Investments in Kazakhstan
Encouraging foreign investment in Kazakhstan’s economy
$23,008.7m of foreign investment (FI) was placed in Kazakhstan’s economy in 1993-2002. Foreign direct investment (FDI) made up the bulk of this amount at $15,353.8m (66.7%), trade loans, credits and other liabilities came to $7,316.7m, and foreign portfolio investment (FPI) amounted to a mere $338.2m or 1.5%.
Breakdown of foreign investment by country
Investment trends in Kazakhstan in recent years have undergone no major changes. As before, the United States remains the unchallenged leader in terms of investment. It accounts for $6,660.4m or 28.9% of the total FI in Kazakhstan, $6,286.9m of which is FDI invested in 1993-2002. The US also comes first in terms of encouraging investment in the oil and gas and the transport and communications sectors (table 1).
Britain is the second largest donor, placing $2,404.6m in Kazakhstan’s economy (10.5%). It comes second in the mining sector, and third in the transport and communications industry.
The Netherlands (10%) is increasing its investment year by year. It is especially active in the manufacturing industry: $369.6m. The country leads in sectors such as finance: $661.9m, services to companies (leasing and property transactions): $573.7m and comes second in terms of investment in Kazakhstan’s transport and communications sector.
Despite the rather low total investment of $1,231.5m (5.6%) by Italy over the period under consideration, the past two years have witnessed increased activity from Italian business in Kazakhstan. This is largely due to the successful activities of Italy’s ENI which is a partner in the Karachaganak project. In addition, Italy is a leader in terms of encouraging investment in Kazakhstan’s construction industry at $37.5m.
Foreign direct investment in Kazakhstan’s economy
Altogether, $12,861.1m of FI was placed in Kazakhstan’s economy in 2002, with FDI standing at $4,037m. In 2001 this indicator was $4,048m (excluding the proceeds of privatization under contracts in 2000). Since FDI is prevalent in the FI structure, let’s put its breakdown by type of activity under the spotlight.
The stability of investment flows was due to the ongoing large investment projects for developing the Tengiz, Karachaganak and Kashagan oilfields. The fact that foreign investors augmented the project budgets determined the increase in FDI flow. More than half (51%) of the gross FDI influx in 2002 was accounted for by investment in oil and natural gas production, 19% was due to geological exploration and 14% to metallurgy.
The net inflow of direct investment came to $2,561m, a 9% reduction on the figure for 2001. This was due to the fact that the injection of funds into joint stock Kazakhstani enterprises was overwhelmingly due to the privatization of state-owned shareholdings ($497m), whereas in 2002 privatizations of this type were rare.
In general, transactions of this kind made up $243m in 2002, less than half the amount for 2001. To sum up, in 2002 proceedings to joint stocks fell and the share of borrowed capital and re-investment went up in the structure of FDI (table 2).
Clearly the massive inflow of FDI into the oil and gas sector was due to the favourable investment climate in this sector of the economy. At the same time, FDI in manufacturing was ten times lower in 1993-2002 coming to mere $1,641.2m. Whereas FI used to be comparable across different sectors (e.g. in 1995 FDI in ferrous and non-ferrous metallurgy took up 16% of the total FDI, with 20% in the oil and gas sector), contemporary trends point to the unassailable prevalence of the oil and gas sector (2.6% and 66% respectively).
In addition, foreign investment in the production of metal ores has reduced considerably.
Today the gap between the various sectors in Kazakhstan’s economy in terms of pace of development keeps on increasing, and is consequently influencing the development of the regions: those with a high concentration of oil and gas fields are enjoying the best growth indices.
Outcome of activities by joint ventures and foreign companies
Same of the companies that make up the 25 largest multinationals are present in Kazakhstan, such as ExxonMobil (third in the world in terms of overseas assets), ChevronTexaco (13), and TotalFinaElf (19).
Russia’s Lukoil—the top company in the list of the largest 25 multinationals in Central and Eastern Europe—is also very active in the country. Owning over $4bn in foreign assets, it poses serious competition for the largest multinationals from developing countries, including LG Electronics (3rd position in the list of the largest multinationals from developing countries), which is also a partner of Kazakhstan.
Currently 8,933 joint ventures and foreign companies operate in Kazakhstan. This number has grown by 2.2 times compared to 2001. The bulk of these companies is concentrated in Almaty (5,732 companies) and Astana (558) (table 3).
However, trends over the past two years testify to their broader presence in other regions of the country as well. In the Akmola region their number increased almost eightfold in 2002 (to 176), in the Southern Kazakhstan region the number quadrupled to 382 and in the Mangistau region it went up by 2.5 times to 192. Thus almost all regions saw an increase in the number of joint ventures and foreign companies. However this growth has not always led to improvements in production: there was a decline in industrial production by joint ventures and foreign companies in some regions in 2002. In particular, the Kostanai region saw production reduce by 2.7 times and the Southern Kazakhstan region by 1.2 times (table 4).
At the present time, over 87 large and medium-sized industrial enterprises with foreign participation function in the country, 69 of them operating in the oil and gas sector. In 2002 the share of joint ventures and foreign companies in national production was 63% or approximately $8.2bn (in 1999 this indicator was only 43.6% or $4.2bn). It should be noted that these companies show higher industrial production growth rates than 100% locally-owned firms. This advantage is overwhelmingly due to progress in oil and gas extraction.
The 36% increase in industrial production by joint ventures and foreign companies in the Aktobe region in 2002 was largely due to the activities of CNPC, and the 21% growth in the Atyrau region can be attributed to the operations of Tengizchevroil. A similar trend can be observed in the Kyzylorda region, where a 51% growth was brought about by PetroKazakhstan.
Having said that, it should be noted that 70-80% of the output of joint ventures and foreign companies was exported (mineral resources for the most part).
In 2002 the total share of exports by joint ventures and foreign companies reached $5.9bn or 61.4% of the total amount and showed a clear inclination to further growth (in 1999 it was $3.4bn) (table 5).
It should be noted that, over recent years, imports by joint ventures and foreign companies has also grown sharply: in 1999 these came to around $1.15bn, whereas in 2002 the indicator surpassed $3.3bn. This is largely due to the activation of import of equipment and services for large investment projects in the oil and gas sector currently under way in the Atyrau, Aktobe and Western Kazakhstan regions.
Sharpening the competitive edge of exports
Making exports competitive is a key economic task faced by any government. The objective of this measure is to increase their share in international markets, but there are other important goals as well.
This strategy targets diversification of the export basket. In addition it has to ensure higher export growth rates, upgraded technology and the knowledge of personnel. However, the main requirement is to expand the number of domestic companies able to compete internationally, making the competitive edge stable and thus increasing profits. These have all been urgent problems recently for Kazakhstan’s economy. The necessity for diversifying exports is especially acute, as in 2002 the share of crude oil and condensate in the country’s exports was 51.9%. Over the past four years the share of home companies in national exports reduced from 42% to 38%, while that of joint ventures increased.
We would not have dwelt on this aspect in such detail were it not for the fact that raw materials comprise the majority of exports of companies with foreign participation. This means that the multinationals’ potential is not working for the country, and local industry is rapidly losing its competitive edge. In this situation export re-orientation by home companies is crucial: this would force them to adapt to higher standards, provide easier access to information and put them under tougher competitive pressure, inciting them to become more energetic in mastering new technologies and seeking out new opportunities. This is of tremendous importance in increasing local added value and raising wages painlessly. Although Kazakhstan’s average wage is the highest among the CIS states, the living standards of the population remain quite low since the average per capita income of a third of the citizens is below the living wage.
The role of boosting exports in economic development
Increasing the competitive edge of exports requires colossal efforts, and non-raw material multinationals can help in carrying out this important task. The point is that it is not very easy to make use of their potential.
There are many benefits for Kazakhstan if co-operation with multinationals of this type is established; from improvement of the trade balance to modernization of export operations and keeping hold of the positions gained. It should, however, be taken into account that branches of foreign firms are also engaged in importing.
The economic tendencies of the past four years in Kazakhstan show that the black ink for trade transactions by companies with foreign participation is going down. Over this period imports by joint ventures almost tripled, but exports increased by a mere 1.8 times. If these rates continue, by 2007 Kazakhstan will see no benefit from the operations of joint ventures and foreign companies as a result of red ink on their trade balance. The possibility of this scenario occurring must be taken seriously today.
Therefore, the main question for the government is how the country can derive the greatest advantages from the assets managed by multinationals. Much depends on the strategy pursued by the multinationals and the policy and potential of the host country.
Guidelines for action
The basic instruments of investment policy are:
• partner search services and the provision of relevant information;
• encouraging foreign representative offices to participate in programmes aimed at enhancing the technological potential of home suppliers;
• encouraging the establishment of associations and suppliers clubs;
• joint workforce training;
• various schemes for expanding access to finance by home suppliers.
A favourable investment climate for multinationals has been formed recently in Kazakhstan. However, it is essential to move on, and a study of the instruments used for this purpose in national policy testifies to this.
In 2003 the Kazakhstan Contract Agency (KCA) was set up. Currently it is creating a database of local suppliers of goods and services to make partner searches easier for home businessmen. However the emphasis is on the development of enterprises meeting the needs of the oil and gas sector. Is this feasible, in view of the existing engineering potential and the intensive promotion of production and services in oil-producing Russia? Will the country be able to compete any longer with Russian suppliers in this field and find its own niche in global production? Maybe it would be wiser to set up something different based on the latest technology?
Developed countries such as Ireland have abandoned the concept of developing links between local companies and branches of foreign companies in the country, and instead are encouraging the participation of home businesses in the production chains of multinationals based in other regions of the world.
This is the task faced by countries wishing to boost the competitive edge of their exports through interaction with multinationals: joining in the international production systems of these corporations and then increasing the benefits of this participation.
Whereas KCA’s goal is to foster partner search, the objective of public development institutions such as the newly established Investment Fund, Kazakhstan Development Bank and Innovation Fund is to expand the schemes for government funding of domestic companies. They provide loans to local businesses on softer terms than commercial banks.
A Working Group established under the government of Kazakhstan is in charge of considering investment proposals to be funded by public institutions. It has developed a rather ineffective method of data collection and project selection which seems to have been ‘borrowed’ from Soviet planning and command economic model: information is initially provided by the regions, then by ministries and then by national companies. The question arises: when will initiatives by private businesses be considered? As experts in the Working Group point out, there is a further problem—the small number of innovative investment proposals.
This is why international donor institutions such as IMF, WB and EBRD are drawing the attention of Kazakhstan’s authorities to the danger of the ineffective use of budget funds and are calling for the establishment of investment institutions guided by market principles. They believe that a new investment strategy should not mean optional encouragement to certain sectors and enterprises dominated by the government sector. It is essential to foster the development of the small and medium-sized businesses that create the lion’s share of jobs and more flexible processing methods. Therefore it is more important to bring about greater transparency and equal terms for all market participants by passing adequate and binding standards and legal acts.
Since large investment is required by the state and private sector to foster export diversification, the government has to mobilize all the resources available to develop new engines of economic growth.
It is clear that multinationals are the leaders as regards the production and marketing of goods for export. This is especially true for those goods which require participation in marketing and distribution networks, including manufacturing, for their sale. However, nowadays some of these multinationals pass on the production function to contractors, while they themselves focus on innovatory activities and marketing. Major multinationals are creating innovative mechanisms in alliance with other firms (competitors, suppliers or buyers), research institutions and universities. Speaking specifically of Kazakhstan, it should be pointed out that this crucial resource of multinationals is not being utilized in the country despite the setting up of the Innovation Fund, the Kazakhstan Engineering National Company and other similar structures. The question of staff training for innovation companies is also acute.
As Kazakhstan’s investment policy is to be redirected towards the development of manufacturing and infrastructure, it is important to consider training specialists for these sectors today. However, shortcomings in the public regulation of education are leading to a further deterioration of the skills and knowledge of the specialists being trained, including those with engineering qualifications. The quest for high profits in higher education institutions is not beneficial for the nation.
As for the efforts that extractive industry multinationals are putting into training the local workforce, this process is more or less regulated. Mining contracts include a relevant clause ensuring that a certain amount is spent on this purpose. For instance, training programmes for oil and gas specialists are functioning well at KIO.
A new Oil and Gas Institute has been established, which has close contacts with major international oil and gas producers. A mechanism of interaction between oil companies and public staff training institutions has been defined in the Programme for Developing the Northern Caspian. There are many other examples. However, despite the successful resolution of the staff training issue in the oil and gas sector, it will never be a panacea for the nationwide employment problem. According to data from the Kazakhstan Statistical Agency, the proportion of people employed by oil and gas companies over the past four years made up only 1% of the total economically active population of Kazakhstan. Over the same period the share of employment in joint ventures operating in all economic sectors increased by a mere 1%, coming to 3.7% in 2002 (table 6).
Summing up international experience
In many countries, multinationals have been crucial in boosting exports due to the establishment of links, whether or not these were related to capital participation. The multinationals’ share of exports varies from country to country, though it is quite large everywhere.
The Republic of Korea, a leading international exporter, has made important economic achievements, even though the presence of FDI-importing multinationals in its economy is somewhat limited. And once again, links not based on capital participation have played an important role in boosting the competitive edge of the large Korean companies that form the core of this Far Eastern nation.
The breakthrough of Hungary, Ireland, China, Costa Rica, Mexico and the like into the cohorts of leading exporters has largely been due to their reliance on FDI as a basis for more dynamic export activity. In addition, each of them had certain specific advantages which allowed them to join international production systems. For example, the gargantuan size of the Chinese economy created an ‘economy of scale effect’ and ensured large exports. Hungary, Ireland and Mexico have preferential access to the major export markets. National policies were the determining factor in Ireland and Costa Rica: they practice a far-sighted approach to encouraging high-tech FDI, and have also found an excellent niche in the international supplier networks.
Yet an excessive dependence on multinationals for the competitive ability of exports has its minus points. Multinationals may focus on the comparative statistical advantages of a host country such as large mineral resources or a cheap workforce. Modernizing exports means increasing the effectiveness of production and transforming the statistical comparative advantages of the country into real ones by establishing links between branches of foreign companies and home businesses, improving the skills of the workforce and implementing high-end technology. Having said all that, a specialization in labour-intensive sectors, even given high-tech exports, may be undesirable in certain circumstances as it brings only limited benefits in terms of staff training and technology transfer without influencing the local economy. In addition, a competitive advantage such as a cheap workforce will disappear as wages rise.
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