Opening up the Stans


Kazakhstan’s neighbours, Turkmenistan and Uzbekistan, offer a few mixed opportunities for foreign traders and financiers. There are still a lot of risks to consider however, as Helen Castell, writes.




While Kazakhstan commands most bankers” attention, two other mineral-rich markets wait in the wings. With big gas and oil reserves, plus enough cotton, grain and gold to at least drag their populations out of poverty, why aren’t Turkmenistan and Uzbekistan booming too

  • Is there a chance that they will follow Kazakhstan’s example, and are they even watching



Uzbek trade is certainly growing, according to Shavkat Inamov, first deputy general director of Uzbekinvest National Export-Import Insurance Company in Tashkent. Official statistics for 2006 show a 13.5% increase year-on-year in total trade turnover, including a 18% leap in exports.


However, in terms of deal volume, neither Uzbekistan nor Turkmenistan are anywhere near on the same plane as Kazakhstan, says Ben Dobson, director, structured trade and export finance, at Deutsche Bank in London.


A basic search of syndicated loans raised over the past year brings up just one for Uzbekistan – a €5mn credit line for National Bank of Uzbekistan – whereas more than 20 are shown for Kazakhstan, he notes. “It’s a relatively small market and they’re not as easy to deal with as the Kazakh banks, and lenders have many more concerns with Uzbekistan, whereas Kazakhstan is investment grade.”




Repellent factors


Politics is probably the single biggest factor at play when a banker contemplates either country. Money to be made there may be, but dictatorial regimes, accusations of human rights abuses and political uncertainty don’t make for a happy credit committee.


The European Bank for Reconstruction and Development (EBRD) pulled aid to Uzbekistan in April 2004, citing its poor human rights record and slow economic reform. Terrorism, blamed on Islamic militants, continues to increase, and President Karimov’s iron grip on the country continues unabated.


Worries that the sudden death in December of Turkmenistan’s longstanding dictator Niyazov would throw the country into a political vacuum were eased somewhat with the accession in February of a new leader, Gurbanguly Berdymukhammedov. His promises however to stay true to Niyazov’s political vision have also killed any hopes that a more progressive government might emerge.


“Political risk and lack of transparency make doing business in Uzbekistan and Turkmenistan very difficult, says Eric Van de Peer, director, trade finance, at Citibank Global Transaction Services in London. “Compared to Kazakhstan they have still got a lot of catching up to do,” he says. And “if you want to establish a pecking order, I think Turkmenistan is even lower than Uzbekistan.”


It’s too early to judge what direction Turkmenistan’s new president will take the country, “but I don’t think anyone’s expecting anything dramatic to change,” Dobson says. “And even if it does, it’s not going to become a major market, just given the size of the banks.”


Société Générale had its fingers burned badly in Turkmenistan some years ago, and has not returned since, says says Frédéric Genet, global head of export finance at SG Corporate and Investment Banking in Paris. In 1996, it provided a US$20mn credit facility on the back of a US Ex-Im Bank loan to finance agricultural equipment imports, but when repayment time came, the Ex-Im loan alone was repaid.


Only after the US administration intervened, threatening to pull its support for Turkmenistan unless it honoured the SG agreement, was the sum recovered – two years late.


From finance ministry officials telling SG that they assumed the loan was a gift, to others stating that they would repay the loan when Ukraine had in turn repaid debts to Turkmenistan, “they showed they have little culture of repayment or contractual obligation,” he adds.


“Things may have changed since but our initial experience was poor.” Not that SG rules out a return though. “Now that the presidency has changed, we will see what happens.”




Getting product to market


When it comes to natural resources both countries have huge potential for trade. On top of its already huge gas reserves, Turkmenistan in November discovered another mammoth field, holding an estimated 7tn cubic metres of gas, and has since been trumping it up as the world’s biggest. Getting the gas ready for export though is a different story.


“They have the resources in the ground? but getting it produced – the local government has simply not been capable of doing that,” says Jim Brock, an independent energy advisor in Beijing. “The people in power do not give enough credence to the technical problems involved, so they make promises they can’t keep.”


Turkmenistan has more than just energy to sell though. Cotton is another important part of Turkmenistan’s trade arsenal, says Muhammad Fuad Mohsin, vice-president and general manager at National Bank of Pakistan in Ashgabat. “Gas exports are based on interstate arrangements, therefore petrochemicals and refined goods, along with raw cotton, comprise the major share of the export trade finance market.”




Vulnerable Uzbekistan


Uzbekistan meanwhile has relatively large oil and gas reserves and is one of the world’s top 10 gold producers, notes Muhammad Farooq Saleem, executive vice-president, Central Asian Republics, at National Bank of Pakistan in Almaty.


However, “economic dependence on a few natural products makes growth vulnerable to climatic changes and commodity prices”.


Calyon is active in Uzbekistan’s cotton business and Turkmenistan’s oil industry, although business flow is vastly slower than in Kazakhstan, says Gilles Sayer, head of Asia and Central Asia, structured finance, at Calyon in London.


However, “the access to deals and transactions is more difficult,” he says. “There are fewer counterparties and the markets in those countries are less open than in Kazakhstan.”


Nevertheless, Uzbekistan is slowly attracting more potential trade finance customers. As well as local firms Navoi Mining, Almalyk Mining, Uzbekneftegaz, GAO and Shurtan Gas and Oil Complex, Japanese bus and truck maker Isuzu Motors has started producing small buses in Uzbekistan through local car assembler and seller Samarqand Automobile Factory, notes Inamov.


Other new entrants include LukOil, Petronas, Gazprom and China’s CNPC.


Undeveloped banking systems in both countries however mean that serving new trade finance clients could prove difficult.


While 28 commercial banks operate in Uzbekistan, the National Bank of Uzbekistan and Asakabank support more than 70% of the country’s foreign trade, says Inamov. Banks including Standard Bank, Capitalbank, UzKDB and Khamkor Bank are also becoming more active, he says.


In Turkmenistan “the banks are all extremely small and probably will not have a credit rating,” says Dobson. They may not even have international accounting standard figures.”


Despite Kazakhstan-based Bank TuranAlem’s avowed strategy of regional expansion, neither Uzbekistan nor Turkmenistan are in its current plans, says Timur Sabyrbaev, head of financial institutions and global trade finance at Bank TuranAlem in Almaty. “Maybe in terms of profitability these are really good markets, but in terms of the political and economic situation, it’s really difficult.”


In both countries, “the banking system is not so developed and they have a lot of restrictions in terms of using and applying of trade finance instruments,” he notes. “Of course, because they are our neighbours, we have trade flows with these countries, but they don’t involve trade finance.”




Small is good


A small banking community however is not always bad news, especially when it comes to margins and gaining market share. Because Uzbekistan’s banking sector is not overcrowded, it is more pleasant to do business there, despite the slim pickings, says Genet.


“We are making the same amount of money in Uzbekistan as in Kazakhstan,” he says. SG opened its representative office in Uzbekistan in 1996 and now commands nearly 50% of its structured trade finance market, he claims.


“Uzbekistan has a tremendous history of repayment,” Genet adds. “Because they have very little oil they know they have to protect their credibility, their reliability, and we have always been very impressed.”


However, the country’s currency controls complicate trade finance, says Zhanna Umarova, head of transaction banking, Kazakhstan, at ABN Amro in Almaty. For certain transactions, corporates need to get a licence from the central bank just to buy or sell foreign currency, “so you cannot make decisions quickly. Even a simple letter of credit (LC) for the issuer takes a minimum of a month to get everything formalised”.


The structures used in Uzbekistan and Turkmenistan are simpler again than those in Kazakhstan, Umarova adds. “In Turkmenistan they usually demand pre-payment ­- no LCs, no guarantees, no structured finance, nothing. And in Uzbekistan they just use LCs.”


While cotton exports from Uzbekistan have long been financed through pre-paid contracts, true trade finance requires the involvement of the National Bank of Uzbekistan or one of their other private banks as guarantor, “otherwise it’s a no-go,” notes Van de Peer.


“It’s very difficult to do genuine structured trade finance deals in Uzbekistan without having decent collateral,” and most of the deals that are done there are export credit agency (ECA) based, he notes.


Typical trade finance instruments in Uzbekistan include letters of credit, guarantees and factoring, says Inamov. Advance payment bonds are the commonest instruments for cotton industry export financing while recent years have seen an increase in the use of factoring to support cotton yarn exports.


Uzbekinvest itself, acting as the country’s ECA, has increased its commitments by 10 times over the past two years.


Unfortunately, Uzbekistan is under tight budgetary control, meaning the flow of business is limited, Genet says. “Because they have scarce resources and want to make the best possible use of them they don’t launch big programmes.”


Products are meanwhile traditional. “It’s still plain vanilla, and sovereign guarantee with a government, which is very strong at protecting the quality of its signature,” he says.


SG last year arranged a seven-year €25.4m facility, backed by Euler Hermes and fully guaranteed by the Republic of Kazakhstan, to finance gold processing facilities for Navoi Mining & Metallurgical Combinate, the country’s largest gold exploration company. The deal exceeded Euler Hermes’s usual limits in Uzbekistan and closed within weeks.


Meanwhile, “very few banks are active in Turkmenistan and those that are are mostly in the commodity sector, so they’re very short, pre-financed deals and ones where you have a tight control on the goods,” Genet notes.


With just a small number of international banks claiming to be comfortable in either country, the future for trade finance is more than a little uncertain. Most suggest that a shift towards more openness in Uzbekistan could get the trade finance market kick-started within a couple of years, but that is ultimately dependent on the whims of one man.


For Turkmenistan the glimmers of hope are even fainter. Were the politics to change and a real banking sector to develop, trade finance banks would be the first ones in there. Ultimately though, for both countries, the volume of transactions is likely to remain small, Dobson predicts. “For many banks they’re not really on their radar screen.”