Central
Asia, a stronghold for dictators, poverty and corruption,
doesn’t at first glance seem to offer fertile ground for high
investment returns. But this is precisely what some of the
region’s more intrepid investors hope to find and profit from.
Kathryn Wells spends a week on the road with two hedge fund
managers, on the lookout for opportunities on this new
frontier.
Bids and offers in
no-man’s-land
THE
ROUTE TO the Kant Cement-Slate Plant from Bishkek, the capital
of Kyrgyzstan, is a bumpy 20 kilometres. And our car, which
carries foreign number plates, is likely to attract unwelcome
attention from the notorious traffic police, known by their
Russian acronym GAI, stationed along the route.
After
some discussion about what’s best to do our host has agreed to
send his SUV, bearing official government plates, to accompany
us on our journey. We weave our way through the traffic at
will, paying little attention to oncoming vehicles. Those
police who do contemplate stopping us have second thoughts
when they see the car heading our mini-convoy. They melt away
into the background. Sometimes, it seems, the system has its
advantages.
We
pull up at the plant, its spluttering chimneys sharply
highlighted against the blue of the sky and the white of the
snow-capped mountain range behind it. The snow on the mountain
peaks never melts, not even in the burning 40ºC heat of
summer. The thought crosses my mind: what exactly are we doing
here?
It’s
the final day of a week-long trip around central Asia,
accompanying two hedge fund managers as they tour the region
on the lookout for new investment opportunities. And cement
might prove to be a good investment, as demand for building
materials across the region looks set to
rocket.
Kant
Cement is one of five cement companies spread across Russia,
Kyrgyzstan, Kazakhstan and Uzbekistan that is ultimately to be
packaged into a holding company and listed, in all likelihood
on a London exchange.
Demand
for cement is huge, particularly in Kazakhstan, where the
government is engaged in the construction of its new capital,
Astana, from scratch. Afghanistan is also expected to become a
big importer, along, of course, with China. Kyrgyzstan is a
poor, mountainous and largely commodity-free state nestled
between China, Kazakhstan, Uzbekistan and Tajikistan, and this
factory could well prove to be one of its most profitable
enterprises.
The
plant’s general director, Adal Issabekov, was transferred here
from one of the Russian cement companies in the group earlier
this year, with a mission to get the factory working to its
full capacity before a listing plan is taken any further.
Kant
was one of the largest cement producers in the USSR and,
despite ageing equipment installed in 1962, it is in
reasonably good condition, Issabekov says.
To
falling jaws all around the room, he then proceeds to tell us
about the factory’s other product – artificial slate. “It is
not used widely in Europe, I know,” he says, “as ecologically
speaking, it is not very politically correct. One of its main
ingredients is asbestos. However, there is a huge demand for
it in this region.”
Our
western attitudes make us baulk at this use of something so
injurious to health. Yet it is clear that for the local
population, who face temperatures of minus 25ºC and below
every winter, such concerns are secondary to having a warm
roof over their heads.
We
express the hope, at least, that this will prove to be a
market with a finite lifespan. “As the population gets richer,
demand will certainly drop,” Issabekov agrees.
At
the moment, Kant is Kyrgyzstan’s only cement producer, and the
country’s anti-monopoly commission that regulates it ensures
that most of its production is destined for domestic consumers
at below-market prices.
However,
the government is building a new cement plant, and once Kant
is no longer a monopoly it can take full advantage of higher
market prices abroad in such places as Kazakhstan.
We
are invited to take a tour of the plant and jump in a minibus,
accompanied by the chief engineer. On our way round, we cannot
escape a visit to the slate production line, including a
warehouse where thousands of bags of a white-looking substance
– asbestos – are piled high up to the roof. The chief engineer
pooh-poohs our questions about its safety, saying that he has
worked in the plant since the 1960s with no ill effects. But
as he finishes saying this he breaks into a spasm of coughing;
it does nothing for his argument.
The
new adventurers
The
Diamond Age Russia Fund is one of the few hedge funds
operating on this new frontier. Just 14 months old, and still
growing, it recently became the first international
institutional investor to buy into the corporate bond market
in Uzbekistan. Today, it also holds nine Uzbek equities, with
a total Uzbek allocation of 6% of the fund spread between
different bonds and equities, meaning that no position is
worth more than 0.5% of the total fund.
It
also boasts investments in Azerbaijan, Kazakhstan,
Turkmenistan, Ukraine, Georgia and
the Baltic States as well as its core market of Russia. Its
strategy is to invest in the stocks and bonds of any company
that has most of its assets, revenue growth or net income
growth in one of the countries of the former Soviet Union,
regardless of where they are listed. It also invests in
derivatives in currencies, interest rates and commodities. The
fund’s key investment professionals, Slava Rabinovich, a
former head of leading private Russian bank MDM’s asset
management arm, and previously an assistant portfolio manager
and head trader at Hermitage Capital, the largest public
equity investor in Russia; and John Winsell Davies, previously
a director of Alfa Capital and a managing director of Franklin
Templeton Investments, are constantly on the lookout for new
opportunities.
They
believe that central Asia might offer these. It is a region
where first-mover advantage is everything. By the time the
hedge fund community at large has cottoned on to the yields
that a market can offer, the type of returns that allowed a
pioneer to produce a more than 82% return net of fees for
investors during its first 14 months of operation have already
begun to be eroded.
Emerging
markets have enjoyed a spectacular run in the past few years,
buoyed up by the global search for yield and the absence of
crises in any of the major economies such as Brazil, Russia
and Turkey. Yet this just serves to highlight the gulf between
these economies and some parts of central
Asia.
Diamond’s
managers have agreed to let me spend a week on the road with
them as they travel around the region assessing some of the
holdings in their current portfolio as well as new investment
opportunities. The trip begins in Tashkent, the capital of
Uzbekistan.
Heading
east
Tashkent,
like all the major cities in the region, suffers from a legacy
of crumbling Soviet-era housing blocks that disfigure the road
from the airport into town. Half the cars on the road date
from the same era, ancient Ladas or Skodas that look as if
they are held together with pieces of string. In Uzbekistan,
the other half – unlike in Moscow or Kiev, where big SUVs with
black-tinted windows dominate – are made up almost entirely of
Daewoos, the product of one of the country’s few large-scale
joint ventures.
You
immediately feel the presence of security officials – hanging
about on street corners or lurking by the business hotels. To
western eyes, these are unfamiliar places. The situation is
not, though, like it was in the late 1990s, when foreigners
travelling here were advised to leave any literature critical
of the regime on their planes.
Even
first thing in the morning of a Sunday in early March, the sun
makes a welcome appearance. The land looks flat and fertile,
although this belies the massive water problems that have led
to a severe drying up of the Aral Sea; it is now split into
two far smaller areas of water that are getting still smaller.
Uzbekistan
has long proved one of the thornier countries in the region
for supranational institutions such as the European Bank for
Reconstruction and Development. Its capital did host the
EBRD’s annual meetings in May 2003, although the institution
selects the venues for its annual meetings as much as four
years in advance. Back in 1999, Uzbekistan’s economic promise
loomed larger than it has since delivered on. The government
has proved obstinately opposed to the reforms and improved
human rights that the west has called for, leading the EBRD to
revise its country strategy for Uzbekistan just weeks before
its annual meetings were held there.
This
raises the question of whether democracy, per se, will really
ever be suitable for central Asia. Uzbekistan’s president,
Islam Karimov, is just one of a number of former Soviet
leaders in the Caucasus and central Asia who have maintained
their hold on their countries more than a decade after the
Soviet collapse. And when states such as the US seem more
intent on keeping geopolitically important countries like
Uzbekistan on side than on wholeheartedly promoting democracy,
it seems it is unlikely to become a priority in the medium
term.
Human
rights abuses and the flourishing of democracy, though, are
not at the top of an investor’s list of concerns. Stability
and the ability to repatriate profits are.
Meetings
in Tashkent have been arranged by Ansher Capital, one of the
few investment banks to operate in the region. Ansher’s chief
executive officer, Alisher Djumanov, who has more than 10
years’ investment experience, with Credit Suisse First Boston,
Renaissance Capital and Ernst & Young, gives us an
overview of the country.
Uzbekistan,
he says, has vast potential. It is the most populous country
in the region, with 26 million people, and is situated in the
heart of central Asia. It recorded GDP of $12.8 billion in
2005, $492 per capita. Like many of his contemporaries
throughout the former Soviet states of the CIS, Djumanov has
returned to his native country after years working in the
west, more convinced than ever of the fundamental potential
that it holds.
Our
first company meeting is with Alskom Insurance, Uzbekistan’s
sixth-largest insurance company – there are 26 in total – and
one of the country’s biggest private insurers. The firm has
completed four share issues, offering a return on equity in
the region of 40%. The money has gone towards increasing its
capitalization, in line with new government requirements.
Like
much else in Uzbekistan, the insurance market is in its
infancy. The whole region is acutely underinsured – in Russia,
for example, the average insurance spend is about $120 a year.
Even this, though, compares favourably with the $1 a year or
less per person spent in Uzbekistan.
It’s
difficult to question the growth possibilities; what is less
clear is the timescale needed to realize them. Luckily for
Alskom, president Karimov has said that the market will grow
five-fold in the next five years, although it is not clear
whether or not this will fall by the wayside, as have other
similar presidential decrees.
We
adjourn for lunch to a Chinese/African restaurant described in
the Lonely Planet travel guide – Michelin guides having not
yet reached this far – as a “restaurant with an identity
crisis”. The owner, apparently, is delighted with this review.
Over
lunch we talk about the region more generally. It seems that
there is a natural order to things – just as the British make
jokes about the Irish, or the French about the Belgians, so
Uzbeks make jokes about the neighbouring Turkmen. “We sent a
few people there to do some research,” someone jokes.
“Unfortunately they never came back.” Given what the limited
information coming from Turkmenistan suggests these days, it
looks as if there’s many a true word spoken in
jest.
Cautiously
optimistic
After
a whistle-stop tour of the city after lunch – a particularly
ferocious series of earthquakes in 1966 ensured that few
historical buildings remain intact – we move on to a meeting
with the head of the American Chamber of Commerce in Tashkent,
Donald Nicholson. Nicholson also runs the Central Asia Small
Enterprise Fund, one of the few known private equity investors
into the country.
Nicholson,
a CIS veteran, describes himself as “cautiously optimistic,
couched on the need for certain things” when pressed on his
outlook for the country. The list of these “certain things”,
though, is long, spanning the “acute” need for reform of the
banking sector, a change in tax legislation and so
on.
Cotton,
textiles, food processing and mining are sectors, he tells
us, that should expect investment.
The country has “tremendous mining potential”. He laments the
reasons that have kept big mining groups, such as Rio Tinto or
Anglo American, out of the country so
far.
He
also explains that while the country has a population of 26
million, foreign companies operating there, such as British
American Tobacco, believe the consumer base for their products
is much smaller, perhaps as little as 200,000. He also tells
us that of the 26 million, as many as 3.5 million are
estimated to work abroad. It is this Uzbek diaspora, spread
throughout the west and the Middle East, which regularly
repatriates the money that to a large extent supports the
economy and forestalls its total collapse. Reasons for leaving
the country are obvious – Nicholson says that an
English-speaking graduate can expect to earn about $120 a
month as a receptionist in a four-star hotel in Tashkent but
could make more like $400 a month in a comparable
establishment in Dubai.
Some
of the problems that Nicholson points to are endemic to the
region. Reform of the banking system is top of his agenda, so
that banks “are not instruments of the tax system. They should
be made to work like in other countries” – a complaint
familiar to anyone who has done business in Russia in the past
10 years, albeit one that very gradually seems to be being
dealt with there at least.
Bureaucracy
is another bugbear that the entire region, central Asia
especially, must face up to.
To
be successful in Uzbekistan today “takes a very special type
of investor,” Nicholson tells us. “You can make good money,
but you have to understand the risks.” In 2005, Uzbekistan’s
largest private commercial bank, Business Bank, lost its
operating licence and was put into liquidation on what
Nicholson calls “completely falsified grounds”.
He
says: “We were on the verge of investing, along with the EBRD.
We had both done due diligence. No official reason was ever
given.” The liquidators brought in to oversee the process
turned out to be the bank’s former managers, he says, further
muddying the process.
“If
you are thinking about investing,” he says, “and see that the
EBRD is close to investing, and then this happens, well anyone
else must factor this in.”
This
lack of ground rules does allow for serious profits to be
made, if investors are canny enough – and sufficiently lucky –
to pick suitable targets. “Where else can you buy assets as
inexpensively as here?” Nicholson asks. “There are some very
good opportunities, but if you are a publicly traded fund and
one day the bank you invest in loses its licence, then what
can you do?”
Nicholson
hopes that Russian investors into Uzbekistan might be more
successful at getting their voices heard than their western
counterparts. “Russian investors are echoing the same things
that the West has said about Russia in the past,” he tells us.
“So, maybe the government will start to listen to the Russians
on business matters.”
Speaking
as a strategic investor, Nicholson says: “If you think things
here are bad, then you shouldn’t be here. Our business is
doing well. What is lamentable is that there is so much more
potential, if only a few things were to change. There are
opportunities right across the board, especially in the
extractive industries. There is a case for letting the private
sector in.”
Even
basket-case Turkmenistan, whose human rights record makes
Uzbekistan look positively saintly, has investment in its
natural resources sector through such production and
exploration companies as Petronas, Burren Energy and Dragon
Oil. “If they can be in Turkmenistan, why not here?” questions
Nicholson. “Nothing attracts others like a success story.”
We
jump back into our Mercedes-Benz and make our way to the next
meeting – with the Uzagromashservice Association. The floor of
the entrance hall is being relaid as part of what appear to be
extensive renovations, so we have to hop between pieces of
cardboard laid down to protect us from the dust. Members of
the association, we are told, provide machinery services to
the agriculture sector, and employ 32,000 people. The
association has funded its growth through commercial loans
from local banks but is now looking to sell a stake to
investors. Its main objective is to attract foreign
investment, and the new technology that this is likely to
bring with it. This, the association’s representatives say, is vital because
Uzbekistan is an agrarian country. So far, most interest has
come from Russian investors, although companies from Germany,
Norway and the US are also said to looking at the
opportunities. One example of a member company for sale is an
engine repair firm located in Tashkent in which the government
is offering a 23% stake. A Russian joint venture already owns
a controlling stake in the company.
Chunks
of shares in some of the companies are being traded on the
secondary market, and are of interest to an adventurous fund
such as Diamond.
According
to the association representatives, in cases of strategic
sales on what they call the “primary market”, the price is
calculated and fixed by the state property company. On the
“secondary market”, however, the share price can be
negotiated.
Our
final meeting of the day is with a local banker, who requests
that his name not be disclosed. The average deposit per capita
is around $40, he tells us. “In Uzbekistan, people need more
time to trust banks,” he says.
He
agrees that privatization of state-owned banks must be a
priority. “When the first private bank was set up in 1998, the
state controlled 99% of the market. Today, it still controls
85%. Asaha and NBU must be privatized, otherwise we will see no
change.”
But
one integral problem is that these banks have issued a large
number of loans under state guarantee. The first thing that
any would-be buyer must do is look at the banks’ credit
portfolios, and with many of these guarantees extending as far
as 2015, it might not prove particularly attractive.
The
banker is also critical of the approach of retail lenders.
“Yes, there is demand for good services,” he says. “But what
many banks are doing today, issuing credit cards when people
cannot even withdraw cash, is dangerous.”
The
Golden Road to Samarkand
Uzbekistan
has great potential for tourism, if it can ever fully harness
it. On Tuesday we take a car and drive to Samarkand, the famed
ancient city on the Silk Road to China. The three-and-a-half
hour drive (there is apparently a shorter route that involves
crossing briefly into Kazakhstan, but political disputes
between the two countries mean that the border will not be
open to us) is not particularly scenic until we begin the
approach to Samarkand, when snow-capped mountains suddenly
become visible on our left.
We
share the road with a mixture of cars and occasional herds of
skinny-looking cows. Villages of any size are scarce, and
petrol stations virtually non-existent.
Samarkand,
though, more than justifies the trek. With exquisitely
coloured mosques and mausoleums spread out around the modern
parts of the city, we barely scratch at the surface in the few
hours we have to explore. Our guide, a typical Soviet-era
fount of knowledge, barely stops talking during the entire
visit, offering impressive but ultimately forgettable facts
about the dimensions of every room, and the quantities of gold
used in their construction. We learn about the 14th-century
ruler Amir Timur, known in the west as Tamerlane, who the
Uzbeks seem to regard as a benevolent, fatherly figure despite
his somewhat harsher record for savagely slaughtering subjects
and conquered peoples.
Couple
the attractions of Samarkand with those of other historic
cities such as Bukhara and Khiva, and the chance to explore
the Fergana Valley, the most fertile and most densely
populated region in the whole of central Asia, and tourism
should be booming.
Investment
is clearly needed – both in infrastructure and marketing. The
type of three-star hotels that tourist
groups need are available, although some are still on
the basic side.
A
region of extremes
Next
day, the flight to Almaty, the former capital of Kazakhstan
that remains the country’s business centre, is scheduled to
leave mid-morning. But an air stewardess announces that
because of a “technical break” at Almaty airport that will
last for one hour we must sit on the plane and
wait.
Once
on the ground in Almaty, the difference between it and
Tashkent is striking. Roads are smoother, cars bigger, and
people’s clothes more expensive-looking. Shiny new buildings
are shooting up on all sides, clear evidence of the benefits
of petrodollars to an economy.
It’s
to be hoped that this building frenzy will soon extend to
hotels – one area in which Tashkent does lead its central
Asian counterpart is in business-standard accommodation.
Ironically, the EBRD’s greatest legacy to Uzbekistan appears
to be the plethora of four-star and five-star hotels that
sprung up in response to the bank’s 2003 annual meetings
there. In Almaty, though, we check into a Soviet-era hotel
replete with the heavy furnishings and solemn interiors of
that period.
In
Kazakhstan’s real economy, oil is the only game in town, and
is likely to remain so for many years. The government talks a
good game about diversification but with oil prices where they
are today, the country is enjoying an embarrassment of riches.
In
a sign that Kazakhstan is starting to gain visibility on
international investors’ radar screens, a new Kazakh-based,
but ultimately pan-central Asian, investment bank has just
been set up.
Visor
Capital’s co-founder, Michael Sauer, a veteran of the
Brunswick brokerage in Moscow, meets us in his newly built and
still being furnished offices and takes us out onto the
10th-floor terrace to see close-up the extent to which new
buildings are shooting up. With the sun glinting off the
buildings’ mirrored walls, and a clear blue sky creating a
sharp contrast to the snow-capped mountains that lie just a 20-minute drive away, it is easy
to see what might tempt entrepreneurial bankers such as Sauer
to relocate here.
Dangerous
territory
The
downside, of course, is that this is still central Asia.
Violence within the business community of this relatively
stable “stan” has been escalating, with several notable bank
officials being murdered in recent
months.
We
go to meet Almas Chukin, the former ambassador of Kyrgyzstan
to the US, who today heads the Compass Asset Management
company in Almaty. He is well placed to discuss with us the
relative merits of the stans.
Davies
from Diamond kicks off by saying that the Uzbek market is the
least correlated to the Russian index (RTS) of any market that
his fund looks at. Lack of correlation is a priority of hedge
fund managers regardless of their investment environment, it
seems.
Short-term
Uzbek bonds offer a yield of more than 20%, and the chances of
default in the next 12 months are low. Diamond follows a
basket approach, so a diverse mixture of countries and
products is crucial to its strategy. It has nine equity
positions in Uzbekistan, which account for around 20% of the
fund. These include sugar producers, light machinery companies
and also state-owned Uztelecom, which Diamond uses as a proxy
for the Uzbek market, rather than regarding it as a well-run
company per se.
Last
year’s unrest in the Fergana valley, which the Uzbek
government categorized as “Islamic fundamentalism” and dealt
with particularly heavy-handedly, might prove to be a blessing
in disguise for funds like Diamond, as it will keep out all
but the most adventurous of rivals.
To
the uninitiated, the situation in Uzbekistan seems pretty
backward. But bankers and investors who have been visiting the
region for the best part of a decade can point to tremendous
changes. “It is as different as night and day,” says Davies
says. “The potholes have gone, the electricity works.”
Diamond
is betting on what Davies calls “a one-way, one-directional
transfer of wealth from west to east.” By this he means the
rise of China, the growing importance of commodity producers
such as Kazakhstan, and the booming populations of many
eastern countries (although few former Soviet republics fall
into this last category). “I can buy stocks [in central Asia]
where the dividend yield on common stock alone is 14% to 18%,”
he says. “And you can repatriate profits.”
One
way to invest in the “trickier” countries in central Asia,
Diamond believes, is through companies domiciled outside their
main area of operations. For example, the fund invests in
several operations in Turkmenistan, but through mining
companies listed in London, New York or Dublin that have a
large proportion of assets there.
The
most fascinating aspect of the trip is the insights it gives
to the different stages that these three central Asian
republics have reached. For western-based investors, it is
easy to lump them together as a homogenous block of far-off
stans. But as Compass’s Chukin explains, their paths since
independence 15 years ago have been far from identical.
His
native Kyrgyzstan was the darling of investors in the
mid-1990s and hailed as an “oasis of democracy”. But the
ultimately poor and commodity-free country, despite having had
one of the most economically liberal regimes in the CIS – it
was the first to join the World Trade Organization and has the
most liberal currency regime – ultimately fell out of love
with its experiment in democracy, and has failed to translate
this into performance. Today it is Kazakhstan that claims that
prize.
Nursultan
Nazarbayev, Kazakhstan’s president since independence, has proven to be one of the
region’s canniest when it comes to economic reforms.
Following
independence, the government engaged in the construction of
new institutions, and subsequently growing its business
sector, up until the double-whammy of the Asian and Russian
financial crises of the late 1990s. Since 2000 it has grown
steadily, with 9% increases in GDP and real incomes up 30% in
the past six years.
It’s
arguable, of course, that this is easy for a country with the
natural resources that Kazakhstan enjoys, which have helped to
cushion the shock for its people of transition from a command
to a consumer economy. Nevertheless, Kazakhstan has
implemented policy changes in areas such as pension reform
that leave it sitting comfortably ahead of many in western
Europe.
Pension
reform is another factor in the country’s favour from the
point of view of western investors. The asset management
business there is still young – the law on investment funds is
a mere 18 months old – but Kazakhs have more than $6 billion
in deposits, Chukin says. This domestic bid will support the
debt and equity markets and should help avoid some of the
problems connected with speculation that countries such as
Hungary have experienced in recent
years.
First
among Kazakhstan’s problems, everyone in the room agrees – and
this is something that affects the region as a whole – has got
to be corruption. There is no point being an honest importer
of furniture, say, and being hit by heavy customs costs, when
you are being undercut by a corrupt competitor.
The
bankers and investors refer to a famous dispute in Russia over
the development of a new Ikea branch just outside Moscow.
Disputes between various local officials meant that it took a
meeting between the head of Ikea in Russia and president
Vladimir Putin himself to get the huge new store open on
schedule.
Visor’s
Sanzhar Kozybayev, an executive director at the firm, then
tells us about a company Visor is working with – a
pharmaceuticals manufacturer called Chimpharm. Listed on the
Kazakhstan stock exchange, the company is the biggest producer
of medicines in central Asia. It makes about 50% of
Kazakhstan’s drugs, in a market expected to grow from $409
million in 2005 to $572 million by 2008, and is focused on
increasing the proportion of its
exports.
Visor
believes that Chimpharm is an interesting investment that can
harness the consumer boom the country is experiencing, and is
working with it to look into the possibility of a further
listing, strategic sale or recapitalization. Diamond’s Davies
says that what is interesting is its potential to increase
exports to the Chinese market. These are the types of
companies offering diversification away from the oil and gas
sector, that funds are on the lookout
for.
We
wrap up for the day and head to a restaurant. As in Moscow,
sushi is all the rage here, and we
are pleasantly surprised by the quality and freshness that
this land-locked country can offer. Almaty’s rich and
beautiful young people are here on display, celebrating the
tail end of March 8, International Women’s Day, which is feted
throughout the former USSR.
The
main game
On
Thursday morning, excited by the thought of our drive across
the steppes to Bishkek in Kyrgyzstan that afternoon, we
prepare to meet an example of the sort of company Diamond
likes to invest in. Max Petroleum is an oil and gas
exploration company initially focusing on Kazakhstan that has
recently completed a listing on London’s junior market, AIM.
Diamond does not invest in Max yet, but its fund managers are
eager to hear about the company’s plans. Ole Udsen, Max’s
Norwegian country manager for Kazakhstan, talks us through the
company’s strategy. Its market capitalization stood at £430
million ($753 million) at the end of January, although this
fell to £260 million in early March after what Udsen describes
as unhelpful research reports, written, he believes, with
little understanding of the company’s situation, and possibly
with the aim of artificially depressing its share
price.
Investing
in an oil explorer entails a fair degree of risk – especially
the risk that the sites it has acquired for exploration do not
eventually yield serious reserves. This, though, argues Udsen,
is offset by the sites’ proximity to two massive fields,
making it more likely that oil will be struck, as well as the
access it has to good infrastructure, and its excellent
government relations. This is an area the company and its
potential investors are keen to underline. Kazakhstan is still
very much a place where who you know is vital to do business.
The
company is still deciding how it will fund its 2007
operations. It is mulling over either a loan or the sale of a
stake in one or more of its projects to a multinational,
although this will undoubtedly mean that it loses an element
of control.
After
the best part of two hours, Udsen leaves. Diamond’s managers
are definitely interested, and will do more
research.
We
adjourn to a vast new restaurant in the basement of a hotel
that promises genuine Kazakh fare. The room is large enough to
be a banqueting hall but we are virtually the only people
there. Our hosts order a selection of delicacies, including
horse meat and a whole pig’s head. Having gorged ourselves, we
get ready to set off for the border and
Kyrgyzstan.
The
drive is spectacular, taking in the vast emptiness of the
Kazakh steppes. To the right, the fields stretch for ever. To
the left, the mountains rise out of the plain like ghosts. Our
driver, Sasha, makes good time across the Kazakh leg of the
journey and it is only when we reach the border that we hit
trouble [see
story].
The
problem with revolutions
The
last day of our trip is also our one full day in Bishkek. We
begin with a meeting at the ministry of finance with deputy
finance minister Murat Ismailov. Diamond’s fund managers do
not yet invest in Kyrgyzstan but are constantly on the lookout
for new opportunities, especially ones that they can spot
ahead of the rest of the market. They are eager to hear what
the ministry is planning, although they view Kyrgyzstan more
as a prospect for 2007 and beyond than as a buy for today.
Kyrgyzstan’s
Tulip Revolution last May, which resulted in the overthrow of
president Askar Akayev, brought the tiny republic – its
population is 5 million – into the consciousness of many in
the west who have never heard of it before.
One
thing that many countries that have undergone such revolutions
have in common though, is that the
upheavals, while opening up the possibility of the type of
democracy advocated by the EBRD, IMF and other such
institutions, can play havoc with the economy.
“Last
year, of course, the economy struggled a bit,” Ismailov says.
“This year, though, GDP growth will be around 5%. The
president wants to see 8%. In my opinion, we haven’t deserved
this fall in confidence. The situation has already
stabilized.”
The
deputy minister takes us through a number of projects that his
ministry is working on, such as the extension of a railway
line through his country that will complete a link between
Uzbekistan and China. Part of the line, from Bishkek to
Issy-Kul, is already in place. Plans are also under way to
convert a military airport near Lake Issy-Kul to accommodate
civilian aircraft in large numbers, as part of a push to
develop the region’s tourist industry.
Issy-kul
is the world’s second largest alpine lake, and its beauty,
combined with that of the spectacular Tian Shan mountain
range, and the possibility of home stays in nomadic yurts,
mean that there is plenty on offer for the more intrepid
tourist.
But
while this is interesting stuff, and it sounds sensible to
mine tourism, there seems to be little immediately on offer
for the portfolio investors.
We
ask instead about the tax code – a new one is being prepared
that the deputy minister claims will do a lot to improve the
investment climate. It includes a flat rate of 10% corporate
and personal tax. The government, he says, understands that
without foreign investment, the economy will continue to
struggle.
But
to some extent its hands are tied – it is working on an IMF
programme that it must stick to rigidly. The country has
nearly $2.5 billion of external debt – huge for a country
whose annual GDP is about $2 billion — and so has few options.
It is in discussions with the IMF about privatization in the
energy sector – although it has few natural resources,
hydroelectricity could be developed much
further.
We
leave the ministry with the feeling that the tiny country is
at the mercy of an institution not famed for its understanding
of the difficulties of implementing fancy Washington-developed
theories of capitalism on the ground. The IMF’s prescriptions
for the rest of the CIS have had at best mixed results, and we
end up hoping rather than truly believing that Kyrgyzstan can
be one of its success stories.
Privatization
perils
After
the unexpected encounter with asbestos at the Kant
Cement-Slate Plant that follows, we form our convoy again and
return to the centre of Bishkek. The sun is shining, and the
temperature a pleasant 18ºC – a million miles, or so it seems,
from the sub-zero climes of Russia.
Tiny
one-storey individual dwellings line the road, often decorated
in a range of bright colours and with roofs of corrugated
iron. In the sunshine their simplicity seems far more
attractive than the Soviet apartment blocks that pervade most
of the region.
The
official number plates on the lead vehicle do the trick once
again, and we reach the centre without incident. We grab some
manti – central Asian steamed dumplings stuffed with meat – to
eat en route, and drive to the offices of the committee on
state property and direct investments, to hear from its deputy
chairman, Anatoly Makarov, about the state’s plans for
privatization.
The
committee is housed in a typical Soviet-style building,
fraying at the edges and with identical looking dingy offices
along every corridor. The committee, representing the state,
is the main shareholder in Kyrgyzstan, as privatization is
still in its infancy.
So
what is the real value of privatization in a country like
Kyrgyzstan? It is certainly no panacea and, in countries ill
prepared for the concept of joint-stock companies and share
ownership, it can be an agent of value
destruction.
Makarov
explains that the first stage towards privatization of
companies in sectors such as electricity generation and
telecoms is to turn them into share companies. The government
then plans to sell them to strategic
investors.
“We
are looking at some plans that will use the stock market in
2006/07, but I do not think that this year will see the sort
of trading that you are interested in,” Makarov tells
Diamond’s fund managers.
He
says that of the 120 firms that the committee owns shares in,
some 40 are “serious” companies and could be interesting to
foreign investors. This, he says, includes the tender for a
stake in Kyrgyztelecom. He, like Ismailov at the ministry of
finance this morning, stresses the country’s liberal tax
regime and the fact that investors can repatriate profits
without any difficulties.
“We
are a small country, without many resources,” he says, summing
up. “But our time will come. If we meet in a year’s time, then
there will be more interesting propositions for you. Last
year, with the revolution, was very difficult.”
Our
meetings here today in Bishkek seem to have confirmed the
opinion of the two Diamond managers that Kyrgyzstan is a story
for tomorrow, not today.
Although
there are some signs of commitment to developing the capital
markets, there is still some way to go before portfolio
investors will see securities capable of being traded. The
EBRD, Asian Development Bank and similar institutions might be
engaged in projects to develop the stock market but today it
seems that strategic investment offers the more immediate
possibilities.
With
just an hour before sunset, we leap into a taxi to try to cram
in a sightseeing dash around town. Our transport is an
ancient-looking Lada with seats that are barely fixed to the
car’s body. Our driver, a weather-beaten old man chewing
tobacco, is mystified by our request to be taken to a
viewpoint that we have been told about.
There
is no formal viewpoint, he explains, although not wanting to
lose our business he drives us up into the foothills of the
nearby mountain range where we can look back on the urban
sprawl that is Bishkek.
Without
the backdrop of the snow-capped mountains to romanticize it,
it is easier to see the city for the poverty-stricken outpost
in the middle of a vast landmass that it is. Bishkek’s
outlying areas blur into a mix of half-finished building sites
that don’t look likely to be completed soon, and decades-old
apartment blocks.
This
view seems to sum up the state of play in Kyrgyzstan and also
in large parts of central Asia in general. The situation is
not completely hopeless but a great deal of investment will be
needed if the region is to fulfil its potential.
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