© 1997 BridgeNews

Kazakstan's Emerging Financial Sector

OPINION: Kazakstan's Emerging Financial Sector

Mineral Wealth, Oil Deposits, An Educated Population Add Up To Vast Potential, But Questions Remain

By Keith W. Rabin of KWR International, Inc. (kwrintl@kwrintl.com)

NEW YORK -- Since gaining its independence in 1991, the former Soviet Republic of Kazakstan has been working hard to develop the institutions and regulatory framework needed to support a market economy. Having established the foundation, the nation is now preparing to move forward. Recent months have seen several developments that indicate both the potential that Kazakstan offers and the determination of the Kazak business and financial community to advance as rapidly as possible. Kazakstan's upcoming eurobond offering, the opening of the Kazakstan stock exchange and the planned privatization of 32 "blue chip" state enterprises are a few of the many events that promise to focus more attention on the nation. Others include the formation of the AIG Silk Road Fund by the insurance carrier American International Group Inc., the recent $43 million offering of Kazakstan's largest private bank (in the form of American depositary receipts) and Citibank's decision to open a branch office in the capital city of Almaty.

THE VIEWS of international analysts, journalists, portfolio managers, bankers, lawyers and business officials will become far more important, and their perceptions will have real implications on the valuations accorded to Kazak securities and the capital costs incurred by its corporations and financial institutions. Kazakstan is not yet, however, fully prepared for this scrutiny. There is little awareness of the nation and the economic opportunities it offers. This has, at least in part, contributed to its failure to gain the sovereign credit rating it desires. THIS CREATES potentially rewarding opportunities for those who can assess and enter this market before it becomes better known to analysts and the financial community. Kazakstan is a rich country. It is more than three times the size of Turkey, yet few Americans can even locate it on a map. Situated on top of Kyrgystan, Uzbekistan and Turkmenistan, Kazakstan lies between

Russia and China. The nation is rich in resources, with substantial petroleum, natural gas, coal and mineral deposits. Western geologists believe Kazakstan's Caspian Sea reserves hold billions of gallons of oil. Its gold deposits are the sixth largest in the world and, after South Africa, the second largest in terms of gold content in ore. Five percent of the world's silver is mined in Kazakstan. It is also a source of diamonds, copper, zinc, lead, chrome, manganese and uranium as well as a large producer of grain, meat and wool.

AMERICANS KNOW little about Kazakstan and its people, a nomadic race of Asiatic descent. (The word Kazak in Turkic literature originally referred to "riders of the steppe.") Currently populated by about 16.5 million people, the first formation of Kazak people was established in 1465. Warlike tribes began to invade in the 18th century and, over time, Kazakstan was absorbed into the Russian empire. In the 1930s, Stalin forcibly resettled its nomadic population. It has been estimated that more than one-third of the Kazak population perished. Today, native Kazaks encompass only about half of Kazakstan's population. Ethnic Russians comprise slightly more than a third, with the remainder consisting of Ukrainians, Germans, Uzbeks and others. Kazakstan possesses an educated population, with a literacy rate approaching 100 percent. English is mandatory in Kazak schools, and advanced technical and scientific degrees are prevalent.

DESPITE many attractive commercial opportunities, a lack of accessible information has made it difficult for foreigners to make informed decisions. International investors therefore tend to perceive Kazakstan as a "discounted play" on its underlying natural resources -- with little regard for the considerable progress and advances made over the past six years. Media reports tend to dwell on Kazakstan's remoteness, its abundant resources, its history as a stop on the "Silk Road," the social difficulties encountered in uniting its heterogeneous population or the environmental problems from having been a center of Soviet industry. Few international journalists have been to Kazakstan. It should not be surprising that they are unable to communicate the details of Kazakstan's development -- from a subordinated republic of the Soviet Union to a country that promises to become the economic powerhouse of central Asia.

TO ASSIST in this transformation, the U.S. Agency for International Development recently funded a program to introduce almost two dozen Kazak securities officials to the U.S. financial community. For two weeks, delegates met with prominent U.S. banking and custodial firms, portfolio managers, regulatory agencies, attorneys and financial institutions. This innovative program was managed by Legal Technical and Advisory Services, a Washington-based training firm under contract from the Academy for Educational Development. Our firm, KWR International Inc., helped to promote the visit.

THE OVERALL perceptions of investors toward Kazakstan remain in the formative stages, and the critical question -- Will Kazak securities trade at a discount or premium -- remains to be answered. Much will depend on the nation's ability to maintain the development of a coherent regulatory regime and a stable business environment. More information is essential, not only on the macro level but also in respect to the financial offerings and the individual enterprises that will seek to attract international capital.

AS SEEN in the phenomenal rise of the Russian stock market over the past year, the largest rewards in the investment world are generally earned by those who assess new opportunities as quickly as possible. By the time a trend becomes clear, major gains have already been made. The quality of institutions and individuals that met with the Kazak securities delegation can be seen as a very positive indicator of the vast potential they foresee in the Kazak market. Astute investors may wish to begin focusing some of their attention on Kazakstan. By beginning now to examine the potential risks and rewards, they will be better prepared to capitalize on investment opportunities resulting from continuing development of this emerging central Asian nation. End

KEITH W. RABIN is president of KWR International Inc., a New York-based consulting firm that recently helped to promote a Kazak "road show" funded by the U.S. Agency for International Development. His views are not necessarily those of Bridge News.