Business & Economics:
DESPITE CORRUPTION CONCERNS, KAZAKHSTAN CONTINUES TO LURE INVESTORS
Mark Berniker: 4/28/03

Concerns over a corruption scandal and alleged rights violations appear not to be tarnishing Kazakhstan’s reputation with international investors. The resource-rich country remains among the best investment bets in the former Soviet Union, according to a leading US financial risk evaluator.

An April 8 study from Moody’s Investor Services, which assesses countries’ abilities to honor their loan commitments, gave Kazakhstani President Nursultan Nazarbayev’s administration an "investment-grade" rating on the country’s debt. This rating ranks two notches higher than Russia’s, and higher than those of some American cities, such as Trenton, New Jersey, and Buffalo, New York.

According to Moody’s Vice President Jonathan Schiffer, Kazakhstan’s ranking is chiefly due to the fact that it possesses abundant energy reserves. "The other Central Asian countries don’t have the natural resource base of Kazakhstan," Schiffer said. At the same time, the Nazarbayev administration has adroitly managed the development of the country’s energy sector, boosting the economic value of Kazakhstan’s natural resources with "prudent macroeconomic policies," according to Schiffer. He also praised the administration’s ability to forge "political consensus about the nation’s economic development."

Kazakhstan has long enjoyed a reputation as Central Asia’s economic dynamo. The country has recorded double-digit growth in recent years. And even for 2003, a year of global economic uncertainty, Kazakhstani leaders are projecting an 8 percent growth rate. During the period covering 1989-2001, Kazakhstan attracted $11.36 billion in foreign direct investment, according to statistics compiled by the European Bank for Reconstruction and Development. Kazakhstan’s total for this period was more than one-third of overall foreign direct investment in all former Soviet states, including Russia.

The Moody’s assessment has provided the Kazakhstani government with a respite from a spate of bad publicity. In recent months, Kazakhstan has come under international criticism for cracking down on opposition political activity and for intimidating independent journalists. [For background see the Eurasia Insight archives]. Top Kazakhstani leaders also face the possibility of becoming embroiled in a US oil development corruption investigation that has already resulted in the indictment of merchant banker James Giffen and a top former oil company executive. [For background see the Eurasia Insight archive].

Schiffer focused his analysis on the congruence between Nazarbayev’s policies and those of Kazakhstan’s central bank. These include "tight fiscal and monetary policy and improved banking system regulation and supervision." In early April, the Kazakhstani parliament adopted a draft law tightening regulation of securities markets.

This focus on regulating financial activity has drawn praise from other leading financial institutions. On March 28, for example, the International Monetary Fund (IMF) expressed confidence in the Kazakhstani economy. "Not only oil revenue but also early structural reforms and a wise macroeconomic policy were the basis for Kazakhstan’s good economic indicators," the IMF announced. In addition, Fitch Ratings recently upgraded Kazakhstan’s Kazkommertsbank’s debt, paying special praise to its risk management policy.

The high ratings aside, some observers believe that Kazakhstan’s status as a good investment risk could change quickly. They point to the corrosive effects of corruption, which is viewed as a region-wide problem. Civil society advocates also note that Nazarbayev’s reliance on directly negotiated oil deals leaves the economy vulnerable to corrupt practices. A recent report by Transparency International, a German organization that tracks government malfeasance, ranked Kazakhstan 88th out of 102 countries in perceived integrity in 2002.

Kazakhstan’s oil wealth, and the large-scale foreign investment in the energy sphere, helps obscure the fact that other sectors are not good investment risks, some observers say. "The legal environment for smaller and medium-sized projects is more tenuous, because of the systemic nature of corruption," says Martha Brill Olcott, senior associate at the Carnegie Endowment for International Peace, and author of "Kazakhstan: Unfulfilled Promise."

Olcott also cautions that Kazakhstan’s attitude towards the presence of foreign oil companies has changed over recent years. Some Kazakhstani government officials are reportedly uncomfortable with the existing development framework, believing it grants foreign entities too large a stake in Kazakhstani energy ventures. Accordingly, the government has of late acquired a reputation for being a tough, and perhaps unreliable, negotiating partner.

The case of ChevronTexaco illustrates this issue. In November 2002, the energy conglomerate briefly pulled out of a $3.5 billion exploration deal in the Tengiz oil field over a dispute regarding how quickly it had to make payments to the government. [For background, see the Eurasia Insight archives.] The company eventually reached an agreement with Kazakhstani officials, details of which were not disclosed, to resume the project.

The evolving government attitude towards foreign energy-sector investment, coupled with the corruption issue, means investors may have to worry more in the future about how the government will treat their contracts. "The question of the re-nationalization of oil and gas assets is now becoming a bigger issue. The sanctity of contracts has been a problem, and this means it could get worse," Olcott said.

Olcott said that it is becoming apparent that the government will try to own a majority, rather than just a part, of future energy deals. "Today, we are seeing some pro-Western members of the Kazakh political elite now saying that the country has to be more concerned about controlling its natural resources," Olcott said. She expects Nazarbayev to continue to pursue policies that advance expansion of the country’s energy sector, while appealing to more nationalistic, political sentiments, which want to see Kazakhstan preserve and control the rights to its natural resources.

Meanwhile, some international financial organizations have expressed concern that Kazakhstan is overly dependent on the energy sector to maintain the country’s development pace. The IMF in its recent report, for instance, called on Kazakhstani officials to promote reforms that promote better performance in non-energy-related sectors. A diversified economy would better shield Kazakhstan from a potential downward shift in global energy markets,.

Nazarbayev appears to agree with the IMF assessment. In his state-of-the-nation speech April 4, the president outlined an ambitious economic growth agenda. Specifically, energy-sector profits would be redirected to promote jobs in the agricultural and industrial spheres.

"Today Kazakhstan has developed fuel and energy, metallurgical and chemical complexes which ensure high tempos of economic growth," Nazarbayev said. "At the same time, we are facing an important task – to ensure balance in the economy, the anticipatory development of the processing industry, high technology and science-driven industries, the production infrastructure and the agricultural sector."

Editor’s Note: Mark Berniker is a freelance journalist specializing in Eurasian affairs. This is the sixth in an eight-part series on political risk in Central Asia and the Caucasus.