Kazakhstan: Investor status

In recent years the oil-rich states of the CIS have experienced financial windfalls because of the high price of oil. That has moved them out of the category of states in need of aid and investment, to the status of investors themselves. In the case of Kazakhstan, the period 2004-2007 saw outward investment grow from US$1.8 billion to over US$18 billion. Although investing outside of the country is a relatively new phenomenon, a discernable picture of investment trends is emerging.

In the neighborhood

Within its immediate neighborhood, Kazakhstan is the largest foreign investor in Kyrgyzstan. Between 2004 and 2007 Kazakh investment in Kyrgyzstan grew eight-fold, from US$16 million per year in 2004, to US$133 million in 2007, making the sum of Kazakhstan's total investment in Kyrgyzstan worth some US$475 million. That amounts to over 40 percent of total foreign investment in Kyrgyzstan.

The investments are spread across a wide array of businesses ranging from gold mining - which provides Bishkek with its largest source of revenue and makes up five percent of the country's GDP - to sugar processing, a cement plant, an antimony factory in the south around Batken, the construction of a new highway from Almaty to the tourist resorts around Lake Issyk-Kul, building hotels around the lake, and even investing in a factory producing knitting needles. Investment began to slow only in 2008 when the housing bubble burst in Kazakhstan.

Tajikistan has also benefited from Kazakh investment, to the tune some US$100 million, much of it going to the banking sector. Kazakhstan has had less success in investing in Uzbekistan, largely because the unfriendly investment environment. Still, trade between the two rose to US$1.4 billion in 2008, and the number of Kazakh businesses operating in Uzbekistan rose from 73 to 400 over a two-year period.

The largest chunk of Kazakhstan's investment has gone into Russia. One of the biggest investment projects in Russia is the Konstantinovo complex outside of Moscow, being built by Kazakhstan's Build Investment Group (BI Group) in conjunction with Russia's Eurasia-City. The project is a US$3 billion development that will build 6.5 million square meters of residential space and 2.6 million meters of commercial space. Kazakhstan's BTA Bank will finance the project, as it finances most of BI Group's ventures. The ambitious project even envisages building a high-speed rail link between Konstantinovo and Moscow, so that the complex would be linked to the capitol by a commute of less than half an hour. Apart from the Konstantivo development, in 2006, Kazakh banks collectively invested some US$5 billion in Russia.

Along the oil export trail

While negotiations have been ongoing for Kazakhstan to hook up to the Baku-Tbilisi-Ceyhan pipeline and export its oil through a route that bypasses Russia, Kazakhstan has begun investing heavily in Georgia. In 2006 it was reported that Kazakhstan had become the single largest investor in the Caucasian republic, and by 2008 its total investment in Georgia had reached US$2 billion.

The Georgian investments have been diversified, but follow the largest businesses in Kazakhstan - energy, construction and banking. Kazakhstan has invested in the construction of upscale hotels in Tbilisi, including a 170-room Radisson Hotel and the renovation of the city square where the hotel is located. Kazakhstan's second largest bank, Bank Turan Alem, is financing the project. Kazakhstan is also building up energy export facilities in Georgia by upgrading the oil terminal at Batumi, where Kazakhstan's state energy company Kazmunaigaz owns the controlling shares. The state company Kaztransgaz also bought out the Georgian gas distributor Tbilgaz for US$12.5 million, and Bank Turan Alem bought the controlling share of United Telecom of Georgia for US$90 million. Bank Turan Alem is also financing the construction of hotels in Adjaria, while Kazakh companies have been working on the grain terminal in the port of Poti, since Kazakhstan exports 6 million tonnes of grain each year through Russia and Ukraine and sees the Poti terminal was seen as an alternative export route.

Despite the extensive investment, Russia's intervention in Georgia in August 2008 on behalf of the separatist regions of South Ossetia and Abkhazia has dampened Kazakhstan's investment activities in the country. In September, Kazakh officials announced a halt to both the Poti grain terminal and the Batumi oil terminal projects. There are numerous rumors that Moscow has put pressure on Astana to halt its port development activities in the Caucasian republic, and Kazakh analysts have conceded that Russia could blockade economic development in Georgia, which would force Kazakhstan to reassess its investments there.

Following the oil exports routes further afield, the Kazakh construction company Eurasia Logistics is reportedly planning to build four industrial parks in Ukraine at a cost of US$1.25 billion, and another four in Turkey for US$1 billion. The company has already built several parks in Russia and the CIS.

Kazakh investment in the tourist industry and financial sector in Turkey has also been noted. In 2006, Bank Turan Alem bought a 33.98 percent stake in Turkey's Sekerbank for US$256 million. The deal means Bank Turan Alem can now offer its banking services in nine countries.

Further along the oil route, Kazakhstan made its first EU acquisition in 2007 with the purchase of 75 percent of the shares of Romania's Rompetrol by Kazmunaigaz for US$2.7 billion. By most accounts, Kazakhstan had been looking to buy into refining and downstream oil facilities in Europe some time before the Rompetrol acquisition and had approached refineries in Lithuania and the Czech Republic, but was turned down because the Central European states worried that any Kazakh acquisitions may eventually be resold to the Russians. The purchase of the controlling shares of Rompetrol give Kazamunaigaz two refineries in Romania, as well as 630 gas stations in Romania, Bulgaria, Georgia and France. Kazakhstan has also acquired interests in a gold producing project in Romania through its company Kazakh Gold Group, in conjunction with Britain's Oxus Gold.

Plenty of suitors

The investment activity has attracted a number of suitors for Kazakhstan's oil money. Iran has been engaged in oil swap deals with Kazakhstan for a decade, importing Kazakh oil to its oil-poor northern provinces, and giving the equivalent amount to Kazakhstan from its oil fields in the south.

Recently it was reported that Kazmunaigaz had engaged in talks with Tehran to construct an oil pipeline for Kazakh oil to Iran across Turkmenistan. Such a pipeline would violate US sanctions against Iran, which threaten sanctions against any country that invests more than US$20 million a year in Iran. Yet those sanctions have largely been disregarded by European companies and the US has never implemented the sanctions against any company. That has led Kazmunaigaz to start talks on the pipeline, as well as jointly constructing a new oil refinery in Iran.

Tehran's nemesis, Israel, has also been courting Kazakh investment. Israel has engaged in talks with Kazakhstan to invest in the Dead Sea Project aimed at refilling the shrinking Dead Sea with water from the Red Sea. Israel has also been looking at the Baku-Tbilisi-Ceyhan pipeline and would like to see it extended to Israel. The Kazakh investment firm Kazyna has also been investing in Israeli hi-tech industries through the National Innovation Fund.

Even the French have come calling on Astana. During his visit to Kazakhstan in February this year, French Prime Minister Francois Fillon encouraged Kazakh investors to invest in France, noting that France was the country's fifth-largest trading partner, receiving one-twelfth of its oil imports from Kazakhstan and 12 tonnes of uranium annually.

Symbiotic investors

Kazakhstan has a mixed economy of state-owned enterprises and private companies, but the symbiosis the larger private companies have with the country's government is a prominent feature. The largest banks and construction firms have members of President Nursultan Nazarbayev's family on their boards or close cronies of the executive.

Nurbank, which had been in the headlines after its chief officers were kidnapped and killed in 2007 allegedly by the president's then son-in-law, now has Nazarbayev's grandson as a major shareholder and board member as well as his oldest daughter, Dariga, holding substantial shares. Dariga, furthermore, is the ex-wife of Rahat Aliyev who allegedly killed the Nurbank executives. 

The president's second daughter Dinara and her husband Timur Kulibayev are frequently alluded to as Kazakhstan's wealthiest couple, making the Forbes billionaire's list in 2007 with a personal fortune of US$2.1 billion. Kulibayev has held a number of high-ranking posts in Kazakhstan's business world, although he is usually placed in the number two spot, rather than the top job. He had formerly been the number two in Kazmunaigaz, then held the number two spot in Samruk, a state investment management company that was merged recently with Kazyna.

For her part, Dinara Nazarbayeva owns the Elite Construction company - a firm that has built many of the new high rises in Astana and Almaty. Just as Nazarbayev's oldest daughter Dariga and her son are important shareholders in Nurbank, Kulibayev is associated with Kazakhstan's fourth-largest bank, Halyk Bank, and a close associate of Kulibayev's, Nurzhan Subkhanberdin, has been linked with another major bank, Kazkommertsbank.

Even critics of the president can be found in possession of major banks and companies. Mukhtar Ablyazov, the chairman of the board of Bank Turan Alem, was formerly the minister of energy, industry and trade until he joined the political opposition Democratic Choice of Kazakhstan. In what was viewed as a politically motivated conviction, Ablyazov was sentenced to six years in prison in 2002 for illicit business dealings, but was pardoned in 2003 and has abstained from further political activity.

A professor at the Kazakh Institute for Management, Economics and Strategic Research told ISN Security Watch that Ablyazov survived his fall from grace because he had a substantial network in Kazakhstan and sizeable assets, which he moved abroad, largely to Russia. Rumor has it that he parted with some of those assets when he was pardoned and promised to stay out of politics.

The national fund

Apart from Kazakhstan's symbiotic companies, another source of investment coming from Kazakhstan is investment funds. The largest source of investment is likely to become the National Oil Fund. As of October 2008 the fund was reported to have US$27.6 billion. It is modeled on the Norwegian Pension Fund, which has over US$350 billion, and accrues US$100 million each day in interest and further contributions. According to Per Einar Rettedal, the country manager in Kazakhstan for StadtoilHydro, the fund's managers are actually hard pressed to find places to invest the money.

Kazakhstan's fund is managed by the National Bank of Kazakhstan, but as of this month there were reports that the Kazyna Sustainable Development Fund - created in 2007 and set to become independent by 2012 - will be taking over management of the Kazakh national oil fund's investment portfolio. Kazyna merged with the China International Trust and Investment Corporation (CITIC), set up in 1992 to act as the state investment company for investments directed at China. When the merger of the two was announced in 2008, CITIC Group reportedly held a portfolio of investments in China, Canada, the US, Australia and New Zealand worth US$120 billion. Should oil remain at over US$70 per barrel, Kazyna's assets are projected to top US$100 billion in the next five years.

Financial crisis and the future of investments

Although the Kazakh National Fund gives Kazakhstan the potential to be a major international investor, the current global economic crisis has led Astana to dip into the fund to shore up the Kazakh economy. Earlier this month, it was reported that the government had allocated US$10 billion from the fund to stabilize to country's economy.

How well Kazakhstan will weather the crisis is difficult to gage. The country's total reserves including its gold reserves, currency reserves, gross bank reserves in the National Bank and the savings in the National Fund amounted to US$48.11 billion in September. At the same time, housing prices had fallen as much as 40 percent in the major cities, from their peak in 2006/07. The symbiotic relationship between the top banks and leading government officials make it likely some at least will be bailed out, yet the crisis is deep.

The domestic crisis will undoubtedly impact Kazakhstan's potential to invest abroad in the near future, yet in the long term the National Fund and Kazakhstan's larger companies are unlikely to stop making inroads in their global investments.