Analytical materials / Kazakhstan

Irina Galkina: “Foreign investors always wait for a special invitation”

26.08.2015

“One thing is obvious: foreign investors do not come to trade, and the activities of local entrepreneurs are limited only to trade during a quarter of a century after gaining independence, – foreign investors, as a rule, have a brutal business, with advanced technologies and business processes. For this reason alone, they deserve respect, in the long term”, said Irina Galkina, chief editor of Portal Millioner.kz (Almaty, Kazakhstan), in an article written for CABAR.asia.
Investing in Kazakhstan’s economy is not easy. Western partners have yet to solve the difficult task of whether to invest capital in the unknown Asian country, and there are certain prejudices, they always must evaluate all the risks. Another thing is the global structures, transnational corporations, which, many years ago, already had a full marketing arsenal and were completely aware of all the “undercurrents” of our country. They came. Now we will tell them about our national idea.

One thing is obvious: foreign investors do not come to trade, and the activities of local entrepreneurs are limited only to trade during a quarter of a century after gaining independence, – foreign investors, as a rule, have a brutal business, with advanced technologies and business processes. For this reason alone, they deserve respect, in the long term.

Kazakhstan’s achievements in the field of foreign direct investment are significant enough. More than 207 billion dollars have been attracted since 2005. We have achieved much more than our neighbors, as we began working with foreign capital back in the days of the Soviet Union. Moreover, we have to understand that largely thanks to foreign investors only, Kazakhstan can achieve any appreciable success in the modernization of the economic system. In fact, the country needs real diversification – not in statistical data, but in real life.

Prerequisites for a meeting with the investor

It seems that 2015 will be one of the worst for the countries, whose economies are heavily dependent on oil prices. Thus, the periodic reduction in the price of “black gold” cannot be regarded as a fluctuation. It is obvious that in the conditions of excess supply in the market, which is observed at present, the price of this resource will decrease.

On July 5, 2015, during the summit of the OPEC, it was decided to maintain production volumes, despite the fact that there was a threat of a further fall in oil prices. Then some oil chauvinism prevailed: the country of the cartel are trying to keep their share of supplies, which is not exactly easy in an environment where production growth of the hard-to extract oil has been rising, including in the US shale deposits.

The target level of production in OPEC is 30 million barrels a day, but the cartel regularly exceeds it from May 2014. Middle Eastern oil producers compete with companies from Latin America, North Africa and Russia in the Asian market.

And it took only a little over two months, and the OPEC members are negotiating the possibility of holding an extraordinary meeting in connection with the fall in oil prices.

The current situation is that the oil market sets anti-records one after another – even inspiring mantra of the International Energy Agency (IEA) do not help, which is trying to infuse optimism in the oil market with their monthly reports. By the current moment, the price of oil has been reducing during eight weeks [1]. According to analysts, this is the longest period since 1986.

Another one of the anti-records is the actual price itself. Thus, the cost of the October (2015) futures for North Sea Brent blend was reduced by 0.94% – up to 46.18 dollars per barrel, the price of the October futures for WTI crude oil fell by 1.02% – to 40.9 dollars per barrel. It remains quite a bit for the price of oil to reach the level of previous financial crisis of 2008-2009, when a barrel of Brent crude oil fell to $45.

Projections for oil prices, alas, are disappointing. For example, recently the World Bank published its forecast for oil prices in 2016 [2]. Its experts believe that the “withdrawal of international sanctions against Iran in the light of the agreement on the nuclear program of the Islamic Republic will lead to a further significant reduction in oil prices”. They believe that after a “full return of Iran to the world market”, the amount of oil sold will increase by about 1 million barrels per day. As a result, experts say, the next year the price of oil will decrease by approximately $ 10 per barrel, or approximately 21% compared to today’s level.

Analysts at Citigroup Inc., in turn, predict the fall in the value of black gold to 32 dollars per barrel. The reason for the current situation is dual – oversupply in the market and the increase in world oil reserves.

For a country like Kazakhstan, whose export products in a large part (over 60%) are hydrocarbons, and more than half of government revenue of which are formed by oil and gas sector, the need for economic growth extremely increases. Already in 2014, the growth slowed to 4.3%. Forecasts for 2015 are not optimistic. The Ministry of National Economy of the Republic of Kazakhstan predicts GDP growth for 2015 at just 1.5%, which is 3.3 percentage points lower than the previous forecast.

Experts of RA Standard & Poor’s also believe that the growth will be not more than 1.5%.  International rating agency Moody’s also expects that in 2015, Kazakhstan’s GDP growth will be 1.5%, in 2016 – 2.2% and in 2017 – 3.3%. The medium-term forecast for GDP growth is about 3%, which is lower in comparison with last year’s estimates by agencies – at the level of 5%.

The Asian Development Bank (ADB) decreased by 0.6% the growth forecast for the economy of Kazakhstan in 2016, but expectations against the general background look more optimistic: “The growth forecast for Kazakhstan for 2015 remains at the level of 1.9%, and for 2016, it reduced to 3.2% from 3.8%”. In its report, the financial institution notes that the growth of the economies of Central Asia, including Kazakhstan, slowed due to lower world commodity prices and recession in the Russian Federation.

In the context of the slowdown, the question about the drivers who are able not only to stop this negative process, but also to bring the economic machine in motion, becomes extremely important. Of course, investment in new sectors and diversification of the economy may be such a driver.

Ratings as a beacon

In order to draw the attention of foreign investors to Kazakhstan and attract them with their investment projects, the country should have some international rankings. Despite the fact that the international rating agencies have caused a storm of criticism in connection with the recent financial crisis and an incorrect assessment of the companies that have become the primary source of financial turmoil, for investors however rating actions are still the most important benchmark.

In principle, the analytical assessments of the economy of Kazakhstan by all relevant agencies are similar, there is only a small difference in the notation of scale. They usually say that Kazakhstan’s economy is dependent on the resource base, particularly on the oil sector. For example, this year, Standard & Poor’s has reduced the long-term rating of Kazakhstan to «BBB» from «BBB+», the rating outlook is “negative”. Analysts estimate like this internal and external risks. The analysts in S&P believe that the ratings of Kazakhstan are positively affected by strong fiscal performance. However, the ratings are constrained by limited institutional and managerial efficiency of the government.

Rating agency Fitch confirmed Kazakhstan’s rating at the level «BBB+», the forecast is “stable”. And the agency Moody’s Investors Service rates our country as having the level of Baa2, and forecast is “stable”.

Moody’s analysts believe that the situation in Kazakhstan’s economy will improve only with the conduct of the planned structural reforms, as well as the country’s accession to the WTO. “Membership in the WTO should lead to a better business and investment climate and attract more FDI. It should also contribute to a more efficient market economy and reduce the country’s dependence on oil and gas exports”, believe experts in Moody’s.

“At the same, the decline in oil prices is putting pressure on the economy of Kazakhstan, as the share of revenues from the sale of energy resources was 50% in total government revenues, while the country’s GDP – 16%. Efforts to diversify the economy were not successful, given the unfavorable business climate in sectors such as infrastructure, transport and energy, despite the fact that at present, Kazakhstan is committed to enhancing its integration into the international transport network, linking East Asia and Europe, due to the modernization of its aviation, rail and road infrastructure”, said Ernest Sergenti, the report’s author, Associate Vice President – analyst at Moody’s.

Background information

In the beginning of its sovereign path, Kazakhstan decided to attract foreign investors. The first law “On Foreign Investments in the Kazakh Soviet Socialist Republic” was adopted in December 1990. Thus, it laid the foundation of the legal protection of investments and established a number of tax incentives for foreign investors, which has played a significant role in bringing in the economy of the first foreign investment.

In 1994, a new law “On foreign investments” was adopted. Then, foreign investment was almost the main source of funding for large-scale projects – domestic capital had not yet been established.

In 1997, the Law “On state support of direct investments” was adopted, in order to regulate relations connected to investment activities in the priority sectors of the economy.

In 2003, there emerged a law “On investments”, which for the first time in the sovereign history gave equal rights to foreign and domestic investors, providing the latter with exactly the same guarantees and preferential treatment as foreign businesses.

Finally, in late 2014, this law was substantially amended and improved. Large investors have a kind of carte blanche.

Modern investment field

The largest investors in Kazakhstan have a number of investment incentives. They are exempt from customs duties (usually within five years from the date of registration of an investment contract), are eligible for state grants. The state grants may be: land, buildings, machinery and equipment, computers, measuring and control instruments and devices, vehicles (except passenger cars), industrial equipment. These grants are transferred free of charge upon the expiry of the investment contract, if the investor has fulfilled all its obligations [4].

Investors may be exempt from key taxes for ten years. The limits on foreign labor force are not applicable to them. When it comes to priority projects using modern technology, investors can count on compensation of 30% of the costs of the budget.

The law clearly stipulates which subjects of business can have investment preferences: these are new companies that are willing to invest not less than 2 million MCI; companies in which the share of the government or quasi-public sector does not exceed 25%; organizations operating within the territory of free economic zones; autonomous education organizations. Moreover, in case of non-compliance with certain restrictions, for example, state participation cannot be more than five years, the investment preferences should be returned to the government.

There are important innovations: firstly, an institute of investment ombudsman was created, which is designed to solve the current problems of investors. It is also engaged in extra-judicial and pre-trial settlement of disputes. The government of Kazakhstan officially appoints investment ombudsman. The first ombudsman is Aset Isekeshev, Minister of Investment and Development, who was appointed in February this year.

Second, there was created a “single window” for investors, which greatly simplifies the preparation of a variety of public services for the start of the project. It is necessary to collect all the necessary documents and submit them to the Ministry of Investment and Development or Service Centers for investors in local administrations. They, rather than the investor, will be engaged in obtaining permits in various government agencies.

EXPERT OPINION

Chairman of the Committee on Investments of the Ministry of Investment and Development of the Republic of Kazakhstan Yerlan Khairov: “The government has created a completely new system to attract investors. The first level of the system is external. Our embassies have a clear task to attract investors. There are special advisers at the embassies for this purpose. We have joint plans with the Ministry of Foreign Affairs and embassies, and we are working closely together.

The second level is central – central state bodies, including our investment committee. The fact that the ministry responsible for industrial and innovative development was last year renamed into the Ministry of Investment and Development confirms the emphasis that the government has placed before the start of SPAIID-2 (State program of Accelerated Industrial and Innovative Development of the Republic of Kazakhstan). The Committee is responsible for investment policy and creation of a favorable investment climate. We also have the National Agency for Export and Investment Kaznex Invest – it can work with each investor individually.

The third level is regional. Each Governor’s office has a special deputy mayor who is in charge of industrial development and investment promotion.
Our goal is not just to attract money into the economy. It is necessary to motivate investors with advanced technologies to work in Kazakhstan. Therefore, service centers for investors were established in the regions (SCI), like small Kaznexs [5].

“Brainstorm” under the auspices of the President

Foreign Investors Council was created in Kazakhstan in 1998. It was created under the President of RK and, probably, it was his idea. Be that as it may, the ancient form, which resembles a council of elders, has been tested by time and still is an important communication to solve many problems. Take, for example, the fact that the current law “On investments”, comprising a series of measures to improve the investment climate, was signed at a meeting of that Council.

Currently the Board consists of the heads of 34 foreign companies and international organizations – world-renowned transnational corporations, top foreign banks and industrial companies. Among those who joined the discussion platform in 2015, there are Citigroup, CNPC, Baker & McKenzie – CIS, Limited, Eurasian Development Bank, Ernst & Young, BG-group.

The format of communication of the President of Kazakhstan (and he is always present in person in all meetings) is democratic. The Kazakh participants set the theme of communication, and then there starts brainstorming – all participants can openly express their attitude towards an issue and offer their own version of its resolution. In addition, businessmen and top managers have an opportunity to personally interact with Kazakh President Nursultan Nazarbayev and sometimes even lobby for specific issues.

In order to give the Council an additional political weight, important people in the business world are sometimes invited to co-chair. For example, in June, president of the European Bank for Reconstruction and Development Suma Chakrabarti acted as a moderator, demonstrating the Bank’s determination to cooperate with the countries of Central Asia. The theme of the last meeting was the development of agribusiness in Kazakhstan, which is important: an agrarian country needs modern technology.

By the way, in Kazakhstan, there is also a Council of Improvement of Investment climate under the Prime Minister, which considers systemic issues: the necessary changes in the tax environment and customs legislation.

The second Five-Year Plan is on the agenda

According to official reports, the results of the first five-year state program of accelerated industrial-innovative development, in which the majority of foreign investors from the non-oil sector participated, are the following: about 500 productions were initated, productivity in the manufacturing industry increased 1.5 times, energy intensity of GDP decreased by 10% from 2008 to 2013, non-oil exports increased by 16%, more than 17 billion dollars were attracted in the manufacturing sector…

Surprisingly, the optimistic reports of the government on successful programs, new productions, assimilated funds, and finally, a record amount of foreign investment, to put it mildly, are poorly correlated with reality. All of these things exist in some kind of parallel reality, which we cannot see. If we look closely, the structure of capital investments remained virtually untouched, and there is not any desired change in the structure of GDP. We have heard about diversification many years ago, but the actual tectonic shift in the economy has not yet happened.

The recent events, when the fall of oil prices put the economy into a difficult situation, alas, confirmed these theses.

Investors, creating a seemingly modern production, cannot receive the expected economic effect. Every day, they face a number of specific problems: lack of quality local raw materials, shortage of qualified personnel, poor transport and logistics infrastructure, the limited capacity of the local market, unsettled problems of export deliveries to neighboring countries, etc.

However, the government and the relevant ministry still have a lot of optimism. The second five-year plan has been launched. According to the analysis, there were selected six priority sectors of the manufacturing industry, such as metallurgy, chemicals, petrochemicals, machinery, construction materials, food industry, which are divided into 14 sectors:
1) ferrous metallurgy;
2) non-ferrous metallurgy;
3) oil refining;
4) oil and gas chemistry;
5) food production;
6) agrochemicals;
7) production of chemicals for industry;
8) manufacture of motor vehicles, their parts, accessories and engines;
9) production of electrical machinery and equipment;
10) production of agricultural machinery;
11) Manufacture of railway equipment;
12) Manufacture of machinery and equipment for the mining industry;
13) Manufacture of machinery and equipment for oil refining and oil industry;
14) production of construction materials.

600 billion tenge will be allocated from the budget for the implementation of the second five-year plan, it is planned to attract $ 6 trillion private investment, despite the fact that the capabilities of the private sector are getting reduced, according to Chairman of the Board of JSC “Kazakhstan Industry Development Institute” Aydin Kulseitov. [6].

“In this regard, the approaches to financing will be revised, in order to either increase government funding to attract more private investment, or reduce any plans due to the fact that private business will not be able to implement a number of its initiatives, or  a third way is to make such a transformation of the economy, in which it would be more profitable to invest and attract investments”, said the official.
He also made a statement that Kazakhstan can enter the top thirty most competitive countries in the manufacturing sector by 2035, “if the ideology of industrialization will be the national idea”. [7]

Despite the fact that Kazakhstan has accumulated a fairly solid state capital – at the expense of the National Fund, a quasi-public sector, and so on, it is not so easy to transform the economy into a precise and perfect mechanism. Some experts have criticized Kazakhstan that budget money is too actively invested in projects that ultimately do not give the expected results. The efficiency of public investment and private investment of residents of Kazakhstan are two separate issues. But in any case, it is necessary to remember that the state’s resources are not limitless, and the investor is happy to find the use of its capital.

Irina Galkina, Chief Editor, Portal Millioner.kz

The views of the author do not necessarily represent those of CABAR

[1]. The news agency RIA Novosti. http://ria.ru/economy/20150821/1198568188.html
[4]. Law of the Republic of Kazakhstan “On Investments”. http://adilet.zan.kz/rus/docs/Z030000373_
[5]. Web-portal Expertonline.kz. http://expertonline.kz/a13625/

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