KAZAKHSTAN’S INVESTMENTS ABROAD

Prudent economic management and oil wealth have transformed Kazakhstan from a net recipient of FDI into a major foreign investor of its own. By the end of 2011, Kazakhstan’s stock of cumulative foreign investment abroad topped US$ 16 billion, only slightly below Turkey’s equivalent figure of US$18.5 billion. Neighboring Central Asian states stand out as some of the main beneficiaries of these Outward Foreign Direct Investment (OFDI) flows, even if Kazakhstan’s investments are now global. Kazakh OFDI promotes economic growth in host states, strengthens Kazakhstan’s integration into the international economic system, and spurs technology transfers in both directions.

BACKGROUND: Kazakhstan’s OFDI has steadily expanded over the past decade, even if investment flows abroad were close to zero in the 1990s. For example, between 2001 and 2002 Kazakhstan’s OFDI stock grew tenfold from US$ 42.6 million to US$ 463.9 million. By 2007 Kazakhstan’s OFDI reached US$ 3.2 billion and rose to US$ 7.8 billion in 2010, according to IMF’s Balance of Payments data. Even if the financial crisis temporarily interrupted these flows, falling to US$ 1.2 billion in 2008, they had recovered by 2010. The financial crisis, worsened by heavy borrowing of Kazakh banks abroad, compelled the government to dip into the coffers of its reserves. The multi-billion dollar rescue package has not scarred foreign investments and the National Oil Fund noticeably, however, since both continue to climb rapidly.

The total stock of Kazakhstan’s direct investments abroad amounted in December 2011 to an estimated US$ 16 billion, ranking the country among the 50 largest FDI senders world-wide, and in the same league as such developed countries as Turkey, the Czech Republic, and Thailand. An impressive economic growth, averaging around 10 percent annually since 2000, has accompanied Kazakhstan’s emergence as a global investor.

Much of Kazakhstan’s ODFI accrues states within the former Soviet Union, primarily in Central Asia, the South Caucasus, and Russia, but investments in Europe are also expanding. For example, between 2004 and 2007 Kazakh investments in Kyrgyzstan increased from US$ 16 million to US$ 133 million, translating into a total stock of OFDI worth US$ 475 million – 40 percent of total foreign investment in Kyrgyzstan. Gold mining, sugar processing, a cement plant, highways, and tourist resorts, among other sectors, were the targets of these investments.

IMPLICATIONS: These expanding ties were manifested in the establishment of a Kazakh-Kyrgyz investment fund in 2011. Worth US$ 100 million, the fund is primarily allocated to construction of the Datka Kemin power transmission line, hydropower expansion, and the banking sector. In fact, Kazakhstan was the largest foreign investor in Kyrgyzstan for years, even if recent Russian and Chinese investments may have overtaken the first and second positions.

By 2008 an additional US$ 100 million had been invested in Tajikistan, most of it in banking, but investments have expanded since then into light industry, the food industry, energy, non-ferrous metals, the financial sector, telecommunications and metals mining. The establishment of the Kazakh-Tajik investment fund in 2010, containing at least US$ 80 million, is a further manifestation of the regional scope of Kazakhstan’s investments.

As regards Russia, Kazakhstan’s OFDI here totaled a sizeable US$ 715 million between 2004-2008, most concentrated in Russian banking, construction, and energy. Perhaps most significantly, Kazakhstan’s total OFDI to Georgia exceeded US$ 2 billion in 2008, making it one of the largest sources of foreign investment in the country.

Similar to Russia, the investments in Georgia are mostly in banking, construction, energy, and tourism. For example, Kazakhstan has invested in several Tbilisi hotels, including the Radisson, built and upgraded energy export facilities (e.g. the oil terminal in Batumi), grain terminals, and other infrastructure. Other investments include tourism development in Georgia’s Adjara region and energy systems in Tbilisi. Kazakhstan’s second largest bank, Bank Turan Alem, appears to have been actively involved locally in most of these as partner and developer.

Turning to Europe, Kazakhstan’s largest investment to date is its US$ 2.7 billion acquisition of Rompetrol in 2007. The purchase of Rompetrol, a Romanian refining and petroleum company, represented Kazakhstan’s first major non-CIS investment and indicated Astana’s desire for “vertical integration” in the European oil market. Kazakhstan’s investments in Europe are set to expand further with the signing of a US$ 4 billion “trade and economic deal” with Germany in March 2012, including “a partnership on raw materials, industry and technology”.

Kazakhstan’s burgeoning oil wealth is fuelling this growing stock of foreign investments. Modeled on Norway’s Oil Fund, the National Oil Fund of the Republic of Kazakhstan was valued at US$ 36 billion in April 2011 and US$ 43.7 billion in February this year, much of it invested in sovereign debt securities and other foreign portfolio investments, as well as infrastructure and real estate. However, President Nursultan Nazarbaev now seems intent to invest more of these funds in Kazakhstan, as expressed in his State of the Nation Address in January, 2012 – a recommendation that also has been issued by the IMF.

Barring another financial crisis, the National Oil Fund is set to grow steadily due to high oil prices, low withdrawals by the Kazakh government, and accumulating interest on these funds. Assuming an annual net return on investments of 7.5 percent, the fund will grow this year by at least US$ 3.2 billion or around US$ 9 million per day. The trend of growing Kazakh investments in the Central Asian region and beyond is thus likely to continue, for the benefit of Kazakhstan and its investment partners.

Four main implications can be derived from Kazakhstan’s growing OFDI: First, Kazakhstan contributes to the economic growth and welfare of its poorer former Soviet neighbors, in particular Kyrgyzstan and Tajikistan, but also others, not least Georgia. Like FDIs elsewhere, Kazakhstan’s investments will introduce new technologies, managerial techniques, and raise the scarce capital stocks of these countries. This, in turn, will generate economic growth, employment, and diversify the economies of these developing states. Second, Kazakhstan’s investments will spur competition in the host countries, improve efficiency, and ultimately benefit local competitiveness.

Third, OFDI also involves direct benefits to Kazakhstan. The exposure of Kazakhstan’s companies to European and international competition will enhance efficiency, give ready access to the “know how” of more advanced countries, and create new areas of competitive advantages. Furthermore, the competitive position of Kazakhstan will increase as its companies acquire “vertical integration” in foreign markets. Return on investments, it is hoped, will also be greater than what is offered in Kazakhstan’s market exclusively.

Fourth, Kazakhstan’s National Oil Fund – a backbone in the country’s OFDI – will create a buffer to international shocks and diversify the country’s wealth. Specifically, the Oil Fund will help insulate Kazakhstan from fluctuations in oil prices and capital inflows, and thereby protect it from overnight demand disruptions. Spread over a large number of international assets, the Fund is the safest precaution that this national wealth will accrue future generations.

CONCLUSIONS: Kazakhstan’s rapid economic growth and responsible management of its oil wealth have transformed the country into a major investor internationally. Even if some of the primary beneficiaries of these investments are its poorer neighbors, one would expect more global penetration of this capital in the near future, especially in Europe. Kazakhstan will benefit too from this development as the country is further integrated into the international economy and can access the technology of more advanced countries. Furthermore, its regional investments will contribute to a prosperous regional neighborhood – an invaluable asset for an economically stable Kazakhstan. Kazakhstan’s National Oil Fund is the crowning achievement of this regional success story, and it will be of benefit to the Kazakhs, the region as a whole, Europeans, and peoples further beyond.

AUTHOR’S BIO: Nicklas Norling is Research Fellow at the Central Asia-Caucasus and Silk Road Studies Program Joint Center, and a Ph.D. Candidate at Johns Hopkins University-SAIS. He can be reached at: nnorlin1@jhu.edu.