"I Don’t Think We’re
in Kansas Anymore"
By Mitchell Wiener
Businesses and government agencies in Kazakhstan don’t operate under the same
rules as they do at home. In fact, actuary Mitchell Wiener found that at times, consulting
there could be a little bit like doing business in the Land of Oz.
For the past 18 months, my two children and I have been living in Almaty, Kazakhstan,
where I have been working as a United States Agency for International Development-funded
consultant. I’m here on a pension reform project to redesign the Republic of
Kazakhstan’s social security system.
It’s a system that badly needs redesigning, but the challenge is to do it in a
country that’s in the midst of trying to reinvent itself. To give you some idea of
what this is like, imagine riding a wild horse on the steppes of Kazakhstan. The horse is
charging across the vast open plains, doing its best to get rid of its rider. The goal of
the rider is to stay on the horse and keep it from running over the edge of a cliff and
killing itself. If these two objectives are accomplished, the rider wins.
Our goal as consultants is to keep the government from throwing us off and from running
off the cliff. We know with certainty that it will make many mistakes along the way, but
it’s up to us to keep the mistakes from being fatal. If we can prevent the most
serious mistakes as the government rushes down the path of reform, we count ourselves
successful and we all live to fight another day.
Kazakhstan, as it exists today, is only 6 years old. For the past 75 years, the country
followed a socialist economic philosophy and was part of a much larger entity—the
former Soviet Union. Suddenly, and quite unexpectedly, the country finds itself
independent and trying to make the transition to a completely different economic
philosophy. Though the old economic system is gone, the new one is still under
construction. And all the regulatory institutions we take for granted (the Internal
Revenue Service, the Securities and Exchange Commission or their equivalents) don’t
exist or are virtual newborns. It’s truly a wide-open, unregulated environment.
The best way I know to describe the chaos of the current situation is with another
analogy. Imagine you’re part of a family living in an old house. You’ve been
living in this house for three generations. There are many things wrong with it, and you
know it: The heat isn’t very good, doors don’t close properly, all the pipes
leak, and there isn’t enough insulation. All the appliances are old, but if you
jiggle the wires and kick the pipes, they’ll work.
One day the government comes along and tells you it’s going to bulldoze your house
to the ground the next day. But, they promise, they’ll quickly build a new modern
house for you and your family to take its place.
The bulldozer comes the next day, right on time, and knocks down the old house. But
it’s 5 years later and the new house still isn’t finished. You know that when
it’s done it’ll be much better than the old house, but now there are only a few
walls, part of the roof, and one or two new appliances. You can see possibilities and
they’re tantalizing, but you’re not sure when or if it will ever be finished,
and whether it will work when it is. Many days you wish you could just have your old house
back.
This is daily life for the people of Kazakhstan. For my part, I’m an observer, on
the outside looking in. I’m studying a specimen in a cage and I can leave whenever I
want. For me, what’s going on is a fascinating intellectual study. But for the
citizens of Kazakhstan, this is their life and they can’t just run away.
The King’s Donkey
The pace of change in Kazakhstan is astonishing. The government studied and implemented
a new national social security system in about 18 months—less time than most
medium-sized U.S. corporations would take to implement a change in their corporate pension
program. Consequently, everything moves at a frantic pace and yesterday’s news is
quickly outdated. Many officials are working 14 hours a day, 7 days per week to implement
the changes. Several visiting U.S. businessmen asked me how it’s possible to make
these types of changes so quickly. The answer is simple: Kazakhstan is a dictatorship. One
of the most interesting things I ever did was to read the Kazakh constitution. The three
branches of government are there, but there are no checks and balances, and the power of
the president is astonishing.
If the president issues a decree, either it happens when he says, or the relevant
individuals find themselves unemployed. So the modus operandi is to do the best job
possible in the time frame provided. This inevitably leads to incomplete laws,
insufficient regulations, half-built administrative systems, and a fix-it-on-the-fly
mentality. The Kazakh government is trying to accomplish in a few years what it’s
taken us 200 years to do.
The current pension system was inherited from the old Soviet Union, and it no longer
functions properly in a market economy based on private ownership. The old system is a
pay-as-you-go affair, just as we have in the United States. There are, however, several
significant differences. The retirement age for men is 61; 56 for women, and many workers
can retire even earlier based on their occupation. Payroll tax rates are considerably
higher and must be supplemented from general revenues. Disability is more liberally
available.
In the past, pension payments were as much as 8 months in arrears in many parts of the
country and many pensioners never got paid at all. Why? In addition to the huge number of
early retirees, there’s also a huge underground economy operating in Kazakhstan.
Whatever tax laws there are aren’t enforced and nobody bothers to comply with them
anyway.
The new pension system that went into effect on January 1, 1998 is probably closer to
the Chilean system than any other social security system in the world. This means that the
new system is predominantly based on private accounts funded by individual contributions
to pension fund companies. The prior system is being phased out by essentially providing
individuals with a projected unit credit benefit at retirement, based on their final
average pay and service credits as of January 1, 1998, in addition to the value of their
individual account. Also, disability and survivor benefits remain on a defined benefit
basis. If the value of the individual account is insufficient to provide the benefit,
it’s topped-up by payments directly from the Republican budget.
In general, the older Kazakh citizens get the short end of the stick. Retirees will
never reap the benefits of the new system, and the value of their pensions is generally
inadequate if they’re paid at all. For younger people just graduating from
university, the new system will probably be to their benefit. They’ll have far more
opportunities and freedoms than their parents ever had.
A very cynical man here in Almaty told me a story that he said illustrates how pension
funds would operate in his country. It was the story of a king who promises to give his
kingdom to anyone who can teach his donkey to speak English. Failure to produce the
desired result, however, would mean death.
Finally, at the end of a long search, the king finds one man who agrees to teach the
donkey English. But he has certain conditions. One, he requires 20 years to succeed. Two,
during all that time he will issue no reports. And three, no one will be able to see the
donkey for those 20 years.
The king agrees to the conditions but the man’s friends still think he’s a
fool. "You’ll surely be put to death," they tell him. "It’s
possible," he replies, "but 20 years is a long time. Either I, the king or the
donkey will probably be dead by then. Or the donkey just might actually learn to speak
English."
This, according to the storyteller, is how pension funds will work in Kazakhstan. Give
the government your money, ask no questions, expect no reports, and in 20 years, come and
get your money back.
The Columbo Approach
Kazakhstan, like other FSU countries (Former Soviet Union, not Florida State
University) are in very poor financial condition. The last 6 years make the Great
Depression seem like a picnic. Gross Domestic Product has been cut in half since
independence and real wages are down almost 40 percent. During 1993 and 1994, the country
experienced hyperinflation, with rates over 1,000 percent! Since then, rates have declined
to about 18 percent in 1997, and a projected 12.5 percent for 1998.
Unemployment is very difficult to measure due to the underground economy and
moonlighting, but it’s officially at about 12 percent. This is incredibly high for
Kazakhstan, because unemployment in the FSU was zero.
Perhaps the most shocking thing for an American is the all-cash economy. There are no
credit cards here, no checking accounts, and no credit. Everything must be paid for in
cash, including salaries and pensions, cars, apartments, houses, furniture, etc. Every
time I come here, I normally have to carry about $5,000 in brand-new $100 bills with me.
Exchanging money is easy, however. There are exchanges all over the city with fairly
similar rates, and the bid/ask spread is quite narrow. Unlike other FSU countries, the
currency is freely traded and stable. So whenever I need cash, I just bring a brand new
$100 bill to the closest exchange.
Financial institutions are very unstable, so most people don’t have (and
don’t want) bank accounts. Banks fail regularly and hundreds have been closed in the
last two years. Also, in order to get a bank account you must have a tax ID number. And
since no one wants to have to pay taxes, everyone avoids the banks.
Doing business here is definitely different. For one thing, anyone who wants to start
small and grow (the American Dream?) is considered a wimp. Instead, you start with a big,
elaborate idea. If you want to make widgets, you don’t start with just one factory.
You make plans to build 15 factories in every part of the country and produce 80 million
widgets in your very first year.
And, of course, you don’t need anything like a detailed business plan to attract
capital. You just have to name your company after a national hero—Kunaev, for
instance, a former Kazakh party boss, or Abai, a famous Kazakh poet—and investors
will throw money at you.
To learn what’s really going on in Kazakhstan requires the adoption of what I call
the Colombo approach—play stupid, ask lots of questions, and show absolutely no
reaction to whatever you’re told. An example: "So you don’t know who your
shareholders are but you still have an annual stock holders meeting? I don’t quite
understand how that works. Could you tell me how you do that?" (Your tone of voice
shows obvious awe at their incredible ability to make this happen.) The secret is to never
show shock no matter what anyone says, and keep asking for further explanation. It’s
amazing how eager everyone is to tell you about how clever they are in ripping off the
system.
Tax withholding in Kazakhstan is another fascinating issue, and explains why everyone
moonlights at the end of the year. There is no universal tax filing in Kazakhstan, so all
employers withhold taxes from wages. The tax rates are progressive, as in the United
States, and quickly increase from 5 percent to 40 percent. There are no deductions, so the
appropriate percentage of wages is withheld each month. The first paycheck of the year has
only 5 percent withheld, and by the end of the year 40 percent is being withheld. Of
course, no one here saves money, so at the end of the year they’re far poorer than
they were in the beginning of the year—and everyone has to moonlight to make ends
meet.
Town and Country
Kazakhstan may sound like the Wild West, but in many ways it’s not like that at
all. Most of my friends back home think I’m living in some backwater wasteland with
no roads, electricity, or running water. They’re shocked when I show them my pictures
of the area I live in.
The country of Kazakhstan itself, which no one has ever heard of, is huge. It’s
two-thirds the size of the United States and is the 9th largest country in the
world. However, it has a population of only 17 million people. It’s bounded on the
east by China, on the west by the Caspian Sea (the largest inland sea in the world), on
the north by Russia, and on the south by Kyrgyzstan, Uzbekistan, and Turkmenistan. The
former Soviet nuclear test site is located in Semipalatinsk in Northeastern Kazakhstan.
The Soviet space flight center is still located in Kazakhstan. And one of the world’s
biggest ecological disaster areas, the Aral Sea, is located in Southwest Kazakhstan on the
Uzbek border.
Almaty is a city of 1.2 million people located in Southeast Kazakhstan, about 150 miles
from the western border of China. Its climate is very similar to Denver’s. The city
is about 3,000 feet above sea level, sitting on the plains at the base of the 15,000 foot
Tien Shan mountain range. The climate is very dry and there’s virtually no wind. The
summers are hot and dry and the winters are relatively long but pleasant because of the
low humidity. And there’s great skiing and hiking in the mountains, along with
several nice nearby lakes and rivers for summer recreation. The city also has dozens of
beautiful parks filled with statues and fountains.
The main problem with winter in Almaty is that the streets and sidewalks are not
cleared after snow storms. Sidewalks turn to glare ice and remain that way from December
through April. Skill in ice walking is essential for survival. We were once talking with
the head of the National Securities Commission (the fledgling equivalent of our SEC) and
he jokingly suggested a Soviet-style solution to all weather problems. It’s simple,
he said. Appoint an Administrator of Weather and make him responsible for all the weather
in the country. When crops die or there are floods, you simply execute the Administrator
and appoint a new one.
Almaty’s broad streets are full of cars and lined with wide sidewalks and
beautiful old trees. There are probably more fancy cars here than on the streets of
Washington, D.C. The cars of choice are the Mercedes-Benz and any type of 4-wheel drive.
Many people fly to Germany to buy a used Mercedes, and then drive it 3,500 miles all the
way back to Almaty.
Even in good weather, the condition of the roads leaves a lot to be desired. Some of
the potholes are so large we’ve given them names. ("There goes another Mercedes
into Big George.") The streets themselves often have two names—the old Russian
name and the new Kazakh name. So to get around town, it’s essential to know both
names for every street.
Using seat belts in Kazakhstan is strictly taboo. Every car has them but no one uses
them. In fact, all the drivers on my project get mad at me when I use them, and I just
tell them that’s how we do things in America. Luckily, because of the potholes, no
one can go fast enough to get too badly injured anyhow. People drive all over the road
here. About 6 months ago, we were shocked to discover that someone had painted lane lines
on the roads for the first time. They look pretty, but everyone just ignores them.
Shockingly, there are now four left-turn arrows in Almaty.
Which makes it very easy to get lost in Almaty. Even though the city is laid out in
square blocks, almost all the buildings look the same regardless of whether they’re
apartments, office buildings or stores. Consequently, there are very few landmarks to
navigate by. The one clear landmark is the mountains south of the city. So uphill is south
and downhill in north, which is counterintuitive and drives everyone who visits the city
crazy. Especially actuaries.
There are many nice (but expensive) restaurants, and dozens of flashy nightclubs. Most
ordinary citizens, of course, can’t afford them. These places primarily serve the
expatriate community, rich Kazakh businessmen, criminals, and corrupt government
officials. Surprisingly, the nightlife here doesn’t start until about midnight, and
the clubs are all open until about 5 a.m. There’s one pizza joint, Capos, which would
fit in just fine right in Washington, D.C. It has the only real American-style salad bar
in Almaty, good pizza, excellent barbecued chicken wings, pool tables, and dart boards.
It’s also one of the only places in town where all the staff speak good English.
Because the transition to a market economy has proceeded further in Kazakhstan than in
other former Soviet republics, there’s a wide variety of foreign goods available
here. America’s primary contribution is soft drinks, candy, and cigarettes. The very
first American fast-food place (Kentucky Fried Chicken) just opened here in December. And
because the volume of cigarette smoking here is incredible, Philip Morris is about to
build a huge new plant to meet the demand. In exchange, all we want is their oil. (Sounds
reminiscent of a certain island we purchased for beads.)
A Kazakh Thing
Though the overall infrastructure (roads, electricity, heating, gas) outside the
capital tends to be atrocious, the infrastructure is relatively good in Almaty. There are
several things, however, that are hard for Americans to get used to. First of all, the
street lights and office building lights in the city are generally turned off early in the
evening, so it gets very dark outside. One piece of advice often given to foreigners is to
carry a flashlight at all times. When you get here, however, most locals advise you not to
use a flashlight because it immediately marks you as a foreigner.
The heating system is also quite interesting, and illustrates the Soviet fascination
with big centralized everything. All the heat in the city, which uses a hot water system,
is turned on sometime in October and turned off sometime in April. If it gets cold or hot
before then, too bad. How do you regulate the heat, you might ask? (Pause while I wait for
you to ask). Answer: You don’t. There are no thermostats in Kazakhstan, and however
hot your apartment gets is how hot it gets. If you’re too warm, you open the windows.
If you’re too cold, you put on more clothes. That's it. And for about one week before
they turn on the heat, they shut down the centralized system so they can prepare it for
winter. Because buildings don’t contain their own hot water heating systems,
there’s no hot water in the city for that week.
The difficulties compound. The common areas in apartments and office buildings are very
poorly maintained, so stairwells are often dark, elevators are tiny and may not work, and
there’s really no such thing as a lobby. (The apartments themselves, however, once
you get inside, can be quite nice.) And it seems there’s a rule in Kazakhstan that no
two steps can have the same rise, so all the stairs are uneven. The top or bottom step of
every set of stairs may be slightly smaller or larger than the rest. It’s usually
hard to tell ahead of time because the stairwell is so dark and the stairs are covered
with carpeting.
There is nothing that resembles a huge U.S. supermarket in Kazakhstan. Instead, there
are various alternative places to shop. The smallest are the kiosks, little metal houses
that are all over the streets of Almaty. There’s always one close to the house, and
each kiosk seems to sell mostly the same items—cigarettes, alcohol, candy, other
snack foods, and soft drinks. Next are little neighborhood grocery stores and the upscale
"expatriate" grocery stores. These contain more foreign goods, are about the
size of a 7-11, and are vastly overpriced.
Generally, it’s impossible to get everything you need in one place. Usually I have
to go to three or four separate stores to get everything. There are virtually no processed
foods or foods with preservatives in Kazakhstan, but there’s an abundance of fresh
vegetables and fruits available all year round. So you must buy fresh ingredients and make
everything from scratch, which is not such a terrible concept. The bread is also terrific.
About 20 different varieties are made fresh daily. But there are no bagels!
Finally, there’s the large and colorful main bazaar. This is the cheapest place in
town to shop, and bargaining is possible. To avoid being ripped off, however, you have to
know how much things should cost, and you should be able to speak some Russian. Almost
everything is sold in the bazaar—food, toys, clothing, hardware, and particularly
meat, available in large quantities. Each section of the meat department is marked by a
real animal head—a real horse head presides over the horse meat section, for example,
a real pig’s head sits above the pork section. The Kazakhs love to eat lamb, and
it’s considered a great honor to any host for a guest to bring a live lamb to a major
occasion like a wedding or a funeral. The lamb is then slaughtered on the spot and cooked
at the event.
No wedding, funeral or party is complete without beer and vodka, the primary alcoholic
beverages of Kazakhstan. Of particular delight to me is Black Death Vodka. It’s
available only in cans and has a skull and crossbones on the front. Vodka is an essential
part of the country. At all parties, multiple toasts with vodka are required, and an
inability to give a proper toast is a terrible social shortcoming. Kazakhs believe that
American parties are terribly boring. Parties should be filled with food, alcohol, music
and dancing. Standing around holding a drink and talking about business is not a
party.
Living and doing business in Kazakhstan is not like doing business in, say, Kansas. The
rules of the game are still being made up, even as we play it, and often the playing field
seems as treacherous and surprising as a Kazakh staircase. To succeed in this environment
requires a positive attitude, and the ability to laugh at problems and things that just
don’t work. Successful consulting in a place like Kazakhstan requires the flexibility
to deal with a frantic work environment, the lack of needed information, political
decisions that may be impossible to understand, and the daily difficulty and frustration
of not being able to communicate with the citizens of the country. Especially frustrating
to actuaries are those events that just seem to defy logic, even after receiving an
explanation. When things like this occur (and they occur frequently) we’ve learned to
look at the sky and roll our eyes.
"It’s a Kazakh thing,." we say. Then we shrug, shake our heads, and get
down to business.
Sidebar:
The Russian language
The country’s two main ethnic groups are Kazakhs and Russians. The Kazakhs, who
are predominantly in the South, are Orientals and moderate Moslems who speak Kazakh, a
Turkic language completely unrelated to Russian. The Russians, who mostly inhabit the
North, are white and Eastern Orthodox.
It goes without saying that the ability to speak the local language is a huge
advantage. Almost all business is done in Russian, and there are very few people who speak
English. The Russian language itself is very different from English in structure.
It has its own alphabet with some unique letters. The most confusing are the letters
that are the same as English letters but which have a different sound.
All Russian words have a very strong accent on one syllable. There are almost no rules
for which syllable to accent; you just have to know. And the pronunciation of some letters
varies very significantly depending on whether it’s in the accented syllable or not.
Also, the meaning of words can change if the wrong syllable is accented.
The roots of most Russian words are not Latin.
The language has a case structure. This means that the endings of the word change
depending on what the role of the word is in the sentence. There’s one ending if a
word indicates location, another if it’s a direct object, etc. There are six such
cases in Russian. One of the interesting things about the case structure is that it
renders word order unimportant. The endings indicate the role of the word in the sentence,
and word order is used primarily for emphasis.
Verbs in the present and future tense are conjugated similarly to Spanish or French.
However, the present and future tense endings are identical! There are basically two forms
for every verb—the imperfective which is used for the present tense, and the
perfective which is used for future tense, and usually for the past tense as well. The
past tense is conjugated completely differently from the other tenses. Its endings are
based on masculine, feminine, and plural.
There is a bewildering array of verbs for motion. They vary depending on the exact type
of motion, whether it’s a regular action or an occasional action, whether it’s
round trip or one-way, and other factors
The use of the passive voice is a common construction.
I have learned to speak reasonable Russian. It’s not nearly good enough to conduct
business in Russian, but it’s more than adequate for everyday living. However,
depending on what day you ask me, I’m either very proud of my Russian speaking
ability or very frustrated that I can’t communicate as well as I’d like to with
the people around me. To have the speaking ability of a 6-year-old is very humbling, and
illustrates the incredible importance of communication in our everyday lives.
—Mitchell Wiener
Mitchell Wiener is a consulting actuary who calls Gaithersburg, Md., home. He has
recently wrapped up his Kazakhstan project and will be working in Kiev, Ukraine, for the
next two years.
"Shared with permission. Mitchell Weiner, July/August 1998,
Contingencies, magazine of the American Academy of Actuaries,
http://www.actuary.org"
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