Kazakhstan’s Sullied Diplomatic Splash
Kazakhstan’s MSCI frontier stock component, after a 70% gain, and dollar bond prices at 130 cents both sputtered into 2018 as President Nursultan Nazarbaev marked twenty-six years at the helm with high profile foreign investor energy and banking clashes despite a triumphal US visit. In Washington President Trump dismissed corruption and money laundering references to the long reign with his own campaign under the microscope for Russia and neighboring ties, and in New York while chairing the monthly seat rotation on the UN Security Council, the Kazakh chief was praised by Secretary-General Antonio Guterrres for Central Asia development and anti-terror initiatives focusing on infrastructure and drug crime. While there Wall Street money managers also probed details of scheduled sovereign wealth fund partial state enterprise sales to include the airline and natural resource holdings.
European counterparts had previously joined the parade after the EU inked a Partnership and Cooperation Agreement, which aims at bilateral “WTO-plus” free trade slashing both tariff and non-tariff barriers. The pact came on the heels of the country’s 15 place jump on the World Bank’s Doing Business ranking, despite staying in the bottom quartile of Transparency International scores. The European Bank for Reconstruction and Development also signed a new 3-year program memorandum stressing small business and privatization support. However these official achievements were blemished by simultaneous private antagonism after the local unit of US electricity operator AES was seized for one dollar, and Bank of New York Mellon was forced to freeze $22 billion or half of Kazakhstan national fund assets to satisfy a possible Moldovan oil and gas investor claim. At the same time banking instability at home spiked when the ninth largest institution, RBK, was rescued after a depositor run for reported fraud, at an estimated initial $1.5 billion tab. The sector was still coming to grips with the forced merger of the two state behemoths Halyk and Kazkommertsbank, as bad balance sheets linger a decade after the original crisis despite the President’s positive diplomatic headlines.
In his January state of the nation speech President Nazarbayev repeated financial system cleanup and anti-corruption priorities without hinting at an executive succession preference or timeframe, even though parliament in principle gained relative power under 2017 constitutional amendments. He continues to dismiss cabinet members and prime ministers at will, and unilaterally decided on an alphabet switch from Cyrillic to Latin script creating widespread academic and professional confusion. After Kyrgyzstan’s President reportedly insulted him the border was closed temporarily, and Astana delayed its neighbor’s membership in the Russia-led Eurasia Economic Union. Last year GDP growth came in at 4% on 7% inflation, and the central bank recently reduced the base rate to 9.75% as the tenge firmed around 325/dollar. Oil price rebound spurred a 25% trade and an almost 10 million barrel/day output rise, with Kazakhstan now the top over-producer in the OPEC and allies’ global agreement. The Economy Ministry said hundreds of projects were completed under the 5-year privatization plan, as the new Astana International Financial Center based on advanced economy legal and operating standards began registering companies in partnership with the Shanghai Stock Exchange and NASDAQ.
The dedicated offshore framework must contend with the harsh image and arbitrary rule displayed several months ago in the AES saga, where the Fortune 200 power company was stripped of control over two hydro-facilities run since the 1990s. It spent hundreds of millions of dollars installing a state of the art electricity grid only to have a contract compensation clause ignored, when the government demanded ownership and offered one dollar for alleged violations instead of the $90 million AES calculates is due. The debacle was soon followed by the wealth fund asset freezes in the US and Europe in long-running Moldovan investor actions against the state, after it confiscated petroleum fields in 2010. The plaintiffs won a $500 million international arbitration award and tried to enforce payment in Belgian and Dutch courts with Kazakhstan filing counterclaims, and they threaten to pursue future compensation in the giant Kashagan tract if the damages are not met. With over $20 billion in reserves off limits, the Nazarbayev administration will have difficulty mustering additional bank rehabilitation lines, and financial markets will remain wary pending development of a successor plan emphasizing instead governance and management overhaul. .
