is used in this paper. The datasets used from the World Bank, the Organization for Economic Co-operation and Development, and the Observatory for Economic Complexity are deemed to be reliable in the academic field, data is objective and impartially collected.

Based on the sources used in this paper, the argument is built. However, due to lack of knowledge and skills, this research does not include a thorough economic analysis using high-level statistical tools. Important in this research, as in a majority of political economy research, is the interpretation of and political context of data provided by international and other institutions.

To further understand the rent and tax incomes to the Kazakh state, data from the World Bank and the Organization for Economic Co-operation and Development is used. The world bank provides reliable data for foreign rent income to the Kazakh state derived from Kazakhstan’s extractive industries in general, and Kazakhstan’s oil industry in particular. On the other hand, the Organization for Economic Co-operation and Development provides detailed data concerning tax incomes in Kazakhstan.

Relating to inequality, once again the World bank provides important and reliable statistics and data concerning inequality in Kazakhstan. In this research, the GINI index is used as a measuring tool for inequality in Kazakhstan. The Gini Index or Gini Coefficient measures the income or wealth distribution of all residents in Kazakhstan, it is a widely used tool for the measurement of inequality.

Analysis of Kazakhstan’s foreign rents and tax incomes

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16 Observatory of Economic Complexity this section shows that the importance of rents accumulated through Kazakhstan’s natural resource industry has actually become less. Although rents still hold an important place for the state, the tax levied from other parts of the economy have become increasingly important to the Kazakh state. First, rent income from extractive industry, primarily the oil industry, are analyzed. After this, this section takes a look at tax income in Kazakhstan, and how this has developed over time.

Kazakhstan’s decreased dependence on foreign resource rents

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17

Figure I: Kazakhstan Resource Rents (% of GDP) (The World Bank, 2019; The World Bank, 2019)

Whereas figure 1 clearly shows the decreasing importance of foreign rents extracted from Kazakhstan’s natural resource industries, the level still remains relatively high. However, it is still considerably lower than other rentier states such as Azerbaijan (21%), Chad (22%), Republic of Congo (42.7%), Democratic Republic of Congo (32.7%), Equatorial Guinea (24.3%), Iraq (38%), Liberia (25.5%), Libya (38.5%), Mauretania (24.1%), Oman (23.5%), Saudi Arabia (23.8%), and lower than the average of the of the total Arab World (17.7%) in 2017 (The World Bank, 2019). Similar to Kazakhstan’s oil rents, although the level remains high, it is still relatively high with 10.2% in 2017. Nevertheless, Kazakhstan is not as dependent on its oil rents as other resource-rich countries such as Angola (15.7%), Azerbaijan (17.9%), Republic of Congo (36.7%), Equatorial Guinea (19.2%), Iraq (37.8%), Kuwait (36.6%), Libya (37.3%), Oman (21.8%), Saudi Arabia (23.1%), and the Arab World average of 16.4% in 2017 (The World Bank , 2019).

Since the peaks in 2005 and 2008 the share total natural resources rent and oil rents of Kazakhstan’s GDP has been decreasing, thus showing that the Kazakh economy has become less dependent on foreign rents. This is in stark contrast with many authors who argues that Kazakhstan has not become less dependent on foreign rents from its extractive industries but only has diversified the origins of the foreign rents, with increasing importance of China (Aidarkhanova, Aminjonov, McLennan, & Kolesnikova, 2017; Satpayev & Umbetaliyeva, 2015; Palazuelos & Fernández, 2012). The decrease of the share of foreign rents to the national GDP is against the trend of increased production, exports, and share of total exports of crude petroleum products from Kazakhstan (Observatory of Economic Complexity, 2019).

0 5 10 15 20 25 30 35

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Kazakhstan Rents (% of GDP)

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18 Data from the Observatory of Economic Complexity (table 1)show that Kazakhstan’s export of oil has increased from 52.9 million USD in 1992, just after independence, to 19.4 billion USD in 2016. The highest value of crude oil exports was achieved in 2013 with a total value of crude oil exports over that year of 57.2 billion USD. The years between 2011 and 2014 saw the highest value of crude oil exports from Kazakhstan with a constant value of over 50 billion USD. The lower value of crude oil exports after 2014 can be explained by the lower oil price since the oil price fell down from 113 USD per barrel (Brent) to 50 USD per barrel crude oil in 2015 and the consecutive low point of 28 USD per barrel (Brent) in 2016. The highest growth of the value of exports of crude oil in Kazakhstan was between 2010 and 2011, in this period the value of crude oil exports from Kazakhstan grew with 29.5 billion USD from 25.7 billion USD to 55.2 billion USD.

The statistics provided by the World Bank do cover rents extracted from all of Kazakhstan extractive industries and also has specific data concerning Kazakhstan’s oil industry. The oil sector of Kazakhstan is by far the biggest and most important resource in Kazakhstan which comprises over 40% of Kazakhstan total exports since 2000 (Observatory of Economic Complexity, 2019). In 2013, the oil sector accounted for up to 68% of Kazakhstan’s total exports which was the highest point ever since Kazakhstan’s independence. Since then the share of the oil sector has decreased slightly to 54% in 2016 (table 1). In these statistics, it is apparent that the vast majority of Kazakhstan’s rents are accumulated from the oil industry. Although a small portion of the rents received from resource industries in Kazakhstan is extracted from non-oil resources, such as natural gasses and minerals like zinc and titanium. These sectors are very small compared to the oil industry, therefore the remaining of this essay will focus on oil rents in Kazakhstan.

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19

Figure II: Oil Exports and Oil Rents in Kazakhstan (Observatory of Economic Complexity, 2019; The World Bank, 2019)

Therefore, the contrasting trends of on the one hand growing value and share of total exports of Kazakhstan’s crude oil exports and on the other hands the downturn of total rents received from extractive industries provide an interesting and important paradox. Since it would be logical to assume that the rents received from extractive industries would grow with the value of the production of resources and its export. Nevertheless, as figure 5 and 6 show, the share of total export, and more importantly the value of the oil exports of Kazakhstan, grew considerably faster than the received rents from the extractive industries. The fact that since 2008, since the global financial crisis, the share in total export of crude oil has continued to increase till 2015, whilst rents collected from the oil industry have fallen from 2008 onwards. In the period after 2008, the collected rents from extractive, mainly oil, industries as a share in the nation’s GDP has decreased with a half.

The period after 2010 is especially interesting to have a closer look at. In this period the value of Kazakhstan’s oil exports did rise significantly caused by the high and rising oil price. As seen before during this time the exports held a value of over 50 billion USD. Nevertheless, during this time of high oil prices and the highest value of Kazakhstan’s crude oil exports, foreign rents collected from the resource industries did decrease continuously, almost cut in half in the period between 2011 and 2015. It is important to understand how these rents could decrease in a period in which the natural resources were most valuable and the Kazakh state could thus generate more income and profit more. Another important factor to consider in the gross domestic product (GDP) of Kazakhstan itself. After having reached a low point in 1999 of 16.8 billion USD it grew rapidly in the period between 2000 and

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0 10 20 30 40 50 60 70

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Oil Exports and Oil Rents

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20 2013 from 18.2 billion USD to 236.6 billion USD with only a minor fall during 2008-2009, the global financial crisis, during which the GDP shrank from 133.4 billion USD in 2008 to 115.3 billion USD in 2009 (The World Bank, 2019). Nevertheless, after 2013 the GDP of Kazakhstan dropped from 236.6 billion USD in 2013 to 162.8 billion USD in 2017 with its lowest point in 206 with 137.2 billion USD as GDP (The World Bank, 2019). Whilst during the time the GDP was decreasing after 2013 the oil price was very high, consequently Kazakhstan total crude oil exports did also have a high value (Observatory of Economic Complexity, 2019). At the same time, the total natural resource rents as a share in Kazakhstan GDP did decrease over the period between 2013 and 2016 (The World Bank, 2019). Thus whilst the crude oil export was at its highest peak of 67% and 68% in 2014 and 2013 of Kazakhstan’s total exports and in value, the total rents accumulated from these resource exports did decrease significantly. The share of the foreign rents to Kazakhstan’s GDP decreased at the same time the GDP of Kazakhstan also did decrease, starting in 2013, which would result in the fact that incoming foreign rents did decrease at an even faster pace than visible at first glance.

The fact that foreign rents decreased in a period that the oil prices and value of crude oil export were very high compared to the years prior to 2011 could indicate that Kazakhstan was slowly but surely moving away from extreme dependence on foreign rents generated from its extractive industries.

Kazakhstan’s increased tax incomes

In the following section, a closer look at tax incomes for the Kazakh state is presented. The data presented by the Organisation for Economic Co-Operation and Development (OECD) has been collected by the Ministry of Finance of the Republic of Kazakhstan (Organisation For Economic Co-Operation and Development, 2019). The tax data is measured in millions of Tenge, Kazakhstan’s national currency. At the time of writing, June 2019, 1 Euro equaled 434 Tenge, and 1 US Dollar equaled 383 Tenge (XE.com, 2019).

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21 2010 and 2014, the tax income to Kazakhstan was highest (Figure 3 and Figure 8) which could be linked to the increased oil price at that time, and thus the increase in turnover and profit of oil companies operating in Kazakhstan.

In figure 4 it is visible that the total tax income for the Kazakh state grew more rapid then tax levied from the oil sector. Therefore, tax incomes from other sectors, or individuals, must have increased. A quick look at the data provided by the OECD (Organisation For Economic Co-Operation and Development, 2019) shows that the most important sources of income for the Kazakh state, via tax levies, are taxes on income, profits and capital gains of (non-oil) corporates, taxes on goods and services, and value added tax on domestic product and more importantly value-added tax on imported products (Organisation For Economic Co-Operation and Development, 2019). In addition, taxes imposed on domestic firms and enterprises which are not involved in the oil industry has also increased significantly over the years. Whilst total tax income in Kazakhstan did increase rapidly in the period after 2004, between 2004 and 2014 total tax income in Kazakhstan did increase from 1272545 million Tenge ( equivalent to 3321.15 million USD) to 8364983 million Tenge ( equivalent to 21831.35 million USD ) (Organisation For Economic Co-Operation and Development, 2019). This is an increase of 657.34% in ten years.

0 200000 400000 600000 800000 1000000 1200000 1400000 1600000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Kazakhstan Oil Companies Tax Income (Tenge, Millions)

Tax income Tax income to National Fund Tax on Petroleum Products

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22

Figure IV: Tax Income Kazakhstan (Millions, Tenge) (Organisation For Economic Co-Operation and Development, 2019)

It is visible that the rent income from natural resource industries to the Kazakh state has been decreased in the period after 2008, this decrease for oil rents to the Kazakh state started a few years prior in 2005. This decrease in the importance of natural resources rent provides a contrast with the growing value of Kazakhstan crude oil exports. Here we can thus conclude that natural resource rents, more specifically rents extracted from Kazakhstan’s oil reserves, become less important to the state and the nation’s economy. The Kazakh state became less dependent on natural resource rents after 2008. Whereas, the share of Kazakhstan’s natural resource rents started decreasing in 2008, at the same time the total tax income for the Kazakh state did see an increase after 2008. This increase proved to be significant from 4433310 million Tenge in 2008 to 8364983 million Tenge in 2014 with a slight dip in 2009 to 3605585 million Tenge.

Combining both trends, the increase of tax income from 2008 and the decrease of importance of natural resource rents, we can recognize that natural resource rents become less important, since the state has found other income sources via taxation. The mere fact that the tax increase after 2004, and more specifically after 2008, were possible show that the economy of Kazakhstan has been developed outside natural resource extraction industries, since taxes levied from natural resource industries, primarily the oil industry, have not followed the greater increase of total taxes in Kazakhstan. Taxes levied on non-oil corporates, nevertheless, have increased considerably in Kazakhstan. Thus showing the diversification of the Kazakh economy, and the increased importance of non-oil enterprises within its national economy. This ‘catch up’ of the non-oil sector indicate that the Kazakh economy has developed more inclusively than argued in academia.

0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Tax in Kazakhstan

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23 State dependence on foreign rents is the base of the concept of the rentier state (Al Beblawi & Luciani, 1987). However, as seen above, the dependence on foreign rents has decreased, at the same time tax incomes to the state have increased significantly. This thus makes the Kazakh state less dependent on foreign rents and more dependent on its own internal market and domestic industries. The dependence on foreign rents has thus decreased through the tax reforms introduced in the early 2000s by the Kazakh state.

Although is it important to keep in mind that natural resource rents in Kazakhstan still play an important role in the economy and the financial affairs of the state, its importance has been overstated in academic literature. Authors of the like of Aidarkhanova et al. (2017), Ostrowiski (2011), and Satpayev & Umbetaliyeva (2015) have argued increased important and dependence of natural resource rents in Kazakhstan, whilst this was certainly the case in earlier times, more recent data has shown that natural resource extraction rents have become less important in Kazakhstan, the Kazakh state has become less dependent on foreign rents, therefore thus regaining the lost sovereignty as argued by Aidarkhanova et al. (2017). Having shown evidence that the dependence of Kazakhstan on natural resource rents is decreasing in this section, the Kazakh state has become less dependent on the foreign rents extracted from natural resource industries. Therefore, Kazakhstan’s multi-vector foreign policy has not resulted in increased dependence on foreign rents. The multi-vector foreign policy of Kazakhstan has resulted in the fact that other nations, especially China, have become more involved in extractive industries in Kazakhstan, especially the oil industry. These new actors also contribute rents to the Kazakh state with their involvement in the natural resource industries, however, there is no evidence that because of the diversification of rent sources in Kazakhstan’s natural resource industries has increased the dependence on foreign rents. Whilst this policy has diversified the source of rents, it has not increased the dependence of the Kazakh state. On the contrary, this section showed that rent accumulated from natural resource industries have become less important to the Kazakh economy and the Kazakh state.

From the four key characteristics that Al Beblawi and Luciani (1987) did identify for rentier states, it is visible that the situation in Kazakhstan has changed. Although rents still continue, the economy is less dependent on them. Decreased inequality in Kazakhstan shows that these rents thus do not only, although primarily, benefit a small political elite. The rent incomes are slowly being replaced by income from domestic taxation.

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24 Here is argued that both liberal and realist arguments are important in the understanding of the multi-vector policy, however, both prove to be too narrow. Realism provides a perspective to understand the origins and goals of the policy. In which Kazakhstan puts its own interest for sovereignty first. However, another reason for Kazakhstan to implement the multi-vector policy was to become an important member of the international community, including working together with many nations in liberal international institutions and organizations. In order to comprehensively understand this policy, it is important to keep in mind the before mentioned duality.

Inequality in Kazakhstan

Following the arguments showing the decreased dependence on foreign rents generated from the oil sector, and the increased importance of taxation in Kazakhstan, this section looks at how this has impacted inequality in Kazakhstan.

Another factor that shows the catch up of Kazakhstan’s economy and its decreasing inequalities is the Gini index. The Gini index for Kazakhstan, following data provided by the World Bank, has declined substantially in Kazakhstan in the turn of the century. In 2001 the year of which the World Bank first provides data the Gini index for Kazakhstan was 36 (The World Bank, 2019). This index constantly declined, with the exception being 2005 when the Gini index suddenly rose to 39.8, to a low point of 26.8 in 2015. After 2015, the Gini index slightly increased to 27.5 in 2017 (The World Bank, 2019). This decline in the Gini index thus shows that economic disparity and inequality in Kazakhstan are diminishing. This decrease is most likely caused by the increase in services in Kazakhstan (Shayakhmetova, 2019). Services in Kazakhstan has grown from 48% of Kazakhstan’s GDP in 2000 to over 57% in 2017, with a high of 59.2% in 2015 (The World Bank, 2019).

The inverse relationship between inequality and institutional capacity as presented by Easterly (2007) which states that when inequality decreases, institutional capacity would therefore increase. Thus following this notion, the decreasing inequality in wealth in Kazakhstan, as World Bank data shows, would thus indicate that the institutional capacity of the Kazakh state is increasing. As the OECD review on public governance in Kazakhstan shows, the Kazakh state has made noteworthy progress to increased effectiveness and accountability of the state (OECD, 2017).

The duality of Kazakhstan’s multi-vector foreign policy

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25 Complexity. The next part of this section discusses the two other academic arguments concerning Kazakhstan’s multi-vector foreign policy as introduced in the literature review section of this paper. These two arguments are the realist and liberal arguments. First, both the liberal as the realist argument is discussed and criticized individually. Thereafter, this section establishes the argument of duality in Kazakhstan’s multi-vector foreign policy. Whilst realist and liberal perspectives each offer valuable insights, on their own, they prove to be too narrow to comprehensively understand this policy. Therefore, this section argues that the multi-vector policy can be seen as a liberal tool to achieve a realist goal. However, the policy is also liberal since it integrated Kazakhstan deeply into the international community.

The realist argument in international relations, and specifically applied to the case of Kazakhstan’s multi-vector foreign policy is founded in classical realism as formed by Morgenthau (Morgenthau, 1954). Realism is thus based on a system of a zero-sum game, relative gains, and state power. Kazakhstan’s multi-vector foreign policy is thus seen as an instrument of the Kazakh state to increase Kazakhstan’s influence on international situations to ultimately pursue its own national interests of economic development and growth. Whilst state security and economic development have often been seen as the two main interest of the Kazakh state to pursue through its multi-vector foreign policy (Hanks, 2009).

First, whilst it seems logical that good relations with neighboring countries would benefit the security of the state, some authors argue that closer ties to China do not guarantee protection or security. Kazakhstan has already seen tensions over water supply of with China concerning the Irtysh River (Sivers, 2002; Kukeyeva, Ormysheva, Baizakova, & Augan, 2018), which is vital for agriculture in Eastern and Northern Kazakhstan. In addition, ethnic Kazakh in China’s western Xinjiang province have become a target group in the ‘re-education’ campaign by the Chinese state in Xinjiang province primarily aimed at the Uyghur populations, however, other Muslim groups, such as the Kazakh population, have also been targeted (The Diplomat, 2019). However, the foreign minister of China did confirm, shortly after the independence of Kazakhstan, that China did not have any territorial claim in Kazakhstan (Ayazbekov, 2014), this promise in itself, if kept, provides a clear anchor for state security for the Kazakh state in cooperation with China.

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26 of the population of Kazakhstan were ethnic Russians during Kazakhstan’s last census in 2009, down from 40% in the 1990s (The Agency on Statistics of the Republic of Kazakhstan, 2011). However, in the northern regions of Kazakhstan, such as Pavlodar, Karaganda, Konstanai, and North Kazakhstan Oblast the Russian population accounts for more than 50% of the total population (The Agency on Statistics of the Republic of Kazakhstan, 2011). Furthermore, the ethnic segregation of Kazakhstan with the majority of the population in northern Kazakhstan, bordering Russia, being ethnical Russians, whilst the south of the country is predominantly ethnic Kazakh (Bremmer, 1994) introduces ethnic tensions to the nation (Khazanov, 1995). The predominant Russian northern areas of the country bordering Russia could be seen as a reason for tensions between Kazakhstan and Russia if similar conflicts as between Russia and Ukraine start between Russia and Kazakhstan. Therefore, Russia might not be the most suitable partner to work on state security, although the close and tight relationship between the nations and the nation’s leaders might diminish this threat.

The second national interest of Kazakhstan to pursue its multi-vector foreign policy is economic development. Forming good relations with different ‘vectors’ opens up more business opportunities and access to more markets. The five vectors as introduced by the Nazarbayev in 1992, are the CIS (Commonwealth of Independent States) countries, Europe, Asia, North America, and the Pacific Basin. Three additional vectors were established, these are Russia, China, and the USA (Nazarbayev, 1992). Initially, Kazakhstan’s multi-vector policy was aimed at attracting investment into the country, especially into the oil industry. By promoting and attracting investment from different countries, competition for Kazakhstan’s oil reserves would occur which would help develop this sector in Kazakhstan and thus aid the national interest of the Kazakh state. Since Kazakhstan’s independence in 1991, the oil sector has developed substantially. From the small scale and low-quality soviet oil infrastructure, the industry has developed to high-quality large scale oil operations (The Economic Section of the Embassy of the Kingdom of the Netherlands in Kazakhstan, 2018). However, in the process, Kazakhstan did lose control over its national oil industry. Nevertheless, reforms in the 2000s have given back some power over the oil industry in Kazakhstan to the Kazakh state, especially to its national oil corporation KazMunaiGas (Palazuelos & Fernández, 2012). Therefore, the diverse multi-vector foreign policy has contributed substantially to the development of Kazakhstan’s oil sector. However, other non-resource extractive sectors have not benefitted to the same extent as natural resource extractive industries.

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27 As seen in the first sections of this paper, Kazakhstan is involved with many international organizations. Through these organizations, Kazakhstan seeks to secure state security and economic growth. Organizations such as the Shanghai Cooperation Organization are involved in security issues. Liberal thought follows the logic that having deeper bilateral ties, and being more embedded in the international network would decrease the threat of state security, concepts such as commercial peace and institutional peace are derived from this notion.

In the case of the oil sector, the liberal stream focusses on oil corporations. It is extremely important to understand that in the case of China and Russia, oil corporations are state-owned. In China, three large state-owned oil corporations are operational, these are China Petroleum and Chemical Corporation (Sinopec), China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC) (Ma & Andrews-Speed, 2006). In Russia Rosneft and Transneft are state-owned oil companies, Transneft holds the nationwide monopoly on oil industry infrastructure with the exception of the Caspian Pipeline Consortium (Zabortseva, 2014). The fact that these companies are wholly or partially owned by the Chinese or Russian state provides a problem with the liberal theory. Since the oil corporations will act largely according to the interest of the Chinese or Russian state, these oil corporations are not completely non-governmental actors. Some Russian private oil companies, such as Lukoil are also involved in the Kazakh oil sector (Zabortseva, 2014). It is important to keep these limitations of the liberal thought in mind, it does not recognize the role of the state-owned enterprises in international cooperation between nations. State-state-owned enterprises are not solely motivated by profit but are also motivated to help secure national interests.

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28 Authors of both liberal though as of realist thought have made important points in and contributions to the discussion concerning Kazakhstan’s multi-vector foreign policy. As reviewed in the section above, both liberal and realist arguments prove to be too narrow to fully understand the situation at hand. In the case of Kazakhstan’s multi-vector foreign policy, it is clear that the essence and the ultimate goal of the policy are of realist nature. Control over state sovereignty and playing foreign actors against each other, in a zero-sum game, are inherently realist. However, aims and tools used by the Kazakh state in the multi-vector policy to achieve the goals are of more liberal nature. Kazakhstan uses international institution and international cooperative initiatives to secure its national interests. This state behavior can be considered as liberal. In-depth cooperation by Kazakhstan with different countries, both through international institutions and bilaterally, which is often actively initiated by Kazakhstan itself shows the desire of the Kazakh state to get more involved in the international political sphere. One important factor of Kazakhstan multi-vector foreign policy is to attract foreign investment from as many countries as possible. This intent, in a cooperative way, is liberal. Whilst the goal and aim of Kazakhstan’s multi-vector foreign policy can be considered as realist from the start, the tools selected by the Kazakh state to achieve this are liberal. This duality thus provides the fact that both the liberal and realist perspective and argument are important to keep in mind while studying Kazakhstan multi-vector foreign policy. Realism provides important arguments to understand the origins and motivation of the Kazakh multi-vector foreign policy, whilst liberalism provides a deeper understanding of the means to achieve its goal.

These dualistic goals of the multi-vector foreign policy are overlooked by both the realist and liberal perspective on this policy. Authors merely focus on one side of the multi-vector policy. However, it is impossible to argue that the multi-vector policy is a firm realist policy to increase sovereignty and act only to increase its self-interest and leaving out the fact that the very same policy has embedded Kazakhstan firmly into the international community. At the same time, it proves also virtually impossible to talk about the multi-vector policy in terms of liberal international cooperation and not mentioning or discussing the pursuit for self-interest by the Kazakh state.

Concluding remarks and the significance and limitations of this study

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29 to develop the nation’s economy as well. First, the oil industry only entailed some remains from the Soviet Union. Later on, Western companies, especially Shell and Chevron, invested heavily in the oil industry and developed several oil fields. However, using its multi-vector foreign policy, Kazakhstan was able to attract foreign investment from other, non-western, countries later on. This second wave of investment came primarily from China and the re-entry of Russian oil corporations. This paper is concerned with how the introduction of Russia and China into Kazakhstan’s oil sector as a result of its multi-vector foreign policy has impacted the dependency of the state on foreign resources.

Authors have argued that this multi-vector foreign policy is the origin of Kazakhstan’s involvement in the international community, that it is a liberalist tool. Other authors see this policy as a realist tool in a zero-sum game, to play other states against each other for Kazakhstan’s benefit. The third stream of authors argues that the multi-vector foreign policy has not made Kazakhstan less dependent and gain more sovereign control, on the contrary, the rentier state argument states that the multi-vector policy only has diversified the nations Kazakhstan is dependent on, not decreased its dependence.

This essay has provided reliable data provided by renowned international organizations that support the claim that foreign rents from Kazakhstan’s extractive industries, primarily the oil industry, have become less important to the Kazakh state. The decreased dependence on foreign rents could mainly be contributed to tax reforms made by the Kazakh state at the beginning of the 2000s. The Kazakh state has, as a result of these reforms, become dependent on the internal market and taxes generated from its economy. Thus drastically decreasing dependence on foreign nations. The decrease dependence on oil rents and the increased importance of taxation income, in combination with the decreased inequality in Kazakhstan, show that the Kazakh state has become more effective and has enlarged its capacity.

Consequently, after having eliminated the rentier state argument, this essay concludes that both the arguments of liberal authors as well as realist authors remain valid. However, both these arguments remain to narrow to fully comprehend the issue. Whilst the multi-vector foreign policy is indeed a realist at its core. However, it has also been a tool to connect with the international community and obtain a more prominent role in said community. For example, Kazakhstan did lead attempts to solve international conflicts. The most prominent example being the Astana peace talks in the Syrian conflict (BBC, 2017; Al Jazeera, 2017; The Astana Times, 2019). This process shows the willingness and intent of the Kazakh state to be an active player in the international sphere.

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30 financial incomes for the Kazakh state have shifted from predominantly originating from outside the nation to from within the nation. Therefore, the multi-vector policy in combinations with tax reforms and other comprehensive domestic developmental policies have increased the capacity of the state. The multi-vector foreign policy is at the base of these developments since without reducing dependence on a single nation, it would have been significantly more difficult for Kazakhstan to achieve this change.

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31

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