US President Donald Trump and Kazakh President Nursultan Nazarbayev shake hands in the Roosevelt Room of the White House on January 16, 2018. Photo: Reuters / Kevin Lamarque

Kazakhstan’s MSCI frontier stock component, after a 70% gain, and dollar bond prices at 130 cents both sputtered into 2018 as President Nursultan Nazarbayev marked 26 years at the helm with high-profile foreign-investor energy and banking clashes despite a triumphal visit to the US.

In Washington, President Donald Trump avoided any references to corruption and money-laundering during Nazarbayev’s long reign, and in New York while chairing the monthly seat rotation on the United Nations Security Council, the Kazakh chief was praised by Secretary General Antonio Guterres for Central Asia development and anti-terror initiatives focusing on infrastructure and drug crime.

While Nazarbayev was in New York, Wall Street money managers also probed details of scheduled partial sell-offs by Kazakhstan’s sovereign wealth fund of state enterprises, including airline and natural-resource holdings.

European Union had previously joined the parade to cement ties with Kazakhstan, inking a Partnership and Cooperation Agreement that aimed at bilateral “WTO-plus” free trade, slashing both tariff and non-tariff barriers.

The pact came on the heels of the country’s 15-place jump on the World Bank’s Doing Business ranking, despite staying in the bottom quartile of Transparency International scores.

The European Bank for Reconstruction and Development also signed a new three-year program memorandum stressing small-business and privatization support.

However, these official achievements were blemished by simultaneous private antagonism after the Kazakh unit of US electricity operator AES was seized for US$1, and Bank of New York Mellon was forced to freeze $22 billion, half of Kazakhstan national fund assets, to cover a possible claim by Moldovan oil and gas investors.

At the same time, banking instability at home spiked when the ninth-largest institution, RBK, was rescued after a depositor run over reported fraud, at an estimated initial tab of $1.5 billion. The sector was still coming to grips with the forced merger of the two state behemoths Halyk and Kazkommertsbank, as bad balance sheets linger a decade after the original crisis despite Nazarbayev’s positive diplomatic headlines.

Nazarbayev continues to dismiss cabinet members and prime ministers at will, and unilaterally decided to switch the official alphabet from Cyrillic to Latin script, creating widespread academic and professional confusion

In his state-of-the-nation speech this month, Nazarbayev again emphasized a financial-system cleanup and anti-corruption priorities, without hinting at an executive-succession preference or time frame, even though Parliament in principle gained relative power under 2017 constitutional amendments.

Nazarbayev continues to dismiss cabinet members and prime ministers at will, and unilaterally decided to switch the official alphabet from Cyrillic to Latin script, creating widespread academic and professional confusion.

After Kyrgyzstan’s president reportedly insulted him, the border between the two Central Asian republics was closed temporarily, and Astana delayed its neighbor’s membership in the Russia-led Eurasia Economic Union.

Last year Kazakhstan’s gross domestic product grew by 4% on 7% inflation, and the central bank recently reduced the base interest rate to 9.75% as the national currency, the tenge, firmed to around 325 per US dollar. A rebound in oil prices spurred a 25% trade boost and an output rise of almost 10 million barrels a day, with Kazakhstan now the top over-producer in the global output agreement by the Organization of the Petroleum Exporting Countries (OPEC) and its allies.

The Economy Ministry said hundreds of projects were completed under a five-year privatization plan, as the new Astana International Financial Center based on advanced-economy legal and operating standards began registering companies in partnership with the Shanghai Stock Exchange and NASDAQ.

The dedicated offshore framework must contend with the harsh image and arbitrary rule displayed several months ago in the AES saga, where the Fortune 200 power company was stripped of control over two hydro-facilities it had run since the 1990s. It had spent hundreds of millions of dollars installing a state-of-the-art electricity grid only to have a contract compensation clause ignored, when the Kazakh government demanded ownership and offered $1 for alleged violations instead of the $90 million AES calculates is due.

The debacle was soon followed by the freezing of Kazakh wealth-fund assets in the US and Europe in long-running actions by Moldovan investors against the state, after it confiscated petroleum fields in 2010. The plaintiffs won a $500 million international arbitration award and tried to enforce payment in Belgian and Dutch courts, with Kazakhstan filing counterclaims, and they threaten to pursue future compensation in the giant Kashagan tract if the damages are not met.

With more than $20 billion in reserves off-limits because of court decisions, the Nazarbayev administration will have difficulty mustering additional bank-rehabilitation lines, and financial markets will remain wary pending development of a successor plan, emphasizing instead governance and management overhauls.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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