Kazakhstan’s banking sector has suffered from the fallout from the liquidity crisis, having borrowed heavily from foreign markets. Yet, as the country continues to diversify its economy away from its reliance on oil reserves, Kazakhstan still offers many attractive investment opportunities, argues Philip de Leon.
Ignorance is bliss, and maybe even at times a blessing… but what you do not know may hurt you, and this is particularly true if you have not put Kazakhstan on your business watch list, a young country of over 15mn inhabitants with a booming economy, a growing middle class and never less than 8.3% GDP growth since 2001.
Kazakhstan is the largest landlocked country in the world, ninth largest in size with the 11th largest world oil reserves. It is also a country with very ambitious goals set out by its very involved President Nursultan Nazarbayev. These include:
• Making Kazakhstan into one of the 50 most competitive nations;
• Implementing a cultural project to become a trilingual nation, with Kazakh as the state language, Russian as the official language used in government and domestic/CIS business and for inter-ethnic communication, and English for linking into the global economy and high-tech leapfrogging;
• Diversifying the economy by transitioning it from an extraction-based one to a service and technology-based economy, which would enhance its competitiveness and steer it away from the potential Dutch disease pitfall.
The growing importance of Kazakhstan as a regional player has not escaped newly-elected Russian President Medvedev whose first official international trip was to Kazakhstan in May 2008. Similarly, the US is launching in June a Public-Private Economic Partnership Initiative (PPEPI) to foster stability, prosperity and reforms in Kazakhstan and the region.
In 2010 Kazakhstan will rotate into chairmanship of the Organisation for Security and Collaboration in Europe, which could be seen as a leap of faith in the ability of the country to improve its track record on its professed political agenda concerning elections, political opposition, media freedom, and human rights.
Building a marketable identity at home and abroad
Kazakhstan has a rich tribal and nomadic history, but standing buildings, witnesses of a grander past, are not numerous. The existing ones, such as the mausoleum of Khoja Ahmed Yasawi, listed on the Unesco World Heritage list, have been overshadowed by the famed Silk Road cities of Bukhara and Samarkand in neighbouring Uzbekistan.
Any attempts to develop a cohesive national identity were repressed in tsarist and soviet times. Efforts since the country gained its independence in 1991 have had to take into account Kazakhstan”s present day multi-ethnic, multi-confessional diversity. The transfer of the capital from Almaty to what became Astana can be interpreted as a step in that direction.
Then in 2006 came the infamous Borat movie featuring a fake Kazakh journalist touring America, using a primitive image of the country together with outrageous comments. An Irish author once said that: “There is no such thing as bad publicity except your own obituary.” The Borat movie could have turned into Kazakhstan’s obituary in a marketing sense. However, this unsolicited negative attention turned out to be a sort of blessing in disguise – a wake up call for a country whose literacy rate is higher than that of all the G8 countries (99.5% versus 99.0%). Constructively, the Borat movie drove home to the leadership the point that if Kazakhstan wanted the world to have an opinion about it, Kazakhstan would have to take an active role in shaping its own public image.
After a period of perplexity, uneasiness and confusion on how to tackle this situation, the government and its embassies, such as that in Washington, DC, jumped on the public relations bandwagon to market the country. Proactive measures taken included: speaking on public radio, buying advertisement pages in major US newspapers and magazines, supporting the launch in New York and Washington DC of a guidebook entitled “Kazakhstan,” and supporting high profile conferences such as the annual Kazakhstan Growth Forum in London.
Parallel roadmaps to the future?
So what really is Kazakhstan? First, it is a Central Asian country with immense oil and gas reserves; it also has large deposits of barite, lead, tungsten, uranium, chromites, silver, zinc, copper, gold and iron ore. Second, it is a country that understands the need to diversify its economy and insulate itself from the fluctuations of commodity prices.
With the welfare of Kazakhs in mind, Kazakhstan has been paying close attention to the similar experience of Norway, which created the Norway Oil Fund in 1996 and is worth US$391.3bn as of May 2008. The Kazakhstani National Oil Fund was established in 2000 and had over US$25.4bn as of June 1, 2008. Third, it is a country that was recognised as a market economy by the European Union in 2001 and the US in 2002. And fourth, it is led by a hard driving president who has a vision of where the country should be going and a personal approach to democratic concepts.
There are some striking similarities between Kazakhstan and Russia because of their shared Soviet past, though Kazakhstan remains very different from Russia. Both countries over the past eight years have had at their helm ambitious and astute leaders who have a long-term road map for their country.
While President Putin of Russia came up in 2008 with a “Development Strategy Through 2020,” Kazakhstan’s President Nazarbayev, who has been at the head of independent Kazakhstan since 1991, had already launched in 1997 his forward-looking projection, “Kazakhstan 2030 – Prosperity, Security and Improvement of Welfare of the Citizens of Kazakhstan”.
Next, in 2001 a “Strategic Plan of Development for Kazakhstan till 2010” was adopted by presidential decree, followed in 2003 by the “Innovative Industrial Development Strategy for 2003-2015”.
Both Putin – and now Medvedev, along with Nazarbayev see themselves as the guarantors of the economic stability and growth that is benefiting their populations.
Another directly-related similarity is the shared strong belief that unbridled democracy can be a threat, jeopardising the strategic goals being pursued and bringing down all that has been achieved. Therefore, political parties and the bickering that comes with political debates should not be allowed to get out of control.
It is no surprise then that United Russia, the main political party in Russia, is headed by Vladimir Putin, and that Nursultan Nazarbayev affords Nur-Otan, the largest political party in Kazakhstan, the leading role in advancing his national agenda.
The idea of Kazakh and Russian authorities interfering with such a fundamental feature of the political process is puzzling and worrisome to western minds. However, the vast majority of the populations of both countries would rather continue to enjoy the endless opportunities resulting from their unprecedented prosperity boom than be confronted again with the political and economic turmoil that resulted from the break-up of the Soviet Union. The younger generation does not want to become a sacrificed generation in the name of democracy building. The political instability shaking some of the former Soviet republics, such as Ukraine, is closely monitored.
On the financial front, just as Russia sees Moscow becoming a top world financial centre, Kazakhstan sees Almaty becoming a regional financial centre, exploiting the arbitrage time difference between Dubai and Singapore.
Since the Kazakh banking system has sophisticated technology and highly qualified personnel, this is an achievable goal for Kazakhstan.
Kazakhstan, however, has relied heavily on foreign borrowing, and it is not being spared either by the liquidity squeeze or the world economy’s current slowdown. This indirectly impacts neighbouring Central Asian countries as Kazakh banks have used their excess liquidity to expand abroad. Construction, one of the leading industries outside the extraction industry, has experienced an abrupt slowdown, especially as mortgage lending for residential and speculative developments have become tighter. This has led to a shifting towards more short-term lending, but it remains that the Kazakh banking system, which is under the control and supervision of the National Bank of Kazakhstan and is composed of about 30 banks, is still a promising service-based sector of the economy with growth potential.
Still other similarities include the fact that both countries face the same challenges and have pledged to combat them: widespread corruption, an inflation rate over 10% in 2007, and dependency on the price of natural resources. Policy directions and implementing roadmaps can be found in the yearly ‘State of the Nation’ addresses on the websites of each president. Interestingly, that of the Kazakhstani president elaborates more fully who should do what.
A critical difference with Russia is that Kazakhstan enjoys and actively nurtures good international relations, not only with its immediate neighbours, but also with more distant countries, such as the US and the European Union.
Some may see this as the making of a new ‘Great Game’, the name given to the 19th century struggle for influence in Central Asia between tsarist Russia and the British Empire. This time around, the US is seen as replacing Britain, and new players, such as Turkey, India, Iran and Pakistan, come into the picture.
Land-locked Kazakhstan has the need to develop both internal and external transport corridors, and its dependency on Russia and China for access to key transportation routes and export markets explains in part Kazakhstan’s pragmatic and conciliatory diplomatic approach. However, Kazakhstan has not shied away from sending troops to Iraq, partnering with Nato, and openly stressing the importance of its dialogue and interaction with the US and the EU.
Export and investment bonanza but…
After having been resoundingly reelected to a second seven-year term in December 2005, Nazarbayev declared on June 6, 2008 that he is going to be president for a long time and doesn’t have any successors. Kazakhstan is thus a promising export and investment destination with a mostly predictable political climate. However, the minister of economy did announce in May that he expected 2008 GDP growth to be 5.3%, a more than three-point loss compared with 2007. It is still a very enviable percentage when compared with the forecasted GDP growth of many industrialised countries.
Major investments are under way even in sectors other than natural resources, such as tourism. In May 2008, a US$1.5bn Jordanian infrastructure project to build a resort on the Caspian Sea was announced to serve an anticipated 300,000 tourists per year.
Opportunities in Kazakhstan abound, and many companies find it easier to do business in Kazakhstan than Russia. However, some large foreign companies, such as ArcelorMittal, AES, Chevron, and ExxonMobil, have been subject to heavy fines in the hundreds of millions of dollars for alleged tax offenses, environmental wrongdoing, and project delays. Work visas have also been denied for foreign workers, which poses scheduling problems for companies in need of complex technical skills not yet available in-country, aside from the fact that this practice is incompatible with WTO accession and self-defeating of Kazakhstan’s own development goals.
Such punitive treatment of existing investors sends conflicting signals as Kazakhstan at the same time professes openly to welcome foreign investors. The challenge for Kazakhstan is to establish and enforce the sanctity of contracts, and have the rule of law apply uniformly to everyone, irrespective of connections.
Over the years since independence, Kazakhstan has made visible efforts to put in place a legal and regulatory system that is permanent, clear and transparent, understandable to the companies subject to it as well as to the enforcing authorities and judges. Unfortunately, different codes in practice contradict each other. The absence of jurisprudence on some issues makes it unclear how a court will interpret the law. Clarifications sometimes given by bureaucrats on regulations are non-binding, and judges’ lack of experience with commercial matters make them vulnerable to uneducated rulings. Corruption on top of this can lead to a good headache cocktail.
So, while Kazakh authorities may be partly correct in saying that foreign companies breached the law or their contractual obligations, the still fluctuating legal environment makes it hard for even the most willing to be fully compliant. This is why it is strongly recommended to include an arbitration clause in contracts.
The incredible wealth brought in by the natural resources revenues does mask some of the flaws operative in the political, legal and judiciary system. However, Kazakhstan’s efforts towards WTO accession could lead to the legal and regulatory framework cleanup needed to establish a more predictable working environment and a new tax code is already under way.
WTO accession would also help facilitate Kazakhstan’s goals of becoming one of the 50 most competitive countries, which should bring the investments needed to diversify the economy. Bilateral negotiations are under way with the US, the EU, Australia, and India, and once concluded, the multilateral negotiation process will follow.
No target accession date has been officially set but in light of what remains to be done domestically and at the bilateral and multilateral negotiating levels, it is reasonable to think that Kazakhstan’s accession will not become a reality before 2010.
Meeting challenges of regional integration and cooperation, already hampered by long-standing rivalry and mistrust, and then further fueled by ethnic, religious and territorial tensions, will be a necessary condition, along with continued domestic reform, if Kazakhstan is to fulfil its vast potential.
As noted by William Veale, executive director of the US-Kazakhstan Business Association, a Washington-based organisation of major American companies investing in Kazakhstan: “the real, long-term attractiveness of Kazakhstan for the non-energy foreign investor will be to use its increasingly hospitable business environment as a base for serving the much larger markets of the entire region.”
Kazakhstan is not picture perfect but it does not live in denial of what needs to be done in spite of some contradictions between its declared objectives and reality. The political and business elite is generally savvy and exposed to outside influences. There is reason to be hopeful for the future, too: since 2006, some 3,000 Kazakh students are being sent every year to study abroad through the Kazakh government’s Bolashak scholarship programme.
At a time when many natural resources countries are of questionable reputation and raise the specter of supply disruption, the moderation of Kazakhstan on the international stage and its reliability offer a good reason to reconsider who our true friends are.
Furthermore, if Kazakhstan continues to make steady progress on its planned reforms, it could become an anchor of stability and prosperity, helping support poorer and less stable countries in the region.
Philip de Leon is a business development consultant based in Washington, DC and he can be reached at: Philip@pdeleon.com