Is Kazakhstan taking foreign investors for a ride?
The world’s woe is Kazakhstan’s wealth. In the past few weeks, the spot price of an oil barrel on global markets has been above $100 for the first time since September 2008, according to data from the United States Energy Information Administration. For most products, a higher price reduces unit sales, so that revenues do not climb as rapidly as the price. But oil is so vital to production that unit sales decline only a little – until, at least, firms can find a cheaper way to produce. Meanwhile, Kazakhstan’s revenues from exports will capture much of the 28% increase in oil prices that has occurred since early 2010.
The benefits to Kazakhstan don’t stop there. When oilmen respend the export revenues in Kazakhstan, their demand for services will create jobs in one of the country’s fastest-growing sectors. In that sense, the share of oil and gas production in the nation’s economy (roughly 30%) underestimates the industry’s importance here. The back of my envelope says that a 10% sustained increase in the global spot price of oil may relate to a 4% or 5% increase in the size of Kazakhstan’s economy.
As in 2008, $100+ prices may tempt the government of Kazakhstan to cash in assets that have presumably peaked in value. The government has pressed the foreign-dominated consortium at Kashagan to hurry up and produce; and it has moved slowly toward a degree of de facto nationalization by insisting that foreign energy enterprises here turn over more ownership to the state energy firm, KazMunaiGaz. KMG has a pre-emptive right to buy oil assets, and it usually participates in the joint ventures that have replaced production-sharing agreements in the oil and gas industry.
All this should surprise no one. Around the world, developing countries confiscated natural resources from foreign owners in the 1970s, when the prices of those resources were unusually high.
Rebuilding reputation
Still, nationalization may not be sensible. Governments that seize lucrative industries will stop attracting so much foreign-owned capital. They may try to attract it again by promising to forgo taxes, but investors will regard this as cheap talk.
To convince investors that they’re for real, governments may have to show that they’ll penalize themselves in the event of another tax renege. This may help explain why Kazakhstan builds pipelines and Caspian port facilities. KMG is a major shareholder of the pipeline that delivers oil from the Tenghiz field to a Russian port on the Black Sea, Novorossiysk, as well as of the pipeline that runs from a Caspian port, Atyrau, to the Xinjiang region of China, according to the United States Energy Information Administration. If this construction fails to bring in Western investors, then the government may be wasting some of its money, since home industries are not likely to fully use the oil and gas infrastructure. (The main energy fuel for Kazakhstani production is coal).
Government spending on infrastructure comes at the expense of that on health and education. Of course, this expense is essential to the competitive strategy; if the strategy would cost the government nothing, then it is just more cheap talk.
Not only is Kazakhstan’s competitive spending on infrastructure expensive; it probably won’t work. The government’s “forced industrialization-innovation program” might be interpreted in the West -- understandably -- as a new tax on foreign investment. The sprawling legislation for the program, to cost 6.5 trillion tenge (over $43 billion), says it will draw upon funds from “private domestic and foreign investors” as well as other sources. This cryptic statement may undermine any credibility that the government has obtained from building infrastructure for particular foreign investors. -– Leon Taylor, tayloralmaty@gmail.com
References
Government of Kazakhstan. 2010-2014 National Program of forced industrial and innovative development of the Republic of Kazakhstan and cancellation of certain decrees of the President of the Republic of Kazakhstan. Presidential decree. 2010. www.invest.gov.kz
United States Department of Energy, Energy Information Administration. Country analysis briefs: Kazakhstan. www.eia.gov
United States Department of State. Background notes: Kazakhstan. www.state.gov
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