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Kazakhstan 2011: Year in Review: Business & Investment Print E-mail

ALMATY. Jan (Interfax) - The past year has been rich in political events for Kazakhstan. It may be harvest time in the political field but the country's economy is still at the sowing stage.
The country undertook many major projects, each launched towards some significant date. For example, there were many new production projects launched on the eve of Independence Day. Regional chiefs reported on the successful implementation of government programs forcing industrial and innovative development, company heads enthusiastically talked about their production and reported on the government funds spent.
Nevertheless, old problems, especially in the banking system, did not fade away. Reorganization by the regulators has not yet settled various urgent issues. In addition, there was talk of another cycle of financial crisis and proposals to tighten belts once again.

The year saw one of the most anticipated events of the last three years occur - the Karachaganak issue was settled in favor of Kazakhstan. The Kazakh government and members of the Karachaganak Petroleum Operating (KPO) consortium on December 14 signed a deal whereby KPO shareholders will transfer 10% of their stake in the project to develop the Karachaganak field in West Kazakhstan to the Kazakh government. Obtaining its desired stake in the project, Kazakhstan has finally become co-owner of all the major oil fields in its territory.
Kazakh Prime Minister Karim Masimov officially announced plans to join the KPO project at the end of December 2009. Conflicts, disagreements and court proceedings followed. BG Group first filed a case with an international arbitration court against Kazakhstan for over $1 billion, disputing the country's oil export duties (the case was later suspended). Kazakhstan reacted quickly and soon the company was hit by a barrage of different complaints and claims from regulating bodies. The Prosecutor General's Office demanded 3 billion tenge from the consortium in compensation for damage to the environment. The financial police accused the KPO of earning 104 billion tenge from illegal oil production and said it suspected management of embezzling 187 billion tenge. At the same time, the Prosecutor's Office began checking the consortium was adhering to labor and migration legislation and the tax committee began checking into tax payments from 2005 to 2008.
Some clarity about Kazakhstan's plans came in early June 2010. It became apparent that Kazakhstan wanted a 10% stake in the project and it sent the relative proposal to KPO members.
The government and shareholders held tireless talks from this moment until almost the end of 2011. Oil and Gas Minister Sauat Mynbaev said the consortium had confirmed that the agreement was in its interests. Kazakhstan is to acquire a 5% stake for $1 billion and another 5% in exchange for settling all existing disputes, giving it a 10% stake in the project. Although, KPO itself will be lending state energy company KazMunaiGaz the $1 billion for three years and the debt will be serviced and cleared with the money generated by the 10% stake. The parties will mutually withdraw all arbitration suits and claims.
Kazakhstan will become a full-fledged participant of the Karachanak project before mid-2012. BG Group will reduce its stake in KPO to 29.25% from the current 32.5%, Eni to 29.25% from 32.5%, Chevron to 18% (currently 20%) and Lukoil 13.5% (15%).
So the issue of Kazakhstan joining the Karachaganak project was resolved after almost two and a half years.

Another key issue for Kazakhstan that is relevant now is the Common Economic Space between Kazakhstan, Russia and Belarus.
The countries have already created a Customs Union: from July 2011 customs controls were officially lifted between alliance members and the fall the countries signed a treaty on creating a free trade zone within the framework of the CIS. Russia, Kazakhstan and Belarus in November signed a Declaration of Eurasian Economic Integration and a Treaty on the Eurasian Economic Commission.

Kazakh President Nursultan Nazarbayev said the Common Economic Space was the next step after the Customs Union, followed by an economic union.
According to the Declaration, all Customs Union regulations comply with WTO regulations and in the case of accession to the WTO the regulations of that organization will carry greater power than those of the Customs Union. The protocol on Russia's accession to the WTO was signed in mid-December 2011 and Kazakhstan plans to join the WTO in 2012.
Observing the economic changes in the Customs Union member countries and a serious of benefits from the union, some other countries have given serious thought to joining the union. In a EurAsEC heads session on October 19 2011 in St. Petersburg, it was announced that Kyrgyzstan was joining the Customs Union. The country has already been included in the Union but will actually join in 2012.
New Zealand and Vietnam also plan to sign a free trade agreement with the Customs Union. Moldova came across a negative reaction from the European Union when it began to consider the issue. The EU said it would withdraw Moldova's benefits if it joined the Customs Union. Uzbekistan refused to join the Customs Union because it said it feared that the relations of the union members "went beyond economic interests and had a political hue and content."
Many experts and politicians in the CIS believe that if this union is to be fruitful, it has to be sown long and carefully.

Kazakhstan has sold many shares in companies with government participation and has even determined a list of contenders that will participate in a people's IPO program. Over six months after Nazarbayev asked the government to ensure the placement of shares in various national companies between an unlimited circle of investors, including among the population, the government in late August 2011 presented a preliminary people's IPO project.
It became clear that among the so-called first-tier companies, shares would be offered in Kaztransoil, KEGOS and Air Astana. Among the second tier companies, shares in which will start to be offered in 2013, were KazTransGaz, KazMorTransflot and Samruk-energo. Third-tier companies include the national railway Kazakhstan Temir Zholy and Kaztemirtrans - which will be offered in 2013-2014. Shares in raw material giants KazMunaiGaz and Kazatomprom may be offered in 2015.
Overall, the program envisages the sale of 5% to 15% of shares in government companies to the population and to pension funds. The Economic Development Ministry forecasts that demand among the population for these shares could reach $500 million. Current demand from the population is estimated at $100 million to $200 million and demand from pension funds - $200 million to $300 million.

Amid the backdrop of declared victories in other segments of the economy, criticism and self-criticism from financiers talking of continuing problems in the Kazakh financial sector led to many discussions in both professional circles and among ordinary folk.
The second wave of international crisis, unresolved poor asset problems and various other subjects became central in many debates, which somehow avoided the problem of the burden of financial problems faced by Kazakhstan's largest credit organization - BTA Bank.
Meanwhile, the organization had a capital deficit, into which a considerable amount of government money was poured, of $2.2 billion at the end of January-September 2011, and other financial indicators were far from optimistic.
BTA Bank announced on December 22 that it planned to restructure part of its debt liabilities. The bank plans to raise this issue at the shareholders meeting on January 26 2012. National Welfare Fund Samruk-Kazyna, the bank's main shareholder, said it supported the proposal.
BTA Bank completed a previous debt restructuring procedure in September 2010, reducing its debt from $16.65 billion to $4.2 billion. BTA Bank defaulted in 2009 before it was taken over by Samruk-Kazyna (81.48%) and creditors received over 18% of shares.
Despite the opinion of the bank's management that timely restructuring will ensure further normal functioning, strengthen finances and in the future lead to a recovery of market position, behind the scenes various experts have expressed very disappointing forecasts. Some are sure that the bank will reach an agreement with creditors as the first restructuring was much larger. The optimists argue that the government has every opportunity to prevent its bankruptcy.
BTA Board Chairman Anvar Saidenov said in a letter to shareholders and GDR holders that he was doubtful about the bank raising money for debt payments. BTA was due to pay coupon payments on several Eurobonds in tenge, dollars and euros on January 1 2012, totalling over $160 million in dollar equivalent.
National Bank Chairman Grigory Marchenko said a considerable number of structures undergoing restructuring recently were repeating the restructuring process.
"The statistics we have seen show that 34% of all companies that underwent [restructuring] in the United States, for example, were undergoing a second restructuring. Thus, the specific situation where we have three banks that underwent restructuring and one of these will do it a second time is nothing new in international practice and in principle there is nothing terrible in that. Simply the external backdrop remained rather difficult during all that time," Marchenko said.
Even if the second restructuring is approved the question remains open as to whether it will achieve its aims or whether BTA Bank will remain in the history of the Kazakh banking system as a titan destroyed by the greed of its previous management.


Stuart Prior, Honorary Consul for Belarus in New Zealand

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