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Emerging Markets

Wheel of fortune

The extent of Kazakhstan’s economic crash took many by surprise. But policy-makers in the former Soviet republic insist they have the resources to deal with it. And a renewed strategic partnership with China is likely to prove invaluable

For a decade, Kazakhstan – and its president, Nursultan Nazarbayev – rode high on massive new oil finds and high commodity prices, including for uranium and copper. 

The country, the biggest energy producer in the former Soviet Union after Russia, experienced an extraordinary boom: an average growth of 10% in the first seven years of this decade. But when oil prices plummeted last year, and credit dried up, that growth came crashing to a halt. The economy shrank 2% in the first three months this year, having slowed to 3.2% last year, and could contract by up to 3% this year. 

By February, Kazakhstan Stock Exchange’s (KASE) benchmark index had fallen roughly 80% to 581, from a historic high of 2,870 in December 2007. 

The former Soviet republic, flush with funds from the commodity boom before the present global crisis, has had to spend heavily to counter the ill-effects of the collapse in growth. The government devalued its currency in February to save reserves, while its heavily leveraged banking sector buckled from a lack of credit. 

The severity of the downturn came as such a shock it took even the government unawares. While neighbouring Russia’s rouble has devalued gradually over the past six months, Kazakhstan has come under fire for waiting until February for a one-off 18% devaluation of its currency, the tenge. 

The move brought the country to a standstill for a day as businesses closed to recalculate costs. Kazakh stocks rose the most in three months on expectation exports would be more competitive. But import costs also rose while wages did not. 

Asked about the broader impact of the tenge devaluation, Kazakhstan’s economy minister Bakhyt Sultanov, tells Emerging Markets: “It was obviously an unpopular measure, but the public are able to understand the government had to do this.” 

Social tensions

As the economic crisis continues to tighten its grip over Kazakhstan, analysts are worried about a possible rise in social tension as industries scale back production and joblessness edges up.

But Sultanov denies that Kazakhstan is experiencing social tension as a result of the turmoil; he insists the government is delivering on its promises that pensions will be paid and that government employees’ salaries will be increased. Wages are still much higher than they were just a few years ago, he notes. Though unemployment has risen in recent months, it had been on a general downward trend. And the minister expects steady interest rate reductions for the rest of the year.

Even if Sultanov is right to feel confident, there have reportedly been a number of small opposition rallies in recent months, even though domestic opposition remains weak. Speaking on condition of anonymity, one Kazakh official told Emerging Markets:  “If there was a decent opposition I would welcome change, but that opposition hasn’t emerged.

“Outsiders don’t understand that Nazarbayev has been in power 18 years because he is the best man for the job, not because he is an all-powerful dictator who rigs elections.” 

Nazarbayev at least had the prescience to set aside revenue, from the years of growth, in a war chest known as Samruk-Kazyna, or the National Wellbeing Fund. It was valued earlier this year at $27 billion, and the government has been able to access around $5 billion from it to prop up the country’s banks, mortgage system and construction sector, making Sultanov the envy of policy-makers in less fortunate economies.

The minister insists this amount will be enough. “We don’t need to access any more,” Sultanov says. “Any more expenditure won’t be from the [the National Wellbeing Fund]; we’ll get it elsewhere from non-oil revenue.” Unlike the United States and western Europe, Kazakhstan is avoiding recession and may be able to weather the crisis better than many emerging markets, he notes.

Biggest impact 

But the biggest impact of the credit crunch in Kazakhstan has been on highly leveraged financial institutions. Recent data shows that in 2008 profit in Kazakhstan’s banking sector as a whole fell 93% to 15.4 billion tenge ($102 million) compared to the previous year. Last month Anwar Saidenov, head of Kazakhstan’s largest bank, BTA, said he would try to avoid bankruptcy by asking creditors to renegotiate as much as $15 billion of credit; BTA has already stopped making principal payments on its debt and has defaulted on $550 million in bilateral loans. 

The response to the banking crisis has been for the state to move into the sector, which opposition critics say became a pretext for Nazarbayev to tighten his grip on power. Whatever the case, the political fallout from the banking turmoil has torn apart Kazakhstan’s ruling elite, which dominates business as well as politics, many of whom are connected by family ties. 

Mukhtar Ablyazov, the former chairman of BTA, was fired in February during the bank’s nationalization. He fled the country to join a network of emigre Kazakhs who vocally criticize President Nazarbayev from the safety of exile in the West – an echo of expatriate Russian oligarchs. In March, Kazakhstan arrested 20 of Ablyazov’s associates and accused him of fraud and money laundering. His cousin was promptly fired from BTA. Roman Solodchenko, a deputy head of BTA, fled to London within days. The fugitive has been added to Kazakhstan’s wanted list and is accused of theft.

President Nazarbayev’s daughter and son-in-law, who still control Halyk Bank, Kazakhstan’s third largest lender, are trying to raise $643 million by issuing new preferred shares to boost capital.

The World Bank has suggested Kazakhstan should consider a precautionary standby deal with the IMF to ensure additional money is available in an emergency. The IMF last week sent a delegation to Kazakhstan to discuss the impact of the economic crisis on central Asia’s biggest economy. 

But Kazakh authorities insist it has enough state cash to fight the crisis. The government has earmarked $25 billion – or a quarter of gross domestic product – to fight the crisis, and says it has plenty of resources to allocate more if needed. 

Help from China

Authorities have also moved fast to secure outside investment – most notably from China, the world’s second-biggest energy consumer. In April, President Nazarbayev flew to Beijing to sign an agreement in which China will lend $10 billion in return for Kazakh oil supplies. And Kazakhstan is working with its neighbour to ink more deals in both energy and non-energy sectors following the landmark oil-for-loan deal. 

The deal allows China National Petroleum Corporation (CNPC) to purchase 50% of Kazakhstan’s privately owned MangistauMunaiGaz (MMG) and also provides a $5 billion loan to KazMunaiGaz (KMG); and China’s EximBank lends the state-owned Development Bank of Kazakhstan $5 billion. 

A Kazakh official familiar with the deal told Emerging Markets that negotiations lasted roughly three months. “China sometimes is willing to overpay for the assets as the value for them is not mere future cash flows,” he says. 

China has in recent months signed a series of similar pacts with oil producers Russia, Brazil and Venezuela, as Beijing aims to use its huge foreign reserve more efficiently after oil’s $100 collapse from last July’s peak.

As early as February the Chinese government said it was working on a plan to boost oil stockpiles at low prices and to back Chinese petroleum companies seeking to expand internationally. And more Chinese oil-for-debt deals are likely to follow, where Europe, the US, and even Russia could be outbid. 

Three more Chinese-Kazakh projects have been announced since the oil-for-debt deal, including a uranium mining venture. 

Ariel Cohen, senior fellow at the Heritage Foundation, points out that Kazakhstan’s oil output levels could surpass Iran and Iraq within six years on current trends, potentially making it “one of the world’s top five oil producers by 2015”. He forecasts Kazakhstan’s oil production reaching three million barrels a day by 2015 – “if the global economic situation improves”.

The country is uniquely situated to capitalize on shifts in the global economy – part of the landmass is inside Europe (qualifying it for OSCE chairmanship in 2010) – and the EU is already importing Kazakh oil through Azerbaijan, Georgia and Turkey. Meanwhile the relatively close – and important – energy markets of Iran and India give Kazakhstan special trading opportunities, as do its long borders with China and Russia.

The World Bank also recently approved a $2.12 billion loan for building a motor route from China through Kazakhstan to Russia. Despite much talk about energy security and diversification of supply away from Russian and Opec (Organization of the Petroleum Exporting Countries), Europe and America may have missed a trick.

In allying itself more closely with China, Kazakhstan is also trumpeting the cause of greater say for developing nations in the global economy. Sultanov, like his Chinese counterparts earlier this year, also calls for reform of the global monetary system, noting that the global economic imbalances engendered by today’s system mean that developing countries remain the creditors of the developed world – a system he believes must be changed. 

He says:  “Relationships in global currency systems should be fair. For a long time we have wanted the wishes of developing countries like Kazakhstan to be heard.” And if his eastern neighbour has anything to do with it, Sultanov might just get his wish.

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