Satpaev
Big business and high-level politics in Kazakhstan: An everlasting symbiosis?
The managed democracies in the post-Soviet area are neither static nor inherently stable. In Kazakhstan, politics are defined by the tight but fluctuating relationships between top politicians and big business groups.
Kashagan: A Strange Victory
Interesting analysis by Dosym Satpaev, director of the Almaty-based Risk Assessment Group. The original article in Russian can be found here.
Last week, a long dispute between the Kazakh government and the Agip KCO consortium of Western oil companies came to an end. Our officials made the foreign investors an offer they could not to refuse.
As a result, KazMunaiGaz, the national oil company, increased its share in the Kashagan project from 8.33 percent to 16.81 percent. In addition, the participants discussed a $5 billion payment as a compensation for lost profits due to cost overruns and significant delays in commercial production.
All this was hailed as another great success in the government’s pursuit of public interest. But it is a strange “victory” considering that we have heroically solved problems that we brought upon ourselves in the 1990-s when hydrocarbon deposits were distributed like hot pastries at much lower prices than those that we are paying now. It has been announced that KazMunaiGas is going to pay $1.78 billion to increase its share in the consortium. That is no small sum, even if not paid at once but in three tranches once production begins.
All this would look great, if it was not for fact that in autumn 1998, Kazahstankaspishelf, the state oil company (representing the interests of the state), sold for $500 million its stake in the Kashagan project to Japanese Indonesia Petroleum (Inpex) and American Phillips Petroleum Co (7.14 percent each). Even at that time, there was discussion about the appropriateness of the transaction. And that did not only concern the low price (especially compared to $1.78 billion) but also the loss of a strategic asset. Especially since a few years after this sale, Kazakhstan paid BG, a partner who decided to exit the project in 2003, nearly $600 billion for an 8.33 percent stake in the same project. And now they are willing to pay $1.78 billion. Of course, it can be argued that the dollar devalued and the cost of the project increased. But so far, nobody has explained why there was such a hurry to sell Kazakhstan’s stake in the Kashagan project in the first place. Moreover, it’s still unclear where the $500 million went.
Ii is debatable whether all this can be called a “victory” if, in addition to strange math at the expense of national interests, nothing has been accomplished. It also should not be forgotten that the budget of the Kashagan project rose from $57 billion to $ 136 billion. Therefore, joining the new operating company, KazMunaiGaz will be required to invest heavily into the project along with the other larger investors.
Moreover, the Kashagan conflict revealed another more serious problem. Despite our ambitions to join the world’s top five exporters of oil and gas, Kazakhstan controls only 12 to 15% of its recoverable reserves of minerals. The rest, unfortunately, belongs to foreign investors. So, now we may have won one battle, but lost the entire war.
Bankers of All Post-Soviet Countries, Unite!
Dosim Satpaev, the director of Risk Assessment Group for Exclusive, again. The original version in English can be found here, the Russian version is here.
Since August, the banking sector of Kazakhstan has attracted a special attention from society, first of all, in the view of its financial stability. But the event that took place on 12th December indicates the optimism and trust in the future from the side of our banking structures.
In Almaty it was officially announced about the establishment of Eurasian club of Bankers. We should mention here that on 26th September of 2007, during the 8th Almaty Interbank Conference “High growth banking systems of CIS”, the initiator of which was the “Bank TuranAlem” (BTA), memorandum of this club’s establishment was accepted.
As it is known, the idea itself was made public by the President of Republic of Kazakhstan N.A. Nazarbaev in the economic forum held in St. Petersburg on 10th June of 2007. And already this week, the constituent agreement was signed not only by the trustworthy banks such as Bank TuranAlem, KazKom, Alliance Bank, and Bank CenterCredit, but also by the Association of financiers of Kazakhstan, Association of Russian banks and Financial-Banking group of CIS.
There could be several reasons for the establishment of this club. Particularly, despite the fact that there is a range of regional organizations in the territory of former Soviet Union, which has such functions as development of multilateral economic cooperation, not any of them has the opportunities to perform this function in full measure because of wide dispersion of directions of its activity and certain bureaucratization. On terms of globalization and on the verge of possible joining of Kazakhstan and other CIS countries in WTO, it becomes necessary to consolidate the efforts of different fields of economy in order to uphold and further your own corporative interests on regional and global levels. It also concerns the financial institutes of post-soviet states.
Oil and Investment Games of Central Asia
Another interesting piece of analysis by Dosym Sotpaev, the head of Almaty-based Risk Assessment Group. The article can be also found here and the Russian version here.
What had to happen sooner or later, has happened. The government of Kazakhstan has started operations in the conflict against Agip KCO consortium on all fronts. Not the fact of the conflict with one of the largest foreign investors is interesting here, rather the tendency.
The period from 1991 till 2002 was most favourable for attracting foreign investors and their activities. During this period Kazakhstan lost control practically over all of its oil and gas deposits, after selling them to foreign companies. Since 2002 – till present time we observe the policy of establishing investment parity and strengthening the control over investors. There are objective as well as subjective reasons for this.
Firstly, due to favourable pricing condition on the market, Kazakhstan could create strong enough economic platform to decrease dependence from foreign investors. It was also connected to increased role of the state in the economy, including oil and gas sphere, where positions of state owned KazMunayGas are improving.
Secondly, new oil and gas elite appeared in Kazakhstan; this elite wanted an access to the resource pie, which for a long time belonged to foreign investors.
Thirdly, Kazakhstan started forming a new legislation base for resource sector. The main difference from the previous one is in strengthening new priorities in forming investment climate. While during the previous decade Kazakhstan’s priority was attracting foreign investors, in the recent years the priority is supporting national companies, which are closely connected with political elite. For example, several years ago a new law on investments was adopted in Kazakhstan, it cancelled 6th article of the old law “On foreign investments”. According to the abolished article, the government undertook responsibility to restrain from actions that would harm the investors.
The government also adopted the law “On changes and amendments to some legislative acts of Republic of Kazakhstan on the issues of mineral resources and conducting operations with oil in Republic of Kazakhstan”. Now the government officially has a priority in purchasing shares of investors’ projects that decide to trade them. Besides, Kazakhstan has already adopted the amendment to oil legislation, which prohibits transfer of rights for the resources within two years of singing the contract. The term “concentration of rights” was also included into legislation on natural resources, it means that the government has the right to interfere into a deal if it threatens considerable increase of foreign ownership that influences national security. According to the government, the reasons behind the changes are the interests of national security, and that the previous legislation didn’t provide the government with enough control over national resources.
Fourthly, the government of Kazakhstan has already started decreasing the dependence on western capital by broadening the areas of investment activities and inviting Russian, Chinese, Indian and South Korean companies. Activities of Chinese companies in oil and gas sector of Kazakhstan will only increase. It can be seen from their serious intent to participate in new tenders for development of Caspian deposits.
The first sign of changes in government’s policy regarding foreign investors were frictions between the government and “Tengizchevroil” about ecology. It was very uncommon in mid 1990s, the frictions ended up with a big penalty levied to the company.
Later the tax committee of the Ministry of Finance of Kazakhstan stated that it wanted to reconsider tax regulations of large oil companies; the contracts signed during 1993 – 1997 were to be reconsidered. The government wants the companies that came to our country more than ten years ago to stop emphasising investment risks in Kazakhstan. It means that they have to agree to increasing tax payments to the budget. That is to pay according to standard tax procedure of Kazakhstan. Particularly Astana is trying to increase TCO’s input into national economy by 20% without taking into account the growth of extraction of hydrocarbons.
Unexpectedly for everyone, in April 2006 KNB (Kazakh National Bank) of Kazakhstan accused some foreign companies that their activities threaten national security. Nurgali Bilisbekov, head of economic security department of KNB, said that KPO (Karachaganak Petroleum Operating) and Agip KCO consortiums take actions to maximize their profits to the prejudice of Kazakhstan. This was one of the first precedents when KNB publicly accused foreign investors in threatening national economic security. Previously the main accusations towards the investors were about breaching ecological norms, labour legislation or, in extreme cases, non-payment of taxes.
Early this year Karim Masimov, Prime Minister, stated that in general implementation of contractual conditions by producers of natural resources is unsatisfactory. Then it was about extending the exploration periods, postponing beginning of industrial production from the deposits and increasing the costs. It has an obvious hint at the activities of large foreign oil and gas companies working on Karachaganak, Kashagan and Tengis deposits. Thus, the situation has been coming to this ending since long ago.
The government considers the price of political risks, which our country pays to oil investors that came during that period, to be overvalued. In early 1990s the government provided them with very beneficial taxation conditions and guaranteed invariability of terms of the contracts. That’s why in 2007 the government of Kazakhstan stated that it intends to strengthen control over export-import activities of largest producers of natural resources in the country.
On the instructions of the Prime Minister the Ministry of Energy and Mineral Resources together with the Ministry of Economy and Budget Planning have to arrange efficient monitoring of fulfilling the contractual liabilities. Strengthening the monitoring meant collecting the information required for pressing the investors. Then it seemed that the government would try to convince the producers that reconsidering the contract terms once was better than the government’s increased and adversary attention towards their activities.
In addition notice that the government of Kazakhstan often makes concessions to Kazakhstani investors. Extracting and processing with the country’s own companies is emphasized. For accomplishing this goal “KazMunayGas” wants to receive $70 billion in investments and credits from local businesses. Kazakhstani investors also received additional mechanism of cooperating with the President. On 21st of April 2007 the President announced creation of National Investors Council. Currently the investments into the country’s economy by local investors are $80 billion, which is $20 billion more than by foreign investors. However the main task for the President was to redirect internal investments of local companies into non-resource sphere, where foreign investors are not very active.
In perspective the government of Kazakhstan will continue to pursuit the policy of strengthening the control over all large foreign oil and gas investors. Possibly the international consortium that develops Karachaganak gas deposit will be the next target for the government, this consortium has also announced increase of exploration costs.
Besides, the policy of attracting foreign investments will provide more favourable conditions in non-resource sectors. New socio-economic programme of the government for 2007 – 2009, presented by Karim Masimov on 9th of February 2007, confirms it.
Hence, figuratively foreign investors are offered the role of a sheep rather than of a horse rider in kokpar game (Central Asian game of horse riders). It is surprising how our government discovered all of these ecologic and customs violations after a decade of closing their eyes on them. A big mistake by the investors was to accept the rules of the game and make those violations, after becoming accustomed to “blindness” of our officials. Now these officials successfully use the mistake as a powerful pressure tool.
Dosym Satpaev - An Analysis of the Internal Structure
I found an interesting paper written by Dosym Satpaev, a known Kazakh political scientist and head of the Almaty-based Risk Assessment Group. It has been written in 2005 but it still provides an interesting glimpse into the power politics within Kazakhstan’s political elite. Among other things, Satpaev introduces several influential circles within the Kazakh elite and their ties to President Nazarbayev, and ponders a range of outcomes that could come define Kazakhstan’s post-Nazarbayev legacy.
Here is an exerpt, and the whole paper can be found here:
“General Characteristics of Kazakhstan’s Modern Political Elite
• The elite is closed in nature and removed (economically, politically, informationally, and mentally) from the general population;
• The elite functions within the framework of a rigid hierarchy where concepts of professionalism are often disregarded in favor of concepts of personal loyalty and blood ties. This is also true, though to a lesser degree, for the business elite;
• The governing elite is not monolithic. On the contrary, it is caught in a state of continuous contradiction, as a result of which different blocks of convenience are formed around shared interests and the immediate political conditions among the elite;
• The main struggle within the elite is not for the right to spread its ideals of state and social development, but for the right to extend its influence over the head of state and other elite groupings, and only through these levers of power to influence the state and social development;
• The president of the country is the only guarantor of any stability within the political elite.”
