Kazakhstan: A Viable Opportunity For Foreign Investments

Kazakhstan Stock Market Up 30% Following Bank Merger and Anticipated New International Exchange

Kazakhstan is a unitary state governed by a president, a highly ranked official, who oversees all of the government’s domestic and foreign policies. Moreover, he represents Kazakhstan within the country and beyond its borders as an international relations representative. Since Kazakhstan gained independence from Soviet Union in 1991, investments into this country have been growing, leading to investors viewing it as a viable investment opportunity (Andromeda Financial Services, 2004). The Kazakhstan government has formulated policies that have helped to restructure the economy of this country. These policies have helped in attracting foreign investors to the country. From the foreign investments, Kazakhstan has acquired latest technological equipment and skilled labor that helped in improving the overall economy of the country.

Background

Kazakhstan is located in central Asia, and it is the ninth largest country in the whole world. It is bordered to the north by Russia, to the south by Turkmenistan, Uzbekistan and Kyrgyzstan to the west, and on the east by China. The capital city of this country is Astana. It has a continental climate and an adverse landscape consisting of rivers, lakes, steppes, deserts and forests (Oleynik, 2002). Although it has a small land mass, its population is about 15 million people. This population consists of different ethnic groups such as Kazakhs, Germans, Russians, Ukrainians and many other nationalities. In spite of most people speaking Kazakh in this country, Russian is the second official language and is used in business halls, institutions and administrative agencies (Terterov, 2004).

Since independence, the country has undergone many economic transformations including the change of the planned economic system to a free market system. It has privatized state owned firms and introduced the concept of price liberalization in its economic system. Kazakhstan is heavily endowed with oil, natural gas and minerals. It is a major exporter of oil accounting about 70% of its national income and this dependency has led to unstable economic environment in Kazakhstan, especially during the fluctuation of world’s oil prices (Oil & Gas Vertical Analytical Desk, 2004). Hence, the government has been encouraging investors to venture in other sectors of the country in order to promote a well-balanced economy for each sector.

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The political environment in Kazakhstan has not lagged behind since it has adopted practices of acknowledging personal identities, democracy and political stability. This country has experienced a stable social and political atmosphere (Von, 2004). It has adopted policies that have helped in opening up political opposition to promote freedom of civil institutions. This capable political and social ground has provided a stable business environment for foreign investors.

Kazakhstan has a more advanced legal environment compared to Russia. However, its system is still inadequate, and some standards, such as disclosure, accountability and transparency, need to be reviewed. Its judicial institutions are inferior, and this has caused corruption levels in business transactions to increase. Although foreign investment is rendered into many restrictions, the government has shown some notable progress regarding the issue (Jedrzejczak & Rodriquez, 2003).

Opportunities in Kazakhstan

The Kazakhstan markets, like any other, poses initial risks for foreign investors. Yet, for companies ready to take the initial risks, the long-term returns will be worthy than the costs incurred. The country has had some impressive economic growth in conjunction with his restructuring efforts in the recent years, and this makes Kazakhstan the best destine for investments. The investors can venture into the following industries:

Energy Industry

The energy sector is the most profitable business opportunity in Kazakhstan due to the presence of oil and natural gas reserves located in the Caspian region. Experts have spelt out that there are additional oil and gas deposits under the Caspian Sea that are yet to be exploited. However, larger exploration projects have been planned ahead of discovering these potential energy resources (Terterov, 2004). Oil industry, which is the major contributor to the country’s rapid economic growth, is one of the most flourishing sectors in Kazakhstan. Investors should take advantage of the abundant resources in both oil transportation and exploitation projects. A foreign investor can also venture in setting up advanced technology equipments to increase the oil production in this country. The government has also laid out plans to expand the gas industry by increasing the capacity of the present gas pipelines, putting up new pipelines and gas processing facilities and developing a gas-based power generation industry (Terterov, 2004).

Mining Industry

Kazakhstan is richly endowed with mineral resources such as gold, copper, uranium, coal, iron core, and other metals (Oleynik, 2002). Before the country gained independence from the Soviet Union, it had been mainly a mineral resource center. Mineral experts claim that it has large amounts of mineral deposits that people have not yet fully exploited. Foreign investors can be offered a number of opportunities in the mining industry since the mineral extracting processes are highly costly and they require lager investments that can only be funded by foreign companies. In addition to this, the mining equipments in this country are outdated and this has lead to the closure of mining plants. Furthermore, these companies do not have qualified personnel or sufficient capital and thus the government had to privatize them (Terterov, 2004). Kazakhstan needs foreign investors who will modernize and train the technical workforce needed for the industry development. Investors should consider venturing in this industry since it is viable.

Chemical and Petrochemical Industry

The country has large unexploited oil reserves and chemical raw materials that require the establishment of a petrochemical industry. Kazakhstan needs to diversify its operations from crude-oil production to production of petroleum and chemical based products, such as medicine, textiles, plastics, paints, fertilizers, fuels and PVC (The World Bank, 2004). This will lead to a growth of industries and further decrease of overdependence on the oil exports as the major source of national income. This growth will open employment opportunities to the people of Kazakhstan. Petrochemical industry requires high transportation costs and costly production facilities, and thus the government of this country has been calling foreign investors to come in and develop the sector, success of which will lead to further economic growth in the country.

Finance and Banking

In comparison to the Soviet times, Kazakhstan has more advanced financial and banking system now (Jedrzejczak & Rodriguez, 2003). The government has embraced restructuring initiatives to controlled financial and banking system. According to this initiative, financial and economic reforms introduced the tightening of banking and credit laws, banks privatizing, price policies liberalizing and ending to the grants of credits to state-owned institutions (Oleynik, 2002). All of these reforms have led to an improved favorable financial sector and a sound banking system. Even the government has move to make Kazakhstan the central Asia financial hub.

Consumer products

Since Kazakhstan is a new country, it has a deficiency in the provision of basic consumer goods such as personal care, clothing, electronic products and even household appliances. This country lacks specialized industries to manufacture these products hence it imports from other countries. It has been on the run to attract more foreign investors who will help in developing a large consumer products industry. Hence, there is a good market opportunities for the consumer products (Spechler, 2003). However, the market is not fully satisfied because the demand exceeds supply by a large margin. An early entry to the market by foreign investors will allow consumers to have product alternatives and hence increasing market share of these companies. Kazakhstan needs to develop its own consumer products industry by exploiting the local manufacturing facilities in order to reduce its dependence on imports.

Food Processing

Kazakhstan imports most of its food products since it has virtually no processing industry. The imports from other countries are usually of a poor quality due to lack of the fresh food products within the country. When food products are imported, it cannot utilize the excess products since it lacks processing facilities; this leads to loss and wastage. Developing food processing plants and techniques that will allow provision of the required personnel and skills in the full utilization of the southern part of the country will greatly contribute to food processing industry (Aon Kazakhstan, 2004). Development of this sector will lead to the utilization of the agricultural products and to reduction of the excess imports. Food processing is a potential business in Kazakhstan.

The currency has been unstable in the recent times. This led to the national bank of Kazakhstan widening the trading band of Tenge (currency) due to the high prices of oil. The higher global prices have led to its appreciating value. Unsteady nature of the currency brings uncertainties to the price of products. The foreign investors should put relevant measures to curb the uncertainties.

Risks associated with Investing in Kazakhstan

Foreign investment companies should evaluate and be aware of the risks involved in setting up investments in Kazakhstan. Most of the challenges have been carried over from the Soviet times. Although, these challenges are expected to weaken as the transition to a market economy makes its way. The firms should be keen on the following:

Legal risks

Even though the Kazakhstan government has had many reforms to adopt a free market economy, there are still issues remained in the areas of privatization, legal environment and deregulation. In relation to the deregulation initiatives, the government implemented it in some industries like the finance and banking sectors, but there are changes needed to remove the rules and restrictions that apply to foreign direct investments (Spechler, 2003). Kazakhstan government still has control over a large number of the large enterprises, mainly the heavy industries. Due to this, it should speed up privatization of these firms. Modernization of these firms can only arise from privatization practices. Also, a new legal system is needed, which will allow interpretation of the contracts and regulations to be made according to the international standards.

Poor Transportation and Telecommunication Systems

This is one of the biggest challenges facing business operations in Kazakhstan since it has poor infrastructure.The poor infrastructures explain the existence of underdeveloped transportation and telecommunication networks in the country. Its citizens live in different cities that are interlinked by the underdeveloped roads and railways lines: this mostly ends up causing traffic jams in the country (Knobloch, 2004). There is a need for well developed and modern highway systems to be created. The poor telecommunication networks may lead to delays in the distribution and supply-chain networks.

Lack of commercial technology

The country mostly depends on heavy industries that consume more inputs than modern light industries while producing inferior consumer products. The country needs further investment to improve the production process of these products. It has a duty of setting up advanced technological industries that will utilize resources well for further developments.

Bureaucracy and Social Risks

Despite some economic, political and social reforms that helped this country to become a market economy, some of the old Soviet ideologies still have impacts in several business areas. In addition, the culture of organizations with defined line of authority, where the top management is responsible for the decision making process, have not changed. The existence of these hierarchical organizations promotes bureaucracy that is a menace to most organizations. (Griffin K, 1999)

Kazmunaigaz Exploration and Production is one of the companies that have invested in the exploration of oil in Kazakhstan. It faced many operational challenges considering the inadequate infrastructural development and poor communication networks. It had invested heavily in its operations that helped it to survive in the market.

Management of the Investment Risks

Firms should do several things in order to manage risks associated with investing in this country. Firms should consider building a good relationship with the government.Companies intending to invest should make sure to build a strong relationship with the government while doing business in Kazakhstan, because it is the latter who issues strict controls on business activity. Furthermore, when a firm wants to implement a large-scale project, it should make long lasting relationship with the government for it to be approved. Firms should also consider making large investments in order to minimize risks. This is because doing businesses in Kazakhstan yield low margins in the short run due to the presence of the transition economy (The World Bank, 2004). Although they may be hampered by poor infrastructure, poor buying power and weak legal system, they must be ready to make large investments in the infrastructure building area. Initial stages may not yield, but in the long term run, they have high returns. Firms should also consider forming joint ventures in order to reduce investments risks in Kazakhstan. Foreign investors should consider collaborating with the government while developing projects in this country. This will help the foreign investors to limit risk the of capital exposure during the initial phase.

Conclusion

Kazakhstan is a viable investment opportunity that foreign companies could consider while expanding their operations to foreign markets. This is because the coutry has several investment opportunities in the energy sector, mining industry, chemical and petrochemical industry, financial and consumer products sectors. However, when a firm invests in this country, it faces the legal risks, poor transportation, poor technology and social risks. A firm could consider forming a joint venture with the government, investing in the long term projects and building a good relationship with the government in order to manage these risks.Based on the current business environment in Kazakhstan, a phased strategy is recommended for foreign investors that would like to enter the Kazakhstan market. This strategy suggests that multinational firms should initially follow a small-scale entry strategy and then gradually strengthen their presence in Kazakhstan according to the business environment and opportunities encountered. Therefore, a phased entry strategy is ideal for foreign firms that would like to avoid costly mistakes and huge losses in an unfamiliar market environment.

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