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Sun 10 Aug 2008 04:00 AM

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Ka$hakhstan

Gulf states are leading the charge into Kazakhstan with its vast and untapped commodity wealth up for grabs.

The Soviet-era architecture of Almaty and Astana is set to get a Dubai-style injection of glitz as a wave of investment targets Kazakhstan. Up for grabs is the vast and untapped commodity wealth of a country the size of Western Europe, with all the wheat, copper and uranium that Gulf states need.

On the drab streets of Almaty, Kazakhstan's largest city and commercial centre, a quiet revolution is taking place.

"When I first moved here in December, there were four or five restaurants fit to eat at," says Patrick Vosgimorukian, a French national born in Lebanon and now living in Almaty. "Now there are perhaps 15."

The pace will not slow for Vosgimorukian, either. The head of investment banking at Renaissance Capital in Kazakhstan, is being kept busy guiding foreign investment into a nation where economic growth has averaged 10 percent a year since 2000 - fuelled largely by its oil and gas industries.

Kazakhstan has immense natural wealth — but that wealth is to date more underground than above ground.

Most of that investment is now coming from Gulf states, helping to plug the financing gap left by a local banking crisis coupled with increased government pressure to realise Kazakhstan's commodity production potential.

"People say that Kazakhstan is like Dubai was 10 years ago, and that's pretty accurate - as long as you don't think it's going to take Kazakhstan 10 years to get to where Dubai is today," insists Vosgimorukian. "It will be more like half that time."

The Central Asian country has attracted a surge of investment from Gulf states in recent months. This includes Abu Dhabi's Sheikh Tahnoon Bin Zayed Al Nahyan's decision last week to raise his stake in AO Kazkommertsbank, Kazakhstan's second-largest bank, to more than 25 percent; a $100m Islamic start-up courtesy of Qatar Islamic Bank; and Ithmaar Bank's plans to tap into the country's burgeoning energy sector with a $1bn energy investment fund in partnership with the government of Kazakhstan.

Real estate and construction is another burgeoning sector, and Gulf giants including Dubai World and Aldar have moved into Kazakhstan in recent months, eager to take a slice of such a fast-growing market.

Kazakhstan holds about 4 billion tonnes of proven recoverable oil reserves and 3 trillion cubic metres of gas, which industry analysts believe could reach 3 million barrels per day by 2015 with appropriately planned expansion of oil production and development of new fields. It also holds chromium, lead, and zinc reserves, the world's third-largest manganese reserves, the fifth-largest copper reserves, and ranks in the top 10 for coal, iron, and gold.

"Kazakhstan has immense natural wealth in the form of oil and gas and other mineral resources - but that wealth is to date more underground than above ground," Vosgimorukian says. "It's just starting to go from the exploration to the production stage, and as such we are at the inflection point where the next couple of years are going to transform the country."

Fund flows are following where the natural resources are, and Kazakhstan is loaded with natural resources," says Robert McKinnon, managing director of equity research at Al Mal Capital. "There's a lot of competition going on to access these resources - everybody truly feels like they've got to do it now if they want to get in there and participate, and establish trade relationships."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.

Quality projects aren’t being funded because Kazakh banks don’t have the cash — and that’s where the Gulf can step in.

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.

Gulf developers descendDubai World is helping to develop Aktau City, a development that will be built on the shores of the Caspian Sea and will include resort hotels, schools and homes.

Aldar Properties, Abu Dhabi's largest real estate developer, is also working with other UAE investors on the $2bn Abu Dhabi Plaza project being built in the centre of the Kazakh capital Astana. The project includes shops, apartments, hotels and offices and is due for completion in 2012.

"Kazakhstan is an opportunity, and it has a very fast growing economy with excellent fundamentals," says Ron Barrott, CEO of Aldar.

"However, it's not a cheap place to be," he continues. "Land is still sensibly priced but the actual cost of operating and the cost of building in Kazakhstan is quite high because of its climate which goes from -25C to +25C."

"Ithmaar may have been one of the first Gulf firms into Kazakhstan, but certainly not the last. That was just the beginning," says Jithesh Gopi, head of research at Bahrain-based SICO Investment Bank.

Kuwait-based Gulf Finance House (GFH) estimates it will invest $10bn in the Central Asian country. It plans to develop a series of energy business clusters in partnership with the government.

"Europe, Southern Asia and China continue to rely on the supply of Kazakh hydrocarbons and the projected growth in demand over the coming years is formidable," Mehran Jamsheer, deputy CEO of GFH, tells Arabian Business.

The Kazakh government is certainly playing its part in trying to stimulate the stuttering economy.

Quality projects aren’t being funded because Kazakh banks don’t have the cash — and that’s where the Gulf can step in.

This year it warned mining concession-holders that their assets would be seized unless they agreed to develop them productively.

"This is not a renationalisation of the country, and the logic is very simple: people have these assets and they're not exploring them, and therefore the economy is suffering," insists Vosgimorukian. "The government's view now is: ‘you're committed, so now you're going to mine it', and so now people urgently need to find finance for the exploration phase and for work programmes - or sell up."

Oil and gas are not the only riches to be found. Kazakhstan has 15 percent of the world's uranium reserves and hopes to become the world's biggest producer of the metal.

Next year it plans to produce 12,826 metric tonnes of uranium, overtaking Canada and Australia's production.

These resources are increasingly sought after with the number of nuclear reactors expected to jump 30 percent by 2010 according to the World Nuclear Association. The UAE alone is planning to build up to 14 nuclear power plants at a cost of around $80bn.

"The goal of all the nations out there right now is to lock in some of these resources at the moment while they're tight," says McKinnon at Al Mal Capital.

"So it makes sense to begin to establish relationships and trading relationships - and then expand those relationships so that you have access to the resources of the future, such as uranium."

The Gulf’s new bread basketNot all of Kazakhstan's natural wealth is to be found deep underground. It is the world's eighth-biggest food exporter and sixth-biggest wheat exporter, with 220 million hectares of agricultural land.

UAE President and Abu Dhabi Ruler HH Sheikh Khalifa Bin Zayed Al Nahyan has already expressed an interest in investing in Kazakhstan's vast agricultural industry in a bid to diversify the UAE's sources of food imports.

The soaring cost of food staples and subsequent export bans are putting increasing pressure on Gulf governments to purchase agricultural land abroad to secure their own supplies. According to the World Bank, the price of wheat rose by 120 percent in 2007 alone.

Abu Dhabi-based food manufacturer, Emirates Foodstuff and Mineral Water (AGTHIA) plans to establish a strategic alliance with Kazakhstan as it looks to secure lower transportation costs.

The food company is also considering acquiring land in the country.