One step west and one step east

Conversation in Kazkakhstan in recent months has centred on one topic: oil. What appears to be a major new find has excited locals, multinationals operating in the energy sector and buyers of an oversubscribed sovereign Eurobond. The prospect of this impoverished country, where the average wage is barely $100 a month, becoming the next Kuwait has also enabled the nation teasingly to play prospective bride to both the West and Russia. Ted Kim reports

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For months, the people of Kazakhstan have been watching with mounting expectation developments in the east Kashagan oilFIeld in the Kazakh section of the Caspian Sea. Oil Finds in the past year in parts of the Caspian controlled by Russia and Azerbaijan have raised hopes of a big Weld on the other side of the Caspian in Kazakhstan. The government says at least one billion tonnes of oil, a sizeable deposit, has been found. But another report, attributed to US government sources, suggests reserves of as much as 6.8 billion tonnes. If this turns out to be true, it would be the biggest oil Find for 20 years.







Nazarbayev: wants to match Saudi production

Now Kazakhstan's president, Nursultan Nazarbayev, is talking of lifting as much oil as Saudi Arabia, the world's biggest oil producer, by 2015. Before the Rolls-Royce dealerships start springing up, the big question on everyone's mind is timing. The hoped-for oil from Kazakh Welds will not start Flowing in serious quantities until 2008. But a US-led multi-national consortium constructing the Baku-Ceyhan pipeline, one of the world's largest private construction projects, says it will be ready to start pumping by 2004. A multi-billion-dollar pipeline with insuFFIcient oil to pump might leave a multi-billion-dollar hole in the pockets of foreign investors.
Nonetheless, the prospect of Kuwaiti-sized oil revenues has led to a strong rebound in investor sentiment about the Kazakh economy.
This was clearly shown in the reception for the seven-year $350 million Eurobond. Deutsche Bank and JP Morgan priced the issue at 98.347, with a coupon of 11.125% yielding a spread of 500 basis points over similar-dated US treasuries. Standard&Poor's rated the bond B-plus. The issue was split into two parts, with local institutions beneFIting from a $220 million exchange deal for local treasury bills that will give Kazakh pension and investment funds a more liquid and long-term instrument.

The remaining $130 million was sold primarily to institutional investors in Europe and the US. Although Kazakhstan was not in desperate need of external Financing, it has set an encouraging benchmark with the spread on the new issue.
The last time it hit the international debt markets, in 1999 right after the Russia crisis, it had to pay 825bp over similar US treasuries. The pricing is also good news for Halyk Savings Bank and Turan Alem Bank, two of the largest Kazakh Financial institutions, which hope to launch their own international debt issues later this year.
Apart from courting private investors, the government has also been keen to play the role of model student with the multilaterals. In May, the National Bank of Kazakhstan repaid early nearly all outstanding balances owed to the IMF, amounting to $385 million. This was originally drawn between 1993 and 1998 under a variety of IMF arrangements and facilities in support of Kazakhstan's economic transition eFForts. The repayment was made possible by recent favourable developments on the global markets, notably much higher prices for Kazakhstan's main exports, especially petroleum, and by recovery of the economy from the shocks of the Asian and Russian crises in 1998 and 1999.

Kazakhstan's existing programme with the IMF, supported by an extended credit line of $453 million, remains in place. Dealing eye to eye with the IMF and World Bank has become nothing short of personal priority number one for chairman of the National Bank Grigory Marchenko.
With the $350 million Eurobond proceeds safely pocketed and news of Kashagan spreading, a credit-rating announcement in late-July came as the icing on the cake. Standard&Poor's upgraded Kazakhstan's long-term foreign currency rating and senior unsecured rating from B+ to BB-. The agency also affirmed B as the foreign and local currency short-term rating while the outlook remained stable. This upgrade, S&P stated, reflected the improved liquidity of the Kazakh economy and the country's increased hard-currency reserves.
Any further changes in the ratings should depend on progress in restructuring and privatization, the continued increase in reserves and the stabilization of the level of foreign debt. Kazakhstan collected $63.6 million from privatization in January-May 2000 and inflation for the month of July was 0.4%.
In recent weeks, the tenge has even strengthened slightly against the dollar.
The successful Eurobond offering was a key part of the government's policy of developing its economic links as far afield from the CIS as possible. Most of the restrictions placed on the tenge following the Russian Financial crisis of 1998 have been lifted, thus eliminating many of the major obstacles to increased foreign trade. In fact, last year, roughly 73% of national GDP was in the form of foreign trade. Obtaining membership of the World Trade Organization was considered by the government as another major economic policy achievement.
On the political front, although Kazakh- stan may be trying to integrate itself rapidly into the global economy and, in theory at least, move beyond its old decrepit Soviet-era trading network, relations between the Kazakh capital Astana and Moscow have never been warmer. Kazakhstan, along with the rest of central Asia, has become increasingly disillusioned with political relations with the west and is turning to Russia for the type of military and economic assistance enjoyed in the past. Irritated by criticism of their human rights and methods of ruling, and, more important, facing Islamic threats on their southern borders, countries in the region have been quick to embrace new Russian leader Vladimir Putin in the hope of increased economic and political support.







Yelemessov: "We have a mild form of Islam"

The week after his inauguration last May, Putin Flew to Uzbekistan and Turkmenistan, and then met his Kazakh, Tajik and Kyrgyz counterparts in Minsk, Belarus. Over the summer, he had talks with Kazakh president Nazarbayev and then travelled to Tajikistan's capital, Dushanbe, to meet leaders of what is known as the Shanghai-5, which include the presidents of Kazakhstan, Tajikistan and Kyrgyzstan, Russia and China. Although the region has been relatively stable in the past few years, Islamic militants have been active in nearby Tajikistan and Uzbekistan. Putin has started promoting the policy that security fears must force Russia to reconsider its role in central Asia. Last year, Afghan-based militants moved into neighbouring Kyrgyzstan, taking hostage several Japanese geologists.
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Abigail Hofman:

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

One step west and one step east

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