Rule of law risks weigh on Kazakhstan’s privatisation

nazarbaevnIn the face of his country’s ongoing economic turmoil, Kazakh President Nazarbayev is engaging in fast-paced diplomacy to boost his country’s growth prospects. Hot on the heels of high-level bilateral meetings with the US, Japan and Qatar, he has attempted to position Kazakhstan as a land of opportunity for British business during his official visit to the UK this week.

However, while the Kazakh government is actively working to improve the environment for foreign investors, deep-seated deficiencies in the rule of law remain a serious barrier to investment.

Nazarbayev’s roadshow is an attempt to diversify the economy and shore up investment to offset the impact of persistently low oil prices, which have cut the country’s foreign trade surplus by more than 60 per cent and caused budget revenues to plummet by 40 per cent this year. As a result, GDP is projected to expand by just 1.3 per cent in 2015, down from 4.3 per cent last year and 6 per cent in 2013.

Downturn forces correction of economic course 

The continuing downturn has prompted the government in Astana to introduce a series of stimulus measures. November 2014 saw the announcement of the Bright Path programme, which will inject $9bn worth of investments from the national oil fund into the economy over a three-year period.

A further stimulus of $3.6bn from the national pension fund, of which 40 per cent will be used to support the state budget, was announced this October. The remainder is set aside to finance investment projects through a ‘funding for lending’-type scheme. Stimuli are certainly needed given that Kazakhstan’s economy is projected to return to growth only gradually; Wood Mackenzie forecasts just 2.3 per cent growth in 2016.

The country’s economic woes have been exacerbated by the downward

The country’s economic woes have been exacerbated by the downward spiral of the Kazakh currency, the tenge, sparked by the low oil price and Russian economic decline. Abrupt policy changes on the part of the national bank have damaged the credibility of the institution. President Nazarbayev’s attempt to prop up its credibility by this week replacing the central bank governor has had limited effect on an institution already perceived to have limited independence.

Rule of law remains key concern

In his attempt to court foreign investors, Nazarbayev has portrayed Kazakhstan as a bridge between east and west, while simultaneously painting the enduring global economic slump as an opportunity to deepen international trade ties.

Coinciding with Nazarbayev’s stay in London, the country’s national wealth fund, Samruk-Kazyna, announced further details of long-trailed privatisation plans, which will include the sale of at least 25 per cent stakes in national energy and infrastructure champions KazMunaiGas, Kazakhtelecom, Kazatomprom and Kazakhstan TemirZholy, the national rail company.

As part of the wider push to attract both domestic and foreign investors and inject new dynamism into the Kazakh market, more than 200 state-owned and nearly 600 local government-owned entities are earmarked for privatisation. Yet some of the most prominent opportunities may be difficult to sell as some companies, such as KazMunaiGas, are hobbled by both significant social obligations and high debt levels.

Astana is likely to use the privatisation programme to spur the development of the much-touted Astana International Financial Centre (AIFC), the creation of which Nazarbayev announced earlier this year. The Kazakh government’s ambition is that this special economic zone will become one of the world’s top 30 finance hubs by 2025.

The zone is intended to develop a capital market, asset management and private banking services, and become a centre for Islamic finance. Companies investing in the AIFC will enjoy a 50-year tax exemption on all taxes except VAT, as well as two-year rent-free offices at the EXPO 2017 centre.

Crucially, the AIFC will be governed by English commercial law and an independent court.

The inclusion of an independent judicial mechanism for companies operating in the special economic zone reflects the Kazakh authorities’ awareness that investors are deeply concerned about the weakness of the rule of law.

Indeed, Kazakhstan has consistently featured as a ‘high risk’ country in Verisk Maplecroft’s Rule of Law Index, ranking 68th out of 198 countries (where 1st denotes the highest risk).

In this context, the independence of the AIFC judiciary will be critical to the success of the zone. 

While Kazakhstan recently jumped 12 positions in the World Bank’s Doing Business ranking to number 41 through a number of reforms, including improvements to the enforcement of contracts, the judicial system remains one of the main challenges of the country’s business environment.

Reforms are key to success

Structural reforms to the economy are critical to attracting foreign investment and reducing the country’s commodity dependence. Yet, as the failure of past efforts to diversify the Kazakh economy are laid bare by the current crisis, question marks remain over the government’s readiness and ability to deliver necessary reforms.

One reason for optimism, however, may be the country’s accession to the World Trade Organization (WTO), expected by December this year, which will force the government to phase out distortions to competitive markets and liberalise the economy.Implementation of WTO commitments, including an end to restrictions on licensing and local content requirements, will address some key concerns of foreign investors.

WTO accession will open new opportunities for foreign investors and potentially boost the country’s growth prospects. However, the lack of independence of key state institutions, as demonstrated by the recent upheaval at the national bank, will continue to limit the country’s attractiveness to foreign investors.

In the absence of robust checks and balances and demonstrable respect for the rule of law, the Kazakh investment climate will continue to present significant risk for Western investors.

Camilla Hagelund is senior central Asia analyst at Verisk Maplecroft.


Finantial Times, 5.11.2015



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