When Kazakhstan's president Nursultan Nazarbayev uprooted the capital's home from Almaty to Akmola, then in May renamed the new capital Astana (Akmola means ("white tomb", Astana means "the capital"), there were plenty of jokes kicking around in back rooms of the country. "The president wants to be a big reformer. Lenin moved the capital, and George Washington moved his. If you want to think big, move the capital," a former Kazakh government official said.
Foreign portfolio investors who have waited for the past two years for Kazakhstan's economy to come of age are less amused. "Kazakhstan is like a company which has issued a negative earnings announcement. It's become a show-me stock," says Harlan Zimmerman, a portfolio manager at Foreign & Colonial in London. Despite the country's vast natural resources and government promises to kick-start the blue-chip privatization program, progress has been thwarted by reshuffles and bureaucratic red tape, a lack of capital, and delays in reform.
However, while portfolio investors remain frustrated, foreign direct investment is flowing - €1.2 billion in 1997 according to the EBRD - most of it into the oil and gas sectors. It's estimated that the Caspian Sea lies above huge oil and gas reserves, second only to those under the Persian Gulf. Recent surveys suggest that Kazakhstan's Caspian Sea shelf contain as much as 95 billion barrels. The country also has annual production of over 100 million tons of major minerals, and is the world's 10th largest producer of coal. Consider then the government's estimate that only 1% of the coal reserves has been mined so far.
Capital markets on ice
Most local and foreign investors had assumed the Kazakh Stock Exchange, with a market capitalization of $2.8 billion, would be packed with blue chip companies by now. As it is, the privatization programme has so far featured mostly small and medium-cap stocks, leaving slim pickings for larger investors. "I would call Kazakhstan's capital markets an iceberg," says Serkin Elden, who has recently left the US government's Central Asian-American Enterprise Fund for the AIG Silk Road Fund, a venture capital fund launched last year. Trading volume has averaged less than $500,000 a month. The OTC market has been more active, with volume averaging between $4 million and $6 million a month, down considerably from levels last year, when monthly volumes hit $15 million
Blame for the lack of progress has fallen on prime minister Nurlan Balgimbayev, the former president of Kazakoil who took office last year. In March this year, he caused a stir when he announced that privatizations in the oil sector would be halted. Investors were concerned not just because the oil sector accounted for most of the privatization revenues last year and revenue targets in this year's budget were ambitious, but also because the announcement was taken as a sign that the government was clamping down on foreign investment. Balgimbayev has since tried to calm those fears, blaming low oil prices and the consequent deflationary impact on asset valuations for the delay.
He has a point. World export crude oil prices for the first half of 1998 averaged $12.44 a barrel, compared with $19.09 for the first half of 1997. In real terms, oil prices are at their lowest level since the early 1970s. This is especially problematic for central Asia, where oil is the most expensive in the world because the region lacks an adequate transportation infrastructure. Kazakhstan has to pay $4 to $5 a barrel just to get the oil to the international market. That doesn't leave much profit.
"When you say oil is $12 a barrel, it's a problem elsewhere but a crisis for Central Asia," says Curtis Coward, a partner at the Washington law firm McGuire Wood Battle & Boothe. His firm has worked with the Kazakh government for the past five years, and acted as its arbiter on commercial contracts with western companies such as Mobil and Amoco. In regions such as Kazakhstan, oil asset valuations have fallen by a third.
The government may be forced to sell at the low point anyway. Excluding revenues from privatization, Standard & Poor's says Kazakhstan's general government deficit is expected to remain at a steep 8% of GDP. GDP growth is expected to be a fairly meagre 2.5%, or 3% according to the government. "Kazakhstan's economy has been built on the expectation that they will solve their problem in transportation - they can't get oil out," says one senior EBRD official.
The country also needs money to develop the means of extracting the vast quantities of natural resources underground. Even though the government has avoided the borrowing excesses of other emerging market peers - according to Global Securities it's external debt is about 21% of GDP, a fraction of that elsewhere in the former Soviet Union - it has a dismal record for generating income at home.
Tax revenue collection averages just 12% of GDP, one of the worst records in the region. For the past two years, the country has refrained from dipping into its $400 million IMF Extended Fund Facility, after a bad experience with excessive foreign borrowings in the early 1990s. "They only want to use the IMF facility as a corrective measure," an EBRD official says.
Given that position, privatization of the most sought-after assets may be the only option. "I'd say that they don't have a lot of luxury in terms of time. They're not in a position of strength. They have urgencies in the state budget that they have to address," Coward says. On the other hand, he acknowledges that the government is against the wall because of the valuation declines on its most precious assets in the oil, gold, and uranium sectors. He believes this, rather than the government's reluctance to part with key state assets, is why the government has resisted bringing those assets to market.
Privatization potential
They will come. The plan for 1997 included a new programme to privatize 50 strategic companies in the oil, gas, mining, metallurgy, and utilities sectors. At the first stage, according to Global Securities, the government hand-picked 13 companies to be offered through the stock exchange.
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