OPPORTUNITIES ABOUND

Kazakhstan 2018 | TRANSPORT | ROUNDTABLE

TBY talks to business leaders on the importance of the Belt and Road Initiative (BRI) for Kazakhstan, improvements to the investment climate, and how to leverage the country's unique advantages to diversify the economy.

Agris Preimanis
AGRIS PREIMANIS
KFICA Governing Board Chairman, & Director of EBRD
Kazakhstan
Curtis Masters
CURTIS MASTERS
KFICA Governing Board Secretary & Director and Partner of Baker McKenzie
Kazakhstan
Erlan Dosymbekov
ERLAN DOSYMBEKOV
KFICA Governing Board Treasurer
FIC Investment Policy Working Group Co-Chair from foreign side
Erlan Khairov
ERLAN KHAIROV
Chairman
Committee on Investments, Ministry of Investments and Development
Andrey Kurilin
ANDREY KURILIN
Governing Board Member
KFICA

What are the overarching themes of BRI, and what are its impacts on the country and region?

ERLAN KHAIROV What we have with the BRI in Kazakhstan currently are a series of special priority projects between the Kazakhstan and China—some 51 undertakings worth a total USD27.7 billion. They are in many different areas, such as food processing, machinery, and energy. It is essentially an industrial investment program between our two countries. If we have interest from partners in both countries, they reach some agreements and then ask the government to help them. If the project is on the priority list, then it receives the full support of both governments. This way the project can attract investment and financing from the Chinese Development Bank, the Export-Import bank of China, or the special new Silk Road Fund. There is also the opportunity to directly invest in Kazakhstan and work here. We review the viability of these projects in the different sectors in the ministries responsible for service, as well as the local governor, to understand where the support is from. As our co-partner, China reviews the information on the Chinese partner to determine if it has the ability to invest and the know-how to work here.

AGRIS PREIMANIS Kazakhstan's location used to be a disadvantage; the general perception was that Kazakhstan was far away from everywhere. Now, when we look at BRI, perceptions have completely reversed, as Kazakhstan is the first country on the road from China to Europe. Moreover, the whole BRI has long transcended the notion of a solely Chinese initiative. I look at this as a way to create much better connectivity between China, Europe, and all the countries in between, not to mention the subcontinent, and so on. It also goes well beyond infrastructure, which, coupled with logistics, was the initial thought process behind the initiative. However, it is also about energy, telecommunications, and finance. For Kazakhstan, when a country thinks about taking advantage of this, it is really important to think within the project's context. The country will be better connected to Europe, the subcontinent, and China. What will they do with that? In addition, the area of finance, the Astana International Financial Center—which can be one of the business and financial hubs of BRI—telecommunications technology, and further digitalization are all important for the country.

Of the 51 projects, are there any that stand out the most?

ERLAN KHAIROV We have realized six at the moment and expect another nine to start this year. We have small and big projects. These can be anywhere between USD10 million or a few billion. Right now, most of the projects are industrial plants, but will soon be about logistics and transportation. A great example is a project with COSCO Shipping, which is one of the top companies in container transit. It entered our special economic zone, Khorgos, and bought a hub. Since we expect the transit of goods from China to Europe to go through the Khorgos Special Economic Zone, we expect 100% growth in this market every year. By roughly 2020 Kazakhstan will receive around USD5 billion from this transit.

In what specific areas does BRI have the greatest potential to boost trade and energy, and where does technology come into play?

ANDREY KURILIN BRI is extremely important for Kazakhstan from several angles. First, from what we know—and Citi's focus on Kazakhstan is substantial as we are the only global bank operating here—Kazakhstan is currently one of the world's largest recipients of the Chinese direct investment. Second, Kazakhstan is a key logistical segment of BRI. The Eurasian land bridge, or the New Silk Road, goes almost entirely through Kazakhstan, connecting Khorgos in the east of the country with Aktau on the Caspian shore in the west. Third, the BRI should bring along advanced industrial practices, including those involving digital technology, and boost many segments of Kazakhstan's economy and help diversify it. When a country's market becomes more appealing in general, everything from education and technology to agriculture and manufacturing may get affected. Kazakhstan is large, and there are many projects underway everywhere, such as new modern inter-city roads or a light rail in Astana constructed with the help of the Chinese National Railroads. We could go on, and things are happening fast.

ERLAN DOSYMBEKOV As with any initiative of this scale, we will attract digital and technological aspects, which very much align with certain projects already underway. There will be joint ventures for which the local market will provide access to the land and resources, where applicable, whereas the Chinese market will probably come in with the funding and technology. Given that transportation and logistics are such a big part of this initiative, both industries are not only about hardware but also about technology and digital. I expect all of these joint ventures and projects that happen along the way to be very much about technology and aligned to the overall approach of the Kazakhstani government's development strategy.

AGRIS PREIMANIS What will be important is the pressure that Kazakhstani companies will face. BRI will result in a much more connected Kazakhstan in terms of access to other markets. On one hand, this provides opportunities to companies; on the other, it opens the market to competition. These are the right sets of pressures to attract more digital and competitive technologies into traditional sectors. But we must also look beyond that. A couple of areas that will be important include high-tech innovation and venture capital, and there are initiatives in the country to develop this side of innovation. However, it is a small market. Therefore, the country needs to think about connecting the innovation ecosystem to other markets. Next to Kazakhstan is China, which has one of the most developed innovation ecosystems. There is also Europe and Russia. One of the results of having BRI will be the right pressures and the right level of increasing connectivity between innovation eco-systems. That will certainly help Kazakhstan. The other area is financial services. If we look at Kazakhstan, Central Asia, and the broader region, the markets are not well integrated in terms of financial service provision. Capital markets remain very much separate. I see BRI helping create more integration between markets, in terms of bilateral connectivity between the countries and the creation of financial services hubs. The Astana International Financial Center being developed in the capital has a chance to be one of these hubs since it will be able to attract companies from countries along BRI to issue products for financing infrastructure projects, bonds, and green bonds. I see much broader benefits that BRI can bring to Kazakhstan if the country takes the right steps. The Financial Center will officially launch in July, although things are already underway. It is a new concept. The initial vision was to initially service the region; however, in the longer term it will grow into something more than that. BRI is one of the themes for the financial center. Looking at the first several years, at issuance, for example, fixed income instruments such as the bonds that will finance BRI projects will be one of the growth areas for the Astana Financial Center.
CURTIS MASTERS What I find interesting and exciting about BRI is that, as my colleagues have mentioned, it is focused on areas such as finance, logistics, transportation, and digitalization. Importantly, it is not focused on natural resources. In the past Kazakhstan has seen investors come here primarily for natural resources such as oil, gas, and hard minerals. That has been the existing economy since independence. To a very large extent, that is not something that the BRI is focusing on. It is very much in the interest of Kazakhstan not to be just a financial resource deposit for China or any other country. Indeed, not focusing on natural resources is very consistent with the Kazakhstan government's plans for development and will certainly help diversify the economy.

In terms of diversification, what are the biggest short-term priorities versus the biggest long-term ones?

ERLAN KHAIROV We currently have the second five-year plan of industrialization, which is currently being implemented under a very different atmosphere than the first in terms of investment. If we look at FDI six years ago, only 8% was geared toward the manufacturing sector; now manufacturing accounts for more than 24%. Because the government is focused on non-extracting sectors, we give preference to investors in the manufacturing as well as agricultural production sectors. With the special program between China and Kazakhstan, there are no projects in the raw materials sector without advanced procession. The goal for the next five years of industrialization is to produce export products. We have a small market but do not fail to see the big markets surrounding us such as China, the Eurasian Economic Union, Iran, and Central Asia. Many of the goods we will produce from these priority list facilities will go to China, with whom we have the special international trade center on the border.

ERLAN DOSYMBEKOV Regardless of this initiative, any big infrastructure project improves our transportation means or helps resolve the issues of regional disparities. Kazakhstan is an extremely large country with a relatively small population, so any infrastructure development would also be a sign of densification. Additionally, we can also better develop our transport connections with neighboring countries. Even though at the moment the population is not that large, Kazakhstan has a history of being a leader in Central Asia for many different reasons, not least of all economically. It will continue to be that way for the foreseeable future. Uzbekistan is also opening up as we speak, a country with huge potential and a larger population. Nonetheless, Kazakhstan has the best chance of being a hub in Central Asia. Particularly within the margins of this initiative, it makes the most sense. Granted, there are things that we lack locally, such as retail. This requires a larger population and more interest from Western and other contenders. If it positions itself as a region, then it can drum up much more interest. In this particular context, Kazakhstan is well positioned to be the driving force to make the region an attractive place to do business for investors, which is a great opportunity to diversify away from natural resources. Over the long term, agriculture is something that could develop considerably.

What are the synergies between the government's Nurly Zhol initiative and BRI?

ANDREY KURILIN The BRI “buzz" acquired worldwide steam in 2017. Two years ago a banker in London might not have been able to tell you what it was. Likewise, when announced four years ago, Nurly Zhol was first widely considered as Kazakhstan's internal undertaking. But now people are beginning to connect the dots: Nurly Zhol is an effective and spot-on program that goes together well with BRI. Kazakhstan is one of the few countries that not only has supported BRI, but made its own budget available to ensure that the cross-border trade boost was successful. Today there is a much wider appreciation that the two complement each other.

AGRIS PREIMANIS When you say BRI is only catching fire now, we should rephrase that to say: only in Europe and the US. When it comes to Kazakhstan, it has been the topic of various events, such as the Astana Economic Forum, for the last three years. Among people based in Kazakhstan, among both investors and the government, there is an understanding that this is transformational. This is where one truly feels on the ground that BRI is real. BRI creates significant opportunities not just for the countries on the route, but also for companies—foreign engineering, architecture, and technology firms that understand the importance of BRI stand to gain the most. And I am glad to see in the capitals and embassies in Kazakhstan that there is increasing devotion of resources to understanding how to be a part of that.

ERLAN DOSYMBEKOV To that point, Kazakhstan has historically done an excellent job in terms of raising awareness. As a country, Kazakhstan has a number of options, and these initiatives have had great timing. However, as previously mentioned, perceptions are extremely important, particularly amongst investors. EY does an investment attractiveness survey where we talk to prospective investors as well as those already operating in the country and take stock of their opinions of Kazakhstan as an investment destination. On the one hand, those already in the country have a better handle on things and are more comfortable, and have no shortage of success stories. On the other, those planning to invest are much more careful. Nonetheless, Kazakhstan is one of the top two investment destinations in the CIS. The other is Russia, which is clearly a bigger market. On the one hand, we are talking about political, economic, and social stability, must-haves for any investor to be comfortable. On the other hand are natural resources, which are another huge factor. Yet people also talk about transportation, services, and agriculture. In each of these industries the government also has plans to develop and diversify. BRI, the Astana International Financial Center, and Nurly Zhol are all interdependent, simultaneous developments. While some people still see Kazakhstan as a vast country of natural resources, and seek to develop it in that way, we are talking about diversifying it. These initiatives mean more and more people acknowledge the need to diversify and, more importantly, implement actual steps to do so. In terms of perceptions, the steps we have been taking over the past five years to diversify and come up with initiatives confirm our commitment to improve perceptions and potential of Kazakhstan.

When did investors catch on to the significance of BRI, and does Kazakhstan have the investors that it wants as a result of the BRI?

ANDREY KURILIN Kazakhstan has long put in place the key regulatory foundations for foreign investors to feel comfortable, and for new investors to enter the market if they see an opportunity. The investment climate is welcoming—the world ratings place the country high up in terms of ease of doing business. When the Astana International Finance Center is launched and running at full capacity, and there are the logistical improvements across the Eurasian land bridge, then the setup will be complete. Now, awareness about Kazakhstan as a country is still being developed, while its low population density poses a challenge for consumer-oriented investors. Enter BRI—an important global theme with Kazakhstan at the heart of it. BRI could help bring the country to the global economic center stage. Size and potential-wise, Kazakhstan belongs at the top of the list of emerging markets that investors, entrepreneurs, and mobile professionals should be looking at.

AGRIS PREIMANIS If we look at these themes of trying to attract investors to the country, it goes well beyond simply looking at the investment climate. It is a question of how do we, as investors already in the country, make sure that we help people identify the most attractive investment themes. To make sure people inside and outside the country understand what these are, we are working with the government to not only clarify them, but also make them more attractive. This is where the Foreign Investors' Council fits in very well—where the major investors in the country are able to engage very closely with the government and be a constructive and critical partner in helping to improve more than the investment climate alone. This is where we, as the Foreign Investors' Council, see our role: not just to improve the investment climate but also help the government better understand what else needs to be done to make these themes more attractive. As for BRI, investors are certainly not the last to the party; they are looking around, and we need to make sure they see the opportunity and are not afraid to come to the country and invest.