Kazakhstan And Safe Investment Havens

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When the Union of Soviet Socialist Republics (USSR) collapsed in December 1991, the emerging fifteen new nations scrambled amidst hyperinflation to restructure their economies away from a centrally planned economy directed by Moscow to sovereign, free market ones that could attract desperately needed foreign direct investment (FDI).

The clear winners in this have been two Caspian nations, Azerbaijan and Kazakhstan. While Azerbaijan might have won the initial PR investment race, knowledgeable investors are also closely eying Kazakhstan.

Azeri President, Heydar Aliyev, realizing that his nation’s indigenous resources were insufficient to develop the country’s hydrocarbon riches, in September 1994 signed the $7.4 billion “deal of the century” with 11 Western oil companies to develop a number of sites in both onshore and offshore Azerbaijan, including the Chirag and the offshore Guneshli oil fields, with the centrepiece of the infrastructure development being the construction by an international consortium of $3.6 billion, 1 million barrel per day (bpd), 1,092-mile Baku-Tbilisi-Ceyhan (BTC) pipeline, which transmits crude from Azerbaijan’s offshore Azeri-Chirag-Guneshli fields to Turkey’s deepwater Mediterranean terminus at Ceyhan.

In a striking measure of how open Azerbaijan had become for investment, British Petroleum heads the BTC consortium and, besides operating the pipeline, has a 30.1 per cent share of the project, exceeding that of SOCAR, which owns 25 per cent. Other Western investors include, Chevron amassing 8.9 per cent, Norway’s StatoilHydro grabbing 8.71 per cent, Turkey’s Turkiye Petrolleri Anonim Ortakligi with 6.53 per cent, Italy’s Eni/Agip group and France’s Total stocking 5 per cent apiece, Japan’s Itochu having 3.4 per cent, the Japanese Inpex Corp. (2.5 per cent) and the American Hess Corp. (2.36 per cent). Accordingly, Western concerns receive a whopping 75 per cent of BTC’s revenues.

Aliyev’s son and successor, President Ilham Aliyev, created a State Oil Fund to use the massive oil revenues flooding the country.

The wisdom of such policies was shown by the fact that FDI flows to Azerbaijan increased by 600 per cent in two years, from $227 million in 2001 to $1.3 billion the following year.

But Kazakhstan has made similar, though less spectacular progress, with FDI, primarily in its energy sector, surging from a paltry $100 million in 1992, the first year of independence, to more than $118 billion by 2010. In a similar measure of the country’s reliability for foreign investors, in September 2002, Kazakhstan became the first country in the former Soviet Union to receive an investment-grade credit rating from a major international credit rating agency.

Building upon these successes, the country is actively soliciting further FDI. In October 2010, Kazakh Prime Minister, Karim Massimov stated that Kazakhstan seeks to attract up to an additional $100 billion in investments to the nation’s oil and gas sector alone over the next decade. He told journalists: “We are currently exporting 1.31 million barrels (of crude oil) a day and we aim to take it to 3 million barrels a day. KazMunaiGas (the national oil company of Kazakhstan) cannot do it alone. We are looking for partners for KMG’s projects.”

Kazakhstan has much more of its energy assets to open, as its proven oil reserves are estimated at 30 billion barrels, including both onshore and offshore fields. Oil development is currently concentrated in several major fields – the Tengiz, Karachaganak and Kashagan, the largest outside the Middle East, as well as in the Kurmangazy and Uzen fields, along with other hydrocarbon basins near the Chinese border and around the Aral Sea.

Among foreign energy companies, ChevronTexaco, ExxonMobil, BG, Total, Agip and Lukoil have already been in the country for many years, while South Korean, Indian and Chinese oil companies are also establishing a presence there. As of December 1, 2010, Kazakhstan held a total of 205 oil and natural gas contracts, including 16 Production Sharing Agreements (PSAs.)

Last but hardly the least, the tax regime in Kazakhstan, while complex is comparatively more favourable than anywhere else in Central Asia and subsoil use rights are among the best in the new high growth markets while the national currency, the tenge, is freely convertible with few restrictions placed on transactions in and out of the country.

But, where does all the oil revenue go? In 2000, Kazakhstan established a Sovereign Wealth Fund to manage its energy income, the Samruk-Kazyna, whose assets now stand at $84 billion. This fund is akin to the Sovereign Wealth Fund created by the President Goodluck Jonathan administration to absorb the huge excess revenues from crude oil sales. Its existence and frugal management has raised issues of concern to many Nigerians, especially the governors who feel the excess fund should be shared between the Federal Government, and the constituent states and local governments.

The same concerns were also shared in Kazakhstan. But Kazakhstan President, Nursultan Nazarbayev , while seeking to allay concerns about the fund’s management, recently fired his son-in law, Timur Kulibayev, as Samruk-Kazyna chairman and replaced him with Umirzak Shukeyev.

In an interview earlier last week with Russia’s Kommersant business newspaper, Shukeyev elaborated the fund’s shortcomings as lack of strategic vision, excessive bureaucracy and overstaffing, stressing that, “I am personally astounded that there has been no strategy until now.” According to him, “Now, it is clearly stated that the main goal of the fund is to increase the market value of the companies that belong to it. But we only reached a level that is considered a baseline for companies listed on international stock exchanges. Our goal by 2015 is to achieve a rating of, at least, 75 per cent.”

So, with massive energy assets, a liberal tax code, few currency restrictions and a reformist bureaucracy – while Kazakhstan certainly has a number of reforms yet to make, including tackling corruption, the country’s increasing attractiveness to foreign investors should be obvious and can only increase over time.

Dr Daly, based in London, contributed this piece for Washington, DC-based OilPrice Intelligence.

 

John Daly

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