Kazakhstan Chamber of Commerce in the USA

KazCham



Influence of financial crisis on Kazakhstan 0

Posted on September 13, 2010 by KazCham

The Kazakh University of economy, finance and international trade faculty of “Economy and business” lecturer Kashkimbaeva K.

In summer 2007, the American subprime crisis had an impact on the Kazakhstani real estate market, and then, in 2008, on its entire banking sector, which after Russia’s is the most developed in the CIS. This sector is facing major difficulties owing to its massive lending sprees in international financial markets and its overexposure to the real estate sector. For the first time since the Russian crash in summer 1998, Kazakhstani authorities are faced with managing a major shock, compelling them to test, in real time, not only the solidity of the country’s most dynamic economic sectors, but also the effectiveness of the state intervention mechanisms. Astana ultimately seems to have demonstrated its overall financial solidity, but the long-term social and regional costs remain unclear.

BACKGROUND: Boosted by great petrol reserves and looking for quick ways to make a profit, Kazakhstani banks borrowed significant sums of money from U.S. banks involved in hedge funds. Today, they are paying the price for their success and face two principal problems. First, the weighty role played by the construction sector in their development (which, for example, constitutes 45% of the Alliance Bank’s loan portfolio), and, second, their massive foreign borrowings, which amount to more than 50% of their total borrowings, as compared, for example, with the 18% borrowed by Russian banks. During 2006 alone, Kazakhstani banks obtained more than US$18 billion in international credits. Today, the servicing of Kazakhstan’s foreign debt that will have to be repaid by 2009, has reached a level equivalent to 42% of its exports. In 2007, the country had a bill of US$4 billion to pay, tripling brutally to 12 billion as a result of the crisis. Kazakhstani banks, for their part, hold US$40 billion worth of foreign loans, a significant share of which now has to be refinanced at very high rates.

Nevertheless, the Kazakhstani authorities quickly stepped in to regulate and stabilize the situation. In spring 2007, Kazakhstan’s Central Bank set up an aid fund for small banks with insolvency problems. When Standard & Poor’s and Moody’s Investors Services downgraded the credit ratings of Kazakhstani banks, the state decided to invest US$11 billion of emergency money (nearly a quarter of the Central Bank’s reserves) in order to halt foreign borrowings and avoid a credit ratings collapse. Astana also set up a Stabilization Fund of US$4 billion to ensure liquidity, but this did not suffice to reassure foreign investors, especially when the Renaissance Capital’s Rencasia Index for Central Asia, which is dominated by Kazakh equities, collapsed in September 2008 after Lehman Brothers’ announced its bankruptcy.

In October, Astana announced it would give US$5 billion in aid to the major national banks for about a quarter of their shares (the state already directly or indirectly controls a third of corporate deposits). Thus, the BTA Bank, the largest in the country, is expecting a state injection of more than US$2 billion, while Kazkommertsbank, the country’s second largest, is awaiting a boost of US$300 million, and the Halyk and Alliance Banks US$500 million each. BTA was the most affected because of its high-level involvement in the construction sector, but it was the collapse of the Alliance Bank that caused the most ink to be spilled. After becoming the leading retail lender and the fastest growing banking institution in Kazakhstan in only a few years, the Alliance Bank spectacularly collapsed; in the first semester of 2008, its net income fell by almost half. In the short term, this situation is going to facilitate foreign banks to establish themselves in the Kazakhstani market, as their share had previously been a modest 15 percent. Now, for example, Italian UniCredit, South Korean Kookmin, Israeli Hapoalim, Abu Dhabi-based private equity fund Alnair Capital, and the London-based HSBC, all have their sights set on snapping up sections of Kazakhstani banks. Moreover, Raiffeisen International and the Bank of Tokyo Mitsubishi are planning to open offices in Almaty in the first half of 2009, the second to facilitate Japanese firms’ entry into the Kazakhstani raw materials market.

The banking crisis continues to lean heavily on the Kazakhstani real estate market, estimated at US$30 billion. The banks have massively increased their credit rates, making it difficult to obtain a loan with annual interest repayments of less than 20 percent. As a result, the construction market has collapsed in all the major cities and especially in the two capitals, Almaty and Astana, which have reportedly plummeted by 40 percent in a few months. The building on many construction sites has been blocked, and in Astana itself, financing shortages have halted construction on nearly every second site. The decrease of the price per square meter is making itself felt, especially since the real estate prices had literally shot through the roof, increasing by 900 percent in four years. Tens of thousands of people have been unable to obtain their recently bought apartments, whose construction has been halted. In order to forestall a total market collapse, the government has set up a US$500 million aid program for construction companies unable to get credit terms and has bought thousands of apartments in Astana. Kazakhstani companies that previously invested in national real estate today are now purchasing in foreign markets, while others have decided to stop selling housing altogether and wait for prices to go up again.

IMPLICATIONS: This crisis has multiple implications. It caused major liquidities shortages for the country. Attaining record levels of 18 percent in 2007, inflation has continued to climb in 2008 to around 20 percent, and the tenge’s stability remains fragile.

Concerning domestic political stability, the crisis is not in President Nursultan Nazarbaev’s favor. In fact, the President’s popularity has been staked on the country’s economic success, on his twin resolve to have it gain entry into the exclusive club of the world’s ten largest exporters of crude oil, and to catch up to the living standards of Central European countries. Disappointed social expectations could turn into political discontent. On the other hand, in the “Family’s” somewhat concealed war against the technocrats and certain oligarchs, the crisis paradoxically plays into Nazarbaev’s hands. Since the start of this decade, the Presidential clan has sought to re-establish “vertical power” in the domain of resource management. This goal has been partially accomplished through the Samruk holding, which has reinforced the preponderant role of the state in the management of the country’s large companies (e.g. KazMunayGas, and Kazakhstan’s telecom, postal, railway, and electricity companies). As a result, the oligarchs have concentrated their oppositional forces in the world of finance and banking, as well as in the metallurgy industry, which both are still privately held. The tycoons, including figures such as Nurlan Subkhanberdin, who is often presented as the “Kazakh Khodorkovsky”, Alexander Mashkevich (Eurasian Group), and Vladimir Kim (Kazakhmys), all make appeals for the diversity of economic actors to be preserved. The sudden weakening of these milieus, in particular of the banking circles, facilitates a recentralizing of the Kazakhstani economy around the state. In the short term, this development raises questions about access to resources for private actors, and, in the long term, questions about the stability of property at the time of the next Presidential succession.[2]

On the societal level, the crisis not only affects the population of Kazakhstan, but that of the entirety of Central Asia. Over recent years, Kazakhstan has become the economic motor of the whole region. It is particularly important for Kyrgyzstan, since, with trade levels reaching nearly 450 million dollars in 2007, it rivals Russia and China as the country’s largest trading partner. Moreover, Kazakhstan is establishing itself more firmly in Tajikistan, continues to be one of Tashkent’s most important partners (for example, in cereals), and Kazakhstani-Turkmen cooperation in the domains of hydrocarbons and uranium extraction is certain to develop in coming years. Any collapse of Kazakhstani investments in the region, especially via bilateral Investment Funds (Kazakh-Kyrgyz and Kazakh-Tajik), would be detrimental to the whole region, even more so at the present moment when Bishkek and Dushanbe both face huge energy shortages and the latter significant deficits of foodstuffs. In addition, Kazakhstan has an indirect influence on its neighboring economies, since, after Russia, it is the second most favored destination for Kyrgyz and Uzbek migrants. Since the beginning of winter 2008, construction sector workers, mainly Central Asian immigrants, have not received any or only substantially reduced proportions of their salaries. As a result, they can either no longer send remittances home or are compelled to return to their countries without the hoped-for money, which has all of a sudden deprived hundreds of thousands of families of revenue at the onset of winter. [1]

CONCLUSIONS: In the end, this crisis may come to have positive consequences. It will streamline the Kazahkstani banking sector by getting rid of those companies that placed all their bets on speculation. It will also act as a corrective to the over-evaluation of real estate and encourage investment in more productive sectors. The crisis has demonstrated that the country’s overall financial basis is solid enough to enable Astana to contain a market collapse. Kazakhstan’s central bank still has about US$20 billion in reserves and the country’s oil fund stands at about USS$15 billion. Nevertheless, the long-term social impact remains unclear, and were the “Kazakhstani model” to fail as a result of this crisis, it would have a detrimental impact on the rest of Central Asia.

 List of literature:

 1.     Marl?ne Laruelle  issue of the CACI Analyst 11.12.2008.

2.     www.worldbank.org

SOURCE: www.aef.kz

 

III Astana Economic Forum 0

Posted on April 28, 2010 by Sergey Sek

The III Astana Economic Forum will be held in July 1-2,  2010 in Astana city and dedicated to the issues of ensuring sustainable economic growth in the post-crisis period.

The third economic forum will bring together over 2000 representatives from political and business area from more than 50 countries of the world this year, and also the leading scientists, representatives of the public and mass media to discuss the key subjects of the global economy development.

The two-day event program is dedicated to the issues of innovation, business, industry, international trade, export and import, customs union, energy, ecology, international financial and currency systems, Islamic financing and youth development. Within the frames of the Forum the exhibition of scientific works and innovative projects, competitions for the best research works and two events with the participation of the international organizations concerning the issues of the role of information and communication technologies and development of “green” economy will take place.

Contact information: 
Tel.: + 7 7172 70 18 32 
Fax: +7 7172 70 18 35 
E-mail: forum@aef.kz 
Skype ID: aef2010

Interview with Grigory Marchenko, the head of the National Bank 0

Posted on April 06, 2010 by KazCham

The crisis came down to nothing or we just got used to live in its terms, taking it as an inescapable reality? The economy is stuck at the notorious bifurcation point and what to expect now: an increase or a new wave of setback? These issues are still hotly debated in society. Discarding the emotions and looking at the situation on the basis of the indicators of bygone years, the head of the National Bank, Grigory Marchenko, offers his view.

– To remind you the key results of the economic growth of Kazakhstan according to official sources in 2009: economic growth was 1,1%, industrial growth – 1,7%. While the predictions at the start of the last year were very pessimistic. Today, experts agree that a positive result was achieved by taking proper anticrisis measures in many ways. The effectiveness of the Government, the National Bank and AFS, summing up the very difficult year, were voiced by the Head of the State in his speech: “The world financial and economic crisis affected the pace of economic growth but did not stop our development. Past economic potential provided us with stability in difficult crisis battles for three years. We have defended the country’s financial system and rescued banks. We were in a “breakout group” of countries with positive growth rates. Gross international reserves and assets of the National Fund already exceeded $ 50 billion and has increased over the past ten years for more than 25 times. It is important to note that we spent part of the funds last year, but yet today the fund is bigger than in December of last year.” Today’s priority is to prepare the economy for the post-crisis development. So, are we done with the page addressed to the crisis and its emotional perception?

– There are lee emotions now and you can safely talk about it, because accusations,  made and not made, in fact, have accumulated a lot, said the head of the National Bank. – The fact that they are mostly emotions, economically unfounded or financially illiterate, is obvious. In particular, the question: why did we have the devaluation? Even today there is still some views that it could not have been done. But this is  misleading.

– Gregoriy Aleksandrovich, to be honest, some measures, particularly February devaluation, seemed very hard, painful, ill-founded a year ago.

– Shall we recall what happened before? Prices for raw materials, which is our main export item and an essential part of the economy, fell two or three times. In autumn 2008 the country’s neighbors  devalued the currency: Russia – 50%, Ukraine – almost 60%. In January 2009, our industrial production fell by 18% in a month. This reduction was for those industries that competed with cheap imports of Russia or Ukrainian (more than two-thirds of them). All that we had already passed in 1998-1999! We also had no internal reasons for the devaluation. But there was a default in Russia. There was an abrupt devaluation, and all of Russian, Ukrainian, Belarusian goods fell sharply in price in dollar terms and poured into our market. They were much cheaper than domestic goods, which costs could not compete with them. As a result, our enterprises had problems: first, they began to go to work in one shift, then began to send people to unpaid leave …
Many financiers saw the devaluation as the only exit in January and February 1999. Although, personally, I was not its advocate. At that time I was a member of the working group, and we were opposing devaluation, believing that we could solve those problems by methods of tax and customs policy of the state. It did not happen. And the National Bank introduced a freely floating exchange rate in April 1999.
In January 2009, there were similar factors and other circumstances. For example, during one month the net purchase of US dollars was amounted to two billion dollars in exchange offices! For our system is an absolute record.
In addition, during the same month the flow of deposits in tenge currency to foreign currency was 3,8 billion dollars. Thus, everybody understood what was happening and began a massive withdrawal into dollars. These factors clearly indicated that the devaluation was absolutely inevitable. The question was only how to do it. But that was what exactly I had to do in a week after taking the office; I did not come up with a scheme. By this decision, I repeat, we summed up the real situation.

– Was there an alternative to implement schemes, for example, the gradual devaluation, as in neighboring Russia?

– The decline in industrial production, the massive buying of dollars and flow of tenge deposits into foreign currency clearly said that the devaluation had to be done before and that we were already late. From the standpoint of economic theory it should have been carried out in October, when commodity prices fell. That happened, for example, in Australia, Canada, Norway. These countries, like Kazakhstan, are commodity exporters. There, the exchange rate in just a few weeks fell to 26% in Australia, at 28% in Canada and 40% in Norway. There was also a second option: to devalue along with Russia in mid-November. Neither the first, nor the second option had been made. Therefore, the only way out was to conduct a one-stage devaluation in February 2009.

– It is believed, that as a result  investors, individuals, who kept their savings in tenge, became the most aggrieved party…

– According to the National Bank, Kazakhstan depositor shifted to the foreign currency deposits 20% savings in four months (November 2008 – February 2009), and in Russia, despite the gradual devaluation – 18%. That is, our people had shifted more money: all who wanted to protect savings which was done before the devaluation. In that case we had no leaks of deposits. And it was in Russia: 300 billion left the banking system, but later returned. I also recall that during the last decade the National Bank has always insisted that you should not keep all your savings in one basket. It is necessary to divide the savings in the proportion of 50 to 50. And then the currency fluctuations between them are not scary. Investors who adhere to this rule were not affected by the devaluation.
If we compare the scheme of the devaluation, let’s judge their performance. In Kazakhstan GDP grew, albeit a little bit; in Russia it fell for 7,9%. Inflation in the neighboring countries was 8,8% in 2009. In Kazakhstan – 6,2%. This one and a half times lower compared to 2008 (9.5%). Although, I remind you that some of the most pessimistic “experts” promised us inflation at 25%. The forecasts of the same “experts” on the second round of devaluation were not justified as well. They frighten people that the dollar would cost 180 tenge. It’s possible even now to hear such predictions, but if the “experts” regularly mistaken before, then why do people believe them now?
I think the important lesson of the last year is that the National Bank, publicly designating its policy, was adhered to it: we did all that we promised. The National Bank marked the corridor, and it passed. And the corridor was even narrower in reality. We promised that there would be more inflation but it did not let that happen. We said that there would be a small growth in GDP, and it was so. However, even more than we planned. We have done everything correctly, and all our predictions were confirmed.
I think the situation with international reserves (gold reserves) of Kazakhstan is fully restored: the total gold and foreign assets (GFA) of the country stand at 52.7 billion dollars now. But it’s more than before the crisis, despite the fact that we spent 10 billion dollars from the national fund for the anti-crisis measures.

– It is common knowledge that you are not a fan of analysts and experts. However, the National Bank uses forecasting and planning. What is, in your opinion, permissible prediction error?

– We have no, unfortunately, serious analysts or an authoritative analytical community. However, many foreign analysts do not differ in their validity and accuracy of forecasts as well. For example, they predicted the deficit of current account balance at minus-six – eight per cent of GDP in 2008 for us, but it was actually plus five percent! Error in 12 billion dollars! However, the same experts come again and give forecasts for Kazakhstan in 2010. But if the experts do not understand the economy, do not understand its significant difference from the economies of Europe or Russia, they should not give forecasts, or give them, but cautiously, with these caveats in mind.
I, personally, and the National Bank, would gladly welcome a serious analytical community, but there are just a few good analysts. I can name one of them – Jonathan Schiffer, the vice president of Moody’s, who is responsible for Kazakhstan since 1996. Before he was a professor at the Columbia University and worked on the Soviet economy. There are just a few people who understand the nature, essence, the origins of the national economy, its specificity and the mentality of the population. Everything matters in the analysis, even, for example, the notion of “sedentary” or “nomads”. And who, for example, knows in Europe what is a nomadic lifestyle and the customs and traditions that it generates?

– For example, the Roma …

– But they do not work as analysts! But if to talk seriously, the National Bank is constantly analyzing the situation and makes predictions. It prepares and not guesses. But even in serious prognosis some errors are allowed. So, we gave the forecast for GDP growth of 0,3%, but it turned out – 1,1%. The volume of GDP at current prices, according to operative data of the Statistics Agency, reached 15.9 trillion in 2009. Let me remind you, some analysts predicted the fall of the main indicators, but in practice it was an increase. That is, first, the trend was identified incorrectly. This is a principle mistake. Secondly, there is an error of calculation – not even for a few percents, but in times. Therefore, the National Bank indicates the corridor in forecasts. And if the process goes in limits of this corridor, the exact approach is correct.

– Grigory Aleksandrovich, I remember well your interviews with our newspaper three-four years ago, when you warned about the mortgage bubble and would predict that it would burst. It happened. Many mortgage based businesses were in a difficult situation. What to do now?

– They are all adults, and if they assume such risks in the market economy, they should be responsible. And I do not see other ways but to negotiate with your bank, explain what the essence of problems is and how the debt can be restructured. There are people who really were in a difficult situation because of the crisis circumstances among the borrowers. But many of them wanted to do business on the growth of prices in the real estate market. That is another story – this is a market risk rather than social risk. In addition, we estimate that one third of borrowers could not service their loans, even if there was no crisis and there would be no devaluation. And there are many lessons to be learned for everybody, because some borrowers used dishonest tricks in efforts to confirm their ability to pay. For example, they provide banks with non-existent income statements.

– To sum up: how does the National Bank evaluate the outcome of the devaluation, does it achieve its goals?

– The results clearly show that our decision was necessary and correct. One-stage devaluation immediately reduced the pressure on the national currency and devaluation expectations, increased the competitiveness of Kazakhstani goods by reducing their costs, improved the balance of payments, and maintained gold reserves of the National Bank and the country. In addition, despite the devaluation, the total amount of residents’ deposits in the banking system for the year increased by 19.7% to $ 6,473 billion tenge. Moreover, individual deposits grew by 28.5%, exceeding 1.8 trillion tenge.

– Your term “asymmetric apron” gave an incentive for new forecasts. In particular, it was about a more pronounced correlation of tenge exchange rate with the rate of the ruble, which includes the establishment of the Customs Union. Are these assumptions reasonable?

– In principle, the establishment of the Customs Union should not have any pressure on tenge exchange rate in relation to Russia’s ruble as well as it does not require an adjustment in the monetary policy of the National Bank. However, one of the potential risks involved with the creation of the Customs Union is a risk of rising inflation. However, if implemented, the National Bank has the necessary tools to minimize it.

– The head of the state demanded banks to cut off from overtly or covertly affiliated entities,  to ensure that they are engaged exclusively in banking activities and that their activity should be very transparent. What measures are supposed to take?

– First, it is necessary to tighten control over the ongoing intra-group transactions and prudential supervision of banking conglomerates. Secondly, it’s necessary to improve measures on transparency of the ownership structure of financial institutions and affiliated organizations. Today, there is a working group, based on the AFS, is being established to develop a bill which will ensure the transparency of banks and their exclusive affiliation with other entities. It will also include representatives of the National Bank of Kazakhstan.

– Evaluating the outcomes of anti-crisis program in 2009, do you consider it necessary to continue the state support for the banking sector?

– The main achievement of bygone years that the banking system of Kazakhstan is relatively successfully coped with the negative impact of the second wave of the crisis. Problems of individual large banks do not have the problems of the whole system, and they successfully complete the restructuring process. In general, a package of anti-crisis measures helped to overcome some of the most dangerous consequences of the crisis. In particular, to overcome the shortage of credit on the most important sectors of the economy and avoid a collapse as a result of underfunding.
If we talk about stabilizing activities in the current year, I think, success will depend on the concerted action of the Government, AFS and the National   Bank. We have already identified the main directions of work. First, to support exchange rate stability of tenge and the level of liquidity of the money market.
This is the main task of the National Bank. Secondly, it is necessary to accelerate the healing process of bank balances and to clean their low-quality assets.
Thirdly, there is a need to develop a set of measures that will stimulate the credit activity of banks in the post-crisis phase. Fourthly, it is necessary to make the transition to a countercyclical management and improved risk management systems in financial institutions. Finally, fifthly, there is a need to develop a set of measures to reduce the level of economic imbalances and systemic risks.
I think that, it is not worth to cease the direct support of the banking sector completely in 2010 because the current state of the banking sector is largely dependent on state support, which allows overcoming the shortage of funding banks. However, there should be a gradual reduction in state aid and stimulus to the process of finding new sources of funding.

The interview is taken by Alevtina DON

SOURCE: http://www.zakon.kz/165594-grigorijj-marchenko-my-sdelali-vse.html

The BTA saga 0

Posted on March 26, 2010 by KazCham

ONCE UPON A time, all six of Kazakhstan’s biggest  banks were Kazakh-owned and accounted for 86 per cent of banking assets. They stayed home-owned,  unlike most banks in central Europe, because they  borrowed to fund their headlong growth by raising  cheap equity in London and/or by borrowing lots  of money, very cheaply, from foreign banks –  $45 billion, to be precise.

By the time the fairy story ended, in August  2007, two of the ‘big six’ banks, ATF Bank and  BankCenterCredit (BCC), had already been sold, at very high multiples at the top of the market,  to Italy’s UniCredit and South Korea’s Kookmin Bank respectively. Several others, including  Kazkommertsbank (KKB), had also linked up with  foreign minority partners.

They were the lucky ones. Once Kazakh banks  became victims of the US sub-prime crisis, deep- pocketed foreign shareholders suddenly became  highly desirable and are now being actively sought by -»Alliance Bank, and above all, BTA Bank.

BTA was effectively nationalised in mid-February  when the government, in the shape of the Samruk/ Kazyna holding company, shovelled nearly $5 billion  into the banking system and took a controlling  75.1 per cent stake in BTA in return for $1.7 billion of  fresh equity.

In a conference call with BTAs investors and  creditors on 28 April, Anvar Saidenov, the former  Central Bank president who now runs BTA, explained  that Samruk had acquired the controlling stake “via a mandatory additional share issue… as a result of BTA  being in breach of liquidity and capital requirement.”BTAs ousted former president, Mukhtar Ablyazov,  didn’t see it that way. He complained that the bank  had been the victim of an egregious act of corporate  raiding, before fleeing the country ahead of the  bailiffs. He is now required to respond to accusations  of money-laundering and illegally transferring  funds to front companies. From a safe distance,  Ablyazov has started legal proceedings in an attempt  to get billions of dollars in compensation for the  bank’s former owners, although he is not formally a  shareholder in the bank himself, according to Central Bank chief, Grigori Marchenko.

Ablyazov, long viewed with suspicion by the  establishment, is a boyish-looking, hyper-active  entrepreneur, and former energy minister. He helped  finance and lead the opposition Democratic Choice  movement earlier in the decade before being jailed  for allegedly misappropriating funds. After a year in  jail he was given a presidential pardon and released,  promising to give up politics and throw his energies  into business.

By the time the global financial crisis broke two  years ago, Ablyazov and chairman Roman Solodchenko had built BTA into the country’s biggest bank. In the  process they borrowed more than $15 billion – mostly  in foreign currency – and re-lent much of the money  into property and other projects in Kazakhstan and  throughout the former Soviet Union.

While commodity prices remained high, for the  first year of the crisis, BTA, along with other heavily  indebted banks, was able to repay maturing debt and  interest by recalling maturing loans and rolling over  loans at higher rates. But when commodity prices  nose-dived in the second half of 2008, in the global  meltdown that followed the collapse of Lehman  Brothers, corporate balance sheets contracted, cash  evaporated and depositors looked for a safer home. Tenge devaluation in early February added further to  the foreign debt burden of all banks, but especially  BTA as the most indebted.

When Samruk/Kazyna took possession of their  new asset, Anvar Saidenov, the former Central Bank  president, moved in to take charge and a small army  of finance police moved in to the bank to go through  the books and computer files with a fine toothcomb.

The cultural change is dramatic – from free- wheeling, growth-orientated, entrepreneurial  whiz-bang the bank is now just ticking over in  the safe hands of a former central banker and  financial bureaucrats. Little wonder, under the circumstances, that the main priorities of the new  management are to restructure the bank’s debt as  soon as possible and find a new owner to rebuild the h bank. UBS and Goldman Sachs have been called in as financial advisers.

Their task became more difficult after the  new management was forced to default on BTAs  foreign loans in April. Morgan Stanley and another  international banks called in loans totalling $550  million, triggering what would have been an  avalanche of early repayment demands, which the  state made quite clear it was not prepared to deplete  its reserves to satisfy.

The US investment bank justified the move as  a response to changes in ownership covenants  following Samruk’s defenestration of the old regime  and downgrades by the international rating agencies.  Standard and Poors moved BTA debt to “default”  status and Fitch downgraded BTAs long-term issuer  default rating to “restricted default” as the new state  owners are continuing to pay interest on outstanding debt and repaying smaller loans, below $10 million,  as they come due.

BTA is not alone in its default. In May, Alliance  Bank requested a three-month moratorium on  debt repayments after writing down $1.1 billion  of assets linked to US Treasuries. BTA, Halyk, KKB  and other banks, meanwhile, have raised new bond  issues domestically where possible to shore up their  capital base and allow them to buy up some of their distressed bonds at a discount.

With BTA formerly scheduled to pay back  $3 billion this year out of $9 billion of foreign loans  still outstanding, the new owners have taken a  tougher line with creditors, pointing out that those  granting foreign loans and credits to Kazakh and  other emerging market banks in the boom years  were all professionals who should have been aware  of the risks.

At the annual Fitch rating conference in April,  Elena Bakhmutova, chairperson of the Kazakh Agency for Regulation and Supervision of Financial Markets  and Financial Organisations (KFSE), said: “We will use all feasible suggestions – redemption of discounts,  substitution of new debt securities and so on.” But,  she underlined “under no circumstances will state  guarantees be used.” It is on this basis that BTAs  new owners are negotiating debt-restructuring terms h with creditors to clear the ground for substantive  negotiations with potential new owners.

The leading suitor is Russia’s giant Sberbank, the  former Soviet savings bank. Ownership of BTA would  give Moscow a powerful new role in the Kazakh  economy. Russia, however, is also suffering from the  global economic crisis and Sberbank is having its own  problems with mounting bad debts. However, the  Russian state is preparing a substantial recapitalisation of Sberbank, both to strengthen it domestically and  provide it with the financial firepower to take over BTA if terms can be agreed. Whether any other suitors  emerge depends largely on the evolution of the  banking crisis elsewhere in the world.

Looking ahead, the chance to buy what was  Kazakhstan’s biggest bank, with subsidiaries  throughout Central Asia, is probably an unrepeatable opportunity. But deep pockets and strong nerves are  called for, and both are currently in short supply.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 82-83.

The Caspian basin’s biggest gas condensate field pauses for breath 0

Posted on March 10, 2010 by KazCham

KARACHAGANAK, ONE OF the world’s largest gas  condensate fields, with estimated reserves of more  than 1.2 billion tonnes of oil and condensate, was  discovered and initially operated in Soviet times, as  was Tengiz some 650km to the west. But coping with h the complexity and high pressures of both fields  was way beyond the technical and organisational  capabilities of the Soviet oil and gas industry.

Repairing the legacy of leaking pipes, abandoned  equipment and ecological devastation was one of the first tasks facing UK-based BG Group and Italy’s ENI,  the operators of the Karachaganak field, who brought Texaco (now absorbed into Chevron) and Russia’s  Lukoil into their consortium, before signing a 40-year production-sharing agreement with the government  in 1997.

Over the intervening 12 years, Karachaganak, like  Tengiz, has changed out of recognition to become  one of the most modern and productive oilfields in  the world. It delivered around 12 billion cubic metres (bcm) of gas last year, more than six times the Soviet  peak level, and around 230,000 barrels a day of oil  and condensate. But after more than a decade of  heavy investment, the consortium operating the field has decided to take a breather and see how the global economy develops before pushing ahead with stage  three of the field’s developments

The initial $1 billion rehabilitation programme  got underway in 2000 after BG and ENI set up the  Karachaganak Petroleum Operating consortium  (KPO), in which the joint operators held 32.5 per cent each, while Chevron-Texaco took a 20 per cent stake  and Lukoil the remaining 15 per cent.

KPO remains the only one of the three Caspian  mega-project consortia to be entirely foreign-owned.  But the combination of a 65 per cent majority  holding in the hands of the joint operators, and  supportive minority stakeholders, appears to  have contributed to the smooth running of what  has become one of the most successful foreign  investments in the country.

Prior to the onset of the global crisis, KPO was  bracing itself for a government-backed bid by the  state energy corporation KMG for a minority stake  in the project, along the lines of KMG’s stakes in the TengizChevroil and Kashagan Consortia.

But faced with a severe banking and construction ^ sector crisis, and a collapsing oil price, the  government appears to have quietly backed away  from a policy that threatened to load KMG with  another heavy investment commitment it would  struggle to deliver. KPO also argued against the risk  of unsettling a proven successful operation, which  was generating tax revenues and creating skilled jobs for thousands of Kazakh citizens in an otherwise  backwater region of the country close to the  Russian border.

Important as its Kazakh operations are to BG,  senior management also indicated that developing  its deep offshore gas fields south of Brazil’s Rio de  Janeiro, and producing methane gas from coal in  Australia, were actually more attractive investment  propositions than producing more gas in landlocked  Kazakhstan in the global scheme of things.

BG alone claims to have invested $2.5 billion  in Karachaganak over the last eight years when  production of high-value gas condensate and gas  for sale to Russia’s Gazprom has risen on average by 18 per cent a year since 1998 to around 136,000 barrels of  oil equivalent a day. Export volumes of condensate are  expected to rise to 10.3 million tonnes a year after a  fourth ‘stabilisation train’ is completed by 2010.

Development is continuing at Karachaganak,  where up to 20 wells are being drilled in the first  stage of phase three of the field’s development.  This will improve oil recovery by increasing both  gas production for sale and re-injection. But the  consortium has called a halt for the time being on  the fuller implementation of stage three, which  entails construction of a $1.5 billion gas refinery and  development of gas sales to the domestic market and  possibly to China, as well as the traditional sales to  Russia’s Gazprom via Orenburg.

Successful completion of both the initial  rehabilitation of the existing field and the $5 billion  second stage has raised volumes and stabilised the  long-term production profile, thanks to powerful  sour-gas re-injection compressors and complex  gas treatment equipment the size of a small city.  Investment to date ensures efficient long-term  exploitation of the unique l,450m-deep column  of gas underground and the 200m-thick rim of oil  beneath it. Together the reservoirs hold an estimated -» l,200bcm of gas and more than 1 billion tonnes of gas condensate and oil.

At present, Karachaganak sends the bulk of its  gas to Gazprom’s processing plant at Orenburg, just  across the Russian frontier. This continues a practice  that began in Soviet times when Karachaganak was  essentially a subsidiary of the Orenburg complex,  with which it shares the same geological structure.  But in order to get a better return than what  would come from merely selling gas to the Russian  monopoly purchaser, KPO has built a 125mw gas-fired power station to satisfy Karachaganak’s own power  needs and a 165km pipeline to supply gas to the  nearest Kazakh town of Uralsk.

This helps to improve relations with the local  community and conforms with the government’s  overall strategy of reducing dependence on imported  gas. Since Soviet days, Kazakhstan has imported  gas from Russia to supply northern Kazakhstan,  and from Uzbekistan to supply gas to the populous  southern cities of Almaty and Shymkent, as well as to Kyrgyzstan and Tajikistan.

Within a few months, southern Kazakhstan will  be able to tap into the lObcm of gas being carried  from Turkmenistan and Uzbekistan across more  than 1,000km of southern Kazakhstan to the Chinese h border, 200km east of Almaty. The capacity of this  new southern export route to the east will triple to  30bcm in a few years. The route will also completely  transform the domestic gas supply situation for  southern Kazakhstan and open up a bottomless  market in China, ending Gazprom’s former  monopoly-buyer advantages.

Once growth returns to the global economy, KPO is  expected to give the green light to full implementation of stage three of Karachaganak. But in the meantime,  both shareholders and the government benefit from  this breathing space, as it allows shareholders to get  a return on their investment to date and boosts tax  revenue for the government.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 40-41.

Road to recovery 0

Posted on March 08, 2010 by KazCham

WHEN THE TWO most dynamic sectors of a relatively  small open economy nose-dive at the same time  the impact on overall economic activity can be very  depressing. That is what happened to the $100 billion Kazakh economy nearly two years ago when over- borrowed Kazakh banks became the first victim of  the global credit asphyxia which followed the US sub- prime mortgage crisis in August 2007.

Economic growth, which had been running at  around 8/9 per cent on an annualised basis over the  first eight months of the year, about average for the  last seven years, dropped like a stone. Cranes stopped swinging on construction sites and a ripple effect  spread right through the supply chain and into the  shops as tens of thousands of building workers were  suddenly laid off. Pressure on the rest of the economy rose as banks, suddenly cut off from foreign capital,  scrambled to recall loans to bank customers, or roll  them over at higher rates, as they struggled to repay  their own maturing foreign loans.

For the Kazakh economy as a whole, recourse to  cheap foreign borrowing by its entrepreneurial,  privately-owned banks in the boom years was a way  of monetising the expected future flow of funds from huge offshore oil and gas fields, such as Kashagan,  whose development is proving more expensive – and  taking longer – than originally expected. Cheap bank -loans for mortgages, large cars and consumer items  generally were a way for hitherto lowly-indebted  Kazakh consumers to access the higher standard of  living that seemed to be assured by the apparently unstoppable rise in the global price of Kazakhstan’s  main exports – oil, gas, minerals and grain.

But the second stage of the global economic  slowdown, which followed the collapse of Lehman  Brothers in September 2008, sparked off a precipitous fall in the traded prices of natural resources of  all kinds. What had begun 15 months earlier  as a construction crisis triggered off by a credit  crunch became a generalised slowdown as miners,  steelmakers and smelters mothballed marginal mines and/or cut output. Only the oil and gas producers  and the uranium miners continued ramping up  production, but even they were hit by lower prices  as oil dropped to just over $30 a barrel and copper to  below $3,000 a ton before starting to recover in the  second quarter of 2009.

The government reacted angrily to the first phase  of the crisis. Bankers said President Nazarbayev  castigated them as “greedy traitors” and, with the  benefit of hindsight, it soon became clear that  the banks had indeed financed far more palatial  mansions and luxury apartments than the number of oligarchs and aspiring middle class able to buy them- but too few flats that working people could afford  in the fast-growing cities. The short-lived craze for  buying top of the range SUVs and Porsches on credit  also looked over the top – especially as the Almaty  Metro project dropped even further behind schedule  and road construction generally failed to keep up  with the growth in traffic and air pollutions

But the real crunch in what is now an almost two  year long crisis came in February 2009, always a  bleak month in the heart of the Steppe winter, when  the government issued a blizzard of instructions –  and put the resources of the National Fund to work  shoring up bank balance sheets. The Fund, flush  with $24 billion set aside from oil revenues in the  fat years for just such a rainy day, transferred $10  billion to Samruk/Kazyna, the state holding company  and de facto sovereign wealth fund. Further billions  were shovelled into financing nearly completed  construction projects, converting luxury flats  into more affordable properties for civil servants,  especially in Astana, and replacing banks as financiers to some credit-starved construction companies.

But the clearest sign of a new determination to  tackle an economy heading for zero growth – or  worse – came with the appointment of Grigori  Marchenko as chairman of the National Bank. One  of his early acts, in February, was to decree an 18  per cent devaluation of the Tenge, with a 3 per cent  fluctuation margin either side of the new Tenge  parity of KZT150 to the US dollar. It was KZT120  before devaluation. This helped the export orientated minerals sector – but aggravated the foreign debt  burden of the banking system.

The most controversial move was virtual  nationalisation of the country’s biggest and hitherto  fastest-growing bank, BTA, as Samruk defenestrated  the bank’s former president, Mukhtar Ablyazov, and  injected $1.7 billion in return for a controlling 76 per cent stake. At the same time Samruk poured another h $3 billion into the two remaining ‘big three’ banks – Kazkommertzbank and Halyk Bank, in return for  a quarter of their equity, and warned creditors of  Alliance Bank that re-financing the smaller of the top six banks would only happen if they first agreed debt-n restructuring terms.

Samruk’s role in the bank re-capitalisation  underlined the accumulation of wealth and power  into its hands over the last three years or so. Set up  ostensibly to improve the standard of management  in state owned companies, critics see its hydra-like  control over the ‘commanding height’ of the Kazakh  economy – railways, telecoms, power distribution,  airlines and the state oil and gas corporation KMG – as a reincarnation of Soviet-style control over the  economy, a sort of Gosplan designed by McKinsey.

Inside the arched Astana headquarters of Samruk, h and the ‘Golden Horn’ building housing formerly  autonomous Kazyna, now merely the financial arm of the merged Samruk/Kazyna, planners and strategists  have swapped the obtuse language of Soviet  bureaucracy, which older staff grew up with, for the  equally impenetrable jargon of US-style management consultancy speak. Samruk, say some of its fiercest  internal critics, has become like the UK’s BBC – a system of outdoor relief for the children of the elite,  setter at analysing problems than deciding and  executing decisions.

One of the big questions over the future of the  economy is whether the rise of Samruk/Kazyna,  headed by Kairat Kelimbetov, points to ever greater  state control over the economy, and a more crypto- soviet future, or whether the accumulation of  economic and financial power in its hands –  Kazatomprom was the latest big corporation to come  under its control – marks a temporary expedient  until a new generation of political leaders emerges  md controls can be relaxed.

Whatever the outcome, which is of great interest to foreign investors, the macro-economic developments  of the last two or three years already point to the  possibility that a much stronger and better balanced  economy will emerge from this crisis.

The big developments now taking place include  major modernisation of the road, rail, port and  Dther transport infrastructure to create a shorter,  modern transit route between China and Europe and  an to Iran. At the same time Kazakhstan’s export  pipeline arrangements are being transformed with  new 3,000km-long oil and gas export pipelines from  the Caspian Sea to Western China, expansion of the  ZPC and other pipelines through Russia – and a new  southern energy transit route across the Caspian Sea  to Azerbaijan and Georgia. China is rapidly raising its  profile and weight in the economy alongside Russia,  Europe and the US. Next year Kazakhstan will become the world’s biggest producer of uranium. All these  themes, and more, are treated, in greater depth,  inside this edition.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 23-24.

Banking overview 0

Posted on March 06, 2010 by KazCham

KAZAKH BANKS ACCUMULATED $45 billion of foreign  debt in a few years of heavy borrowing to fuel their dynamic growth. As a result they became the first  victims of the global financial crisis sparked off  by the US sub-prime crisis in July 2007. Nearly two  years later, the crisis is still being worked through.  BTA, the country’s largest bank, has been virtually  nationalised; another two of the ‘big six banks’  have been partially recapitalised with state money, while two have been helped out by their new  foreign bank owners; and the sixth, Alliance Bank,  is still struggling to find a future either through nationalisation or a foreign takeovers.

BTA, the largest pre-crisis bank, has been virtually  nationalised, and Samruk, its effective new owner  after a $1.7 billion partial re-capitalisation in February, is seeking both to re-schedule its $11 billion foreign  debt and attract a new foreign owner. Russia’s  Sberbank is one interested party, but others may  come forward. The future of Alliance Bank, the fourth  largest, was still in doubt at time of writing, but  Central Bank president Grigori Marchenko hinted that  it could be allowed to fail if creditors cannot agree a  debt restructuring deal acceptable to Samruk/Kazyna,  the state holding company charged with re-capitalising and restructuring the banking system.

Halyk Bank and KazkommertzBank (KKB), the  surviving duo of the former ‘big three’ leading  Kazakh-owned banks, ceded 25 per cent of their  shares to Samruk in return for capital injections  in February, when the state intervened to restore  confidence in the battered financial system. They expect to return to full private ownership within the  next few years. The government insists that de facto nationalisation of some banks and state-financed  re-capitalisation of others is a short- to medium-term  emergency operation to cope with the effects of a  global crisis – and not an attempt permanently to  expand the state’s role in financial markets.

In the three years leading up to the crisis, Kazakh  banks grew at a phenomenal rate – virtually doubling h their assets and liabilities every year – before being  halted in their tracks in August 2007. As they struggled to recall loans or refinance at higher rates, the ensuing credit squeeze throttled the construction h industry and lending for consumer goods and mortgages, and non-performing loans, rose.

The creation of a well-regulated domestic banking system, together with pension funds, a stock market and a government-run National Fund to absorb and conservatively invest ‘surplus’ oil money for a rainy  day, was one of the biggest successes of the first years  of independence. It was therefore reassuring when  Grigori Marchenko, one of the main architects of  banking reform and probably the country’s most  experienced banker, was recalled by President Nazarbayev in January to head the National Bank,  as the wider economy reeled from the collapse of  commodity prices, which followed the demise of  Lehman Brothers.

Record high commodity prices cushioned the  impact of the first stage of the Kazakh banking crisis  and made it possible for banks to repay all their  maturing loans over the first 15 months or so of the  crisis. But the collapse in the value of the country’s  main exports ushered in a new and more acute phase  of the crisis. The partial recovery of oil, copper and  other key commodity prices in the second quarter of  2009 provided the first chink of light at the end of  what has already been a nearly two-year tunnel.

Marchenko, an acerbic free-thinker with experience of both international financial institutions (such  as the World Bank) and the private sector, where  he worked at Deutsche Bank, masterminded  Kazakhstan’s successful navigation of the post-1998  Russian rouble crisis when he was last president of  the Central Bank.

For four years before his re-appointment,  Marchenko ran Halyk Bank, the privatised former  state savings bank. In 2006 Halyk raised $748 million  from a London IPO in 2006, which brought in foreign h institutional investors while retaining control by  the bank’s well-connected main shareholders, Timur  Kulibayev and his wife.

While Halyk’s main competitors – KKB, which  had similarly raised $845 million from an IPO in  2006, and BTA – opted for foreign-funded growth at  breakneck speed, Marchenko ran a more conservative ship. He repeatedly warned of the dangers of reckless borrowing. He warned that Halyk’s own internal  research indicated that the banking sector had become “an accident waiting to happen” months  before the crisis erupted.

Those banks with foreign equity from IPOs and/or  foreign shareholders have fared best in the current  crisis. But when foreign lending dried up and  commodity prices collapsed in 2007-8, globalisation  became a double-edged weapon as Kazakhstan got  lumped together indiscriminately with much less  well-endowed and well-run economies. Fortunately  for Kazakhstan, but less so for the foreign banks who paid top dollar before the crisis broke, Italy’s  Unicredito paid $2.3 billion for ATF Bank and South  Korea’s Kookmin Bank paid $1 billion for a majority  stake in BankCentreCredit (BCC) a few months before the crisis broke. Anvar Saidenov, National Bank  president at the time, was delighted to welcome the  deep-pocketed newcomers, noting that “Kookmin  alone had more assets than the entire Kazakh  banking system put together.”

Significantly the only ‘top three’ bank not ready to launch an IPO three years ago was BTA Bank, which  has been the main casualty of the banking crisis,  together with the much smaller Alliance Bank. The  latter’s headlong leap into consumer and mortgage  finance made it vulnerable and it was unable to lock  in a foreign buyer in time.

In the months leading up to the 2007 crisis, dozens of foreign banks were looking for Kazakh  acquisitions, although many of them, such as  Austria’s Raiffeisen, were deterred by the high  multiples demanded. Now the boot is on the other  foot, as BTA spearheads the search for new foreign  investors and smaller banks seek either foreign partners or mergers as the government raises minimal capital  and other requirements.

The crunch came in early February this year when  Marchenko, who had privately advocated devaluing  the Kazakh tenge in the autumn of 2008 in line  with the Russian rouble, announced an 18 per cent  devaluation from around tenge 120 to the US dollar,  to a 3 per cent margin around a new tenge 150 central  rate. Devaluation added to the foreign currency repayment burden of all banks – but especially to BTA,  the biggest borrower of all, with over $11 billion in foreign liabilities. In March, BTA’s new chairman, Anvar  Saidenov, announced that UBS and Goldman Sachs had  been appointed as financial advisers to help the bank  re-schedule its debts and find a new owner.

Tough rescheduling negotiations lie ahead for Kazakh banks. But Marchenko told the Eurasia Media Forum  in Almaty in April that Kazakhstan’s foreign debt had  already been reduced from $56 billion, or around 50  per cent of GDP, in summer 2007 to $35 billion by  the beginning of April 2009. “The banks will still be  servicing their debts after the second quarter and by  June it will be clear that the foreign borrowings issue  will be resolved,” he added.

A leaner, wiser and temporarily smaller and more  locally-focused banking system is emerging. The  government wants banks to concentrate more on  financing small and medium enterprises (SMEs) and  institutions like the EBRD and the Asian Development  Bank are supporting this. The EBRD, for example,  recently provided two loans totalling $100 million to  support SME lending by ATF Bank. Its parent bank,  Unicredit, also stepped in to shoulder repayment of $500 million-worth of ATF’s maturing foreign loans.

Increasingly, Kazakhstan is looking to the Middle  East and Asia for finance, trade and banking links.  President Nazarbayev signed a $10 billion oil and  infrastructure investment and financing deal with  China during his state visit in April, for example,  and a month later a major South Korean delegation  came to Kazakhstan to sign finance and investment  commitments totalling $5 billion.

Meanwhile, the rise in oil prices above $60 a barrel  and a lift in commodity prices generally in April/May  helped restore liquidity to some of the banks’ main  customers and the banking system itself. It has been a  heart-stopping ride since summer 2007 – but, as markets gradually recover and new sources of finance open up,  Kazakh banks should also benefit.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 80 – 81.

Light at the end of the tunnel 0

Posted on March 06, 2010 by KazCham

Kazakhstan is heading for economic recovery nearly two years after the country’s heavily indebted banks became the first foreign victims of the global financial crisis, which began in the US. Economic growth fell from near double digits to around zero by the end of 2008 as commodity prices nosedived. The collapse in global prices for oil, copper and other export commodities reifoced the effects of the original banking crisis, which had sent shock waves through the construction and related industries as banks recalled loans and scrambled to repay maturing foreign debt.

Nearly two years after the onset of the banking crisis, the fate of two of the largest six banks – BTA and Alliance Bank – still hangs in the balance. Creditors face heavy losses from tough restructuring terms designed to keep the banks alive without saddling the state with heavy bailout costs. This is bad news for investors in Kazakh bank debt. But, paradoxical as it may seem, the hard line now being taken by the National Bank with the foreign banks and institutions which lent so freely to Kazakh banks in the boom times reflects a growing sense that the Kazakh economy has already come through the worst.

When the Kazakh tenge was devalued 18 per cent against the US dollar in February, foreign exchange markets factored in further weakening, which newly re-appointed National Bank President Grigori Marchenko insisted would not happen. Since then, oil prices have virtually doubled to more than $60 a barrel, copper prices have risen 60 per cent to more than $5,000 a tonne, and whatever the shape of the expected global recovery, Kazakhstan, with its rich resource base ,strategic position between China, Europe and the Middle East and rising investment in basic infrastructure will be one of the principle gainers. The next movement in the tenge is more likely to be up than down.

Commodity prices are not the only factor affecting confidence. A spate of top-level personnel shuffles and the arrest of senior officials in Kazatomprom, the state-owned nuclear mining and engineering corporation, on theft and corruption charges which many see as controversial, have unsettled both domestic and foreign investors.

President Nazarbayev, who presided over Kazakhstan’s seamless 1991 transition from Soviet Republic to sovereign state, is 68 years old, still active and vigorous. The next presidential elections are not scheduled to take place until 2012. But the last decade of rapid economic growth and the emergence of a new middle class is reflected in the maneuvering of the rising generation preparing to take greater power and responsibility in the years ahead.

The economic crisis of the last two years has inevitably impacted on this on-going transition process. The tensions are reflected in part by the recent concentration of economic power in the hands of Samruk/Kazyna, which doubles as a de facto sovereign wealth fund and industrial holding company. Samruk, which is headed by Kairat Kelimbetov, former head of the Presidential  Administration, was originally set up to inject modern, market-oriented management methods into the state sector of the economy.

It controls the ‘commanding heights’ of the economic system – Temir Zholy, the state railways; Kegoc, the national power grid; KazMunaiGaz, the state oil and gas corporation; KazkhTelecom, the main telecoms provider; and Air Astana, the national airline. This year it added to this ‘traditional’ portfolio by becoming the main shareholder in BTA Bank, a major shareholder in both Halyk and Kazkommertz Bank, and also took over the former direct state holding in Kazatomprom.

This concentration of ownership reflects the President’s choice of Samruk as the main instrument for carrying out the rigorous anti-crisis policy unveiled in February. Faced with a drying up of foreign bank finance, the government decided to deploy the billions of dollars prudently stashed away in the Norwegian-style National (Oil) Fund and central bank reserves during the boom years. Oil revenues were scrupulously separated from the budget and invested conservatively abroad under the watchful eye of the central bank and the Ministry of Finance.

Some $10 billion of these ‘rainy day funds’ of around $47 billion were transferred to Samruk in February in order to recapitalize the main banks and channel fund into selected support for the construction industry, finance for small and medium enterprises and agriculture.

At the same time, however, President Nazarbayev came back from a recent state visit to China with a $10 billion package of financial assistance, including a $5 billion investment by the Chinese state oil company in a joint venture with KazMunaiGaz. This financial boost from China was followed shortly afterward by a $5 billion investment and financing package from South Korean banks and enterprises. This shift in emphasis towards closer ties with Asia is a part of a global re-positioning in economic power away from the traditional sources of capital and technology in Europe and the US towards China and other dynamic financial surplus countries in Asia.

Two years ago, just before the boom collapsed, South Korea’s Kookmin Bank paid a total of $1 billion for contral of BankCenterCredit (BCC), while Italy’s Unicredit paid $2.3 billion for ATF Bank. Both new foreign owners have since injected further capital into their Kazakh acquisitions,  which both  see as potentially profitable investments in Kazakhstan’s long-term future. International investment banks have also been quietly building positions in the country with JP Morgan, Deutsche Bank and UBS prominent amongst recent arrivals keen to potion themselves for Kazakhstan’s expected emergence as a regional financial hub by the middle of the next decade – a prospect also attracting banks from Russia, Asia and the Middle East.

This quiet positioning of long-term investors contrasts with all the superficial signs of an economy in temporary crisis – idle cranes on early-stage construction sites, a steep fall in formerly boated property prices, a collapse in car sales, rising unemployment, falling inflation – which have imposed real pain on many families and individuals. The statistics indicate negative growth in the first quarter of 2009 and only optimists think 2009 will produce 1-2 per cent GDP growth overall – and that hinges on a global recovery in demand for the commodities, which make up more than 80 per cent of the country’s exports.

But 2010 and beyond should be a different story. Next year Kazakhstan’s international profile will rise as it becomes the first post-Soviet state to chair the Organization for Security and Co-Operation in Europe, which was set up to promote democratic development and economic and political co-operation between countries formerly divided by the Cold War. At the same time, China, Kazakhstan’s populous, resource- and energy-hungry but capital-rich neighbor, should be back on its long-term path of rapid economic development, and taking advantage of new pipelines and road and rail links connecting China and Kazakhstan and other Central Asian resources.

This reflects the key fact that throughout this tough recession the big international oil companies have continued to invest billions of dollars in world-size oil and gas fields in the west of the country, such as Karachaganak, Tengiz and Kashagan, while China has pushed ahead with a 3,000 km gas pipeline to carry Turkmen and Uzbek gas through southern kazakhstan to western China. At the end of 2012 the offshore Kashagan oil field is scheduled to come on stream and oil production and revenues will virtually double as production builds up to 1.5 million barrels a day from the new field.

Kazakh gas will also flow east to China when the new export line reaches full capacity of 30 billion cubic meters over the next few years, while construction companies are also building new oil and gas pipelines south and west to Europe via Azerbaijan, Georgia and Turkey. At the same time, Kazakhstan is poised to become the world’s largest miner and exporter of uranium for nuclear power stations as Kazatomprom powers ahead with operative investments with foreign companies in nes mines and processing plants.

With finance from China as well as the World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and others, Kazakhstan is also gearing up to build a new motorway linking China and Europe. Heavy investment  in new rail links, powerful diesel locomotives from a GE locomotive plant in Astana and new oil and gas export facilities at the ports of Aktau and Kuryk are transforming the basic economic infrastructure and preparing for decades of future growth. The last two years have been tough, but the have not been wasted.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 18-20

Tengiz on the rise 0

Posted on March 05, 2010 by KazCham

PAYBACK TIME HAS arrived at last for the two biggest onshore oil and gas fields in the prolific Pre-Caspian basin in north-west Kazakhstan – Tengiz and  Karachaganak – which are now delivering nearly  half the 70 million tonnes of oil produced annually  by the oil industry in Kazakhstan.

For the best part of a decade, some of the world’s biggest oil and gas companies have been pouring  money, labour and technology into the two complex fields, laid down over several geological time  periods, before being covered by a vast ocean. All that remains of that ancient ocean are the Caspian and Aral seas and the western half of Lake Balkash.

The salt domes and rock reservoirs of the ancient coral reefs, which hold the oil and gas, are now up to 5km below the land surface. But it was the later ocean that laid down the thick cap of flexible, but  impermeable, salt and kept the oil and gas in place.  There it remained under great pressure and mixed  with a lethal cocktail of hydrogen sulphide and  other gases. The rich soup includes ‘mercaptans’,  the volatility and revolting smell of which requires  extensive processing before either oil or gas  can be transported thousands of kilometres to  export markets. Just to make things difficult, Moscow has so  far stubbornly refused to give its assent to the  planned doubling of the 1,600km Caspian Pipeline  Consortium (CPC) export pipeline, specifically  designed to run from Tengiz across southern Russia -» to Novorossiisk on the Black Sea. Karachaganak,  which is closer to the Russian oil and gas town of  Orenburg just over the Russo-Kazakh border than  to Uralsk, the nearest Kazakh town, is linked to the  CPC by a 650km spur line.

A decision on doubling CPC’s capacity to 67  million tonnes a year is believed to be imminent,  but it will take at least two years to build and might  not even be finished in time to transport first oil  from the third giant Caspian project, the offshore  Kashagan ‘elephant’ field, due to start production  around the end of 2012.

Frustrated by Moscow’s delaying tactics, Chevron- Texaco, the operator and 50 per cent owner of  the Tengizchevroil (TCO) consortium set up to  develop Tengiz under a 40-year production-sharing  agreement, has had to invest heavily in thousands of new railcars to export oil the expensive way.

In October 2008, Chevron sent a significant first shipment of oil from Tengiz by rail to the port of  Aktau and pumped it into a small tanker bound  for Baku in Azerbaijan on the western coast of the Caspian. From there it was fed into the 1,750km Baku-Tbilisi-Ceyhan (BTC) pipeline, which runs  through Azerbaijan, Georgia and Turkey.

As capacity builds up in the northern Caspian oil fields, Chevron expects to export up to 5 million tonnes a year to the Turkish port on the eastern  Mediterranean through the BTC pipeline in coming  years, although the bulk of oil from all three of the  giant fields in the Northern Caspian will continue to flow through Russia, once the CPC line’s capacity  is doubled.

Until that symbolic first shipment to Baku and beyond, Chevron shipped surplus oil from Tengiz by rail to Aktau and across the Caspian to  Machachkala, in Russia’s Dagestan province. From there, the oil passed through Russia, either by rail or the re-routed pipeline to central Russia that used to run through the Chechen capital Grozny, but now bypasses it.

This modest opening up of a new cross-Caspian route is the start of something much bigger – the development of an entire new export route to  the west which, for the first time, does not need  to pass through Russian pipelines, railways or  ports. TCO, together with the Karachaganak and Kashagan consortia, is preparing to play a key role  in developing the $3 billion Kazakhstan Caspian  Transportation System (KCTS), now at an advanced  state of planning.

The government’s ambitious southern energy  corridor will run from the giant Kashagan  processing plant at Eskene, 30km north of Atyrau,  more than 600km south to Aktau, and on to the  new oil and gas export facility to be built at Kuryk,  100km beyond Aktau.

From Kuryk, a growing fleet of tankers will take the oil across the Caspian to Baku for onward transit either through the BTC pipeline or by rail and smaller pipeline through Azerbaijan to the Georgian ports of Batumi and Supsa. “With  Kazakhstan expected to add a minimum of 1.5  million barrels a day over the next 15 years,  it needs a new, dedicated and reliable export  capacity, and it needs it urgently,” according to Ian -MacDonald, Chevron’s senior business development and transportation managers

Chevron’s partners in TCO are KazMunaiGaz  (KMG), the state oil and gas company, with 20  per cent and Exxon-Mobil with 25 per cent. The  remaining 5 per cent is held by the Lukarco joint  venture between Russia’s Lukoil and BP. Over the  last five years the partners have invested more than  $3 billion in their ‘second-generation development’  which was completed last year.

Tengiz is operated on the basis of a 40-year  production sharing agreement. The second stage  of its development involved building a small town  to house an army of 6,500 skilled workers. It also  required new road and rail connections, 39 new  drilling wells, a high-tech field production gathering system and eight sour gas re-injection plants.  These house powerful compressors to force sour  gas back into the field. This is required to keep up  the pressure needed to ensure that oil will flow for  decades. Re-injection and related investment has  virtually doubled oil output from 13 million tonnes  in 2004 when construction started, to the current  capacity of 25 million tonnes a year.

Last year’s collapse in oil prices to around $30  a barrel led to many oil companies cutting back  on investment, but Chevron’s board recently  committed to push ahead with ambitious global  development plans and specifically pledged not to  cut back in Kazakhstan.

A series of new wells are being drilled at Tengiz,  together with further exploration of the nearby  Korolyov field. TCO is also planning a state-of-the- art refinery at Tengiz , which fits in well with the  government’s strongly expressed desire to add  value to Kazakh natural resources and develop  downstream processing and refining. A new sulphur processing plant has also removed a source of  friction with the environmental protection agencies, and constant fines. The new pelletisation plant has  converted what used to be embarrassing mountains  of yellow sulphur, which runs blood red when mixed with rainwater, into a valuable by-product.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 38-39.



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