Ka$hakhstan

Last month Abu Dhabi's International Petroleum Investment Company (IPIC) announced a tie-up with Kazakhstan's government to invest in oil and gas projects. The $1bn Falah fund will be half owned by Ipic and Kazakhstan.

Partnerships between the two oil-rich regions are being encouraged. In 2006 the UAE and Kazakhstan signed the Joint Action Plan: Kazakhstan and the UAE, aimed at boosting investment, while a number of Gulf delegations to Kazakhstan have taken place in recent months.
"Gulf countries will be familiar with the structure of the economy in the sense that Kazakhstan is a big mineral producer and reliant largely on oil and gas, although it is arguably more diversified than many oil-rich Gulf states," says Ben Faulks, a sovereign credit analyst for the Republic of Kazakhstan for credit ratings agency, Standard & Poor's.

Since the start of the year, Kazakhstan's own financial institutions have been in a state of turmoil. The subprime crisis and credit crunch hit hard in a nation where some banks were relying on foreign loans to fund as much as 70 percent of their own lending books. The crisis meant many banks were unable to roll-over or repay their debt.

"There's roughly $11bn of redemptions that were due this year, with just over a third paid back, but the rest still outstanding," says Vosgimorukian at Renaissance. "So the banks aren't lending any more - whatever they get back, they're using to repay their debts, and that's acting as a huge handbrake on the economy."

Concern about the country's banking industry caused S&P to downgrade Kazakhstan's foreign currency bonds to BBB- and local currency bonds to BBB in October 2007, citing its high dependency on foreign capital.

"Credit growth in the domestic economy has come to a standstill having risen 65 percent a year for the past four years," Faulks adds, pointing to the credit ratings agency's report which predicts Kazakhstan's economic growth will fall by 4 percent this year, brought on by its $14bn in foreign debt payments in 2008.

"Quality projects aren't being funded because Kazakh banks don't have the cash to hand out - and that's where the Gulf can step in as it has plenty of liquidity," notes Vosgimorukian.

"Valuations are depressed right now because there are less people fighting to acquire assets, and there are a lot of assets that are very highly leveraged."

Bahrain-based Ithmaar Bank was one of the first Gulf companies to recognise Kazakhstan's potential. The bank, which currently manages $2bn, has a $1bn energy investment fund in partnership with the government of Kazakhstan to invest in the country's oil and gas infrastructure.

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