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Nursultan Nazarbayev
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Despite the continuing struggle over
Russian debt negotiations and the flood of litigation about to hit
the New York courts following Ecuador's Brady bond default, in
September last year Kazakhstan managed to become the first CIS
issuer and one of relatively few emerging market sovereigns to tap
the international debt markets since the August 1998 crisis. The
$200 million dollar-denominated sovereign Eurobond was received -
so well that it was later increased.
"All the bankers I spoke to, both here and abroad, feel that
the success of this issue was important for everyone involved in
emerging markets," says Madina Dushimova, director of international
sales at Kazkommerts Securities in Almaty. "It has indicated
resumed investor interest in Kazakhstan and has opened the door for
other Kazakh issues."
The $200 million five-year issue carried a steep 13.625%
coupon and, at offer, was initially priced at a spread to US
treasuries of 825 basis points. The was at the higher end of
previous market estimates of 775bp to 825bp, but such a price was
necessary to attract investors still wary about the region. "It was
a difficult market and a highly negotiated transaction," says an
official at Deutsche Bank, which lead-managed the bond offering
with ABN Amro.
"With this issue Kazakhstan has successfully differentiated
itself from most of its neighbours in a marketplace characterized
by a lack of depth and a susceptibility to event risk news," says
Reid Payne, global head of emerging market syndicate at ABN Amro in
London. However, this differentiation was achieved at a price. Just
three years ago the sovereign paid just 325bp over treasuries for
three-year money. Arguably the pricing was too generous: the two
increases were done at much tighter levels and the bond has traded
as low as 600bp over.
That said, the sovereign Eurobond has now paved the way for
other potential Kazakh issuers who had been forced to wait on the
sidelines since last summer when the first launch was postponed. In
the spring, Halyk Savings Bank conducted a roadshow for a $100
million to $200 million debut Eurobond with Lehman Brothers as the
lead-manager. So far, the only private Eurobond from Kazakhstan has
been the three-year $100 million instrument issued by
Kazkommertsbank, the largest bank in the country, in May 1998. KKB
is also expected to come to market with a new instrument later this
year.
Hard-won success
The success of Kazakhstan's Eurobond could not be taken for
granted. The country is only now emerging from its worst recession
since the early days of independence as its ratings of BB- from
Fitch IBCA, B+ from Standard & Poor's and B1 from Moody's
shows. At the end of 1998 the budget deficit was $800 million -
four times the 1997 deficit, while GDP declined in real terms by
2.5 percentage points.
Given the macroeconomic environment, the success of the
Eurobond was particularly satisfying for the government's financial
planners. "There has undoubtedly been criticism about how much
interest we had to pay. But, in the end, I felt it was absolutely
essential to issue the bond," says Grigory Marchenko, the recently
appointed chairman of the National Bank of Kazakhstan and former
president of DB Securities, a subsidiary of Deutsche Bank, in
Almaty.
The $300 million could have been raised more cheaply in the
domestic market as the Eurobond's opening spread of 825bp was even
higher than yields on T-bills denominated in Kazakh tenge. However,
"the government wanted to be 200% certain of having more than
enough funds to comfortably pay off the $200 million Eurobond due
December," says Marchenko. "More important, the new issue was an
opportunity to show that while Russia is defaulting, we are paying
back in full our old debt and successfully issuing new debt."
On the rebound
The need to show the world that Kazakhstan is in recovery is
essential for the government given how hard the economy was hit. In
1999 revenues were hit by three factors. First, Russia, its number
one export market, collapsed. This cut export revenues and, because
of the link investors still make between Russia and Kazakhstan,
both financial flows and foreign direct investment into the country
were also hit.
Second, world oil and commodity prices spent most of the year
at a 10-year low. Kazakhstan's number one industry is oil, closely
followed by ferrous and non-ferrous metals. Finally, the
privatization of state assets, such as Aktobemunai Gas and
Mangistavmunai Gas, expected to plug large holes in the budget, has
stalled. Although the privatizations are now scheduled for the
first half of this year, continued government procrastination and
lacklustre investor sentiment mean these revenues may not be
realized then either.
The slow climb out of recession began late last year with a
strong performance by the agricultural sector and rising oil export
volumes. With agricultural goods Kazakhstan is able to tap the few
dollars that the Russian government has available for imports which
it spends largely on wheat and sugar beet, Kazakhstan's number one
and two crops.
More important, oil prices have hit a 10-year high and the
Caspian Pipeline Consortium (CPC) is creating more oil transit
routes. The next CPC pipeline project is due for completion in mid
2001, increasing oil export capacity by roughly 250% per annum.
Kazakhstan's biggest potential windfall though is the
Kashagan oil field. Located in the Caspian Sea in the same area as
the giant Tengiz field, Kashagan could be one of the world's top
five oil reserves. Should the preliminary geological findings due
in March confirm this, then the description of Kazakhstan as
another Kuwait will look a great deal more realistic.
Confidence returning
The Economist Intelligence Unit forecasts GDP growth of 2% in
2000, double the government's forecast of 1%. In 2001, with the
opening of the new CPC export pipeline, oil revenues will give a
further boost to growth, bringing it to around 4%.
With the increased cash flow from both oil revenues and
agricultural imports, investor sentiment improved sufficiently to
allow the finance ministry to restart tenge-denominated T-bill
auctions recently. These auctions, were postponed last April after
devaluation. Domestic public confidence in the government's
finances was further strengthened in November when the central bank
eliminated the 50% export revenue surrender requirement. Under this
old regulation, Kazakh exporters were obliged to sell half of their
export revenues back to the central bank and receive tenge in
return as a means of strengthening the currency.
The next quarter should bring about an even greater
improvement in investor sentiment towards Kazakhstan. For one, it
is expected that the agreement for a new package of IMF support
will be finalized.
A key priority for the new prime minister, Tokayev
Kasymzhomart Kemelevich, is to negotiate a renewal of the agreement
with the IMF and thus unlock around $150 million in IMF financing
for 1999 that should have been released months ago.
When this deal is signed, it will be seen as a definite
endorsement, in the eyes of the government, of Kazakhstan's steps
towards recovery.
"With Russia, a nuclear power, and Ukraine, a huge country on
the edge of Europe, the IMF has a very favourable disposition. But,
as far as the IMF is concerned, we are not as important", Marchenko
complains. "It is obvious that they have always played hard ball
with us all along".
Despite these encouraging signs, the economy is still far
from fully recovered. "It is still too early to talk about a
miracle turnround. The external factors, such as oil prices and the
sentiment on emerging markets, have improved substantially."
explains Aidan Karibjanov, managing director of Kazkommertsbank.
"But, the fundamentals have stayed the same. Industrial output is
moribund, there is today still a bottleneck with oil transit, and
the country still suffers from severe social problems."
The long-term outlook for financial investors is still far
clear. "Increased oil prices and the improved harvest will
certainly help the country's repayment ability," adds Anis Saraj,
London based economist at Fitch-IBCA who returned last month from
Almaty. "But, there is still a lot of ground to cover before we can
think about a rating upgrade."
Halyk preaches e-liberation
The popular conception of CIS banks is that they are
predominantly fly-by-night institutions that survive primarily on
the back of government connections needed to win huge government
accounts. This view may be dealt a blow by a formerly state-owned
retail savings bank in Almaty.
Fresh from a five-week course at the Columbia University
Senior Executive Program in New York City (CSEP), the chairman of
Halyk Savings Bank of Kazakhstan, Karim K Massimov, has become one
of Kazakhstan's greatest evangelists for the religion of
globalization and e-commerce. With Kazakhstan having an average
monthly wage of roughly $80, one of the world's lowest internet
penetration rates, and appalling telephone lines, it is easy to
dismiss Massimov as some kind of eccentric. He thinks otherwise.
Massimov has taken on board a view of the world centred on
the internet, boosted by such developments as WAP (wireless
application protocol), which will enable seamless, effortless links
between mobile telephones and the world wide web. Massimov is now
aggressively investing in internet technology, through a new
partnership with the Silicon Valley HQ of Hewlett-Packard.
Eventually, Massimov believes, Halyk can expand beyond the
credit rating cramped confines of Kazakhstan and offer a financial
hypermarket of products - from savings accounts and pension
planning to securities trading and mutual funds - to any client on
earth in possession of a mobile telephone and a PC. With growing
revenues from Halyk's domestic operations, and the planned opening
of subsidiaries in Moscow, Singapore and New York, Masssimov thinks
that within five years, Halyk, one of the largest banks in
Kazakhstan, will generate more business from outside the country
than from inside. The New York subsidiary will be an independently
licensed and registered investment company in its own right, thus
allaying the fears of any potential client about dealing with a
bank from a country he may have never heard of. WAP technology will
mean that the dismal telecommunications networks in the developing
world will be of no consequence for customers wishing to open
accounts and do business with Halyk.
"Presently we have zero revenues coming from outside
Kazakhstan, so this is an excellent point from which to start,"
Massimov explains. "Our strategy is to globalize. We must globalize
and compete for clients no matter where in the world they may be.
Eventually, Kazakhstan will be a small market for us."
This global strategy would certainly be dismissed by
management experts on Wall Street, who look at brand-name
awareness, market share, and a multibillion dollar capital base as
necessary prerequisites to compete in the international financial
sector. But Massimov, who is looking into distributing Halyk's
upcoming Eurobond via his web site later this year, knows that
great innovators, especially in e-commerce, must think in terms
that yesterday's smile-and-dial dinosaurs of Wall Street would
utterly laugh at. Using one of the management-speak phrases he has
suffered at Columbia, he adds: "We must be a rule breaker and a
rule maker - not a rule taker."
Amiable autocrat keeps the lid on
President Nazarbayev's regime in Kazakhstan successfully mixes
democratic and autocratic elements. The result is political
stability, ethnic tolerance and a transparent and attractive
environment for foreign investment and business
Kazakh president Nursultan Nazarbayev looks the stereotypical
Central Asian strong man. He has a weak opposition; his election
successes are disputed and his relatives and close friends hold key
governmental positions.
Last October's elections brought in a new parliament, a new
government, and a new prime minister, Tokayev Kasymzhomart
Kemelevich. But Nazarbayev's grip on power was even further
consolidated and, since the legislature is a relatively unimportant
part of the government structure, Nazarbayev will have little
difficulty in containing the few opposition deputies who have been
elected.
The 59-year old Nazarbayev, a keen skier, seems to be in
excellent health and rather than delegating tends to take personal
control of major political, economic and commercial issues. His
tight control has been welcomed by many as a safeguard against any
Afghanistan-style conflict among the multitude of ethnic groups in
Kazakhstan. At present, the majority Muslim population live
peacefully alongside Orthodox Christians, and both communities look
with horror at the chaos and violence in other Islamic countries,
brought on, many Kazakhs believe, by weak leadership.
Given the potential for separatism and civil unrest in
Central Asia, Nazarbayev has emerged as something of a pacifist. In
a thinly veiled sideswipe at nationalism, in particular
Uzbekistan's desire to dominate its neighbours rather than trying
to cooperate with them, Nazarbayev criticized "a national supremacy
disease" as a key regional problem, along with terrorism.
A metallurgical engineer by education, Nazarbayev became
involved in politics in 1973 when he became secretary of the
communist party committee at the Karagandy Integrated
Iron-and-Steel Works. Like almost all leaders of former Soviet
Republics, Nazarbayev then fought his way up the slippery ladder of
regional government. This was no easy feat given central
government's tendency to put its own hand-picked ethnic Russians at
the helm of the republics - particularly ones as ethnically diverse
and resource-rich as Kazakhstan. He first made it into the
corridors of power in 1984, when he was appointed chairman of the
council of ministers of the Kazakh Soviet Socialist Republic. In
1989, he became first secretary of the central committee of the
Communist Party of Kazakhstan and later also became chairman of the
supreme council of the Kazakh SSR.
On December 1 1991, during the final weeks of the collapse of
the USSR, Nazarbayev was elected unopposed as president of
Kazakhstan, gaining 98.7% of all votes cast. Two years later, he
dissolved the main legislative body and called for new
parliamentary elections, which were held in March 1994. These were
the first in a series of disputed elections severely criticized by
international observers. Nazarbayev's own party won overwhelmingly
with 154 of 177 seats.
A year later, the constitutional court invalidated the
results of the 1994 elections prompting a major power struggle.
But, in the end, Nazarbayev won a referendum extending his term
until at least 2000 and later won a further referendum that
approved a new constitution giving the presidency more power.
More parliamentary elections were held in 1995, again easily
won by Nazarbayev's supporters, with the usual accusations of
corruption.
In the latest presidential elections last January,
Nazarbayev, as expected, won again and is set to stay in office at
least until 2006. This election was also severely criticized by
international observers, including the European Union and the
Organization for Security and Cooperation in Europe (OSCE). Among
abuses cited was the exclusion of the candidacy of Akeshan
Kazhegeldin, the former reformist prime minister sacked in October
1997. Kazhegeldin was the only candidate who could have scored more
than a token share of the vote but was not allowed to run. Kept out
of the country, Kazhegeldin is now even unable to sit on the
sidelines and rally what little there is of fragmented opposition
politicians.
The conduct of the presidential elections led the IMF, many
analysts believe, to delay agreement on any new support measures.
"In terms of the economy, the biggest problem for the elections was
the attitude of the IMF afterwards," says Aidan Karibjanov,
managing director of Kazkommertsbank. "Although with the IMF, you
never really know if their actions are economically or politically
motivated."
The best of the rest
Nazarbayev, who gained 82% of last January's vote, probably
would have won a fair election and probably by a landslide. He
should be classified as a democratic leader and certainly by the
standards of near-by Uzbekistan, Azerbaijan, Tajikistan or
Turkmenistan, Kazakhstan is liberal democracy.
There is a free private-sector media that, although highly
deferential to Nazarbayev, is technically independent. Unlike in
neighbouring Uzbekistan - where investors leave any material
critical of the government on the plane, even banks' assessments of
the economy - ordinary citizens are able to criticize the president
or any of his policies openly. The merits of the government's
devaluation of the tenge last April and the continuing suffering
this has caused, has, for instance, been the target of much open
public debate.
"There is definitely democracy in this country," explains
Arman G Dunaev, head of the international programme department at
Bank TuranAlem. "Anyone can vote for opposition candidates and
criticize the government. But, there is of course a balance to be
struck between increasing the level of democracy one on hand and,
at the same time, ensuring political stability."
Foreigners seem to like the mixture of democratic and
autocratic elements, as they have done in Indonesia, Malaysia,
Singapore and elsewhere. "Nazarbayev's government and the economic
direction he is heading is good for the rating," observes Anis
Saraj, a London based economist at international credit rating
agency Fitch-IBCA. "This is similar to Suharto's early years when
foreign investors generally benefited from Indonesia's rapid
economic transition. But, there has to be a question about what
will happen after he leaves."
As far as a successor is concerned, constitutional reform is
expected within the next five years that will strengthen parliament
and ensure a smooth transition to a new ruler. Nazarbayev himself,
it is widely predicted, will chose to step down rather than run
again and risk the legacy as an artificial democrat who stubbornly
refuses to step down from office. "He is definitely not going to
run again in 2007. This would risk him turning into another Suharto
and, eventually when he did leave, would mean that his children
would be hounded for the rest of their lives," says a senior banker
in Almaty close to Nazarbayev.
"He wants to go down in history not as a Suharto figure, but
rather, as the George Washington of Kazakhstan."
Foreign direct investment and foreigners themselves continue
to flow into Kazakhstan. Expatriates are able to enjoy all standard
civil liberties. The environment for foreign business in Kazakhstan
is one of the most stable and attractive in the CIS. Unlike in many
other CIS regions, there is hardly a machine gun in sight among
banks, security guards and police on the streets.
Nazarbayev also boasts strident pro-western credentials. His
youngest daughter and son-in law are both studying in universities
in the US and, unlike most other CIS politicians, he refrained from
criticism of Nato during the Kosovo campaign. These credentials are
well regarded in Washington, where he has been invited to make an
official state visit this year.
Whether or not Nazarbayev is at heart a real democrat or a
strongman in democratic clothing, is of little concern to most
Kazakhs. Businessmen are content that there is economic and
political stability in a potentially volatile region, and most
ordinary citizens respect him and seem to be indifferent to
criticism by foreign multilaterals of his over-concentration of
power.
"The fact that there has been open criticism about the
electoral process and the level of democracy in the country is
actually a very positive sign. It means that we can learn from
these criticisms and try to improve our democracy even further,"
adds Karim K Massimov, chairman of Halyk Savings Bank. "Kazakhstan
will benefit from not only a developing economy but also a
developing democracy".
Oil growth waits on bottleneck politics
When salesmen at Deutsche Bank and ABN Amro were ordered to
hit their phones and start pushing $200 million in Kazakh sovereign
Eurobonds, they needed only to mention oil. For investors, every
cent rise in world oil prices means Kazakhstan's ability to repay
its debt is enhanced. The extraction and production of hydrocarbons
is the biggest industry, employing 1.33 million in a population of
15 million. Even during much of 1998 when the oil price collapsed,
oil accounted for 44.3% of export value and 38.5% of GDP.
There is, however, a bottleneck to oil-based growth. Because
Kazakhstan is landlocked and has industries that were developed to
serve Russia, nearly all oil exports depend on constrained,
dilapidated Russian pipelines. The routing of any new pipeline is
one of the most hotly debated political issues in the CIS. The
Caspian Pipeline Consortium (CPC) was established in July 1992 to
develop a 1,500km export pipeline from Kazakhstan's Tengiz oil
field to the Russian seaport of Novorossiisk on the Black Sea. In
1996, several global oil companies joined CPC and agreed to provide
all the new capital for the project in exchange for 50% ownership.
CPC ownership is: Russia (24%), Kazakhstan (19%), Oman (7%),
Chevron Overseas Petroleum (11.5%), Russia's Lukoil (12.5%),
Russia's Rostneft (7.5%), Mobil (7.5%), and three other
shareholders.
As things stand the proposed route of CPC makes Kazakhstan
dependent on Russia. As far as Russia is concerned, any non-Russian
route is a bad route whose development must be quashed. One such
non-Russian route involves energy-hungry China. In September 1997,
Kazakhstan and state-owned China National Petroleum Company entered
into an agreement for the construction by 2005 of a 2,800km
pipeline connecting oil fields in western Kazakhstan to China. This
agreement will be eventually be worth $9.5 billion. With China
expecting to double its oil import needs within the next few years,
the completion of this project would allow Kazakhstan to diversify
its customer base from Russia and even the West and start relying
partly on sales to Asian buyers. Another route has been developed
through Iran in the form of an oil swap deal. In 1997, Kazakhstan
entered into a 10-year agreement with Iran for the right to swap 15
million tonnes of oil by shipping it for refining and distribution
in northern Iran. Iran, would sell equivalent amounts of Iranian
oil to customers of Kazakhstan taking delivery on the Persian Gulf.
The biggest move so far for Kazakhstan away from dependence
on Russia came last November at a regional summit in Istanbul. US
president Bill Clinton finally realized one of his administration's
great foreign policy goals for the CIS: the agreement to begin
construction of a pipeline for Caspian oil that will be independent
of Iran and Russia. With US guidance and financial support, the
leaders of Azerbaijan, Georgia, Kazakhstan and Turkey signed a
treaty committing them to seeking financing for the 1,730km
pipeline. The $2.4-billion line is to originate in the offshore oil
fields near the Azeri capital of Baku, be accessible to the Kazakh
Tengiz field, cross Azerbaijan, Georgia and Turkey and then end at
Turkey's Mediterranean port of Ceyhan. For the US administration,
the key argument has been that the west needs alternative sources
to Persian Gulf oil. A more important but less publicized reason
was for the US to try to diminish Russia's old regional dominance.
The Clinton administration has so far pledged $500 million for the
project in the form of loan guarantees from the Overseas Private
Investment Corporation and the Export-Import Bank. But, how Russia
would react to a pipeline that deprives it of precious
hard-currency income, prestige, and geopolitical influence remains
to be seen.
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