Investors Welcome Push To Prise Open Kazakhstan
A sluggish economy adds impetus to President Nazarbayev’s aim to begin privatisation and reforms.
During a banquet at London’s Spencer House in April thrown by financier Jacob Rothschild, the octogenarian host gave his guests from Kazakhstan’s sovereign wealth fund a gentle admonishment.
Executives from the fund had spent the day explaining to potential investors their long-awaited privatisation programme to sell off state-run companies worth $70bn. Lord Rothschild felt a nagging sense of déjà vu.
“This is the second of these dinners, and it is delightful to see you all again. We all want to help make this round of Kazakh privatisations happen in a way that is enduringly successful,” he said.
“But,” he added with a smile, “the process needs to get under way first!”
The 81-year-old banker, long close to Kazakhstan’s strongman president Nursultan Nazarbayev, was teasing. But he had a serious message not lost on his audience. Kazakhstan has been promising to privatise its biggest state-run companies for almost seven years: none have reached the market.
The delay is indicative of a wider malaise. A slew of grand reform pledges lie waiting in the government’s mounting in-tray, stymied by the very bureaucracy, vested interests and administrative inertia they seek to remove. But this time, say officials, ministers and executives, they mean it. An ambitious reform plan announced in January that encompasses almost all of the country’s economy is actually going to be implemented, they say.
Starting the privatisation process is just one piece of an interdependent jigsaw puzzle of reforms, alongside cleaning up its banking industry, reforming its tax regime and cracking down on corruption. At the same time, it is setting up a new financial centre and stock exchange in Astana to attract foreign capital, overhauling its agriculture and land laws, and recalibrating its trade strategy to leverage both the Moscow-led trade zone known as the Eurasian Economic Union and Beijing’s regional ambitions. Crucially, each step requires the others to succeed.
In an era when enthusiasm for privatisation is waning across the world, Kazakhstan is promoting the sort of market reform programme that once was so common among developing countries in the 1990s.
“We hope that the next two-to-three years will be a game-changer for Kazakhstan,” Zhenis Kassymbek, the country’s minister for investments and development, told the Financial Times.
“We want to change the structure of our economy. But in order to achieve this task, we need foreign investment. And in order to achieve that goal, we need to drastically change not just the image of the country, but legislation, norms — the very essence of it.”
The slow progress so far is perplexing. The champion of the reforms is Mr Nazarbayev himself, a man who has been in charge for longer than the modern country has existed. But while his rule exhibits many of the common aspects of autocracy — including heavy restrictions on freedom of speech and a non-existent political opposition — it has so far lacked the ability to force his reform demands through a nomenklatura that likes things the way they are.
As an oil-rich, former Soviet republic where one man pulls all the strings, Kazakhstan bears the hallmarks of the region. Wedged between Russia and China, larger than western Europe but with roughly the same population as the Netherlands, its experience since 1989 has been closely watched as a barometer for Central Asia, where fears of instability abound and natural resource wealth has bred both oligarchs and corruption.
Today, the status quo is under strain. The 2014 commodities crash savaged Kazakhstan’s oil and raw material exports, slashing growth in gross domestic product to just 1 per cent in 2015 and 2016, the slowest rate for almost 20 years. That exposed both its dependence on hydrocarbons and the inefficiency of its agriculture, manufacturing and enterprise sectors.
And there is concern over the longevity of Mr Nazarbayev, who turns 77 next month. Nine months ago, he saw Islam Karimov, his counterpart in Uzbekistan, die in office aged 78. That shock, officials say, made clear that he must redouble efforts to push through reforms.
“There has been de-Russification here, but not yet de-Sovietisation,” says a foreign diplomat in Astana. “They know that there is much to do. But there are powerful forces all around pulling in the same direction that must be considered.”
This month, delegates from almost 120 countries began descending on Astana for the capital’s 2017 Expo, a three-month-long forum that Mr Nazarbayev hopes will be the greatest PR exercise in the $184bn economy’s history and convince investors that the reform programme is real.
The world’s largest landlocked country, Kazakhstan is hugely dependent on foreign trade and investment. But that has often been undermined by the Soviet legacy of an overbearing state role in the economy.
While state-run companies helped fund Mr Nazarbayev’s dream of building Astana — a purpose-built city of ultra-modernist gold, steel and glass towers — in just 20 years, it has also created a cosy clique of local titans for whom reform poses a threat.
Major state-owned companies, such as oil and gas producer KazMunaiGas, the Samruk-Kazyna wealth fund and uranium producer Kazatomprom are prizes whose directorships and well-paid executive roles became handy rewards for regime loyalists or powerful families. Local power brokers swap major roles at the state-run companies or control of the country’s ministries.
As such, previous initiatives to reduce state control over the economy, attract western capital and introduce international standards of corporate governance met stiff resistance — as did efforts to support small and medium enterprises to allow them to compete with the public majors.
“For better or worse, we have a strong vertical of power,” says Timur Suleimenov, the country’s economy minister. “And [the reforms] are sponsored by the president. He wants them done.”
It is a refrain that has been heard many times. But Mr Suliemenov argues that while the length of the to-do list is daunting, the critical mass makes it more likely they will be forced through.
“We have a big state. In everything: ownership, red tape, goods and services production,” says the 39-year-old minister, one of a crop of young, internationally educated officials recently fast-tracked up the tightly-controlled government apparatus. “We need to manage it better, which is one side of the reforms. And we need to decrease it. Privatisation is a big item on the agenda.”
Privatisation of the biggest state-run companies would be the most visible achievement of the renewed push. KazMunaiGas is Kazakhstan’s biggest oil and gas company and accounts for about a third of crude output from the world’s 14th-largest producer. Kazatomprom is arguably even more of a prize: it accounts for 40 per cent of global uranium production and controls the second-largest proven reserves.
Stake sales, with dual local-foreign listings, will not proceed without the successful launch of the new Astana International Financial Centre, slated for this winter, which in turn depends on new laws that will allow British legislation and international judges to rule on commercial issues affecting companies based there. At the same time, the AIFC will struggle to get off the ground if the country’s troubled banking sector is unable to offer liquidity to investors. To fix that, the government must follow through with a major clean-up of lenders saddled with bad debts.
The country’s central bank has already spent $7.6bn bailing out one systemically important lender and is in the process of forcing banks to consolidate to increase stability. Experts expect banks could need another $1.5bn in state aid over the next couple of years.
Achieve all that, and then Kazakhstan can push ahead with its loftier goals of developing a green energy and technology hub in Astana, among other initiatives to use the oil wealth to foster growth in non-extractive sectors.
Tentative progress is being made. Investment banks have been chosen for listings with a flotation in London. A merger between the country’s two largest banks, Halyk and Kazkommertsbank, has been agreed. International stock exchanges have agreed to support the Astana bourse.
In December, a minister was sent to jail for corruption. And Mr Suliemenov says he expects the government to allow “one or two” banks owned by oligarchs to collapse in the next 12 months, sending a message that it will not continue to prop up distressed lenders. But not everyone is convinced.
“What is good is that in our mind there are words like diversification, privatisation, globalisation, liberalisation. But unfortunately, there are no concrete steps taken yet,” says Umut Shayakhmetova, chief executive of Halyk Bank.
“The state is yet to decrease its role, its stake in the economy,” she adds. “And we are still expecting reforms in terms of liberalisation, to make it more of a market economy.”
Finding a way to take full advantage of Kazakhstan’s place on the map is the final piece of Mr Nazarbayev’s ambitious reform puzzle.
The country’s Communist-era transport links were built north to south, a spoke on the great Soviet web with Moscow at its centre. As such, Astana has been a cheerleader of China’s One Belt One Road project to revive the east-west Silk Road trading route between Europe and Asia, pitching itself as the geographical centre of the Eurasian landmass.
But the ambitious geopolitical project is not without problems. Last year, protests erupted after Mr Nazarbayev liberalised rules relating to foreign ownership of land, allowing Chinese investors a stake in the country’s agricultural sector. It was a rare bout of public discontent at his rule, and highlighted the deep-seated nervousness of Kazakhs — who fiercely defend their 26-year independence — about foreign interference.
A startled regime put the reforms on hold. But finding a way to embrace foreign investment and ownership, even if that means allowing its powerful neighbours greater clout, is key to the wider reform puzzle. Of late, Astana’s desire for upgraded infrastructure has trumped its fear of losing economic control: Chinese companies last month bought 49 per cent of an inland port at Khorgos, on the border with Xinjiang, the autonomous region in north-west China. Beijing is also funding new rail links, and this month the two countries signed investment deals worth $8bn.
There is no time to lose. Kazakhstan’s pitch to investors is that by setting up shop in the country, they will benefit from local support and reforms while enjoying free access to the Eurasian Economic Union’s other 165m consumers.
“Unfortunately we are often confused or mixed up with Russia,” says Baur Bektemirov, managing director of the AIFC. “And associated with corruption and lack of transparency. This is to some extent true, of course.” He adds: “The timeline is aggressive. [But] it can’t get worse. It can only get better.”
Uzbekistan: Astana keen to do more business with new regime
When the Soviet Union collapsed, the smart money bet that the economic tiger that would rise out of central Asia would be Uzbekistan, with its large gas reserves and the region’s largest population.
The smart money was wrong. Under Islam Karimov’s autocratic rule, the country’s reputation among investors soured and economic growth never matched its forecasts. Attention instead turned north, to Kazakhstan, which emerged as the new investor darling as foreign capital flowed into its oil and gas and mining assets.
Mr Karimov died last year. He left a country with just a third of the gross domestic product of Kazakhstan. But his successor, Shavkat Mirziyoyev, has made clear that inward-looking policies are a thing of the past.
Since his election late last year, Mr Mirziyoyev (left) has been touring neighbours and major powers, talking up the country’s newfound openness to trade and investment. He plans to visit US president Donald Trump in September, and met Chinese President Xi Jinping last month. The bonhomie is working. Uzbekistan has signed trade and investment agreements worth $44bn over the past six months. That is more than double its trade and foreign direct investment volumes in 2015.
Kazakhstan has welcomed its neighbour’s return to the market, with President Nursultan Nazarbayev warmly receiving his opposite number twice already this year, and demanding fast action on trade deals to make up for lost time.
“The new leadership in Uzbekistan has opened all opportunities to trade and lifted barriers,” said Mr Nazarbayev in March. “We are free, like a blank page that is to be filled with good deeds that will benefit our nations.”
But others in Astana see a possible challenge in Uzbekistan’s change of tack, fearing that Tashkent’s new attitude could lure prospective capital away from Kazakh projects.
“There is severe competition for investors,” says investments minister Zhenis Kassymbek. “Our neighbours are now working for the same goal.”
by: Henry Foy
This article was originally published on The Financial Times. Read the original article.