By Clare Nuttall in Almaty (business new europe)

James Turnbull, CEO of investment banking and global markets Kazakhstan, outlines the firm’s strategy and explains why it still makes sense to be expanding in the country.

According to Turnbull, the firm plans to build “a significant operation” in Kazakhstan. Ultimately, it will offer the full global market platform it already provides in Russia and Ukraine, comprising equity and fixed income, investment banking and advisory services, private equity, private banking and wealth management.

“Troika has a five-year goal: to be and continue to be a market leader in all the businesses it’s operating in,” says Turnbull. “It sees itself very much as a local champion, a domestic investment bank. Kazakhstan is a market that we have to dominate if we’re going to fulfill our goal of becoming a true Russian and CIS powerhouse.”

Troika first announced plans to buy Almex in March this year. It purchased 100% of the company from its previous owner Almex Holding Group, a company jointly owned by Dinara Kulibayeva – daughter of the Kazakh president – and her husband Timur Kulibayev. Today, the Almaty office numbers 22, a combination of former Almex staff and new hires. Troika also inherited from Almex the full range of licences it needs to launch its business in Kazakhstan, as well as its offices in central Almaty. A move to larger premises is planned in 2009, by which time the team is due to double in size.

Turnbull, who previously headed Russian origination and structuring for Merrill Lynch’s fixed-income business, joined Troika in August. From previous visits to the city, he is already well connected with local business people, including Askar Yelemessov, who is now the firm’s chairman.

Troika’s initial move in Almaty was to put together a team of analysts. While it already covers a number of Kazakhstan’s London-listed blue chips from Moscow, the Almaty office will add coverage of additional GDRs such as ENRC and some of the locally traded stocks. Next, it will get its equity trading platform up and running in Kazakhstan. “Our idea is to build a local equity trading platform for our clients,” explains Turnbull. “Troika has a specific way of doing business in terms of how we manage risk. Our equity trading initiative is very centrally controlled, which means rolling out a sophisticated IT platform that will allow Troika to have a direct window onto the local exchange.”

Compared to the $150-180m daily trading volume of Kazakh bonds and equities offshore, Turnbull acknowledges the volume traded on the KASE (Kazakhstan stock exchange) is relatively small. “Yes, it’s an investment project,” he says of Troika’s local trading platform. “Given the size of the market, I suspect that the immediate rollout doesn’t justify a two-month payback. However, it will demonstrate that we are a real local presence.”

He is also confident that the market will expand, a process driven by the entrance of Troika and two other large Russian investment banks, Renaissance Capital and VTB, to the market, alongside homegrown Visor Capital. “I think we’ll see a virtuous circle. Some funds have been nervous about the banking sector and custodian arrangements, but those problems are going to recede. I think the transparency of the exchange and the availability of top-class research will give people compelling reasons to come back to Kazakhstan,” he says, adding that in the longer term, the KASE has a real opportunity “to become a powerhouse for offshore entities from the region.”

Troika’s other priority for 2008 is to showcase its investment banking activities, which will put it in a strong position when the IPO markets re-open. “It’s very difficult to say right now when the capital markets will re-open for equity and debt issuers,” Turnbull says. “In the meantime, I think there’s going to be a lot of work that we can reasonably pitch for on the investment banking side. For example, there’s clearly going to be clearly a lot of change around Samruk-Kazyna, and a lot of restructuring work.”

Brighter outlook

Despite the recent turmoil that has sent stock prices in Kazakhstan, along with other emerging markets, plummeting, Turnbull says that the reasons why Troika chose to enter Kazakhstan still hold strong. “Part of the panic in emerging markets derived from the implied commodities prices. The implied forecast of where the oil and metals and mining companies are trading, takes them in some cases way below the marginal cost of production,” he says. “Clients that we speak to think that will be a short-lived.”

Turnbull points to Opec’s oil production cuts, as well as expected cutbacks in nickel, zinc and copper output. “I think that should resuscitate the commodities market, perhaps in the second half of next year,” he says. “Some of the reasons why people were forecasting $200 a barrel of oil a few months ago have been forgotten, but the intrinsic systemic arguments are still valid.

“I’m hoping that in 2009 markets will start to anticipate a recovery and perhaps that will coincide with a much brighter economic outlook in Kazakhstan.” Even at this low ebb, Troika is forecasting a minimum of 4% GDP growth in Kazakhstan this year.

The firm expects the commodities story to remain at the fore, to a greater extent than in Russia or Ukraine. “Kazakhstan doesn’t have the same consumer and retail angle that has driven the Russian market. Supermarkets and retail will play a role, but the population is a tenth of the size of Russia’s,” he says. “Most people are investing here for the extremely exciting opportunities in agriculture and commodities - oil and gas, base metals and gold.”

In the last week, more details of the Kazakh government’s plans to support the banking sector and the rest of the local economy have emerged. Further analysis of the implications of the Samruk-Kazyna merger to form the $40bn “National Wellbeing Fund” and other government measures will have to be carried out, notes Turnbull.

“Opportunities to manage these funds could be quite exciting in time. I think it’s potentially a mutually beneficial arrangement. The corporate sector is bringing in funds which it needs to grow. The government is providing the liquidity, but by making an investment at the bottom of the cycle, it also benefits.”

Global shift

Turnbull is enthusiastic about Almaty, which he first visited in 1997, not just from a business point of view but also as an ex-pat now living in the city. “Almaty is a fascinating place, full of opportunity and very inviting,” he says. It’s not difficult to appreciate this on a crisp autumn afternoon. Looking out from Troika’s seventh-floor boardroom, the ochre and russet trees on some of Almaty’s abandoned development sites stretch towards the mountains and the towering Hotel Kazakhstan.

But Almaty is more than a pleasant location. Its situation not only in the heart of Central Asia, but on an increasingly important axis between Russia, the Far East and the Gulf states, makes the move here a highly significant one for Troika. “Certainly, Almaty will be a very important centre,” concludes Turnbull. “The world hasn’t changed forever, but it may have tilted on its axis. People used to tell me that Kazakhstan is a long way away. Measuring from London or New York, it is. But if you look at where the influence is, where the dynamic economies are, you’re looking at China, Singapore and the Gulf. Troika needs to build a bridge to these markets, which will be a very important part of the future of investment in Kazakhstan and Russia.”

By Clare Nuttall in Almaty (business new europe)

A handful of building sites are the first signs of the transformation the sleepy lakeside town of Kapchagay will undergo in the next two decades. One of Kazakhstan’s two designated gambling zones, Kapchagay will soon see the creation of a $10bn casino city. A major tourist resort will later be built here as part of the $20bn G4 City project.

G4 City is an ambitious mega-project to build four ultra-modern satellite towns between Almaty and Kapchgay, 90 kilometres to the north. Gate City, Golden City, Growing City and Green City will be devoted to residential property, culture and entertainment, industry and logistics, and tourism respectively. The project was initiated by Caspian Investment Holding in 2006 and is due to start construction next year.

The idea of building satellite cities to the north of Almaty is nothing new. Given the city’s location, surrounded by mountains to three sides and with a high risk of earthquakes on the Almatinsky Alatau foothills, the option of building out to the north is an obvious solution to its growing population. Soviet-era planners envisaged a network of eight satellite cities, but they were never built. “The need for the project is self-evident. Almaty is over-crowded and there are no empty lots available for further development,” says Yerzhan Durumbetov, commercial director of G4 City and managing director of Seven Rivers Capital.

Public/private

The project will be funded by a combination of private sector and government funding. On June 13, the government allocated more than KZT1bn (€6.2bn) within the 2008 budget. KZT13bn has been allocated to the project within the state residential construction programme for 2008 to 2010.

Most of the funding provided by the government will be targeted at infrastructure – which will include a fast public transport system in addition to schools, hospitals, utilities and other necessary services. The dilapidated road connecting Almaty and Kapchgay will be replaced with a new six-lane highway, to be built on a concession basis.

Construction will start first at residential Gate City, the town closest to Almaty. Durumbetov notes the urgent need for affordable residential housing in the city, despite the burst of the housing bubble in Kazakhstan. He points out that average living space per person in Almaty is just 16 square metres (sqm), compared to an average of 48 sqm in EU countries. “There should be at least 22 sqm per capita. There is an immediate demand for more than 12m sqm of residential space in Almaty alone, and the same amount in the surrounding region,” he says. “Kazakhstan has experienced a huge construction boom for several years. We believe that not only will continue, it will become even bigger than before. The demand was there 20 years ago, it is still there, and it will be there for another 20 years.”

The first phase of the project, which has been fully approved by the Kazakh government, will be the construction of a 181-hectare development to house around 30,000 people. Seven Rivers is currently in negotiations with several banks and other financial institutions to set up partnership agreements, as it intends to sell the apartments with built-in mortgages.

Outside expertise was brought in to draw up the plans. The original masterplan for G4 was drawn up by South Korea’s Space Group. Australian firm Kann Finch then did the architectural design work, and a local design institute has been set up to ensure conformity with Kazakh standards. Durumbetov says the team didn’t even look at the Soviet era plans – “the only similarity would be the word satellite”. However, the Australian architects, he says, were very much influenced by old Almaty. “They really liked the way urban design works in the city with the wide streets and good pedestrian access. Although they brought new ideas they were inspired by Almaty’s heritage and the old Almaty feeling.”

In the next town, Golden City, is intended to become a cultural, entertainment and education centre, with plans for an Olympic stadium, a safari park and winter mini-golf facilities. Further north, Growing City has been designed as an industrial complex. G4’s planners hope to encourage existing businesses to relocate by offering economic incentives and modern industrial space, of which there is a shortage in Almaty.

“Growing City will become the logistics hub and an inland free port, serving not just Almaty but cargo going from China to Europe,” says Durumbetov. “The government has already announced plans to build a new line which will go exactly through Growing City.”

Green City, on the southwestern shores of Lake Kapchgay, will be a recreation and tourist centre comprising hotels, an oceanarium, a yacht club and other tourist attractions. It is likely to be the last section of the project to be completed. However, new hotels are being built along the lake shore in anticipation of the town’s development when the planned gambling hub gets underway. “Obviously there will be some positive effect from that city. Although it’s not part of our project, we call it G5 among ourselves, ‘G’ for gambling,” says Durumbetov.

Betting on tourism

Concerned about the spread of gambling and its effect on the country’s moral development, the Kazakh parliament voted in 2006 to limit casinos to two special zones, one in the town of Schuchinsk, north of Astana, and the other in Kapchagay. But the population’s moral health was not the only consideration; by creating two gambling hubs, the government hoped to kick start the tourist industry.

The initial impact has been underwhelming. Nearly two years since the law came into force, Kapchagay has “just two casinos and a gaming hall,” points out Guenther Ziemlich, CEO of Central Asian Tourism Corp. Sceptical locals have sarcastically dubbed the project “KazVegas”, and those who I met on the shores of Lake Kapchagay had come not for roulette or slot machines but to splash in the lake and deepen their tans.

Meanwhile, the hard core of Kazakh gamblers visit the illegal clubs that still operate in Almaty, where $5,000 in cash and a personal introduction secure them a place at the tables. Others drive south to the pleasant Kyrgyz capital Bishkek, where most Almaty casino owners – shunning Kapchagay – have relocated and offer free transport and hotel rooms to their clients. Almaty gamblers can continue to play in Zodiac, Aster or Volcano, as well as indulging in various other vices; the widening economic gulf between Kazakhstan and Kyrgyzstan has caused the latter to be seen as a sort of local Bangkok.

However, the Kazakh government hopes this will change when the plans to create “The Vegas of the Steppe,” as it is termed in promotional literature, come to fruition. According to the Ministry of Tourism, the Lake Kapchagay resort should be completed by 2013. As well as casinos and hotels, plans include Sea Dragon tower, which will be the highest tower in Kazakhstan, a Kazakh Loch Ness, and an artificial island linked to the shore with replicas of London’s Tower Bridge and New York’s Brooklyn Bridge.

In June, the chairman of casino developer Eighth Wonder, Mark Advent, signed a preliminary agreement to develop the first stage of the complex. Eighth Wonder may invest up to $3bn, and several developers from China and other Far Eastern companies are also understood to be interested.

Ultimately, the project’s success will depend on its developers’ ability to attract gamblers from abroad. The Kazakh government hopes Kapchagay will exercise the same international pull as Las Vegas, but others are less optimistic. “In my opinion, this will not attract Europeans to Kazakhstan,” Ziemlich argues. “A special kind of people come here – they are looking for beautiful mountains and outdoor activities. They go to Issyk-Kul; they don’t go to Kapchagay.”

Closer by, however, is the enormous community of Asian gamblers, a market that a Merrill Lynch study forecasts will grow to a staggering $71bn in the next four years alone. In the five years since its casinos were legalized, Macao has overtaken Las Vegas in the gambling stakes, ringing up $6.95bn in revenues in 2007. Kapchagay, just 640km from the Chinese border, is a big gamble on the Asian market.

“The Kazakh government is ready to step in,” Kazakhstan’s Prime Minister Karim Masimov said this morning in a telephone interview with Bloomberg “The Kazakh banking system with the support of the government and central bank will fulfill all obligations to international investors…..We have our own specific plan to survive without any external support….I don’t think we need support from the International Monetary Fund or overseas.”

Well that is good news, so at least we know that one of the CIS and CEE economies won’t be looking to the IMF for bail-out support in this crisis which is presently growing by the day. So Kazakstan, that country which is reputedly host to reserves of approximately 95% of the elements in the periodic table, with a population of around 15 million housed on a surface area greater than the whole of Western Europe, is going to be able to look after itself. But hang on a minute, just where is Kazakhstan, and just what have they been getting up to over there, and why the hell should I take Karim Masimov’s word for it, when just about all the other Iceland Look-alike show contestants seem to be saying the same? After all, didn’t those extermely bright and able young people over at RBC Capital Markets in Toronto say in a report only last week that, along with Latvia, the country’s $100 billion oil-led economy is among the most vulnerable to the present global credit crisis and the skid-row economic trajectories that go with it simply because of its excessive reliance on short-term foreign borrowing. And isn’t it the case that the cost of protecting Kazakhstan government debt against default has more than doubled this month - to over 1,000 basis points (or 10%), the level for borrowers that investors term “distressed,” according to CMA Datavision credit-default swap prices. Only Ukraine, which as we know is already seeking IMF support, is classified as being a bigger risk among European emerging-market governments. Surely all those highly dedicated, bright, and extremely able young people who are doing all that trading know what they are about, don’t they?

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For example, Astana announced it would abandon a project to build a grain terminal in the Georgian port of Poti and oil refineries in Batumi, doubly bad news for the already weakened Georgian economy.

Relations between the South Caucasus and Central Asia are relatively tense. The two regions have had difficulties coordinating their political and economic policies, both during the Soviet period and following its collapse. However, since the beginning of this decade, Kazakhstan has emerged as the principle power center in Central Asia-South Caucasus relations, particularly as they pertain to Georgia. In 2007, despite already strained relations between Georgia and Russia, Astana and Tbilisi continued to develop their economic relations. Kazakhstan became the first post-Soviet investor and the third largest foreign direct investor after Great Britain and the United States in Georgia. By 2006, Kazakhstan had invested more than US$150 million in the construction, tourism, telecommunications, and most of all energy sectors of Georgia.

The core of Kazakh-Georgian cooperation has focused on ways to separate from Russia. In addition to the Baku-Tbilisi-Ceyhan pipeline (BTC), there are the Baku-Poti and Baku-Akhalkalaki-Kars railway projects, which would connect Azerbaijan, Georgia, and Turkey by 2010, and enable Tbilisi to partially circumvent the Russian embargo. This new line of triangular cooperation between Kazakhstan, Azerbaijan, and Georgia was confirmed during the three-party negotiations held in Baku in April 2007. There, the Kazakh transportation minister stated that his country planned to transit by rail over ten million tons of various products to European markets. Oil is obviously the first priority, followed by grain. KazMunaiGas and the private investment company Greenoak Group, which turned Batumi into one of the biggest oil ports on the Black Sea, signed an agreement for the construction of a one billion dollar oil refinery in Batumi. Thereafter, in February 2008, Greenoak Group sold its entire stake to KazMunaiGas for US$220 million, making the latter the sole owner of the Black Sea oil terminal at Batumi. In June 2007, Astana and Tbilisi also signed a ten million dollar contract to construct at the port of Poti a grain warehouse with an annual capacity of 350,000-500,000 tons.

The war in August between Russia and Georgia seems to have stopped, perhaps temporarily, these joint projects. On September 22, Kazakh Minister of Agriculture Akylbek Kurishbayev stated that Astana had abandoned plans to build the grain terminal due to “the current situation in Georgia.” That same week, KazMunaiGas announced the suspension of the oil refinery project, but refused to cite the conflict as a cause. It claimed the decision was based purely on economic reasons, saying that “our experts have carefully studied it and decided that it is not feasible.” At the height of the conflict, Kazakhstan suspended oil shipments through Batumi, but flows were restored in early September. The Georgian authorities have not hidden their disappointment, noting that other foreign partners had not stopped their investment projects.

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By Clare Nuttall in Almaty (business new europe)

Public opinion on whether the market has reached its lowest point is split 50/50, according to Renaissance’s observations in Almaty. “In itself, this is enough to ensure that price trends remain unstable and that most of potential demand will be postponed,” the firm writes in its report, entitled “Kazakh residential real estate: After the bubble burst.”

Despite government purchases of apartments in Astana, the absence of new construction during the last 12 months and improved housing affordability after a 40% drop in prices, there is no immediate prospect of a recovery, Renaissance says. In addition, the yet-to-be-completed supply overhang remains significant, particularly in Astana.

Distressed selling has not begun, although there are numerous potentially sellable properties. “Banks’ ability to sell properties is impaired by weak demand because mortgage origination has not yet recovered and opinion on future price dynamics is split,” the report explains. Banks appear to prefer to keep collateral on their books rather than liquidating it. Anecdotal evidence suggests that if an auction fails to detect a buyer at initial cost - which is set reasonably high - banks do not pursue it.

Before the fall

The Kazakh housing market was booming until mid-2007. New housing commissions increased on average by one-third every year between 2002 and 2007, while prices were a stunning 18 times higher in 2007 than in 2000. Renaissance writes that the growing supply of new housing, “in our view, became incompatible with price appreciation once the financing suddenly became less available when the banking crisis erupted in the summer of 2007.” Extremely active mortgage origination in 2006 and the first half of 2007 added to the problem, sending real estate valuations to record levels.

Statistics published by the General Prosecutor’s Office in July suggest that roughly half of all residential projects that were under construction by mid-2007 failed to be completed on their own. In mid-2008, 285 development companies were operating in Kazakhstan with 407 projects at various stages of construction. Of these, around 200 projects – mostly in Astana and Almaty - being developed by 123 companies, have been designated by the authorities as “problematic.”

Worst affected by this are the customers – known as dolschiki – who had contracted with developers to purchase units that were being built. They account for over KZT104bn that was paid for units in “problematic” developments. “Trust in the prepayment system has been severely damaged and customers’ willingness to be exposed to developers’ risks is minimal. The majority of potential buyers will now want to buy only after completion,” Renaissance Capital says.

The plight of the dolschiki is very much on policymakers’ minds. President Nursultan Nazarbayev has acknowledged the issue as meriting heightened attention by the government and listed it as the government’s top priority in his address to parliament in early September.

Overall, state support for the real estate sector, part of the $4bn financial stability package announced in November 2007, has been extremely high. So far, various government initiatives total more than KZT196bn, Renaissance Capital calculates. A further $1.2bn is expected over the next few years. Budget funds are being allocated to complete construction, and funds are allocated only to commercially viable projects that are between 10% and 90% complete in terms of both construction and the area pre-sold to customers.

A framework agreement was signed between the government, sustainable development fund Kazyna and Kazakh banks in December 2007. Under the agreement, Kazyna deposits 85% of the total money required with the banks, who provide an additional 10% while the remaining 5% is provided by developers. The banks bear all the risks of completing the projects, and have the option to opt-out, as Halyk Bank has done. The total value of this programme is over KZT128bn, and at present covers only Astana and Almaty.

Government money is also being channelled into the real estate sector through direct subsidies to the akimats (municipal authorities) of Astana and Almaty. These are intended to help dolschiki with the most uncertain prospects of having their homes constructed, and – in Astana – to maintain a positive image of Kazakhstan’s newly built capital.

According to Renaissance, punitive actions by the Kazakh authorities against developers haven’t been effective. “The previous (as opposed to the current) wave of credit default swap widening by Kazakh banks in early August was fuelled by media reports about the state’s coercive actions against developers, including the seizure of properties and the arrests of owners,” the report says. “These measures only impacted a limited group of small-scale companies and were not industry-wide.”

To date, the General Prosecutor’s Office has initiated criminal investigations against only eight fraudulent companies. While more criminal investigations may follow, the authorities are unlikely to move against large developers participating in state-sponsored rehabilitation programmes.

By Clare Nuttall in Almaty (business new europe)

Any relief on the part of the Kazakh banks that the direst predictions for their sector haven’t been realized was tempered by new uncertainty about the future. With the financial crisis taking its toll on banks in New York and London, a re-opening of the international capital markets had become a distant mirage.

This resulted in a thoughtful and sombre mood among delegates. Even the leggy models, sporting tiny skating skirts and crop tops in BTA’s red and pistachio corporate colours and handing out welcome packs at the door, failed to raise many smiles. And on opening the conference, Mukhtar Ablyazov, chairman of BTA’s board of directors, immediately struck a note of humility, thanking delegates for coming to Almaty at a time when “everyone is experiencing major difficulties”.

Kazakh Prime Minister Karim Massimov, speaking by video link from Astana, continued in a similar vein. “The world is at the centre of a big storm that started in the US a few days ago,” he began.

However, he went on to point out that the situation in Kazakhstan looks better than it did a year ago. “Kazakhstan was one of the first to have suffered the global credit crunch, and was able to go through it despite the predictions of many analysts,” he said. “No Kazakh banks defaulted, loans have been repaid, and banks showed they were able to withstand the crisis.”

Roman Solodchenko, chairman of BTA’s management board, was also moderately positive, saying he believed there had been a decoupling between the Kazakh and international financial markets, meaning that local banks would be better able to weather this year’s shocks than those of mid-2007. “When we met last year, the crisis had just started, and we were at our most vulnerable point,” Solodchenko told bne. “I think the worst is behind us. It would be naïve to say the world financial crisis won’t affect us - it will. But it won’t have the same impact as last year. I believe we are much better prepared for any difficulties and challenges we are facing in the future.”

But later in the day, he was pulled up by Elena Bakhmutova, chairman of Kazakhstan’s banking regulator, the AFN, for being somewhat over-optimistic. “The crisis is not over yet and we have to be very cautious with optimistic forecasts,” Bakhmutova warned.

ATF Bank’s chairman, Alexander Picker, also took a less sanguine view than his peers. While agreeing with fellow panellists that the liquidity issue had largely been solved for Kazakh banks, he added that the effects of the crisis “will affect the real sector for quite some time,” since the level of non-performing loans with Kazakh banks were a cause for grave concern. “The regulator is taking action, but the real task lies with the banks. They must tackle non-performing loans.

State support

Talk of stricter regulation for Kazakh banks might seem – as one delegate confided over coffee and cookies – like shutting the door after the horse had bolted. However, it was the regulators and the government officials, rather than the banks, that took centre stage for much of the first day of the conference.

Bakhmutova outlined some of the measures currently being taken to reduce risks in the banking sectors. Discussing the harder line the regulator is now taking, she said: “The market has to consolidate. The majority of banks have enough resources to increase their capital. For banks without the resources to do this, it is better that they either leave the market or restructure as a micro-credit organization or other type of non bank financial institution.”

But as, Anvar Saidenov, governor of the National Bank of Kazakhstan, illustrated, the implications of the banking and real estate crisis have been wider than those two sectors alone. As a result, the Kazakh government has been trying to strike a balance between tough love for the banks, and careful nurturing for other sectors of the economy. “The next turmoil in the financial markets is just around the corner, and for refinancing, the horizon of uncertainty is getting more distant. We thought the markets would be open again by August 2009. We’re not so optimistic now,” Saidenov said. “The financial system has to operate under this turmoil, and banks could find it more complicated to repay debt in 2009 than in 2008 as they have already cut back their assets and loan portfolios.” This, he pointed out, “will lead to decreased business activities in the domestic market. Government action is needed to help sectors that have been hurt by this.”

The high-ranking government officials present at the conference showed they had already taken on this responsibility. In his address, Finance Minister Bolat Zhamishev outlined government plans for a distressed asset fund to take over non-performing loans – at prices to be set through independent audits – and thereby restore confidence in the banking sector. The government is looking to invest up to $1bn in the fund, and seek a further $5bn from the private sector, Zhamishev said.

Learning from experience

It was noted, however, that a few days after Lehman Brothers’ collapse, there were still no bankruptcies among Kazakhstan’s banks. For the most part, delegates and speakers were charitable, one dubbed Kazakh bankers as “second-year students” in learning to live with the reversal in international financial markets.

There was, admittedly, a small note of schadenfreude that the crisis had come back to bite the West. One of the few explicitly to voice this sentiment on stage was BTA’s CFO Khalil Kamalov, who pointed out that the credit boom was imported from the west – both the model and the cash. “The crisis was an imported crisis,” Kamalov said, while conceding that there had been mistakes made in Kazakhstan too. “Previously we had indulged ourselves with the abundant foreign equity,” he said.

Overall, the conference may have started just as international financial markets were plunged into gloom, but it was definitely not a wake. Kazakhstan’s banks could take pleasure in the fact that they had weathered more difficult conditions than today’s and survived. Foreign interest in the country was also evident, with international banks such as HSBC, VTB Bank and RBS affirming their commitments to the Kazakh market.

When it came to the final evening, a night of hunting and fishing games followed by a disco on the shore of the Altyn Kol lake near Almaty, delegates seemed more inclined to dance the night away than drown their sorrows.

By Clare Nuttall in Almaty (business new europe)

A key question for Kazakhstan is how best to use its oil and mineral wealth to create the foundations for an enduring economic security, which will continue even when those natural resources are exhausted. The Kazyna Sustainable Development Fund, which announced September 9 it’s planning to turn into an independent investment fund by 2012, is at the heart of the government’s strategy for diversifying the economy.

The experience of other oil-rich developing countries highlights the dangers of revenues being frittered away, damaging rather than developing their economies. To avoid this, the Kazakh government set up Kazyna, a 100% state-owned umbrella organization comprising several funds and development institutions, in March 2006 – at the same time as state holding companies Samruk and Kazagro were formed.

Kazyna’s function is to channel government monies into productive investments, in line with the government’s 2003-2015 strategy for industrial development and innovation. Operating under the chairmanship of former Finance Minister Arman Dunayev, Kazyna is intended to ensure better coordination between the government and various development finance, innovation promotion and other agencies. The government thereby hopes to speed up diversification of the Kazakh economy.

Rather than simply throwing money at the various issues, Kazyna’s remit includes introducing best corporate governance practices to its subsidiaries, increasing their efficiency and helping to develop Kazakhstan’s stock market. It is also responsible for channeling private sector investment into the Kazakh economy.

In a recent interview, Prime Minister Karim Massimov, a driving force behind Kazyna’s creation, stated that, “Kazyna can do nothing without partnership with the private sector. For each dollar invested by Kazyna, there should be a dollar invested by the private sector.”

“Someone should take risks because purely state financing of projects ends pitifully as a rule. This principle underlies the creation of Kazyna,” Massimov added. This is reflected in Kazyna’s investment criteria; projects selected must have private sector participation and be economically viable, in addition to being compatible with the fund’s development priorities.

Finger in pies

Kazyna has its fingers in many pies, not just in Kazakhstan but also in the rest of the CIS. Investments it’s made include those in the Moscow-based Macquarie Renaissance Infrastructure Fund and the Aktau City project, right down to venture capital investments and funding for small and medium-sized enterprises (SME).

Its subsidiary, the Development Bank of Kazakhstan, specializes in funding major projects; the latest 10 projects to be approved include funding the modernization the ferroalloy production plant in Taraz, construction of the Aktau International Sea Port, and construction of the first transport and logistics centre in the West Kazakhstan region.

Smaller projects are funded through the Development Fund of Small Enterprise, which, it announced in July, will spend KZT115.5bn ($96m) financing projects through the state SME support programme. High-tech companies are funded through the National Innovation Fund, which also makes fund of funds investments in venture capital funds. The Investment Trust of Kazakhstan, another Kazyna agency, also provides financial support to private sector companies.

The fund’s private equity arm, Kazyna Capital Management, was launched in May 2007 and today has over $300m under management. It was launched to develop the non-resource sectors of the Kazakh economy and bring in foreign investment, as well as buying international assets. Recently, co-investing with the European Bank of Reconstruction and Development (EBRD), it launched the Kazakhstan Growth Fund with a target of $125m. According to Kazyna’s deputy chairman Gani Uzbekov, this will be increased to $1bn by the end of 2008.

There is also growing speculation that Kazyna could take over Kazakhstan’s National Fund from the National Bank. The fund’s assets are expected to exceed $100bn within five years, assuming oil prices stay above $70 a barrel – according to Global Insight it is the world’s third fastest-growing sovereign wealth fund. Uzbekiov recently said that Kazyna could become responsible for managing the National Fund’s assets.

Investments by Kazyna have not been limited to Kazakhstan, with the fund taking on an increasingly international role. As by far the largest economy in Central Asia, Kazakhstan – via Kazyna – is taking something of a regional development role in neighbouring economies.

Among its international initiatives is the Kazakhstan-Tajikistan Investment Trust, which was finalized on August 28 and is due to start its activities in October. Kazyna Capital Management and Tajikistan’s state committee on investments will co-manage the 10-year, $40m fund, which will later be increased to $100m, and will finance investment projects in Tajikistan in areas such as hydroelectric power, mineral extraction, light industry and agriculture. A similar fund – the $100m Kazakh-Mongolia Direct Investments Fund - is being launched in Mongolia, following Kazakh President Nursultan Nazarbayev’s visit to Ulaan Bataar this summer. Investments will be made in “commercially compensated, economically effective” infrastructure and investment projects, Kazyna said.

On a much larger scale, Kazyna will channel international funds into both Kazakhstan and the wider CIS economy through the $1bn Ithmaar Kazyna CIS Energy Fund. The fund is being jointly managed by Kazyna and Bahrain-based investment bank Ithmaar Bank, and will invest in energy and related sectors; it is expected to become the catalyst for total investments of up to $10bn. The fund “offers regional investors the opportunity to participate in the tremendous growth the CIS energy sector is currently experiencing,” Ithmaar’s CEO Michael Lee said on the launch of the fund in May 2008.

Future plans

It is early days to make any real assessment of Kazyna’s performance. But less than three years after its creation, it’s certainly been effective in putting a lot more money to work than its constituent parts did previously. In the four years before the fund’s creation, its daughter agencies invested in projects worth $3.3bn in total; in Kazyna’s first year of operation, it backed projects worth no less than $5.1bn.

However, money is not the only ingredient when it comes to developing the economy. Kazakhstan has huge supplies of natural resources, but a comparative shortage of human resources. From mega projects like the Aktau City development to high-tech start-ups, finding skilled people is a great challenge. In the industrial sector, ensuring power supplies and effective transport and logistics to get their products to market is also an issue, and the investment in infrastructure development is necessarily long term.

Since its creation, Kazyna’s role has continually widened. In the most recent move in early September, it was given the status of a financial agency by Kazakhstan’s financial regulator AFN. This will both allow Kazyna to provide financial services aimed at the development of Kazakhstan’s economy, and help it to borrow on domestic and international markets.

Earlier this year, Dunayev outlined new investment priorities. “In order to utilize our financial resources in the most effective way, we have decided to revise our investment priorities,” he announced in April. “When financing investment projects in the future, Kazyna will focus on the following priorities: infrastructure, transport and logistics, energy, metallurgy, chemistry and petrochemistry, and entrepreneurship.”

By 2010, these priority areas will account for 75% of Kazyna’s investment portfolio, with the remaining 25% being made up of investment projects in other areas, Dunayev said. In particular, the fund will increase its investments in the industrial and infrastructure sectors.

The current development plan for Kazyna will take the fund through until 2015. Outlining its longer-term plans, Dunayev said: “By 2015, Kazyna will become an independent investment fund after partial or full privatization of the institutes for an adequate premium. The fund will focus on management of the assets in order to diversify the sources of income for the republic.”

Speaking at the Renaissance Capital Central Asia Investment conference on September 9, Uzbekov confirmed that, “We hope that by 2012 most of the subsidiaries will have been privatized and Kazyna Sustainable Growth Fund will turn into an independent investment fund.”

It is expected that a number of smaller, undercapitalized banks will be forced to merge or be acquired by larger rivals or foreign institutions seeking to get an entry into the Kazakh market.

The Kazakh Financial Supervision Agency (FSA) announced that the minimum capital requirement for banks will be raised to KZT 5 billion (USD 42 million) by July 1, 2009, and KZT 10 billion (USD 84 million) by July 1, 2011. As of today, 15 of the 36 banks registered in Kazakhstan find themselves below the new limit.

At the same time, minimum capital requirement for regional banks will be lower — KZT 3 billion (USD 25 million) by 2009 and KZT 5 billion (USD 42 million) by 2011. Yet, the financial sector is almost entirely concentrated in Almaty and Astana with the only exception being the Ekibastus-based Zaman Bank.

According to Yelena Bakhmutova, the chairwoman of FSA, the tightening of banking regulation is a reaction to the increasing inability of small banking institutions with to provide adequate banking services.

Yet, Bakhmutova claimed in an interview with the Kazakh business weekly Biznes & Vlast, the new regulation’s aim is not to diminish the number of smaller banks but rather to make the existing institutions stronger.

“We want the financial institutions that will remain in business to be banks. In order to be called banks, they need to be able to offer a wide spectrum of services - not just to a few specific borrowers but to the population as a whole.”

Negative outlook for small players

Yet, it is already clear that not all small banks will survive. While some banks, specifically subsidiaries of large foreign banks, have ready access to capital, for smaller local banks, the only likely options will either be a merger, an acquisition by a larger bank, or an outright liquidation.

The Kazakh banking system, today considered the most developed among the CIS states, has already gone through the painful process of adjusting to tighter regulation in the past. In 1997, as the National Bank of Kazakhstan increased the capital requirements, the number of banks fell from more than a hundred to 77. The financial crisis caused by the Russian sovereign default then further decimated the numbers of Kazakh banks.

Kazakhstan’s banking landscape has undergone important changes since the outbreak of the global liquidity crisis last summer. Several foreign players have entered the market, either trough acquisitions or by expanding their own network, and most local banks have found themselves quickly reexamining their business models following the global liquidity draught. A wave of consolidation in the industry is already under way, and the new capital requirements will further accelerate it.

By Clare Nuttall in Almaty (business new europe)

In 2007, Air Astana, a joint venture between Kazakh state holding company Samruk and BAE Systems, increased its revenues by around 48%. This year, as the international economic crisis takes its toll on the airline industry, a considerable slowdown in revenue growth is expected, though annual revenues are still expected to grow from $530m in 2007 to $700m-750m in 2008. Air Astana has also halved its 2008 profit forecasts to around $46m, due to high fuel costs and “shrinking global demand,” vice-president Askhat Beisembayev told journalists.

Air Astana is in a difficult position, since the domestic market in Kazakhstan is heavily regulated and so it’s unable to raise prices sufficiently to offset its increase in expenses. “Rising fuel prices have affected us very badly because we are not allowed to impose surcharges on domestic routes, which account for almost 70% of our network. For international flights, we managed to raise the fuel surcharge to some extent but again it doesn’t cover our full costs, which have more than doubled,” vice-president Ashendra Liyanage said in an interview with bne.

Meanwhile, stiff competition on international routes from carriers like Asiana, British Midland, KLM, Lufthansa, Transaero and Turkish Airlines has prevented the company from raising international prices to a large extent. “We currently have quite a lot of strong competition, and our competitors do not have domestic restrictions on fuel surcharges as we do. So although everyone is suffering, we are in a uniquely difficult position,” according to Liyanage.

However, Air Astana still plans to carry out its long-term $1.445bn expansion programme confirmed at the end of last year. This will see the company’s fleet grow from the current 21 aeroplanes to 63 by 2022. An IPO at some point in the future has not been ruled out, but the firm has no immediate plans to do so, instead it’s planning to finance 15% of its expansion from its own fund and the remaining 85% from borrowed monies, the company’s president Peter Foster has said.

To Bangkok and beyond

Air Astana started as a domestic operator before moving into the international market. It owes its rapid growth to a combination of factors – its status as the only international standard domestic carrier in Kazakhstan, heavy investment in marketing and consumer service, and the Kazakhs’ increasing propensity to travel.

When the company launched its international operations, flights to Moscow and Germany accounted for the lion’s share of its operations. Most journeys were either business related or to visit relatives abroad. Today, the pattern has shifted fundamentally as disposable incomes have increased.

While Moscow remains Air Astana’s most popular destination, with 21 flights a week, the airline now serves cities including Delhi, Dubai and Bangkok. “Kazakhstanis are looking for new holiday destinations. People who used to holiday in Antalya now go down to Southeast Asia,” says Liyanage. “We have seen strong growth in demand for flights to Dubai and Bangkok. By contrast, inward traffic is still dominated by family visits and business travel. There are not many inbound tourists because we don’t have a proper tourism infrastructure here.”

Later this year, Air Astana is planning to increase the frequency of its flights on the Astana-Dubai, Astana-Frankfurt and Almaty-Bangkok routes, and is considering opening up new routes to Munich, Baku, Urumchi and possibly Hong Kong. However, due to concerns over rising fuel prices, it has only made a definite commitment to opening one new route before the end of this year - between Almaty and the Kyrgyz capital Bishkek. “In the current situation, we are being very careful and prudent about how we grow,” says Liyanage.

In 2002, when Air Astana was launched, jokes about “Aeroflop” and other CIS airlines were still common. The company has invested heavily in international marketing, not just to get brand recognition, but to emphasize that it operates to western standards. “We have done a lot of marketing on that front to emphasize that we offer western standards, our fleet is entirely western planes – from Boeing, Airbus and Fokker – and our crews are trained in Europe,” explains Liyanage. “There are still some people who have a negative view, but that is diminishing very fast.”

On the services side, Air Astana has invested in new menus, in-flight entertainment and launched a frequent flyer programme, the Nomad Club, in 2007. On May 31, it announced that it had made a transfer to 100% electronic ticketing, which will slash processing costs by up to 90% and improve the level of service for its customers.

While becoming a paperless airline was a big step for Air Astana, pioneering e-ticketing in the Kazakh market meant that as well as investing in its own systems, it also had to provide new equipment to airports in Kazakhstan without the ability to handle electronic tickets. It has hit a similar problem in its plans for transit routes. “90% of our routes – both within Kazakhstan and internationally – are point to point,” says Liyanage. “With the exception of Astana International airport, the infrastructure for transit passengers isn’t there. The Bishkek-Almaty route is our first stab at doing a real transit run since many people travel from Bishkek to Almaty by road to connect to flights to international destinations.” If this proves a success, Air Astana may offer more transit routes, but airport infrastructure will need to catch up with the airline if it or its competitors are to manage this on a larger scale.

By Clare Nuttall in Almaty (business new europe)

The country’s leading index, the KASE Index, fell by 102.72 points, or 6.1%, on Tuesday, September 16 as news of the bankruptcy of US investment bank Lehman Brothers caused panic across the world, bringing the index’s fall to 26.6% in the last 30 days. The following day on Wednesday, as markets around the world continued to plunge despite the news the US government had bailed out the giant insurer American International Group, it fell another 2.0% to 1,556.11.

Renaissance Capital’s Rencasia Index for Central Asia, which is dominated by Kazakh equities, is down 21.68% in the week to Tuesday, and 31.76% in the last month. According to Gairat Salimov, Renaissance Capital’s head of research for Central Asia, Kazakh equities are declining very much in correlation with the Russian blue chips. “There is no decoupling right now between Russian and Kazakh indexes, because a significant part of the investor base is funds with CIS or CEE mandates, who start to reduce their Kazakh holdings when they see significant problems in Russia,” says Salimov. “This happens even though the economic dynamics and growth prospects in Kazakhstan and Russia are very different.”

Like Ukraine’s equity market – also in freefall - the majority of Kazakh stocks listed on the KASE are very illiquid, which multiplies the effect of sales orders. But there have also been significant declines in the valuations of the largest and most liquid stocks in the mining, oil and gas, and banking sectors, some of which are listed in London.

Analysts continue to argue that at these prices Kazakh stocks look cheap. The Rencasia index as a whole is trading at a price/earnings ratio of 5.5 times, despite a 35% increase in earnings this year. KazMunaiGas E&P, the country’s largest and most liquid oil and gas stock, is being traded at just over 4 times P/E for this year. Salimov points out that, “around 40% of its market cap is represented by cash, so it’s very cheap at current valuation levels.”

In the current fear-saturated atmosphere, sentiment is trumping fundamentals. While the fundamentals in the Kazakh market are strong, there is a significant market risk in the current environment, Salimov says. “The risk to investors is that stocks will be valued cheaper tomorrow, which has prevented a significant inflow of funds to push up low valuations.”