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December 2014 www.bne.eu

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Top story

New rail line to turn Kazakhstan into transit hub

between China, Middle East

A new railway connecting Central Asia with the Persian Gulf through Iran was officially opened on December 3. With Kazakhstan completing its east-west rail line that links the country's centre to the west earlier this year, the new international railway line now offers direct passage for Chinese goods to Iran and on to the Gulf, as well as Europe via Turkey.

Kazakh President Nursutlan Nazarbayev, Turkmen leader Gurbanguly Berdymukhamedov

and Iranian President Hassan Rouhani opened the new Ozen-Gyzylkaya-Bereket-Etrek-Gorgan railway line on the Turkmen-Iranian border on December 3. The line is part of the international North-South corridor. The length of the Kazakh section of the railway is 146 kilometres, Turkmen 700km and Iranian 82km. The parties signed the agreement on the construction of the railway link in 2007 and construction started in 2009.

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The project means that Kazakhstan now has a direct line to Turkmenistan and Iran, bypassing Uzbekistan and cutting the route by hundreds of kilometres. Together with the new east-west railway line from Beyneu to Zhezkazgan opened by President Nazarbayev in August, the lines will drastically cut the transit time for Chinese goods to Europe via Russia and the Middle East.

In addition to rivalling sea routes for Chinese cargoes, the new rail lines should spur the development of Kazakhstan’s central and Aral Sea regions, hopefully attracting investment in raw minerals and industrial projects. The Beyneu-Zhezkazgan rail line will enable Chinese cargo to cross Kazakhstan along an almost straight east-west line, cutting the transit route across the country by around 1,000km. The 1,036km line, which cost KZT561bn ($3.6bn) to build, will now link to the new Kazakhstan-Turkmenistan-Iran line.

Strategic importanceFrom the Kazakh perspective, the new rail links will have huge strategic importance, as they allow for the diversification of transport routes for the country’s main export commodities and energy resources if need be.

Railway transport is more expensive than pipeline, but it can be used as an alternative option in case of interruptions to traditional routes. This might prove pertinent given the current geopolitical turmoil over Russia’s role in the civil war in Ukraine and tensions in the South China Sea. Styling Kazakhstan as a key transit hub on the China-Europe cargo route, Astana reasons the direct railway link between China and Europe via the Eurasian Economic Union (EEU) member states of Russia and Belarus will entice exporters from central and western China to consider the trans-Eurasian railway networks as an alternative to sea routes, which cross disputed waters in the South China Sea.

Since Kazakhstan is part of the Russia-led Customs Union that will be transformed into the

EEU in 2015, Chinese cargo travelling by rail will undergo customs clearance only once on the Kazakh-Chinese border, and this, the Kazakh government claims, will cut travelling time between Chinese eastern seaboard and the EU's eastern borders to just 10-11 days, versus up to 44 days by sea and 14 days along the Trans-Siberian railway. In order to boost the transit of Chinese cargo by rail, Kazakhstan intends to increase the capacity of the existing Dostyk-Alashankou railway corridor from the current 23mn tonnes a year to 50mn tonnes. In 2012, Kazakhstan commissioned the second Zhetygen-Korgas railway link to China with a capacity of 12mn tonnes per year, with a prospect of increasing that to 33mn tonnes per year.

Initially, the new international route will be mostly used for exports of Kazakh grain and possibly metals: the first cargo transported via the new line was grain; Iran is among the traditional importers of Kazakh grain. With Iran set to see imports of Kazakh grain rise from 345,600 tonnes in the 2013-2014 marketing year to 1.2mn in the current marketing year that started on July 1, Iran will account for 14% of Kazakhstan's total grain exports. In order to boost grain exports, Astana also plans to build grain terminals and storages on the Turkmen-Iranian border.

For Turkmenistan the railway is the first big infrastructural project that makes it a transit country; for Iran the project demonstrates that it can be a reliable partner in such international transport projects.

Turkmenistan is also involved in building a railway line to Tajikistan via Afghanistan, bypassing Uzbekistan. Tajikistan and Uzbekistan are currently at loggerheads over Dushanbe’s construction of what will be the world's tallest dam, Rogun, which will have a huge effect on irrigation for Uzbekistan’s cotton fields. In retaliation, Tashkent cut off Tajikistan from its railway networks to prevent construction

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materials from reaching the upstream country. The construction of the new 400km-long rail line that will bypass Uzbekistan started last summer and is expected to be completed in 2016. When commissioned, the new line will break Tajikistan's transport isolation and link the country to the Middle East and Russia via Iran and Kazakhstan.

It is worth noting that these rail projects are also in line with China’s grand strategy of building transport corridors along what it dubs the “Silk Road Economic Belt” to be used to transport Chinese goods exclusively via railway to Europe. A railway connection between Iran and Turkey has been in place for years now, while the Marmaray project linked the European and Asian parts of Turkey by rail last year.

Over hill and mountainIn addition to railway links via Kazakhstan, China is also considering the construction of a railway line to Uzbekistan via Kyrgyzstan. However, this project has become bogged down because Kyrgyzstan wants the line to link its northern and southern regions, while China and Uzbekistan

advocate a shorter, more direct route between China's Kashgar and Kyrgyzstan's Osh cities.

Kyrgyzstan's northern regions are separated from the south by mountain ranges, and heavy snow and mudslides complicate overground links in winter. Using China's experience of building railways in high mountainous areas, Bishkek hopes to acquire a reliable transport connection all year round. The Kyrgyz government also fears that the route suggested by China and Uzbekistan could well drive a further wedge between the country's south and its north, giving ammunition to separatists. With China's expertise and financial support Tashkent is already building a railway tunnel under the 2,200-metre Kamchik pass to link the Uzbek part of the Fergana Valley and the country's centre.

However, with Kazakhstan's track record of successful transport projects and willingness to attract as much transit cargo as possible, Kyrgyzstan's reservations over the China-Kyrgyzstan-Uzbekistan railway route could well make it obsolete, further boosting Kazakhstan's transit potential for China.

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Two of Almaty’s biggest classified ad newspapers are going digital only. After 18 years in print, the decision to kill the hardcopy sisters of the country's most popular websites kolesa.kz and krisha.kz – car and property marketplaces, respectively – has been prompted by losses and the growing trend in Kazakhs buying goods online.

The popularity of these websites with Kazakh netizens is so great that they attracted foreign investment worth $15mn in April, in one of the biggest internet deals seen so far in the Central Asian country. "This is the hugest deal in the entire history of the Kazakh internet," declared Mikhail Lomtadze, chairman of Kaspi Bank's board of management and co-owner of the websites, in April, referring to private equity firm

Baring Vostok Capital Partners' investment in the firm that owns the classified ad papers and websites.

When it invested in Kolesa LLP, which owned the newspapers and websites, Baring Vostok had already enjoyed several successes with well-known internet companies in former Soviet states, such as Russia's largest search engine Yandex.ru and Russian classified ad websites Ozon.ru and Avito.ru. "With the arrival of the international investor in the person of Baring Vostok, our company has acquired much greater opportunities for future successful development and expansion of its market positions," Lomtadze said at the time.

The weekly Kolesa car and Krisha property newspapers, launched in 1996 and acquired by Lomtadze and partner Vyacheslav Kim in February 2013, had become very popular with Almatynians because they offered targeted, niche adverts unlike "horizontal" classified newspapers that covered everything from cars and housing to pets, Nikolay Babeshkin, director of Kolesa, explains to bne IntelliNews. "The newspapers immediately gained momentum quickly, becoming flagships in Almaty and offering a model for regional outlets," he says.

The newspapers developed well until broadband internet started booming in Kazakhstan: in 2006, after some hesitation, the owner of the titles decided to set up websites to mirror adverts placed in the hardcopy online. "The websites quickly became No. 1 in terms of hits, as there was little content available on the Kazakh internet," Babeshkin says.

The scope and room available on the websites for flats and car sale ads vastly improved the quality of the product, allowing users to use

Biggest classified ad papers go digital only as Kazakhs buy more online

Interview

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various filters to narrow their searches. As such, the company decided to separate the online and offline versions of kolesa.kz and krisha.kz, Babeshkin explains. "This also marked a fall in the circulations of the newspapers, because they were limited to Almaty, whereas the websites developed rapidly as they could cover the entire country," he says. "The more successful the websites became, the more the newspapers deteriorated."

The first investors in the company, Lomtadze and Kim, foresaw the death of print and have invested money exclusively in the development of the online editions over the past two years, because "no one will invest in newspapers with falling circulations," Babeshkin says.

About two-and-a-half years ago, the revenue of the websites overtook that of the newspapers; the company's overall revenue grew by 30% a year on average, with 80% growth in online revenue compensating for the losses made by the hardcopy editions. This led to the decision to end the print editions from January 2015. "When we close the newspapers our profits will remain the same, but our revenue will slightly fall," Babeshkin sighs. "But this is a strategically correct decision, as it will enable the team to fully focus on the internet."

With the closure of the newspapers, the company will have to shed 50 members of staff whose skills are not applicable for online only. However, Babeshkin hopes the company's revenue will start growing again by March, as January and February typically show sluggish sales anyway.

Revenue sourcesThe company's online revenue mainly comes from two equal sources at the moment: the placement of classified ads and online commercials it sells to corporate advertisers. Babeshkin says revenues will rise if the company adjusts the fees it charges for the placement of classified ads; with the first seven days of an ad posted on the websites free-

of-charge, not many users are willing to post their adverts for another seven days, even at a paltry $0.25. Despite this, those who value their time spent on creating a new ad make up the numbers: on average krisha.kz publishes 15,000 new ads a day and extends 14,000 existing ads daily, while kolesa.kz's numbers are 17,000 and 11,000, respectively.

The extension of ads and paid services, such as bringing the ad to the top of the list and marking it to stand out, make up 90% of the company's revenues raised from classified advertising.

Another possible source of revenue, Babeshkin tells bne IntelliNews, could be a fee that the company would charge motorists and homeowners for helping them sell their cars or flats. "But the market is not yet ready for this," he complains.

According to J’son & Partners Consulting, there are 11.5mn mobile internet users in Kazakhstan, marking a penetration rate of 67%. This has boosted demand for the company's mobile apps, which caused a drop in the number of unique users who visit its websites: 100,000 people use Kolesa's mobile app daily, versus about 300,000 unique users kolesa.kz receives per day on average. "This is a huge number [of mobile app users] because the website's counter counts the same user accessing it from different IP addresses as different users," Babeshkin explains.

As the internet kills newspapers the app is killing the internet because advertisers are not yet ready to place their commercials there since they still lack mobile versions of their websites. "Even we don't have our mobile versions at the moment but they should be launched within the next six months," Kolesa's director pledges.

Investors bring know-howThe $15mn new investment from Baring Vostok puts the value of the

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company at between $30mn and $60mn, allowing it to launch a new website for classified ads outside the car and property markets. The new website, market.kz, covers jobs, hobbies, pets, electronics and other areas where the company hopes to make money in the future. This latest online marketplace, launched in April, already boasts 85,000 active adverts, which are posted free-of-charge.

The investment has also enabled the company to promote the websites in the regions of Kazakhstan, thus growing its client basis and offering new services and products. For example, Babeshkin says, the kolesa.kz website has started offering free-of-charge checks of cars put up on sale by approved garages, in order to speed up the sale of the car and ease the process of

obtaining a loan from a bank for the buyer. This allows the website to earn a commission from the bank. "We are also thinking of ways to make transactions between home sellers and buyers more comfortable, so that they receive adequate services for commissions they pay estate agents," Babeshkin says, referring to the fact that estate agents charge both sides a commission of $1,000 for their intermediary services.

The new investors have also already suggested innovations that they have tested in other markets for adoption by the Kazakh marketplace. "We are receiving fascinating ideas from our investors. Moreover, they tell us what results we will achieve if we implement their ideas and this is fantastic," Babeshkin says.

McKazakhstan

US fast-food giant McDonald’s announced in November it will bring its burgers, fries and now more healthy food options to Kazakhstan next year, when it opens its first burger joint at an unspecified location in the second half of 2015, with more to follow.

Arriving in such emerging markets, a connected local partner is always a good idea, so McDonald’s partnering with prominent gas tycoon Kairat Boranbayev, whose daughter Alima is married to Nazarbayev’s grandson, Aysultan Nazarbayev, according to EurasiaNet.org.

“Our agreement with Kairat will enable us to continue to build our brand,” Doug Goare, president of McDonald’s Europe, was quoted by the website as saying.

Goare described the planned launch in Kazakhstan as part of McDonald’s strategy of “looking at opportunities to enter new markets with development potential.” Kazakhstan’s growing middle class, enriched by an oil boom despite an economic hangover from the 2008 financial crisis, is developing a taste for a more Western lifestyle, particularly in the major cities of Almaty and Astana.

Success in Kazakhstan would also help offset problems at McDonald’s traditional market in the Commonwealth of Independent States, Russia, where US sanctions over its meddling in Ukraine has inevitably resulted in retaliation by the Russian authorities, in the form of investigations into more than half of McDonald’s 440 locations over alleged health and safety violations.

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Uzbek President Islam Karimov has courted Kazakhstan's Nursultan Nazarbayev in order to seek a wise man's advice on how to shield the region from challenges emerging as a result of the rapidly changing geopolitical situation. Another reason Karimov went to Astana is to find ways of improving relations with Russia, according to observers.

"They [these challenges] require us to cooperate more closely to preserve peace, stability and tranquillity in our countries and the region as a whole and ensure the sustainable development of national economies and improving the welfare of peoples," Karimov said during a visit to Astana on November 24-25. "The early stabilisation of the situation in Afghanistan and establishment of peace in this country is of crucial importance for security and stability in the Central Asian region and beyond."

The Uzbek leader criticised the speedy withdrawal of forces by the US and its allies from Afghanistan as this may lead to "unexpected" results. "It is not ruled out that all this might lead to something that's happening in Iraq at the moment," Karimov said, referring to Islamic State.

In this light, Karimov is seeking to secure Nazarbayev's assistance in improving the deteriorated relations with Russia following Tashkent's departure from the Moscow-led CIS Collective Security Treaty Organisation (CSTO) in late 2012 for the second time. "Obviously, Uzbekistan wants to improve relations with Russia and has been trying to test the ground in this direction," Andrey Kazantsev, director of the Moscow State Institute of International Relations' analytical centre, told Russia's Nezavisimaya Gazeta.

He suggested that Uzbekistan could get close with Russia either via Eurasian integration or the CSTO. Russia, Kazakhstan and Belarus are part of the Customs Union, which will be transformed into the Eurasian Economic Union in January 2015. Armenia will join them in the new year and Kyrgyzstan some time next year.

Karimov's flattery of Nazarbayev as a man who is getting "wiser" with every passing year may well prove Kazantsev right. Karimov must have also kept Russia in mind following Moscow's outrage at the new Ukrainian government's drift away from its orbit towards the West. Karimov, 76, has not announced yet whether he will stand for another term in the forthcoming presidential election in March 2015. The Uzbek president may feel the need to reassure the Kremlin that his successor would not be anti-Russian should he decide not to stand. Russia's Vladimir Putin is expected to visit Tashkent in December.

Feature

Uzbek president courts Kazakh leader to improve relations with Russia

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Joint positions and bilateral trade Karimov also used the visit to reiterate his opposition to the plans by upstream Kyrgyzstan and Tajikistan to dam rivers that feed water to Uzbek cotton fields. "Today we confirmed a joint position on the construction of new hydrotechnical facilities on the upper reaches of the Syr Darya and Amu Darya rivers which should be conducted in strict compliance with commonly admitted norms of international law and conventions of the UN and with mandatory coordination with all countries located on the lower reaches of these rivers," Karimov said.

"Cooperation in this vitally important sphere is possible only on the basis of mutual trust. Transparency and account of interests of all regional countries without exception should be ensured," Nazarbayev echoed Karimov.

Kyrgyzstan is planning to build the Kambar-Ata 2 hydropower station on the upper reaches of the Syr Darya, while Tajikistan is building what will be the world's tallest dam, Rogun.

According to Nazarbayev, bilateral trade between Kazakhstan and Uzbekistan is on the rise and had quadrupled to over $2bn between 2005 and 2013. In the nine months of 2014, it exceeded $1.5bn. However, Uzbekistan still accounted for only 1.2% of Kazakhstan's exports and 2.6% of imports.

Zeman's spectreKarimov's visit to Astana coincided with Czech President Milos Zeman who concluded his visit on the day Karimov arrived in the Kazakh capital. Whether Karimov met Zeman while both men were in Astana is not clear, but the two presidents have long been seeking a meeting: Karimov's visit to Prague in February was cancelled when Zeman came under pressure from human rights activists.

The Kazakh presidential press service told RFE/RL that the visiting presidents would meet Nazarbayev separately and there would be no trilateral talks. However, the press service refused to clarify whether Zeman and Karimov would meet separately, officially or unofficially.

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Kazakh power grid monopoly ends "People's IPO" campaign

Kazakhstan's national power grid operator KEGOC on December 5 ended its sales promotion for the latest share issue under the government’s "People's IPO" programme, which is designed by the government to offer shares in big state-owned companies to the Kazakh population to help develop the local stock market and nurture a shareholder culture. The sluggish month-long subscription period was supposed to end on December 3, but was extended by two days to encourage more citizens to buy shares before they debuted on the Kazakhstan Stock Exchange.

The price of shares was set at a "very conservative" KZT505 ($2.8) per share, the company announced ahead of the subscription campaign. "This is very conservative, I would say, and the lowest conservative assessment of fair value. This was done because shares will be offered to citizens, individuals within the 'People's IPO' programme," Yelena Bakhmutova, deputy chairwoman of the sovereign wealth fund Samruk-Kazyna, said at the height of the campaign on November 24.

Despite the "conservative" price, Kazakh retail investors showed little interest in becoming shareholders of KEGOC. Indeed, the national postal operator Kazpost, which was appointed to conduct the subscription campaign, received bids for around 743,000 shares worth just KZT375mn ($2.07mn) between November 5 and 13. According to Kazpost, as of December 4 only about 11,000 people had bought 4.698mn shares worth KZT2.372bn ($13.1mn). Yet the company's "People's IPO" programme envisaged the sale of 26mn shares, equal to a stake of 10% minus a share, to the general population.

This KEGOC subscription campaign compares unfavourably with that for the "People's IPO" of

the national oil pipeline operator KazTransOil in 2012. In a month-long campaign, 34,687 bids were received worth KZT59.409bn, meaning demand was double the supply.

Despite the announcement that KEGOC would divert at least 40% of its annual profit to paying dividends, the authorities seemed to have realised that the KEGOC shares would not generate as much interest as those for KazTransOil. Two days after the start of the subscription campaign, on November 7, National Bank Governor Kairat Kelimbetov admitted that the KEGOC shares not purchased by the population would have to be bought up by the state-run Single Accumulative Pension Fund.

Although the company's reports show that the book value per share was almost three times the IPO share price, KEGOC's financials may have discouraged the population from buying into the company. Ahead of the IPO, KEGOC’s chairman, Bakytzhan Kazhiyev, admitted the grid operator had borrowed over $1bn from international financial institutions to carry out investment projects. Despite reducing its outstanding debt to about $600mn by the time of the IPO and having "significant funds" in foreign currency to service the debt over the next 12 to 24 months, the company's financial performance was hit badly by a 19% devaluation of the tenge in February, as its expenditures grew faster than its revenues. As a result, KEGOC’s profit was down 48% year on year to KZT1.8bn in the first nine months of 2014.

The company could yet improve its financial situation after the government approved a tariff increase for the company's services, including a 50% jump for transmission services, on November 1. Generally, the structure of tariffs is a weak spot of the power transmission monopoly and the government realises this.

Sector

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Samruk-Kazyna's privatisation campaign shows results

Kazakhstan's sovereign wealth fund Samruk-Kazyna embarked on a privatisation campaign as part of its transformation programme six months ago and it has already produced some results.

The idea is that national and subsidiary companies run by Samruk-Kazyna will streamline their activities by shedding non-core assets, thus boosting the general competitiveness of the country's business environment. Since the launch of the privatisation campaign, the fund has managed to sell off nine assets by auctioning them off or finding co-owners of these assets using the pre-emptive right to Samruk-Kazyna's stake, says Nurlan Rakhmetov, financial director and member of Samruk-Kazyna's board of management.

The assets sold so far are mostly service companies and security organisations that were previously fully or partially owned by national companies such as the railway operator Kazakhstan Temir Zholy or oil and gas giant KazMunaiGas. The initial asking price of these nine enterprises totalled KZT1.9bn ($10.5mn),

but the fund managed to raise over KZT3.5bn, Rakhmetov notes. "I believe this is a quite good result to begin with," Rakhmetov tells bne IntelliNews. The number of assets sold and money raised from their sales will only grow, he adds.

Samruk-Kazyna's privatisation campaign is designed for three years: a total of 106 assets will be sold off during the campaign, including 64 this year, Rakhmetov explains. The Samuk-Kazyna financial director notes that the fact that the fund had managed to privatise 405 non-core means that they attract interest from private investors. "Part of these 64 assets we will sell this year, the other part next year and following years," he says. "I will tell you that we would have sold them even without announcing the privatisation programme."

These assets have been selected according to a very simple principle, the official explains. The state has identified areas where it wants to maintain its presence through companies and enterprises that Samruk-Kazyna manages. "Firstly, these are strategic spheres which impact the development of the country as a whole," Rakhmetov tells bne IntelliNews. This is railways, oil and gas pipelines, power transmission networks and other infrastructure. "Secondly, these are sectors in which investors show little interest, so the state participates in them without creating hindrance and competition to private businesses." Most of the enterprises that the fund will shed do not fit development strategies and specialisation of national companies and subsidiaries of the fund, Rakhmetov says of criteria used to select companies for privatisation.

Samruk-Kazyna denies accusations made by some MPs that the privatisation campaign is being conducted in a non-transparent manner, with the names of new

Corporate statement

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owners of formerly state-owned assets kept in secret. "We don't adopt the rules. There is a law under which we work. As far as I know the issue of disclosing the names of buyers or not is being discussed by the National Chamber of Entrepreneurs," Rakhmetov argues. "What I can say for sure is that the fund itself intends to conduct all procedures as transparently as possible. All information – both about assets that will be sold and that have already been sold – is posted on the official website."

He also argues that tenders to sell off assets are conducted on the Finance Ministry's electronic trading floor, which is why "some external involvement and attempts to somehow influence the results of tenders can be ruled out." Rakhmetov also says there are no restrictions on foreign investors in taking part in tenders unless there are legislative limitations imposed on foreign ownership of certain assets of strategic importance. "Generally, our fund doesn't intend to

impose such restrictions, which means foreigners can take part in tenders on usual terms."

The only condition the fund sets for the new owners of formerly state-owned assets is to retain the specialisation of these enterprises and to avoid redundancies for at least a year. This is done in order to allow the personnel to undergo training or find a new job should the new owners decide to change the nature of a company, Rakhmetov explains.

As any other commercial enterprise, the fund will invest money raised from the privatisation of non-core assets in the development of its business project and not spend it on covering current operating expenses. Samruk-Kazyna has a huge portfolio of investment projects worth a total of $150bn, Rakhmetov tells bne IntelliNews. "All the money raised from assets sold the fund will invest in promising investment projects over the next decade," he concludes.

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S&P affirms ratings on Kazakhstan, keeps outlook negative

Standard & Poor’s Ratings Services on December 8 affirmed its 'BBB+' long-term and 'A-2' short-term foreign and local currency sovereign credit ratings on Kazakhstan. The outlook on the rating remains negative. At the same time, the agency affirmed long-term national scale rating at 'kzAAA'.

S&P pointed to Kazakhstan’s dependence on the oil and sector, which directly accounts for more than 13% of GDP, over 50% of fiscal revenue and 60% of exports. The agency also predicts a deterioration in Kazakhstan's external and fiscal positions in the next three years due to lower GDP growth, failing oil prices and lower-than-expected oil output, as well as more challenging external environment.

Kazakhstan’s oil output is expected to remain flat next year, increasing only in 2016 to 83mn tonnes. S&P does not expect any significant production gain from the giant Kashagan field until 2017, but once commercial production is commenced it will increase the overall output by 20%. S&P notes a great deal of uncertainty over the field.

The agency also expects Kazakhstan’s economy to expand by 4% this year, down from 6% seen in 2013. The reasons for the slowdown are lower oil and metal outputs, less favourable terms of trade, and depressed consumer demand that followed the devaluation of the national currency by 19% in February. S&P expects growth in the next two to three years to stem from investment, supported by counter-cyclical fiscal policy in the form of a government stimulus plan that will tap into the country’s National Oil Fund’s reserves.

In November, President Nursultan Nazarbayev announced that up to $3bn annually will be withdrawn from the fund to fuel the economy in 2015-2017. Investment related to long-term oil and gas projects are expected to remain stable.

The agency expects policymaking in Kazakhstan to remain highly centralised, which will continue to limit institutional effectiveness and governance. Institutional risks remain high given the lack of transparency and clarity concerning the eventual presidential succession process and the corresponding policy implications, S&P notes. Despite the government’s efforts, S&P expects limited progress in diversifying the economy, especially as the non-oil economy will be under pressure due to lower domestic demand and given expectations of medium-term oil sector expansion.

The agency negatively assessed the effect of the devaluation in the tenge, noting that it influenced its view on credibility of the country’s monetary policy. Moreover, the effect of a unified pension fund on the domestic bond market and the central bank's ability to support the economy remains uncertain. The banking system is still burdened by a high share of non-performing loans, but there is a probability that authorities will deal more aggressively with these legacy bad loans through a distressed assets fund and tax breaks for loan write-offs.

Kazakh parliament adopts 2015 budget with $80 oil priceKazakhstan's Senate, the upper chamber of parliament, has approved a tight budget for 2015, forecasting moderate economic growth based on the Brent oil price of $80 per barrel.

Economics & finance

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In this year's budget the oil price was assumed at $90 per barrel.

The budget deficit is targeted at KZT997.1bn ($5.5bn) or 2.3% of expected GDP. This year's revised budget puts the deficit at 2.6% of GDP. Revenues are projected at KZT6.858tn, while spending is at KZT7.855tn.

GDP growth is expected at 4.5% next year, up from 4.3% projected for this year and down from 6% reported in 2013. Nominal GDP in 2015 is expected to stand at KZT43.721tn or $242bn at the current exchange rate. The inflation corridor was set at 6-8%, same as in the current year. The bill needs to be endorsed by the president, which is a formality.

Kazakhstan revised its GDP forecast twice this year. The country's economy is suffering from the economic slowdown in neighbouring Russia, low oil and metal prices and structural problems like high level of non-performing loans in the banking sector and lack of the substantial diversification of the economy.

The government plans to stimulate the economy using assets of the National Oil Fund, as was envisaged in the Kazakh president's annual address to the nation on November 11. The president said up to $3bn a year would be additionally withdrawn from the fun in 2015-2017. In 2017, budget deficit is expected at 1.7% in 2017.

Fitch rates Housing Construction and Savings Bank of Kazakhstan 'BBB+'

Fitch Ratings on November 26 assigned the Housing Construction and Savings Bank of Kazakhstan (HCSBK) a long-term local currency Issuer Default Rating (IDR) of 'BBB+' with a stable outlook.

The rating is based on Fitch's 'BBB+' Support Rating Floor, which reflects the agency's view of the high probability of support for the bank from the Kazakh government if need be. This assumption is based on the bank's 100% state ownership, its important role in the state's social policy, the state's recent funding and equity injections to support the bank's expansion. The rating also considers the currently limited cost of support that might be required by the bank, given its small size.

The one notch difference in ratings of the bank and the sovereign reflect HCSBK's still quite limited track record of operations, Fitch expects that the cost of support from the state will increase in the long-run, a moderate risk regarding the timeliness of support from the parent organisation the national management holding Baiterek and a moderate risk that the government would cease providing full support to all quasi-sovereign entities before defaulting on its own obligations, in a stress scenario.

HCSBK was established in 2003 with the objective of developing a housing savings and mortgage system in Kazakhstan.

Kazakh average salary reaches $656 in OctoberThe average monthly salary in Kazakhstan amounted to KZT118,884 ($656) in October, the State Statistics Committee informed. In nominal terms, the salary went up by 12.2% y/y and by 4.3% y/y in real terms.

The highest salaries were traditionally reported in technical sphere (KZT240,800), the mining industry (KZT237,700) and in financial and insurance services (KZT203,800). On the other hand, the lowest average salary was in education (KZT74,400).

In a geographical breakdown, the highest wages were reported in oil-rich Atyrau region, while the lowest

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in North Kazakhstan region, centre of agriculture production.

Kazakh president pledges annual $3bn boost for ailing economyKazakh President Nursultan Nazarbayev in November pledged to draw an extra $3bn annually from the country's oil fund to support the ailing economy over the next three years. Nazarbayev made the announcement in a surprise state-of-the-nation address on November 11, indicating that the state of the national economy is dire and needs urgent attention.

The president explained that the cash would be taken from the National Oil Fund to "ensure stable socioeconomic development and protect the economy from external troubles" because the situation in the global economy had prevented the country from "achieving set goals without additional financial resources".

Oil price below $80 seen leading to devaluation of Kazakh currencyRenaissance Capital analyst Oleg Kuzmin believes that decreasing oil prices might have a negative impact on the Kazakh currency, the tenge. He explained that at present the tenge is pegged to a basket of the dollar (70%), euro (20%) and ruble (10%), thus the weakening of the Russian currency has a limited impact on the tenge.

According to him, the main pressure on the Kazakh currency comes from declining oil prices. Kuzmin assumes that if oil prices stand at $100 per barrel, it will have no impact on the tenge; in case of the price at $90, the tenge will weaken by 5-7%; but in case of the price at $80, a devaluation of 16-17% is likely.

He also added that in the case of the average price of $80 per barrel, Kazakhstan's economy will expand by a mere 1.5%, down from 4.3% expected this year. Growth will be achieved thanks to a planned stimulation of the economy announced by the Kazakh president in his annual state-of-the-nation address on November 11.

Inflation in Kazakhstan accelerates to 7.6% y/y in NovemberThe CPI in Kazakhstan advanced by 7.6% y/y in November, the State Statistics Committee has informed. In m/m terms, inflation reached 0.6% while since the beginning of the year it stood at 6.9%. In January-October, inflation was 6.7% y/y.

Prices of non-food and food products were the main drivers of inflation in the previous month. Food prices increased by 0.7% m/m and by 7.7% y/y while prices of non-foodstuffs advanced by 0.5% m/m and by 8.6% y/y. On the other hand, prices of services increased by 0.5% m/m and by 6.1% y/y as the government put some caps on tariffs preventing acceleration of inflation after a February currency devaluation.

Traditionally, inflation is accelerating in autumn after a seasonal summer decrease in prices of vegetables and fruit. In November, among food products prices increased for peppers (20.6% m/m), tomatoes (19.6% m/m), cucumbers (11.1% m/m), cabbage (8.6% m/m), potatoes (8.2% m/m) and cottage cheese (1.4% m/m). Prices of the same products also grew in October.

Significantly, Kazakhstan carried out an almost 20% devaluation of its currency in February. To prevent social discontent, the government decided to raise wages by 10% at main state-owned enterprises as well as forced private firms operating in the extractive sector to do the same.

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The Moscow-based investment bank Renaissance Capital forecasts Kazakhstan's economy to grow by 5.6% in 2015 should the price of Brent crude oil stand at $105 per barrel. "If oil prices are higher in 2015, we estimate GDP growth in Kazakhstan could exceed 6%," Renaissance Capital said.

The table shows that the bank expects the Kazakh economy to grow by 2.9% and 1.7% if the oil price is at $80/b and $70/b respectively. The bank justifies its forecast that there won’t

be a significant contraction in growth at lower oil prices because Kazakhstan delivered an outstanding economic performance during the previous collapse of the oil price during the global economic crisis in 2009 thanks to proactive anti-crisis policies, backed by sizeable spending from its sovereign funds.

If the price of oil falls to $50/b, then Kazakhstan will enter recession, with the economy contracting by 1.4%.

A well-oiled economy

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‘Milestone Kazakh PPP’ event at EBRD attracts over 100 companiesThe first public presentation of the Almaty Ring Road Concession project, Kazakhstan’s first public-private partnership (PPP) structured under the new regulatory framework, was held today in London on December 9, at the headquarters of the European Bank for Reconstruction and Development (EBRD).

The presentation was led by representatives of the government of Kazakhstan, as well as by the International Finance Corporation (IFC), which acts as an advisor to the project, and the EBRD, which also provides advisory services and expects to become an investor in the project. The event, opened by Yerbolat Dosayev, the Kazakh economy minister, was attended by over 100 representatives of international companies. The amendments to the existing PPP legislation passed in June 2014 as part of a new reform programme in Kazakhstan has created the necessary conditions that enable international investors to invest in PPPs such as Almaty Ring Road Concession project, also known as BAKAD. “If successful, the Almaty Ring Road PPP will serve as a blueprint for new public-private partnerships in Kazakhstan in the transport infrastructure sector and possibly in other sectors that need to attract private funding. This will be the first PPP structure of its type not only in Kazakhstan but in whole of Central Asia,” said EBRD Managing Director for Infrastructure, Thomas Maier The Almaty ring road project involves the construction of a 66km road around Kazakhstan’s largest city, under a 20-year concession contract.

Kazakh uranium, railway operator to offer shares to population in 2016Kazakhstan's national uranium producer Kazatomprom and railway operator Kazakhstan Temir Zholy will offer their shares to the population in 2016, while Samruk-Energy, a power generator, will float its shares in 2015, Yelena Bakhmutova, deputy chairman of the sovereign wealth fund Samruk-Kazyna, told senators on November 24.

She noted that in order for Samruk-Energy to offer its shares to the population under the "People's IPO" programme, legislation on tariff regulation should be changed. "Without predictable tariff policy it is impossible to forecast the results of a company's performance and it is impossible to carry out an IPO without this," she said.

Kazakhstan may get nuclear power plant in 12 yearsKazakhstan will draft a feasibility study for building the country's first nuclear power plant over the next two years and the construction of the plant will take at least another 10 years, Trend reported on December 8, citing the Kazakh Energy Ministry.

“Necessary works include choosing a site, design, construction works, production, installation of equipment and commissioning of the plant. Moreover, the infrastructure should be developed, and trainings for the staff should be carried out accordingly,” the ministry told Trend.

The government plans to start building a nuclear power plant in the town of Kurchatov in 2018 and is considering Lake Balkhash as a possible site

News in brief

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for a second plant, Deputy Industry and New Technologies Minister Bakhytzhan Dzhaksaliyev told a Kazakh-Japanese seminar on the peaceful use of nuclear energy in June. "We are considering possibilities of building nuclear power plants in these areas. The exact choice of specific sites in these areas is a vast job which is only starting now," he said.

Kazakhstan's national nuclear company Kazatomprom and Russia's Rosatom signed a contract for the construction of nuclear power plants in Kazakhstan in May. Dzhaksaliyev said Kazakhstan's first nuclear power plant would start generating power in 2023 or 2024.

The Kazakh and Russian nuclear companies agreed on the construction of nuclear power plants with a capacity of 300-1,200 MW. They will use pressurised water reactors of Russian design.

Kazakhstan, as the world's largest producer of uranium since 2009, has long been attempting to tap into nuclear energy to meet the booming economy's demand for electricity. The country produced 22,500 tonnes of uranium in 2013, all of which was exported.

Kazakhstan to cancel fee for small business registrationKazakhstan plans to cancel registration fees for small businesses, Deputy Minister of Justice Bakytzhan Abdirayym has said. He added that the issue was currently being discussed.

The minister assessed that this step would reflect the government’s contribution to creating a comfortable business environment. As other measures discussed by the government in this regard, he named plans to cancel the requirement for the authorised capital for small businesses to minimise impediments. According to him, the authorities are working on the abolition of

technical passports for real estate transactions: “since the entire database will be in electronic format, businessmen will not need to carry around technical passports,” the minister explained

We would expect some more similar measures promoting the development of SMEs, as it is one of the country’s priorities and cutting administrative barriers is an easy and efficient way to help Kazakhstan get better scores in international rankings. The stagnant oil and gas sector is also forcing the government to look for other areas to ensure economic growth in the country.

Kazakh property prices grow by mere 0.2% m/m in NovemberIn November, prices in newly-constructed buildings increased by a mere 0.2% m/m to KZT215,300 ($1,185) per square metre (m2). In October, growth was only 0.1% m/m. In y/y terms, prices went up by 12% in November and by 11.2% since the beginning of the year, the State Statistics Committee has informed.

Significantly, we believe that despite positive statistics, the growth in prices was generated by the devaluation of the Kazakh national currency in February by 19%. This led to a growth of around 10% in real estate prices. In January-November, the average prices increased by 15.6% y/y.

Prices on the secondary market moved up by 0.3% m/m and stood at KZT172,700 in the reported month. Since December 2013, a growth of 17.2% was reported while in y/y terms prices went up by 17.9%. Rent went up by 0.4% m/m and by 12.6% y/y to KZT1,230 per 1 m2. At the same time, since December 2013, rent increased by 12.2%.

The Kazakh real estate market suffered heavily during the financial crisis in 2008-2009. In the past two years a recovery was observed in

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the market. In 2012, prices of flats in newly-built blocks increased by 12.1% y/y and in 2013 by 9.6% y/y. The tendency this year is rather difficult to assess due to the impact of the devaluation.

France’s Alstom raises stake in Kazakh joint ventureFrench engineering group Alstom has signed an agreement with the Kazakh railway company Kazakhstan Temir Zholy (KTZh) to acquire an additional 25% stake in EKZ joint venture. The deal raises the French company’s stake to 50%. After the completion of the transaction (subject to approval by the relevant authorities), Alstom will become the main shareholder: Kazakh KTZh and Russian Transmashholding will both have 25% in the joint venture.

EKZ joint venture has been awarded a €1.3bn contract for maintenance of freight, passenger and electric locomotives for 25 years. The joint venture will create a centre to deliver its services.

Alstom entered Kazakhstan in 2010 and at present it manufactures locomotives in the country.

Peugeot to assemble cars in KazakhstanPSA Peugeot Citroen and AllurGroup have agreed to assemble French cars in Kazakhstan. The parties signed a relevant agreement on a complete knockdown kit.

The cars will be assembled at the SaryarkaAvtoProm plant in Kostanay (northern Kazakhstan) which is owned by AllurGroup. The first model to roll out of the line will be Peugeot 301, the French company’s bestselling car on the Kazakh market. The line will be launched in September 2016. The average production of

Peugeout cars is expected to reach 12,000 in 2017 with possible expansion to 17,000 a year. Output is intended for the local market and Peugeot is considering the expansion of its dealership network in Kazakhstan.

The Kazakh and French companies started cooperation in 2013. AllurGroup subsidiary AgromashHolding has been assembling four Peugeot models at its SKD plant in Kostanay. The cars were sold through AllurGroup dealership network.

Kazakhstan’s car market has expanded rapidly in the past years: from 45,000 units sold in 2011 to 166,000 units in 2013. Demand in 2015 is projected at 200,000 cars. The growing demand is a result of high economic growth and rising purchasing power of Kazakh citizens. Demand for domestically produced cars was also supported by the establishment of the Customs Union that imposed high tariffs on imported cars. This has led to the development of domestic production and imports from Russia (also a member of the Customs Union).

Kazakh grain harvest expected at 17mn tonnes in 2014The Kazakh Agriculture Ministry has revised grain harvest projection to up to 17mn tonnes in clean weight in 2014. The original target was set at 15.5mn tonnes. Grain exports are expected to stand at only 7mn tonnes due to a lower quality of the crop. Earlier projections put exports at 6-8mn tonnes.

In 2013, Kazakhstan harvested 18.2mn tonnes of grain and exported 8.7mn tonnes. In this season, Kazakhstan harvested 18.9mn tonnes of grain in bunker weight, according to Agriculture Ministry figures. As a rule, clean weight (after grain processing) is 5-10% lower than bunker weight.

The Agriculture Ministry declares that it has enough grain to satisfy domestic consumption and provide

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projected volumes for exports. Since the beginning of the marketing year (starts on July 1) until December 1, Kazakhstan exported 2.9mn tonnes of grain and flour in grain equivalent.

Kazakhstan is among the top-10 grain exporters in the world. The country traditionally supplies grain to neighbouring Central Asian states, Iran, the Caucasus and since recently China. A record harvest was achieved in 2012 with 27mn tonnes of grain harvested.

Kazakhstan likely to miss oil production target this yearKazakhstan might miss oil production target this year, Deputy Energy Minister Uzakbai Karabalin has informed. He explained that the current level of production is at 98.7% on the same period of last year.

According to the minister, the reason for lower oil output is maintenance works conducted by Tengizchevroil, the main oil producer in the country. The company halted production for 75 days this year, up from usual 30 days due to extra work with the sour gas injection plant. At present, the works at the field are going according to the plan but losses in production that occurred during the repairs were not compensated.

Kazakhstan produced 81.7mn tonnes of oil last year. The target for 2014 was set at 81.8mn tonnes. The country will come back on growth path after the launch of the third development stage at the Tengiz field and re-launch of production at Kashagan field (scheduled for 2016).

Kazakhstan starts supplying electricity to KyrgyzstanSamruk-Energy, Kazakhstan's national operator

in the electricity generation and distribution sector, started supplying power to Kyrgyzstan on December 1, the company said in a press release.

The company said that its subsidiary Zhambyl power thermal plant was using 230 MW of its capacity to supply power to the neighbouring country.

During a visit to Astana on November 7, Kyrgyz President Almazbek Atambayev and Kazakh President Nursultan Nazarbayev agreed on supplies of 1bn kWh of electricity from Kazakhstan to Kyrgyzstan in the winter period, ie between December 1, 2014 and March 31, 2015.

Dry weather conditions and excessive use of water to generate power to compensate for Uzbekistan's suspension of gas supplies to Kyrgyzstan's south reduced the water level in the Toktogul reservoir which forced the government to seek supplies of power in neighbouring countries. Uzbekistan suspended supplies of natural gas to Kyrgyzstan's south in April after Russia's Gazprom took over Kyrgyz gas-distribution networks. Uzbekistan said that Gazprom's takeover of Kyrgyzgaz meant it was no longer bound by contracts signed between Uztransgaz and Kyrgyzgaz.

EBRD finances large wind project in KazakhstanThe European Bank for Reconstruction and Development and the Clean Technology Fund will finance construction, connection to the power transmission grid and launch of a 50MW wind power plant. The facility will be located in Yereymentau in central Kazakhstan.

The EBRD will provide KZT14bn (¤59mn) to Wind Power Yereymentau, a special-purpose vehicle. Up to ¤18mn will come from the Clean Technology Fund.

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