Stratfor has been following the Kazakh economy's slowdown closely. Highly indebted companies, a string of banks on the verge of default, currency devaluations and a failure to expand energy production have contributed to Kazakhstan's economic pressures. On June 13, Standard & Poor's rating agency downgraded Kazakhstan's credit rating from "stable" to "poor," and on June 19 seven Kazakh firms (Samruk-Kazyna, Development Bank of Kazakhstan, DAMU Entrepreneurship Development Fund, KazAgro National Management Holding, KazMunaiGas, KazMunaiGas Exploration Production and KazTransOil) were also downgraded.
In response to these circumstances, the Kazakh government has begun dispersing $5.5 billion from its national oil fund to its indebted companies, both private and state-owned. The government has also started a painful restructuring of its banking system. In April, Karim Massimov was reinstated as prime minister, a development that Stratfor said was indication that Kazakhstan will adopt more investor-friendly policies to help the ailing economy.
Tactics to Attract Investors
Now Massimov's plans are being revealed. A string of new and additional legislation will be enacted in order to attract investment. These changes will apply to new investments worth at least $20 million. The new legislation includes granting land tax exemptions for 10 years, property tax exemptions for 8 years and government compensation of up to 30 percent of capital expenditures after initial investment. Massimov will also introduce stability mechanisms for tax rates, charges and fees (excluding value-added and excise taxes) for 10 years after investment contracts are concluded. Moreover, investors will have the right to employ foreign labor without a permit or quotas for the investment projects' entire construction period and for one year after the project is commissioned. Investment policies and regulations are incredibly complex and burdensome in Kazakhstan, so in theory these changes should help Kazakhstan gain investor confidence.
The Kazakh government is also offering stakes in some of the country's largest firms as part of a privatization scheme to be carried out over the next two years. Most of the privatizations will be of companies under or associated with Samruk-Kazyna, the state's umbrella fund that oversees some $78 billion worth of assets and nearly 56 percent of the country's gross domestic product.
The enterprises, which are being split into three categories, will be either fully or partially privatized. The first group will consist of non-core businesses and will be fully sold. The second group will be transfers to other entities or state structures. The third group, however, will be strategically important to the government's efforts to attract serious investors, both domestic and foreign. Because of this, entities in this group will be only partially privatized. Here, Samruk-Kazyna will privatize shares in 103 subsidiaries, such as state railway firm Temir Zholy, state energy firm KazMunaiGaz, state nuclear firm KazAtomProm, Kazakhstan Engineering, and state electricity firms Samruk-Energo and KEGOC. The government will offer shares in these companies to specific investors after negotiating with them.
In addition, shares in 93 companies — including some firms affected by privatization — will be available in initial public offerings. In 2014, the government will offer 10 percent of shares in KEGOC and 75 percent of electricity firm Mangistau Grid Co. In 2015, the government will offer 10 percent of shares in Samruk-Energo and transportation firm KazTemirTrans, along with 49 percent of shares in state telecommunications firm Transtelecom, KazTransGas-Aimak (which handles natural gas transport for 75 percent of the country) and KazTransGaz-Almaty (the natural gas transport firm for the Almaty region).
Signs of Lingering Protectionism
Though the Kazakh government is trying to address its many financial and economic problems by shifting the structures of its economy, as well as launching these new investment and privatization plans, there are still many warning signs for foreign businesses and investors — particularly in the energy sector. While the government is attempting to promote business-friendly practices, it is also increasing pressure on some of the largest foreign consortiums in the country.
First, the calls for investment in the country's energy sector are limited. In May, Kazakh First Deputy Prime Minister Bakytzshan Sagintaec said Kazakhstan would not allow foreign companies to expand in the country's energy sector, saying the government meant to "protect national interests." It is unclear what levels of expansion in the energy sector will be tolerated. Nevertheless, this contradicts Astana's privatization and investment strategies, which will garner much interest from foreign energy firms. In the past, the Kazakh government has shown that it will ignore contracts and even its own legal system in order to protect itself. Astana has also nationalized assets as it has seen fit.
In addition, the Kazakh government is pressuring the consortiums of two of the three largest energy projects in the country, the Kashagan and Karachaganak mega-fields, to increase their investment in what Kazakhstan calls "local content." This means the consortiums have to invest in local businesses and infrastructure while creating jobs in their energy projects' regions. Basically, the Kazakh government is requiring these mostly foreign-owned energy firms to invest in the country beyond their energy projects. The consortium for the third largest energy project in Kazakhstan, Tengiz, already has fulfilled its obligations to local content by creating 20,000 jobs in its region and investing in various metalwork companies.
The consortiums for Kashagan and Karachaganak are both cash-strapped. Kashagan has greatly exceeded costs and has been delayed again, while Karachaganak is postponing production increases due to costs. But should these firms decline to increase investment in local content, the government could levy another series of fines on the groups — a move that could turn even more foreign energy groups away.
Although the Kazakh government is attempting to strengthen the economy over the next few years, the government's protectionist habits will remain a priority — and an obstacle to Kazakhstan's economic stability.