Why German SMEs Should Look East

Global economic shifts are pushing nations and businesses to find new paths for growth. For Germany, the idea of Zeitenwende (a turning point) now includes economics, highlighting the need to diversify markets and supply chains. Changes in established relationships, like moving away from Russian energy and managing risks with other major partners require finding reliable alternatives.

Kazakhstan stands out as a key strategic and economic partner seeking international help for its own transformation. Kazakhstan, Germany’s top trading partner in Central Asia, is pursuing balanced foreign policies and reforms to diversify its economy beyond natural resources. While challenges exist, Kazakhstan offers a compelling market for German small and medium-sized enterprises (SMEs) looking for growth, diversification and a base in a developing region.

A meeting of strategies: Germany’s new path and Kazakhstan’s diversification

Germany’s strategic shift, known as Zeitenwende, has major economic effects. It means more than just defense spending. It involves reducing critical dependencies and building stronger international economic ties. The end of low-cost Russian energy forced a quick diversification of energy sources. It also pushed German industry, especially its globally connected small and medium-sized enterprises, known in Germany as Mittelstand, to rethink supply chain risks and seek new partners. The German government supports these efforts for national economic security.  

At the same time, Kazakhstan is transforming its own economy. The government, aware of the risks of heavy reliance on oil and gas exports, has prioritized economic diversification. National plans focus on developing sectors like manufacturing, agriculture, renewable energy, logistics and digital technology. Goals like achieving carbon neutrality by 2060 and significantly increasing renewable energy’s share show a commitment to modernization. This requires investment, technology and expertise. German companies, especially innovative SMEs, can provide that investment, technology and expertise

Germany’s search for reliable partners and Kazakhstan’s need for investment create a prime opportunity. It is a match based on shared national interests, increasing the chances of successful partnerships and ensuring political support, as shown by frequent high-level state visits. This stronger relationship could also serve as a model for broader EU-Central Asia cooperation.

The Germany-Kazakhstan connection: a growing economic partnership

Germany and Kazakhstan have built a solid relationship over 33 years, starting diplomatic relations in 1992. Regular high-level meetings confirm mutual commitment. Kazakhstan sees Germany as a strategic partner in the European Union.

This political closeness is reflected in trade. Bilateral trade hit €8.75 billion in 2023, making Kazakhstan Germany’s most important trading partner in Central Asia by far, accounting for about 80 percent of Germany’s trade with the region. Germany is Kazakhstan’s largest EU trading partner. However, the trade pattern shows room for diversification. In 2023, Kazakhstan mainly exported crude oil ($2.56 billion) and other raw materials to Germany. German exports to Kazakhstan, valued at €3.23 billion (about $3.5 billion) in 2023, primarily consist of high-value manufactured goods like machinery, vehicles, electronics, pharmaceuticals and aircraft.  

German investment in Kazakhstan is increasing, aligning with the country’s diversification goals. President Kassym-Jomart Tokayev noted a 64 percent rise in German direct investment in 2023, reaching $770 million. A record number of German company branches opened in Kazakhstan in 2023, showing growing interest in the market.

About 90 percent of Germany’s cumulative investment of roughly $6 billion has historically gone into Kazakhstan’s non-resource sector, even before the recent diversification push. This focus on value addition beyond raw materials suggests a long-term perspective likely to receive government support. Hundreds of German companies operate in Kazakhstan, including major names such as Siemens, Linde, Knauf and CLAAS, proving market viability. Large projects, such as a $50 billion green hydrogen initiative, highlight potential.

Kazakhstan’s economy: growth, reform and opportunity

Kazakhstan is working to attract investment by improving the business environment. Initiatives aim to reduce barriers, increase transparency and offer incentives like tax breaks. Kazakh Invest is the national agency supporting foreign investors, and a high-level Investment Headquarters addresses investor issues. A National Digital Investment Platform aims for more transparency. Kazakhstan also works with international bodies such as the IMF and World Bank on reforms.

Key sectors for German SMEs

• Manufacturing and high-tech: Modernizing industry requires advanced machinery and technology. Opportunities exist in supplying equipment for processing industries, construction, logistics and digital solutions
• Energy transition and renewables: Kazakhstan aims for 15 percent renewable energy by 2030 and carbon neutrality by 2060, offering vast potential in wind, solar, green hydrogen and energy efficiency
• Logistics and the middle corridor: As a land bridge between Asia and Europe, Kazakhstan is vital for the Trans-Caspian International Transport Route, also known as Middle Corridor. Opportunities lie in logistics services, warehousing, transport technology, and infrastructure projects
• Agriculture: Modernizing agriculture requires machinery, processing technology, irrigation systems and farming techniques
• Mining and critical raw materials: Kazakhstan has vast mineral wealth, including critical materials like lithium needed for green technologies. Opportunities exist in exploration, mining technology, and processing

Navigating the market: support and considerations

Entering Kazakhstan requires planning. Support is available from the German Chamber of Commerce Abroad (AHK Central Asia) and Germany Trade & Invest (GTAI), offering market insights and practical help. Within Kazakhstan, Kazakh Invest assists foreign investors.

Risks include bureaucracy and potential corruption. Economic risks involve commodity price changes and inflation. Mitigation involves thorough research, using support networks such as AHK and Kazakh Invest, finding reliable local partners, and understanding the legal environment. Monitoring Kazakhstan’s reform progress is also important

Conclusion

The alignment of Germany’s diversification needs and Kazakhstan’s development goals presents a timely opportunity for German SMEs. Kazakhstan offers access to its market and a gateway to Central Asia, backed by a strong political relationship. Key sectors such as manufacturing, renewables, logistics, agriculture, and critical materials offer prospects matching German expertise. While challenges exist, support institutions can help navigate them. For well-prepared SMEs, Kazakhstan is a strategic market worth exploring now to participate in its economic transformation and secure future growth.

[Image Credit: Generated by OpenAI’s DALL·E]

Kamran Yagubzade is an EU-based advisor on SME internationalization and Eastern European geopolitics. The views and opinions expressed in this article are those of the author.