Testifying three weeks ago to the US Congress’ House subcommittee on the Middle East and central Asia, Paula Schriefer, director of non-governmental organization Freedom House, said the position of civil liberties in Kazakhstan remains “precarious”. Last December’s presidential election was preceded by attacks against opposition activists and journalists, and fell short of international standards in the view of most outside observers, including the Organization for Security and Cooperation in Europe (OSCE).
“Throughout the year, members of the opposition alliance faced threats and physical assaults, including the death of one opposition leader and the apparent abduction of another member’s daughter,” said Schriefer.
Accusations of authoritarianism have been levelled at Kazakhstan’s president Nursultan Nazarbayev since the country gained independence from the Soviet Union in 1991. More recently, the listing of Kazakhmys copper mining group on the FTSE 100 last December brought the country’s corporate standards under close scrutiny.
Attractive for investment
Kazakhstan continues to attract big private investment. The country’s oil and gas reserves, concentrated on the north-west shore of the Caspian Sea are estimated at 30 billion barrels, They have attracted over $30 billion since 1991.
Those with first-hand experience offer a more focused view. They worry about a big political upheaval, but point to the present stability of the system. A presidential election in which the incumbent wins 91% of the vote and legislates that the state oil company has first refusal on all sales is not a deal breaker for investing in Kazakhstan – for now.
“Politically, it has been pretty stable. There are always risks of political struggles that affect stocks, but at the moment it looks like the situation is fairly calm,” says Harvey Sawikin, co-founder of Firebird Management, a New York-based eastern Europe and CIS-focused fund manager with shares in both offshore-listed companies that do business in Kazakhstan and locally-listed companies.
However, he continues, corporate transparency remains “very shaky” in the country. “For example, ADR (American Depositary Receipts) holders have different rights to holders of local shares.” Firebird does hold shares in Kazakh Telekom, where corporate governance is “very weak”.
While Kazakhstan’s president-centred regime is “inherently less stable in the long term than a democratic system”, the country is “really the only investable central Asian country,” says Sawikin. Other energy-rich countries, such as Azerbaijan and Uzbekistan, are blighted by a “lack of functioning equity markets, corruption and dictatorial regimes that do not allow even a small amount of freedom as Kazakhstan does”.
According to Tanya Costello, analyst at political risk consultancy Eurasia Group, the system of political and economic patronage built by President Nazarbayev around himself and his vast family business interests, combined with reasonable economic management, has underpinned Kazakhstan’s stability to date. This also means that the biggest political risk in the country is the issue of succession. “He hasn’t made an obvious attempt to groom a successor. It is quite uncertain how he will deal with it,” says Costello.
Nazarbayev, 65, won a third seven-year term as president at the end of last year, and is not expected to step down until 2012.
He has taken some steps towards putting his country on the path to economic development, says Costello. After all, Kazakhstan’s economy grew at over 9% last year for the sixth year running. “There has been some trickle-down effect and the country is changing. People look at Kyrgyzstan and Uzbekistan and feel comparatively better off,” she says.
POLICY CHANGE?
Investors, however, should worry about the change in government policy towards the oil and gas sector, Costello says. Having been very open during the 1990s – when Kazakhstan needed financing and technical expertise to develop its energy sector – the state has started claiming a bigger role for itself. It is a trend that may continue. The new legislation gives state oil company KazMunaiGaz the right of first refusal if an investor in any mineral extraction project sells any part of his stake, a guaranteed 50% role in any offshore project in the Caspian Sea, and applies a tougher tax regime to foreign investors.
The shift away from international corporate governance standards began in 2003, when KazMunaiGaz disrupted UK firm BG Group’s attempt to sell its stake in the Kashagan oilfield, the country’s biggest, to two Chinese companies. However, as Kazakhstan makes itself less attractive to multinationals that need to report back to shareholders, says Costello, it has attracted more Chinese investment.
In 2005, the China National Petroleum
Corporation bought PetroKazakhstan, a Canadian-run company that was Kazakhstan’s largest independent oil company, for $4.18 billion and spent another $700 million on a pipeline that will take the oil to the Chinese border.
Corporate governance is far from perfect, but it is improving, according to
Grigori Marchenko, chairman of Halyk Bank and a former adviser to President Nazarbayev. “Our companies are all different,” he says. “If one of them [Kazakhmys] was accepted to the FTSE 100, then it is as good as any of the top 100 companies in the UK. We have 280,000 companies here. Some are good, some are less transparent.” He predicts that the trend for Kazakh companies to list on foreign exchanges, particularly London’s AIM and FTSE 100, will raise standards in local companies generally.
As for the threat of social upheaval following from a disputed succession or other possible political crises, Marchenko is sceptical. “If I thought that I would have any problems living in this country I would move elsewhere,” he says.
In another testimony to the House subcommittee, Martha Brill Olcott, one of America’s leading experts on Russian and Eurasian affairs, points out an immediate opportunity for Kazakh reform. “The drive for greater international acceptance provides some reason for optimism that the situation in Kazakhstan may continue to improve,” she says.
President Nazarbayev badly wants his country to chair the OSCE in 2009, and has promised judicial reform and expanded local elections and governments to strengthen his case. This, however, could all change. “If Kazakhstan’s OSCE bid is turned down,” warns Olcott, “then Nazarbayev might decide it is much easier to abandon democratic reform.”