The child weans itself from Mother Russia

Kazakhstan declared its sovereignty from the Soviet Union on October 25, 1990, and became an independent country on December 16, 1991. It began moving its capital in November 1997 from Almaty in the southeast to Astana (formerly Akmola) in the north both for security reasons and in recognition of the country]s ethnic minorities. (Kazakh independence has brought into the open long-suppressed ethnic and religious grievances between non-Muslim Russians - many a legacy of Stalin's resettlement policies - and mainly Muslim Kazakhs. Today, ethnic Kazakhs constitute a slight plurality of the population, with ethnic Russians close behind.)

Kazakh officials have noted in the past that Astana "is our security insurance" against Russian nationalists (on both sides of the Russian-Kazakh border) who have suggested redrawing the northern border so that Kazakh Russians would live in Russia.

So far the divorce has been amicable, though it's been a hard slog, especially after what's happened over the past year. The Russian crisis last summer hit Kazakhstan hard. Within hours of the rouble collapse, prices of Kazakh securities - from tenge-denominated government debt to depositary receipts and Eurobonds traded offshore - nose-dived.

Virtually every Kazakh asset became untradable. Kazakh equities slumped to a point that international investors thought the paper worthless. Foreign investors were in such short supply that all mekams (tenge-denominated short-term treasury bills) were owned by domestic investors.

Trading in debt and equity on the Kazakhstan Stock Exchange (KASE) slumped to below $50,000 a day - and most of that was nominal paper transactions between brokers.

"Yes, it was a terrible year - our total turnover was just $28 million," says Damir Karassayev, the 24-year-old KASE president. "First the Asian crisis, then the GKO default in Russia, wiped out foreign buyers. The only investors left were the domestic institutions."

But the KASE bounced back strongly this spring. "Trading volumes have soared. In the first half of 1999 they exceeded the total for last year by 900%," says Karassayev. It was not just a local effect. Trading volumes on major Kazakh instruments bought and sold abroad, several equity depositary receipts in Frankfurt, a Eurobond issued by Kazkommertsbank and several tranches of the Kazakh sovereign Eurobond, have also shot up.

Part of this was accounted for by administrative changes - Kazakhstan's National Securities Commission prohibited OTC trading of any Kazakh securities, boosting the role of the KASE. Additionally, one of the most liquid Kazakh instruments, the Kazkommertsbank $100 million 11.25% 2001 Eurobond, was officially listed on the KASE.

Pension fund boost

But the biggest factor was the surprise creation of a private pension fund sector. Already some $400 million has been accumulated by a few newly created funds. Kazakhstan has become the only CIS country to have a fully functioning pension fund system in operation - with all the laws, regulatory bodies and, most important, cash, already in place.

A large proportion of the assets held by Kazakh pension funds will be invested in local securities through the KASE. By the end of 1999, pension funds should have over $500 million invested. By the end of 2000 this could well exceed $1 billion.

In 1998, there was just one large Kazakh state pension fund. Today, there are dozens of private funds. Even president Nursultan Nazarbayev has opened an account with one. As luck would have it, the Russian crisis came as a huge buying opportunity for Kazakh pension fund managers. After the GKO default in Moscow last August, Kazakh sovereign Eurobonds collapsed to all-time lows. The $350 million issue due in 2002 traded at 50% of par value, offering a spread of 2,565 basis points over US treasuries, compared with a launch spread in September 1997 of 2bp over. The $200 million bond maturing in December 1999 traded at 60% of face value on a 2,400bp spread to US treasuries.

With few other suitable securities available, the funds quickly took advantage of the rock-bottom price and ended up buying most of the Eurobonds. Today, the deal maturing in 1999 is priced at 97% of par and the 2002 bonds have recovered to 93%. Spreads to US treasuries are under 600bp on both issues.

Equities in demand

At the same time, a great deal of pension cash has also been directed towards the tiny equity market. "Given the huge assets that pension funds are accumulating and the fact that a large percentage of these assets must be directed towards Kazakh securities, there is a severe shortage of Kazakh equities floating around on the market," says Karassayev.

"Just over two-thirds of shares in the country are held by long-term strategic investors, under a third by the government and about 10% by the workers. None of these three shareholder groups sell very often," he says.