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AFC Travel Report - Kazakhstan

In line with our process of being on the ground in the countries we invest in, Scott Osheroff and Ruchir Desai travelled to Kazakhstan to meet with companies and attend the Astana Economic Forum. All photos are by Asia Frontier Capital.

Flying into Nursultan Nazarbayev International Airport in Astana, Kazakhstan’s remote capital city, a strong gust of wind caught the plane making for a rather interesting final approach. This is an all too common occurrence as the city sits on the open steppe and is famous for its robust winds and freezing winters, though it ensured a clear day as peering out the window, the green steppe was emerging from the final patches of snowpack as spring had arrived.

We were visiting Kazakhstan for the first time, there to learn about the country and its prospective investment opportunities as it is the largest and most advanced of the Central Asian economies. Though what was interesting was the lack of connectivity to the country, with most major Asian airlines not yet flying to Kazakhstan, except Air China. However, the flag carrier, Air Astana, has regular flights to Beijing, Bangkok, Dubai, Hong Kong, New Delhi and Kuala Lumpur.

Having arrived in Astana on the weekend was as good an excuse as any to explore what is certainly up there among the most eccentric capital cities in the world. Astana was founded in 1997 by Kazakhstan’s first and only president in the post-Soviet era, Nursultan Nazarbayev, who turned a small village town on the open steppe where the winters often reach −60 Celsius into a mini metropolis of one million people. The city is an architect’s dream as the design of the city’s buildings are as diverse as the countries in the United Nations and it is expanding rapidly. It’s a sight to be seen, at least once.


Construction activity continues in Astana


The downtown core is host to a wide array of architecture including the largest tent structure in the world (the Khan Shatyr shopping mall), the Baiterek Tower which is designed around a Kazakh folktale about a magical bird, Samruk, which laid a golden egg atop a mythical poplar tree, while in the area of town nearer to the airport is the recently opened Astana International Financial Centre (AIFC) which is intended by the government to become a regional domicile for foreign companies. It will also host its own stock exchange, the Astana International Exchange (AIX).


Downtown Astana



Khan Shatyr Shopping Mall


Downtown Astana


In town for a conference, as the work week started we met several government agencies including the AIFC, Samruk Kazyna (Kazakhstan’s sovereign wealth fund), and the Ministry of Finance.

Our first meeting was with the AIFC which officially opened on 1st January 2018. The concept is to offer local and foreign companies the opportunity to domicile themselves within the AIFC’s boundary where there are 50-year tax breaks, no foreign ownership restrictions, etc. However, what was interesting is that in the 21st Century digital economy in which we live, companies incorporated in the AIFC are required to have a physical office location in Astana with employees in the office. Perhaps that partially explains why four months after the opening of the AIFC there were only 12 registered companies.

More exciting than domiciling a company at the AIFC is the AIX, as the stock exchange has settlement with EUROCLEAR which means foreigners can add significant liquidity to the market once there are IPO’s, something our following meetings in Astana addressed.

Meeting both Samruk Kazyna and the Ministry of Finance, the government, after the collapse in oil prices in 2014 which hurt the economy, decided to initiate a privatization program to sell down its interests in over 900 companies. This is an effort to reduce government participation in the economy, now estimated at approximately 70% of GDP. While most of these companies will be privatized through an auction system, Samruk Kazyna intends to take public and possibly even dual list the biggest state-owned enterprises, Kazatomprom (the world’s largest uranium miner), Air Astana (the national airline), KazMunayGaz (an oil and gas company), Kazakhstan Temir Zholy (the national rail operator) and Kaz Post. These companies are very interesting to us and we are looking forward to further news about their upcoming IPO’s which are scheduled to occur before 2020.

As part of the trip to Astana we attended the Astana Economic Forum, an annual event which brings together participants from diverse areas of business, politics and academics. This year’s keynote speakers were the President of Kazakhstan, Nursultan Nazarbayev, former UN Secretary General, Ban Ki-moon, and the former President of France, Francois Hollande. The forum was held at the Hilton and the Expo Congress Centre both of which are part of the Expo-2017 exhibition complex and have since been incorporated into the AIFC. This complex with futuristic designs was developed in the run up to the Expo-2017 held in Astana between June and September 2017.


Architecture within the Expo complex


After our visit to Astana, we flew to Almaty to meet with private sector participants and learn more about the country.

Our first meeting in the very charming city of Almaty, which was reminiscent of a blend of Paris and an ex-Soviet city, was with a macro-analyst who is not only tuned in to the country, but also the region. We discussed for several hours the impact on Kazakhstan from sanctions on Russia (as Russia is Kazakhstan’s largest trading partner), the collapse in oil prices and the fact that the country is yet to fully recover from this slump, most notably in the banking sector, where NPL’s are still high, though improving.



The Zailiyskiy Alatau mountain range in Almaty on the border with Kyrgyzstan


The economy has recovered to some extent and the macro economic situation has stabilized especially after the increase in oil prices over the past year. Kazakhstan’s overall foreign exchange reserves (including the oil fund) reached USD 90 billion at the end of 1Q18 leading to greater currency stability, while industrial production and loan growth have also shown an improvement over the past few quarters. Furthermore, the country’s government debt to GDP ratio is not stretched, currently at 25%, and banking sector consolidation is helping reduce stress in the banking system. The de-dollarization of the economy is also a positive sign with local currency deposits increasing their share over the past year.

Kazakhstan suffers from too much of a good thing, as they have mineral deposits of seemingly every element on the periodic table and rank 12th in global oil reserves. The country’s focus on natural resources has left the economy hostage to the boom-bust cycle in commodities and it is a question of whether the current privatization program mentioned above will see proceeds used to diversify the economy, something it seemed many in the private sector in Almaty were sceptical of, due to the government’s inability to effectively execute its policies. With the current upswing in commodity prices, namely oil, and the stabilization of the Kazakh economy, the diversification of the economy will be an important story to follow.

Though resource-focused dependence has hurt the country in the past, it has also brought some development and wealth as Kazakhstan has the highest per capita GDP amongst the Central Asian states at around USD 8,000. Both Astana and Almaty have large modern malls with all the latest brands, while the public transport infrastructure is also well developed. Uber has also made inroads into the country and is widely available in both Astana and Almaty.

One of the key factors which could help the country diversify away from resources may potentially be the China-led Belt and Road Initiative. The land route from Western China to Eurasia will pass through Kazakhstan and this link is expected to lead to a large jump in trans-shipments which will have a positive spillover into the overall economy. The Khorgos land port at the China-Kazakhstan border is already in operation and it is expected to be the largest land port in the world as container volumes crossing the border are estimated to grow from around 100,000 TEUs (twenty-foot equivalents) to more than 1.5 million by 2020.

During the next day of meetings we met with publicly-listed Kaz Minerals which trades in Kazakhstan, London, and Hong Kong. They operate multiple copper mines with exceptionally low production costs. We spoke about the general outlook for the economy and the fact that, while it is still challenging and bureaucratic to do business in the country, it has become easier over time.

This was echoed by our next meeting of the day with the Co-Founder and CEO of a publicly listed vanadium company which boasts an impressive foreign institutional shareholder base as the company is expected to be the lowest cost primary vanadium producer in the world once they scale their production. Vanadium is a metal used to strengthen steel and with China’s environmental measures to cut pollution, the production of vanadium from secondary sources, such as that from the waste of steel production, has been banned. This has seen the price of the metal rise nearly 300% since June 2017.

Our last meeting of the day was with the leading confectionary company in Kazakhstan which produces a range of cookies and chocolates. In this case, like with many meetings in frontier markets, getting information from a one-on-one meeting can at times be difficult as management teams at times are not used to meeting with institutional investors.

That is something the Kazakhstan Stock Exchange would like to work on as we discussed these challenges with them at their headquarters in Almaty. The current benchmark, the Kazakhstan Stock Exchange Index, has eight listings, while the overall market has a larger number of stocks listed, but the benchmark names are the liquid ones with the exchange looking at ways to increase liquidity for the non-benchmark names. Investor and information disclosure of the eight companies on the main index is regular and is on par with the other markets we cover.



A visit to the Kazakhstan Stock Exchange in Almaty


We concluded our final day in Almaty with a stroll around the city as spring had come and the air was both clean and crisp. Locals had begun dining al-fresco again and the trees were no longer barren. Almaty is a very walkable city with several pedestrian streets, giving it a unique feel among other Asian cities, along with the ubiquitous Soviet-style food bazaars.



Checking out the Green Bazaar in Almaty


The day concluded with a thirty-minute drive to the outskirts of Almaty to Medeu, home to the highest ice rink in the world, and Shymbulak, a wonderful ski resort. Ascending the mountain to its peak in a gondola, the weather was a comfortable +11 Celsius and you could hear the skiers and snowboarders below, grinding their way down the mountain on the largely uninhabited slopes.



Shymbulak ski resort


Kazakhstan hosts a number of opportunities from natural resources to tourism and logistics. With the development of the Astana International Stock Exchange, perhaps Kazakhstan will be able to achieve its goal of becoming a regional financial hub, attracting IPO’s from companies based in its neighbouring countries and increasing the listed investment opportunities in the country as Central Asia is an underappreciated region, acting as the connector between Asia and Europe.