Investments in the Kazakh Economy in 2001
Editorial Overview
Today there is no room for argument that the resurgence of Kazakhstan’s economy rests entirely upon the rapid growth of its oil and gas sector. The strategic partnership with international oil companies which have invested millions of dollars in the national raw material sector has prepared the way for the country’s entry into the international hydrocarbons market.
Since 1998 there has been sustained growth in production and export of crude oil and gas condensate, accounting for 14% and 18% per year respectively. Foreign investment in Kazakhstan’s oil and gas industry is also on the rise. In 1993-2001 gross investment in this sector amounted to about $9.6 billion, or more than 60% of the gross foreign direct investment (FDI) received by Kazakhstan. In 2001 alone this figure was 74.5%, or about $3.3 billion (Table 1).
The National Bank of Kazakhstan reports that in the past year gross foreign direct investments totalled $4,418.5m, whilst net external financing under direct investment transactions was $2,760m. Total debt to parent companies, taking into account capitalisation of interest accrued, amounted to $1,778m, with three quarters of this amount due to mining ventures.
In 2001 the share capital of Kazakh companies was the primary target for direct investment. The proceeds from selling the State stakes in Tengizchevroil (5%) to Chevron, and in Mangistaumunaygaz (30%) to Central Asia Petroleum Company, made up the main part of state revenues. In addition, direct investment was made in CPC construction, development of the Karachaganak oilfield, and geological surveys by oil companies.
On the other hand, heavy investment in the oil and gas sector aggravates the existing imbalance in the development of the various industries and regions of Kazakhstan. FDI in the mining sector, ferrous and non-ferrous metallurgy, the food and other industries have been declining year by year. Bearing in mind the need to diversify investment targets, the Government has been taking steps to attract investment into the priority sectors of the national economy since 1997*. Unfortunately, these efforts appear to have been to no avail, as foreign investors see better opportunities in the oil and gas industry, due to the more favourable investment climate or, at least, the comparable levels of risks and profits for oil ventures.
* Kazakh Act on State Support for Direct Investment of 28 February 1997.
The political and regulatory risks which foreign investors are faced with in the oil and gas sector appear somewhat more manageable, compared to processing industries. Importantly, many mining contracts with international companies involve the Government as a shareholder, a factor which has a strong bearing on decision-making by the authorities. Finally, the rights of foreign investors are protected by the “stabilisation clauses” of the Kazakh Act On Foreign Investment.
As for political and regulatory risks in the processing sector, neither foreign nor Kazakh investors seem to be in a position to exert any influence on the situation. Medium-sized and small businesses lack an efficient mechanism for interaction with state bureaucracy, they are unable to lobby their interests through associations, nor can they take direct initiatives to change or interfere with public decisions.
Major problems arise from the very start of any new business. Thus, it might take a foreign investor as long as half a year to get a company set up in Kazakhstan. The situation is much the same in Russia, where the full bureaucratic procedure, including registration, approval and project appraisal at federal and regional levels takes at least nine months. Given the fact that Kazakhstan draws heavily on the Russian model, the prospects for new foreign and domestic investment in its processing sector, agriculture, tourism and other industries are poor.
Unlike Norway, where about 45% of the national workforce is engaged in small businesses and the service sector despite the country’s status as the largest European oil producer, the investment policy of Russia and Kazakhstan is centered around “projects of the century”; that is to say that projects worth millions of dollars are deemed to be a more promising choice than the routine work of fostering small and medium-sized business development.
At the same time Kazakhstan is faced with serious problems associated with uneven development of its regions. Whereas the official unemployment rate in the country averages 3.7%, in some areas it is 6%. Amazingly, unemployment strikes especially hard in oil-producing regions, revealing the inadequate development of the small and medium-sized business sector there.
As elsewhere, the efficiency of investment policy at a regional level largely depends on the powers vested in local governments. Prompted by the example of some Russian provinces, the administrations of the Mangistau, Atyrau and other regions have embarked on attracting capital through bond issues. These regions have received investment ratings from the leading international agencies, which improves their chances considerably. However, it should be remembered that many provincial governments in Russia are now encountering serious problems with repayment, whilst the expected upsurge in the local economies has not occurred. In our opinion, the competence of local authorities should be extended not only to include borrowing capacity, but also in the sense of giving them more freedom to make contracts with foreign and domestic investors, and granting tax rebates to those who can improve employment in the region.
Increasing employment with small and medium-sized companies has a far-reaching effect: a growth in personal income boosts consumption and, accordingly, production by the food, light and other industries. Ultimately, solvent demand from the population itself represents an internal “strategic investor”.
Recent years have seen an increase in public trust in the domestic banking sector, resulting in an expansion of savings with commercial banks (Table 2). In 2001 deposits from the public doubled to reach some $1.3 billion, which is half the total net FDI for the same year. The deposit structure is also changing: during the first half of 2002 dollar deposits grew by 3.4% and tenge deposits by 16.4%.
In 2001 lending by commercial banks doubled compared to the previous year (Table 3). Although trade loans still dominate the loan structure, lending to industrial companies, farms and construction businesses is on the increase. In the first half of 2002 a trend formed towards a greater proportion of loans being denominated in tenge: this grew from 28.8% to 33.6%. At the beginning of the year the weighted-average interest rate for corporate borrowers was reduced from 15.3 to 14.6% for tenge loans and from 13.1 to 12.7% for dollar loans as compared to December 2001.
The rapid growth of the banking sector in Kazakhstan has been accompanied by a decrease in the number of foreign banks (from 17 to 12) and foreigner co-founded banks (from 10 to 4) in operation; the number of affiliated banks has remained the same for three years (12). As a result, the proportion of foreigner co-founded banks in the total authorised capital of Kazakh second-tier banks dropped from 36.9% in 1998 to 17.6% in 2001.
The policy of the National Bank is explicitly orientated towards favouring the interests of local banks and containing the presence of foreign capital in the national financial sector. This explains to some extent the low level of the Kazakh commercial banks’ equity capital (about $1 billion as of 1 July 2002).
Meanwhile the domestic capital market has become prone to a lack of balance between the dominant short-term and high-liquidity borrowing opportunities, and the overall demand for long-term loans. Commenting on this situation, Grigory Marchenko, head of the National Bank, stressed the need to expand borrowing by the real sector of the economy on the domestic stock market.
Towards July 2002 the official list of the Kazakh Stock Exchange (KASE) has been expanded with 33 private bond issues in a total amount of 65.5 billion tenge ($0.44 billion). By subscribing to these instruments, pension funds and other institutional investors are financing the real sector of the national economy. Currently non-state bonds issued by Kazakh entities account for 35% of the investment portfolio (totalling about $0.36 billion) of private pension funds.
Whereas in 2001 the non-public securities sector accounted for as little as 5% of the Stock Exchange turnover, during the first half of 2002 transactions in these instruments grew by six times compared to 2000. However, bonds remain the principal item traded on KASE, and the lack of shares in circulation represents a major concern. According to National Bank data, by 1 July 2002 there were 3,123 joint-stock companies in Kazakhstan, whilst shares in circulation totalled 728.1 billion tenge (about $4.9 billion). As a rule, shares are concentrated in the hands of strategic investors, which greatly reduces the opportunities for the sale or additional issues of shares intended for public floatation.
The fact that Kazakhstan has made little progress in promoting the sector of portfolio investors is undeniable when comparing the foreign investment structure for developing countries with that of Russia and Kazakhstan (Table 4).
A more or less balanced picture can only be seen in the investment structures of developing countries. By early 2002 Kazakhstan and Russia had developed a clear imbalance ensuing from the low degree of diversification of investment flows. Portfolio investments in both economies are comparable and account for a negligible percentage. In Kazakhstan, most portfolio investors are from Great Britain, whilst in Russia this sector is dominated by Germans and Cypriots. US investors take a very reserved position towards both countries (Table 5-6).
After the financial crisis of 1998, the Russian economy was fed principally by loans, whereas Kazakhstan focused on seeking FDI. In this respect partnership with the USA is strategic to Kazakhstan, since the inflow to the country comes in the form of direct investments. Some international experts argue that FDI must not exceed 15% of GDP, because a greater proportion would threaten the nation’s economic independence. In 2001 the figures for Kazakhstan and Russia was 10.7% and 0.6%, respectively.
Russia has no distinct strategic partner. This observation is supported by the fact that its FDI from the USA is roughly matched by that from Cyprus. It is appreciated, however, that investments from Cyprus, an offshore zone, are of completely different nature and represent a return of capital outflows. Investors from Germany are particularly active in the Russian market; they are implementing long-term projects in the oil and gas, food and other industries. In the 90s, German businessmen had unsuccessful experiences from working in Kazakhstan, and must still be nurturing a negative image of our country. Bearing in mind that the German economy is third in size only to those of the USA and Japan, the Kazakh Government should take decisive steps to get German business circles to take one more unprejudiced look at Kazakhstan.
The investor has a vast geographical choice for capital allocation, and hence exercises great caution in decision-making. Whereas before the 1997 Asian crisis, which was followed by the Russian default of 1998, the main selection criteria were rate of return and the prospects for economic growth in the country, investors today are generally concerned about the quality of economic changes, the competence of the national authorities, and the predictability of political decisions. In this connection the setting up of foreign investors’ advisory bodies under the governments of Kazakhstan and Russia is an important step forward.
However, finding a common language with the authorities often appears to be an arduous job for these bodies. For example, it took the Foreign Investors Advisory Council (FIAC) under the Russian Government a whole year to allow foreign entities to open more than one currency account in the country. The adoption of the production sharing agreements law took five years, and finally is was heavily amended “to support the domestic producer”, to the prejudice of foreign investors’ interests.
The Advisory Council in Russia is an important vehicle for foreign companies to lobby for changes in investment conditions, which are equally relevant to Russian businessmen. These include:
• improving the awareness of tax-payers, and eliminating the scope for fiscal bodies to construe the tax legislation arbitrarily;
• setting up favourable conditions for increasing the presence of foreign banks in Russia;
• improving the transparency of the banking system;
• simplifying the procedure for granting tax credits and exemptions to eligible investors;
• other initiatives on protecting ownership rights and fighting corruption.
At the October 2002 meeting of FIAC, Mikhail Kasyanov, head of the Russian Government, said that a number of bills are in the pipeline to amend the currency, customs, anti-monopoly, land and labour laws. He also said that “passage of this package by the State Duma will stabilise the rules of play in the Russian market.” In his opinion, the key issue at present for stabilising the economy is court reform, as “the judicial system no longer meets modern challenges, especially as regards arbitration practices.”
“The objective of our policy is to ensure equal competitive conditions for all market players,” stressed Kasyanov.
The Russian Government has learned a lesson from the situation. Indeed, the fact that in 2001 Kazakhstan’s FDI flows exceeded those of Russia by some $400 million (according to EBRD) is illustrative of the superiority of Kazakh investment climate (Table 7). However, Kazakhstan should not reduce its efforts. A new investment law is currently under consideration by a conciliation committee, and customs and taxation practices are being perfected; not all Government initiatives, however, are found to be adequate or welcomed by investors.
The forthcoming entry of Kazakhstan into the WTO requires revision of the legal framework for foreign trade-related investment. In this connection, there is a special WTO agreement on trade-related investment measures (TRIMs Agreement), which deals with the obligatory proportion of national input in foreigner co-founded ventures, restrictions on the use of foreign currency by these ventures, and the percentage of exports in their output. Therefore any newcomer to the WTO is required to bring its national laws into line with the organisation’s standards.
Table of contents
Bogatyr Access Komir, the Power of the Land Dennis C. Price
Ispat Karmet, a Leader of the Steel Industry of Kazakhstan Nawal Kishore Choudhary
Factors Influencing the Growth in Tax Revenues from the Oil and Gas Sector in 2001 Janat Berdalina, Inna Alkhimova
Distribution of Powers with Respect to Oil Operations Between State Agencies and KazMunaiGas National Company Kanatbek Safinov
Means of Performance Guarantee Anatoly Didenko
The Environmental Aspects of Subsoil Use in Kazakhstan Vasily Skolsky
