Kazakhstan Goes To The Polls, Hoping Investors Return Post-Pandemic

Kazakhstan went to the polls in a snap election on November 20. It was highly likely that Kassym-Zhomart Tokayev would win in a landslide and he did, thus returning him to the leadership position after tragic events in January last year. Tokayev garnered over 82% of the vote with an estimated 70% voter turnout rate. He will be in power for a single seven-year term in Central Asia’s most important frontier market.

“For all its challenges, Kazakhstan is the most stable and advanced economy in Central Asia,” says Roland Nash, Managing Partner, VPE Capital. “The recent political turmoil is the inevitable consequence of a change in the head of a highly centralized power structure. But President Tokayev seems intent on maintaining the same balance as his predecessor while making it easier for foreign investors to invest. Kazakhstan has developed a lot of investor credibility over the last 30 years.”

Covid and China slowed the economy down. Kazakhstan has been a major beneficiary of China’s One Belt, One Road development project. But the last two years have been bad for the Chinese economy, which has slowed Kazakhstan’s investment.

The presidential elections with five candidates competing will be viewed by the West as an important step towards a more transparent and participatory government. Kazakhstan is a young nation. Not only demographically (the average age is around 30), but also politically. It was ruled from Moscow until 1991.

Government policies will continue their focus on modernization, which means investment in human capital and raising the standard of living. Adjusted net income for Kazakhstan is not that far off from Russia and China. Russia’s has contracted this year and is expected to fall to $9,500 in 2022. China’s is $12,556. And Kazakhstan GDP per capita for 2021 rose to $10,041, based on World Bank data.

Senior Kazakh officials say they have another year of more economic reforms coming. If those reforms are not delivered, more civil protest against the government, as was seen late last year and into January, might happen again. The middle-income trap burdens China, Russia, Kazakhstan and other countries which did not fully complete the transition to the post-industrial, high-tech economy of the 21^st century. Kazakhstan is trying to accelerate its long-standing promise of economic diversification.

The country also needs to be more than just a hot spot for foreign direct investment aimed at the Chinese market.

“This is an exciting time to be in Kazakhstan,” says Marius Dan, senior executive director for the Corporate Strategy division at Franklin Templeton. “It’s an exciting investment opportunity because of Kazakhstan’s economic stability, their abundant natural resources, their strong commodity market fundamentals, and the political and economic policy reforms by Tokayev.”

Energy Lifeline for Europe

Kazakhstan recently signed a green hydrogen deal and a critical minerals supply agreement with the European Union on the sidelines of the COP27 climate policy gathering in Egypt.

The country has always been an important source of energy, but now it has become a lifeline, especially for Europe. Russia allows Kazakhstan to export its oil via the Caspian Pipeline Consortium (CPC) pipeline to the Black Sea, despite interruptions earlier this year.

“The major threat is that President Tokayev makes a misstep in his dealings with Moscow. The country is almost completely reliant on Russian transit to get most of its exports to the world market,” says Chris Weafer, CEO of Macro-Advisory, a macro investment research firm.

Russia temporarily blocked oil exports from the CPC on three separate, occasions to remind Tokayev that Moscow can shut that down if it wants. But Tokayev has on several occasions called to end the Ukraine war and promised the West to abide by sanctions against Russia. Still, Tokayev maintains positive relationships with both Vladimir Putin and Volodomyr Zelensky, something that cannot be said about any Western leader. Tokayev’s balanced diplomacy keeps oil flowing to Europe (including Russian oil), and cash flowing to Kazakhstan.

“The government is planning to use its accumulated hydrocarbon wealth to create much greater diversification in the economy,” says Weafer. “Today the economy is critically dependent on oil exports.” Some 60% of the value of all exports is made up of oil. “So, if there was to be a global recession which dragged the oil price lower or, if Kazakhstan moved too slowly with its diversification plans and western demand for oil fell sharply, the Kazakh economy would be in trouble.”

The country recently started exporting oil via Azerbaijan and Georgia through the so-called Middle Corridor, building a “bridge” across the Caspian to Azerbaijan that will utilize tankers to bring Kazakh oil to Baku in Azerbaijan that will utilize the Baku-Tbilisi-Ceyhan and Baku-Supsa pipelines. This oil will find its way into Europe.

Also, Kazakhstan spent much of this year selling more oil to China and has helped speed up its container shipments from China all the way to Europe.

Moreover, exports via the Druzhba pipeline – aka “The Friendship Pipeline” — will expand into 2023. This is a crude oil pipeline that runs in different directions, but connects Kazakhstan oil to Russia and further to Europe. Kazakhstan has managed to avoid sanctions circumvention charges (as some of their oil is Russian)

What’s Next?

Investors are hopeful that elections will speed up economic reforms, which have already delivered to a large extent.

Kazakhstan’s e-commerce company Kaspi became a surprise hit on the London Stock Exchange in 2020. Some state-owned companies like Kazatomprom, the uranium miner, have sold shares or have privatized over the last three years, with more in the works.

According to a recent YouGov poll, two-thirds of Western business leaders said political reforms implemented by the President of Kazakhstan have “made the country a more attractive investment opportunity.”

Some 69% of European and U.S. business leaders said the reforms were positive for the country. The study found that 77% believed the reforms would “have a positive impact on democracy in the country.”

British and German business leaders were more positive about the benefits of the policy shifts in Astana, the capital.

Europe is Kazakhstan’s biggest trading partner. Some 4,00o companies with European connections are operating in Kazakhstan. UK and global businesses, including satellite company OneWeb – in which the UK government has a stake – and U.S. technology group Honeywell, are the latest companies to set up in the country.

The YouGov poll was undertaken between November 1 and 9, with 350 business owners and/or board directors from companies from the U.S., UK and Germany surveyed. The survey was conducted on behalf of The Chamber of International Commerce of Kazakhstan and found that 82% of the senior business leaders believed the government was prioritizing the appropriate issues for the country, while 64% believed the government’s leadership was ‘very’ or ‘quite’ serious about improving human rights. That belief was strongest among U.S. business leaders, where 72% said so.

The Organization for Security and Cooperation of Europe monitored Kazakhstan’s election, as it has done in the past. Some 330 observers were in the country for the election.

If Central Asia grows, as every frontier investor thinks it will, Kazakhstan still stands at the center of it all, Weafer says.

“India is starting to show greater interest in Central Asia and Kazakhstan in particular after it started the International North-South Transport Corridor (INSTC) rail link,” Weafer says.

This mostly rail route starts in southern Iran via a ferry link to Mumbai and then runs along the Caspian coast via Kazakhstan all the way up to St. Petersburg in Russia.

“Trains started using this route in September and volumes from India, Iran, and Russia are expected to grow,” he said. “The INSTC also links with the Chinese Belt and Road transit lines and the European Middle Corridor pipeline network into Kazakhstan. All of this offers the opportunity for Kazakhstan to be one of the key transport hubs on the Caspian Sea,” he says. “And a major link in trade from east-west and north-south.”

Nash says Kazakhstan is becoming a newly preferred route for oil and gas transit (even if that route includes the very Russian hydrocarbons the EU sanctioned).

“Just as the war in Ukraine has ramped up the transition in Europe´s energy policy to warp speed, so the incentive to find a new transport route to bypass Russia has sky-rocketed,” Nash says. “Kazakhstan offers the best stable alternative route. Also, one important additional catalyst for the Kazakhstan investment environment: the exodus from Russia of business and people. Some of the most entrepreneurial and best educated people in Europe are leaving Russia in droves, and Kazakhstan is one of their favorite destinations.”

Kazakhstan is still the biggest investment opportunity in the region.

“There’s not a lot of liquid options to choose from, although we hope this will change over time. The few companies that are investible – Halyk Bank, Kaspi and Kazatomprom – are generally high quality,” says David Nicholls, Portfolio Manager, East Capital. For instance, because of the war in Ukraine, sentiment for emerging market stocks has crushed Kaspi’s valuation. It now trades at a cheap 8 times 2023 earnings. Last year, it traded at around 20 times. Nicholls says he expects Kaspi’s earnings growth to be above 30% this year. This is the business climate Tokayev has kept intact.

“We have been a long-term holder of Kazakhstan equities,” Nicholls says. “Compared to other frontier markets, Kazakhstan is attractive.”

Seven more years of Tokayev’s presidency are likely to ensure a balance of stability and economic development, and that is what companies East and West want. This is one thing Russian, Chinese, European, and U.S. businesses and investors all agree on.