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Content: 1 Top Story 4 Interview 7 Feature 8 Sector 9 Economics & finance 10 Chart 11 News in brief

July 2014

Top story

Kazakhstan pushes to improve economic transparency Kazakhstan has passed legislation in its latest bid to have citizens disclose undeclared assets, as well as moves to clamp down on money laundering - part of a wider plan that ultimately seeks to make the country more attractive to investors. Kazakhstani President Nursultan Nazarbayev on June 30 signed a bill that will grant an amnesty to people who disclose shadow capital and property starting on September 1. The campaign will

run until the end of 2015, and Astana hopes the 16-month period will bring as much as $12bn out of the grey economy. The move is part of a wider effort by Astana to bring greater transparency to the country's capital flows. Nazarbayev also signed amendments to the legislation on Kazakhstan's ratification of the EU's anti-money laundering convention, which it finally joined in 2011, close to a decade after it first applied.

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Money legalised during the campaign will be deposited in special savings accounts at commercial banks or invested in domestic assets, Deputy Prime Minister and Finance Minister Bakhyt Sultanov told a news conference when plans for the amnesty were first announced in May.

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Clean-up campaign The ultimate aim is to help attract additional funds and investment to the economy, Finance Minister Bakyt Sultanov said. The Kazakh parliament adopted a new criminal code on June 11, toughening punishment for money laundering, income from illegal activity and terrorism funding. The hope is that the toughened measures will encourage a greater uptake of the legalisation campaign. The new criminal code has now been sent to the president for signing.

Kazakhs will be able to deposit their previously illicit cash for five years at market interest rates (up to 10.5% for tenge-denominated deposits). Alternatively, they will be able to invest it in government securities, bonds issued by banks and state companies, and shares floated as part of the "People's IPO" programme or those traded on the In March, the Kazakh financial police announced Kazakh Stock Exchange. Those wishing to get their it is to step up efforts to clamp down on capital hands on hard cash sooner will have to pay a penalty. flight to offshore accounts and to improve transparency over ownership of assets. Olzhas "In future, citizens themselves will choose an Bektenov of Kazakhstan's Agency for Combating instrument of legalisation. If a citizen legalising Economic Crimes and Corruption said: "the lack money doesn't want to use available mechanisms of of transparency in the structure of ownership in investment, they can dispose [of] their money as they strategic Kazakh companies" is also a pressing wish," Sultanov said. "If they withdraw this money, problem. "Currently, the identification of the they will pay a levy worth 10% of money legalised." ultimate beneficiary is not possible," he said. Legalised money and property will be exempt from income tax. The law rules out the legalisation of property and money received as a result of criminal or corrupt activities.

In February, one Kazakh deputy proposed the country should create its own offshore zone, in a bid to keep capital from leaving the country. "Kazakhstan invested $3.6bn in the Virgin Islands, $2.6bn in the Seychelles, and $1.9bn in Cyprus," Sultanov said he expects to see $10bn-12bn emerge claimed Tursunbek Omurzakov, according to from the shadows. According to government Trend. estimates, the grey economy equates to around 20% of the official economy. Kazakhstan's nominal GDP The MP also noted that a Russian plan for an stood at $221bn in 2013. That's despite two previous offshore zone in the far east creates additional campaigns to bring into the open shadow capital risk of capital flight, as there will be no restriction and undocumented property. The first amnesty in on money flows within the Eurasian Economic 2001 saw around 3,000 Kazakh citizens legalise a Union. "We should work with such countries: sign total of $480m in a 20-day campaign. In 2006-2007, agreements and exchange tax information," he $5.3bn ($3bn in money and $2.3bn in property) was demanded. declared.

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innovations and modern technologies - projects which will have served as a launching pad for an industrial revolution," Nazarbayev told a July 2 government meeting on the results of the programme. Economy and Budget Planning Minister Yerbolat Dossayev said that the economy had grown by 30% in the given period, while the manufacturing sector grew by 24.5%. Both figures are below the target.

Kazakhstan fails to start industrial revolution, admits president Kazakhstan has failed to create a critical mass of successful projects to start an industrial revolution, President Nursultan Nazarbayev has admitted. Moreover, the share of manufacturing has fallen despite billions of dollars invested over the past six years in wake of the global economic crisis.

The programme also failed to increase the share of manufacturing, which decreased from 11.8% of GDP in 2010 to 10.3%, and its share of the country's exports fell from 30% to 20%, despite the extractive sector seeing no significant growth. Dossayev explained the fall on a growth in nominal GDP, high growth rates in the services sector and an 11.5% jump in oil prices in the given period. Manufacturing exports fell from $20bn in 2008 to $19.5bn in 2013, while the total exports increased from $109bn in 2008 to $131.4bn in 2013.

This year the government endorsed the second stage of the programme, which will be carried out between 2015 and 2019. It plans that the In 2009, the Kazakh government adopted an "innovative-industrial" programme in 2010-2014 programme will receive investment totalling at the height of the crisis with ambitious plans to $36bn, 90% of which will be private investment, increase the country's economy by 38.4% between according to the president. Dossayev said the 2009 and 2014, and the manufacturing sector by budget would allocate $3.5bn and $5.5bn would nearly 40%. Public spending on the programme come from the National Fund. totalled nearly $25bn between 2010 and 2013. Another $15bn came from private investment. The programme aims to increase manufacturing output by 43% in this period and productivity "We haven't managed to create a critical mass by 40%. of successful industrial projects based on

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Interview a reality. Everything will depend on how the US and the EU develop the situation. It depends on the situation in Ukraine, but this is a lose-lose situation. It is beyond our control, as it is politically driven, not economic," he says.

Central bank's Kelimbetov fighting fires in Kazakhstan

The impact of the sanctions has already been felt in the degree of uncertainty that it has created over policymaking. For example, the government of Kazakhstan is known to be preparing a sovereign Eurobond issue. But the timing of this issue has been thrown into disarray by the regional uncertainty. This in turn is impacting other Kazakh corporates who also are looking to issue bonds.

The uncertainty has also forced the government into some unplanned actions, notably the 19% devaluation of the tenge, sprung on the population As the head of the National Bank of Kazakhstan, in February as a response to the fall in the Russian Kairat Kelimbetov is the leading spokesman and ruble. "In February, we realised that we were in policymaker for economic policy in Kazakhstan. a very uncompetitive situation for the economy," He is also a close confidant of President Nursultan Kelimbetov says. "Reserves had decreased over Nazarbayev. So when he says his country is "very 2013, from $28bn to $24bn. In the first two months scared of radical sanctions" being imposed on of 2014, we continued to lose reserves. The Russia, it is clear that events in Ukraine are National Bank was facing speculative attacks on sending shockwaves through Central Asia. the currency. We saw the line of people who wanted to exchange the tenge for the dollar growing and we In an interview with bne, Kelimbetov said Kazakh decided we couldnâ&#x20AC;&#x2122;t artificially support this level of officials are currently trying to estimate the the currency. We would get out of the market. Then consequences of the sanctions regime imposed we started to support the tenge at the level of 185 on Russia by the US, EU and other nations. "The tenge to the dollar, a weakening of 19%." Russian economy will be impacted by sanctions and with negative growth. There will be an indirect "If you asked me if I am now comfortable with the influence on the Kazakhstan economy," he says. situation of the tenge versus the ruble, I would say yes. We now have room for some reserves. The Furthermore, he says Kazakhstan is "very scared economy has responded in a proper way to the of radical sanctions" that might follow if the crisis changes. The reserves of the National Bank have in Ukraine deepens. "Russia is our biggest trade returned to $28bn. The joint reserves partner and we are in a Customs Union with of the government and the National them," he says. "Definitely this is not the situation Bank now exceed $100bn, which is that we like. This is only a concern at the moment, where they were before the crisis," but we realise that this [could] very soon become he says.

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Bad loans Kelimbetov has redoubled efforts in the wake of the Ukrainian crisis to deal with one of the spectres hanging over the local banking system , namely their level of non-performing loans (NPL). These are a legacy of rampant, unsustainable property lending before the global financial meltdown in 2007-2008, but the country has failed to provide the institutional tools to allow banks to work them down to a safer level – something Kelimbetov believes would put the banks on a surer footing. "There was a very tolerant policy towards NPLs [under previous governor Grigori Marchenko]. When I arrived, everyone understood that we couldn’t continue this policy," he notes.

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argument to limit the credit they provide to the real sector. This is not acceptable to the National Bank. We want to fix it, we want to clean up the balance sheet of the banks, we want to check the capitalisation of the banks," he says. The NPL problem explains the collapse in the credit ratings of the bank from just below the Kazakhstan sovereign rating of 'BBB+' to below investment grade over the last decade. "I am happy with the sovereign rating of 'BBB+', but we are not happy with the ratings of the banks," says Kelimbetov. "In 2004, the banks were in good shape. At that time, the banks were one or two notches below the sovereign. Now they are seven or eight notches below the sovereign because of the high level of NPLs. We want to convince banks to fix this situation and bring their ratings closer to the sovereign."

Kelimbetov, who was appointed in October 2013, says the previous system of banks provisioning against NPLs had allowed banks to misrepresent to the regulator that everything was normal "when Privatisation and consolidation it was far from that," adding that this had led to Kelimbetov is currently overseeing the led to "zombie behaviour" by the banks. privatisation of two Kazakh lenders, Alliance Bank and Temirbank. These were on the verge Today, banks are being encouraged to get rid of of collapse and defaulted on their payments to bad property assets by putting up equity, which foreign creditors in 2008 and 2009 as a result of they place with the National Bank as collateral. the real estate bubble bursting, and had to be The scheme is backed by $1bn of government taken over by the sovereign wealth fund Samrukfunds. Management of the non-performing assets Kazyna (of which Kelimbetov is a former chief). stays with banks, Kelimbetov explains. "We don’t have the expertise to manage it. We will say [to But in 2013, President Nazarbayev instructed banks], let’s complete the construction of a house Samruk-Kazyna to sell its shares in Alliance and and let’s sell it. You will pay us back the funds Temirbank. "[Samruk-Kazyna] has a bureaucratic realised and that will clear the obligation. If you type of management and no one from the cannot fulfil the construction and the business still bureaucracy wants to take on responsibility for doesn’t work, then we will take some of the equity the writing off and the asset-recovery process," as collateral," he says, adding that the National says Kelimbetov. "The whole idea was to get Bank will provide money for five or ten years. Samruk-Kazyna out of the process and to provide opportunities to the private sector." NPLs should be reduced to 15% of total loans by the end of 2014 and to 10% by January 2016, After failing to secure foreign partners from the under a deal between the National Bank and US, Europe, Russia and China for the two banks, Kazakhstan’s top-10 banks. Banks that fail to it was decided to look closer to home. meet the deadline will be penalised for breaking And on May 20, Samruk-Kazyna prudential norms. Kelimbetov hopes the scheme announced it had finalized the sale will turn the tide on NPLs. "Banks are always of stakes in the two banks to Verny trying to not do anything. They have used the NPL Capital, the investment vehicle of

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mineral resources oligarch Bulat Utemuratov, a local businessman. Verny Capital acquired 80% of Temirbankâ&#x20AC;&#x2122;s common stock for $196m and 16% of Alliance Bankâ&#x20AC;&#x2122;s common and preferred stock for $8.2m. This leaves Samruk-Kazyna with a controlling 51% stake in Alliance Bank, while Verny Capital becomes the controlling shareholder of Temirbank. The privatisation process is another step in Kelimbetov's strategic goal to see more consolidation of the country's banks. Kazakh

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banks currently need just $50m of core capital, but Kelimbetov describes this as an insufficient amount. "We would like to increase it in five years 10-times, to $500m (KZT100bn)," he says. "We now have a total of 38 banks, but half of this list will not make it in the new conditions. Those that cannot provide this capital will have their licence revoked and that will prevent them from collecting deposits from the public. They can convert themselves into an investment bank, but not have the benefit of [holding] the money of the people of Kazakhstan."

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Feature

Kazakhstan names most corrupt public agencies

Cumbersome regulations, red tape and inefficiency at government agencies leave a lot of room for corruption in Kazakhstan. At the Korgos customs post on the Kazakh-Chinese border in 2011, the then acting head, Temirkhan Yerumbayev, admitted corruption was rife at his post, but shifted responsibility onto entrepreneurs who "encourage" corruption. "It's still in the heads of our citizens that it's easier to give a certain amount of money [as a bribe] to have all documents filed for them to cross the border than do it officially by themselves," he said in 2011. "People believe they are being extorted for a bribe" even though the delay is for technical reasons, he explained. The customs post was hit by a scandal in 2011 when about 50 customs officials and officers were arrested on suspicion of involvement in a smuggling ring. Korgas is one of Kazakhstan's (and the Customs Union's) main gateways for imports from China.

Kazakhstan, which like most post-Soviet states suffers from high levels of corruption, has named its most corrupt government agencies. Tax, customs, land affairs and public procurement are the most corrupt spheres in the country, according to a body designated to fight corruption. In a separate development, during a parliamentary debate on legislation governing the postal service, Kazakhstan has adopted the best measures Senator Svetlana Dzhalmagambetova complained to change legislation to bring it in line with about malpractices at Kazakhstan's national international standards to reduce corruption, postal operator Kazpost. Andrey Lukin, deputy chairman of the Agency for Fighting Economic Crime and Corruption, told a Dzhalmagambetova claimed that postmen in conference in Almaty on June 26. However, "a lot rural areas just outside the capital, Astana, were of work has yet to be done," he said. employed as part-timers for as little as less than $50 a month, while Kazpost managers received The corruption tsar admitted that "isolated" cases monthly salaries worth "KZT1m-1.5m [up to of corruption existed in "all spheres," according to $8,100] and bonuses." the state-run Kazinform news agency. "I can point to a number of spheres that are most corrupt The senator echoed President Nazarbayev's this is corruption in the tax, customs, land affairs complaints in 2006 that the heads of Kazakh state and state procurement spheres," he said. companies and development institutions received hundreds of thousand dollars a month in salaries According to Transparency International's and millions of dollars in bonuses. "Corruption Perceptions Index" in 2013, Kazakhstan They also had "telephone calls, occupied 140th place out of 177 countries, below lunches and laundry services" Russia and Pakistan which are tied in 127th place paid for by their companies, and only four notches above Nigeria (at 144). Nazarbayev said.

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Sector [abroad]. Whether we sell it for a good or not very good price depends on the output."

Kazakhstan expects to harvest up to 17m tonnes of grain in 2014 Kazakhstan's harvest is expected to total between 15m and 17m tonnes of grain this year, Agriculture Minister Asylzhan Mamytbekov told a news conference in Astana on July 1. The Agriculture Ministry's press service told the state-run Kazinform news agency that this year's harvest was expected to be between 15m and 17m tonnes of grain. The volume of exports will depend on grain output, Mamytbekov told journalists. "If nothing extraordinary happens, we plan to reach the average or higher than the average harvest," Mamytbekov said.

The minister explained that Kazakhstan had adopted a policy of reducing wheat acreage depending on domestic consumption and export market conditions. Under its agriculture development programme, the Kazakh government is also easing the financial burden on farmers by cheapening and lengthening their debts. The minister said debts worth KZT167bn ($900m) had already been restructured for 217 farmers and agricultural enterprises. In total, KZT300bn ($1.6bn) is expected to be spent for this purpose, he added. The likelihood of low global prices and excessive grain surplus in Kazakhstan was low, the minister explained. "Such problems as shortages of train cars or grain storage capacities will not arise either," Mamytbekov said. Kazakhstan produced 18.9m tonnes of grain last year, including 14.5m tonnes of wheat. The country is expected to export 9.5m tonnes of grain in the 2013-2014 marketing year. Iran and China are major markets for Kazakh grain. China should absorb 4% of the grain sold abroad. Supplies to the Asian giant are expected to more than double to 370,000 tonnes during the current marketing year, which runs to June.

Iran is becoming an even more important market, "The domestic consumption of wheat is 6m tonnes, that is set to see imports of Kazakh grain rise of which 2m tonnes is for seeds, 2m tonnes for from 345,600 tonnes in 2012-13 to 1.2m in the food and about 2m tonnes for processing and current marketing year, equivalent to 14% of total forage," he said. "All the rest we will in any case sell exports.

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Economics & finance state-owned companies will be floated on the Kazakhstan stock exchange (KASE), with the aim of boosting activity on the KASE and encouraging retail investment in the stock market. Kazakhstanis will be able to purchase KEGOC's stock as soon as in December this year, but no preliminary dates for the other three companies are available yet. Few details of the campaign have been disclosed so far, though it's reported that a 10% minus one share in KEGOC is going to be floated.

Four more Kazakh companies to float in People's IPO Four big Kazakhstani companies will float their shares as part of the "People's IPO" programme, Tengrinews reported July 9, citing Almaty TV channel. These are national transmission grid operator KEGOC, electricity producer SamrukEnergy, national railway company Kazakhstan Temir Zholy and state-owned nuclear holding KazAtomProm. Under the People's IPO programme, minority stakes in up to ten major state-owned or partially

The main advantage of the People's IPO is that shares will be sold at their nominal value, that is, the lowest price per share at the primary listing bid. And the new holders of the floated stock will be able to start receiving dividends on their stock in one year after the purchase. KazTransOil was the first company floated as part of the People's IPO two years ago, when 35m common shares of KazTransOil were purchased by 34,000 Kazakhstanis. The price of each share was KZT725 (around $4.83 at the exchange rate of that time). The company raised more than KZT38bn ($253m) through the IPO.

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Chart Waiting for Kashagan Kazakhstan's GDP increased by 3.9% in the first half of 2014, which compares poorly with the 6% growth recorded in 2013 and 5% in 2012. Estimates of GDP growth for the whole of 2014 range from 4.5% to 6.0%. The economic slowdown in Kazakhstan is being blamed on the knock-on effects of the recession in Russia, resulting in reduced demand for Kazakh exports, as well as on scheduled repairs at the Tengiz oilfield being

developed by the Tengizchevroil consortium. But as the chart shows, Kazakhstan is expected to see strong GDP growth of over 5% once production kicks off in the giant Kashagan oilfield in the Caspian Sea. Production has repeatedly been delayed at Kashagan due to complex technical conditions and is not expected to start until at least the end of 2015.

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News in brief Kazakhstan mulls including more nations on visa-free regime

“We are interested in cooperation with the Latin American common market. I hope a corresponding document will be signed in early 2015, after our agreement with Kazakhstan and Belarus on the establishment of the Eurasian Economic Union comes into force,” Putin told journalists after his talks with Brazilian President Dilma Rousseff.

The list of countries whose citizens will be able to enter Kazakhstan without a visa is going to be extended, Vice Foreign Minister Rapil Zhoshybayev was quoted as saying by local news on July 10. “Russia is interested in establishing contacts with the Union of South American Nations with Brazil’s On June 12, when speaking at the sitting of the support,” the Russian leader stressed. Foreign Investors Council, Kazakhstani President Nursultan Nazarbayev announced the introduction of a visa-free regime for citizens of 10 nations that have been actively investing into the Kazakhstani Internet access on the rise economy. The list of countries includes the US, in Kazakhstan the Netherlands, the UK, France, Germany, Italy, Malaysia, the UAE, South Korea and Japan. The Internet access is on the rise in Kazakhstan, visa-free regime is to be introduced as a pilot chairman of the Kazakh Agency for project from July 15, 2014 to July 15, 2015. Communication and Information Askar Zhumagaliyev was reported on July 15 as saying.

National Oil Fund assets reach $77bn The assets of the National Oil Fund of Kazakhstan have reached $77bn, the governor of the National Bank of Kazakhstan, Kairat Kelimbetov, told President Nursultan Nazarbayev in a meeting, according to the President’s Press Service on July 9.

EEU to sign cooperation deal with Mercosur in early 2015

"Internet connectivity has recently increased by more than 70% in Kazakhstan. As for mobile penetration, it has exceeded the mark of 160%," Zhumagaliyev said at the Council of Heads of the Regional Commonwealth in the Field of Communications in Astana.

S&P affirms Kazakh government-related Samruk-Kazyna's ratings

Standard & Poor's Ratings Services affirmed its long- and short-term local and foreign currency The Eurasian Economic Union, which comprises issuer credit ratings on Kazakh government-related entity SamrukRussia, Belarus and Kazakhstan, plans to sign a cooperation agreement of Mercosur, or Latin Kazyna at 'BBB+/A-2', the rating America’s common market, in early 2015, Russian agency reported on July 11. The President Vladimir Putin said on July 14. outlook is negative.

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"The ratings on SK reflect our classification of the and Information predicts that in six years, the fund as a GRE and our assessment that there is share of e-commerce in the general market of an "almost certain" likelihood that the government goods and services will reach 10%. of Kazakhstan would provide timely and extraordinary support to SK if it ran into financial difficulties," the agency said.

$2.6bn worth of contracts signed at Kazakh defence expo The Third International Exhibition of Arms and Military Equipment KADEX in Astana saw $2.6bn worth of contracts signed, Tengrinews reported, citing the press service of the Ministry of Defense of Kazakhstan. More than 46,000 visitors attended KADEX this year.

Kazakh housing prices rise by over 20% in Jan-Jun In January-June residential housing prices in Kazakhstan rose by 21.1% compared with the same period of the last year, the press service of the Agency for Statistics informs. The average price for 1 square metre of new housing in the country in June amounted to KZT214,350.

Kazakhstani e-commerce market doubles in 2013 According to official figures, Kazakhstan's e-commerce market has been increasing twice annually and in 2013 the volume of transactions reached $600m. The Agency for Communication

Kazkom-BTA merger may produce largest universal bank in region

Kazakhstan's largest bank Kazkommertsbank and Kazakh businessman Kenes Rakishev have completed the acquisition of BTA Bank from Samruk-Kazyna National Wealth Fund, Tengrinews reported citing the press service of Kazkom. Previously, 58% in BTA was held by a group of Kazakh businessmen led by infamous Mukhtar Ablyazov, who chaired the bank from 2005 to 2009. During this period, the bank grew rapidly, but its growth in loans was not matched by an equivalent growth in deposits. In 2009 Abliyazov fled to Britain after falling under suspicions of embezzling money from the bank. The bank defaulted the same year. Ablyazov is currently awaiting trial in Lyon, France. He is accused of embezzling $6bn from BTA.

Kazakhstan starts construction of wind farm Kazakh President Nursultan Nazarbayev attended a ceremony to begin construction of the first industrial wind park in Yereimentau (north Kazakhstan) on July 2. The capacity of the wind farm will be 45 megawatts, with the possibility of reaching 300 MW.