bne:Invest in Astana - February 2015

Content: 1 Top Story 4 Interview 6 Feature 9 Sector11 Corporate statement13 Economics & finance16 Chart17 News in brief

February 2015 www.bne.eu

bne:Invest in Astana

Top story

Kazakhstan slashes budget, blaming “global crisis”

Kazakh President Nursultan Nazarbayev has ordered his government to adopt new "anti-crisis" measures including cutting budget spending by 10% in order to overcome the current economic difficulties. Nevertheless he claimed that "there is no economic crisis in

Kazakhstan" and blamed the "global" economic crisis for the country's economic troubles.

At a government meeting on February 11, Nazarbayev announced a 10% cut in central budget spending, or KZT700bn ($3.78bn),

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which should not affect government spending on social programmes. Nazarbayev also said that the Samruk-Kazyna sovereign wealth fund and national companies it runs would cut their spending by KZT337bn ($1.8bn), including capital spending by KZT240bn ($1.3bn).

One of the areas where the country could save money, Nazarbayev suggested, are the preparations for the Universiade in Almaty in 2017, which many regard as nothing more than a PR exercise, and the construction of the underground in Almaty. The former's price tag is, according to Nazarbayev, KZT100bn ($540mn), while the second stage of the Almaty underground requires funds worth KZT227bn ($1.23bn).

The low prices of oil and other minerals and a weak Russian ruble are the main factors of the global crisis that are hurting the Kazakh economy, Nazarbayev admitted. According to S&P - which downgraded Kazakhstan's credit rating to BBB on February 9 because of the fall in the oil price - oil accounts for up to 30% of Kazakhstan's GDP, over 50% of revenue and 60% of exports, while Russia is the country's largest supplier, accounting for a third of its imports.

At the same time, he fended off criticism that the country's membership of the Moscow-led Eurasian Economic Union was the source of the problem. "The weakening Russian ruble and growing pressure on goods on the Kazakh domestic market are damaging our local producers, but this has nothing to do with the Eurasian Economic Union," the Kazakh president said, adding "to believe this is the fault of the Eurasian Economic Union or the Customs Union is complete amateurship". Kazakhstan and Russia along with Belarus set up the Customs Union in 2009, which transformed into the Eurasian Economic Union in January 2015. Armenia joined the free-trade bloc in 2015 and Kyrgyzstan is expected to follow suit in May.

He noted that the Western sanctions against Russia imposed over its continuing support for rebels in Eastern Ukraine had resulted in Russia ending up in a "complicated situation". The Russian economic troubles are in turn hurting the Kazakh economy, which seems to have led Nazarbayev to harden his rhetoric on the economic war between Moscow and the West.

"These barbaric sanctions are not helping anyone as Europe is losing $25bn while Russia is losing $41bn," Nazarbayev said in unusually undiplomatic remarks carried by the nur.kz website. "I am sure and we are sure that Russia will overcome this situation with honour and will be developing and flourishing, as will we along with it."

The oil price and the ruble are putting significant pressure on the Kazakh currency to devalue but the governor of the National Bank of Kazakhstan, Kairat Kelimbetov, reassured the president at the meeting that he would not allow sharp fluctuations, ie a one-off devaluation, of the tenge.

"If there are changes in the foreign capital markets then we correspondingly will not allow a single-step shock devaluation but will work within a smooth and flexible change in the exchange rate," Kelimbetov said.

The National Bank has over $100bn in foreign currency and gold reserves which it can use to support smooth "correction" of the exchange rate, Kelimbetov noted. "I have no grounds not to trust the National Bank," Nazarbayev reassured. "I tell the Kazakh people again that we won't conceal anything," he said in reference to previous unannounced devaluations of the tenge.

The president also urged Samruk-Kazyna national companies to support the exchange rate of the national currency, even though a weak tenge benefits them as their

February 2015 Page 2


products become more competitive on foreign markets.

"Kazakhstan will try not to allow sharp fluctuations of the exchange rate of the tenge and take into account your interests," Nazarbayev said. "I understand what is the point." Major metal companies operating in Kazakhstan, namely copper producer KAZ Minerals and steel smelter ArcelorMittal Temirtau, have announced plans to either suspend unprofitable enterprises or cut wages for their personnel, citing financial difficulties.

Expectations of a devaluation of the tenge in February - the previous two single-step devaluations took place in February 2009 and February 2014 - has led to a high level of dollarisation of the Kazakh economy. According to National Bank figures, Kazakh citizens are stacking away their savings in foreign currency,

the share of which in total retail deposits increased to two-thirds at the end of 2014.

Kelimbetov said that the central bank and the government would in the near future announce anti-dollarisation measures by tightening controls over payments, foreign currency and foreign exchange players.

While pledging KZT250bn ($1.35bn) in emergency funds to support local machinery, small and medium-sized businesses, agriculture and exporters, as he did during the previous crisis, Nazarbayev called on Kazakh consumers to keep spending to support the economy - this time, however, on local products. "Let's appeal to all Kazakhs to be patriots in this complicated situation and buy our Kazakh goods. This will be help to our economy from our citizens," Nazarbayev said.



Emboldened by the successful raising of money on the global capital markets in October, the Kazakh government is planning to issue the country's first Islamic bonds, or sukuk, in 2015.

Kazakhstan issued 10-year and 30-year Eurobonds worth a total of $2.5bn last year. The oversubscribed bonds – the state’s first in 14 years – were snapped up by investors. "On the back of the Eurobonds issue an aspiration to issue sovereign or quasi-sovereign sukuks in 2015 is more than wise," Kazakh National Bank Governor Kairat Kelimbetov told an international conference on Islamic finance in Dubai in late October.

Issuing sukuk is just one part of Astana's grandiose plans to develop Islamic banking in the country and to turn its financial capital, Almaty, into a regional centre for Islamic finance, servicing Russia, Central Asia and other countries of the Commonwealth of Independent States, by 2020. But before that, Kazakhstan has to reconcile its legislation with Islamic finance principles.

In September Kelimbetov told a conference on Islamic finance in Almaty that to create the rapid development of Islamic banking in the country the central bank is studying other countries' experience in this sphere. "The National Bank is ready to offer any, including financial, support for the development of this industry," the governor said.

For this, he added, Kazakhstan would develop human capital by training specialists abroad and adopt legislation to develop Islamic finance infrastructure. The third aspect, Kelimbetov said, is to market Islamic finance and attract global players to the country. "Our aim is to attract financial institutions from the Middle East and Asia-Pacific," he said.

Kazakhstan has already started experimenting with Islamic finance and can already point to some expertise and better conditions compared to regional peers such as Russia, Azerbaijan and other Central Asian countries. "There are a number of Islamic finance organisations already operating in Kazakhstan. For example, Al Hilal Bank, a number of financial companies, such as Islamic leasing, insurance companies and one of the local banks is going to transform into an Islamic bank soon," says Aydyn Tairov, member of the management board of Al Hilal Bank Kazakhstan, a branch of the UAE-based Islamic finance institution which arrived in the country in 2009.

Even though it’s only been a short time, Kazakhstan's "experience is already generating interests from market players and regulators from Russia, Kyrgyzstan, Azerbaijan, Tajikistan and Turkmenistan," Tairov tells bne IntelliNews in an interview. "These countries have also attempted to introduce some elements of Islamic banking and some products, but only

Kazakhstan upbeat on developing Islamic banking but problems persist

Interview



Kazakhstan has developed legislation and some infrastructure."

Kazakhstan also has some capacity in place to develop Islamic banking and there are specialists at the National Bank and the Association for the Development of Islamic Finance, an industry body, Tairov says. Noting the differences between Islamic financial products offered in established centres like London, Dubai or Malaysia, Tairov explains that, "Islamic finance is about the principle but it can be implemented and adapted in different ways. Models of Islamic finance differ from country to country because they depend on specifics of legislation and economic development in a specific country.”

Although, Kazakhstan has bright prospects for the development of Islamic banking, it would be difficult for Almaty, as a regional centre of Islamic finance, to compete against London, Dubai or Kuala Lumpur, Tairov admits. "The government is now considering amendments to legislation which take into account the experience of the past few years. but it is too early to speak of Almaty as a developed regional centre of Islamic banking," he tells bne IntelliNews. Instead, "Almaty could be developed as a regional centre of Islamic finance for Russia and Central Asia."

One of the major issues that Kazakhstan is facing in this task is the implementation and interpretation of principles of Islamic finance. "Kazakhstan has specialists who have worked in Islamic finance organisations either abroad or at Kazakh branches and who have acquired practical knowledge of implementing and interpreting Islamic finance," Tairov says.

The five years since Al Hilal Bank started operations in the country could be considered as "a trial period when we have learnt by trial and error," Tairov said. At the same time, Al Hilal's problems were not linked to its Islamic banking nature as such, but "to the entire financial market.” Al Hilal entered Kazakhstan at the height of the financial crisis that the country was experiencing in 2008-2009. "We have analysed our past experience and have initiated legislative amendments for the greater adaptation and integration of Islamic financial products into the country's legislation," Tairov said. "With support from the government and the National Bank we are now working on improving the business environment for the development of Islamic banking."

"Almaty has realistic chances of becoming a regional centre of Islamic finance because the main thing is that there is support and political will of the National Bank and the government," Tairov concludes.



Falling oil prices and the currencies of its major trading partners are piling pressure on Kazakhstan's national currency, but against all the odds the tenge seems to be holding its hold. Despite reassurances by the Kazakh government about its ability to maintain financial stability and defend the currency within its trading corridor, this might not last long, as it has become customary for the government to devalue the tenge in February, by 19% in 2014 and 25% in 2009.

Oil, which together with other raw materials accounts for 17% of Kazakhstan’s annual GDP and four-fifths of its exports, has more than halved to around $50 per barrel since the summer of 2014. This drop in the oil price has devastated the currency of its neighbour Russia, which at one point in December had hit an all-time low of RUB80 to the dollar. Although the

ruble is now trading at around RUB65 to the dollar, with few signs of a rebound in the oil price, some like Goldman Sachs predict little relief for the Russian currency anytime soon. The euro is also trading at nine-year lows against the greenback on fears of a "Grexit" and the European Central Bank's quantitative easing plans. The EU and Russia are Kazakhstan's major trading partners, accounting for 30% and 13% respectively of the country's total foreign trade in 2013. Russia is Kazakhstan's largest supplier, accounting for a third of Kazakh imports in money terms last year.

Despite central bank chief Kairat Kelimbetov's public denials last year, the Kazakh government is now frantically discussing various measures to come up with a response to the falling oil price and weakening ruble, a source close to government circles tells bne IntelliNews on condition of anonymity. "As soon as a compromise on these measures will be reached, I hope, at the end of January they will officially announce measures which will make it possible to defuse all tension," the source said.

When the National Bank of Kazakhstan (NBK) devalued the national currency from about KZT155 to KZT185 to the dollar in February 2014, it cited uncertainty about the exchange rate of the Russian ruble, which had begun weakening at the end of 2013, and the need to maintain balance of payments amid growing imports as reasons for the devaluation. In early September Kelimbetov said that the tenge, "will be fine at the ruble's rate of 40-42" to the dollar. His former adviser, Olzhas Khudaybergenov, suggested in October that "the next critical level is RUB52 to the dollar".

Aware of the challenges the faltering Kazakh economy is facing because of the weak demand for the country's

Feature

Kazakhstan maintains tenge rate despite falling oil price, ruble – but for how long?



main exports, low oil prices and the uncertainty surrounding the ruble and the Russian economy, Astana claims it is prepared for all kinds of worst-case scenarios.

Chairing a special crisis meeting in Astana on January 15, Kazakh President Nursultan Nazarbayev noted that notwithstanding all the difficulties, the economy managed to achieve growth of 4.3% in 2014. However, he urged the government to monitor the situation in Russia and the EU to prevent "social tension in neighbouring countries" from spilling over onto Kazakhstan. "We should not allow this," Nazarbayev warned, ordering the government to have "clear plans for all possible cases" by the time of the next government meeting he will attend in late January or early February.

At the same January 15 government meeting, Kelimbetov boasted that the country had managed to build up a "significant" cushion for the economy in 2014, with its gold and foreign currency reserves at $102bn. Kelimbetov, who repeatedly denied rife speculation of a "second wave" of devaluation last year, then continued to recite his mantra that, "the National Bank intends to prevent sharp fluctuations of the exchange rate this year."

However, this invited ridicule from Kazakhstan watchers. "I am tempted to ask by which calendar they are talking, Chinese? Kurdish? I think Kurdish New Year is in March," Timothy Ash of Standard Bank commented at the time in a note to investors. "Anyway, maybe with this Astana Ukraine peace summit slated for the end of January, they will try and hold the line until then at least," he said in reference to Kazakhstan's proposal to host Ukraine peace talks in the frozen, unwelcoming Kazakh capital.

Indeed, the image-obsessed Astana, which styles Kazakhstan as an island of economic and political stability in the Commonwealth of Independent States, would not want to draw unnecessary

media attention to domestic problems during any international get-together, should the public again use the devaluation as a pretext for protests over its economic policies that have resulted in the falling living standards.

Tools at handAnalysts question the decision of the Kazakh central bank to devalue the tenge in February 2014 when the price of oil hovered around the $100 mark, but is resisting the call to do so now. "The NBK is afraid that letting the tenge float would create a vicious cycle between expectations of devaluation, panic and actual devaluation. That is one way to rationalise the actions of the NBK," Sabit Khakimzhanov, head of research at Almaty-based investment bank Halyk Finance, tells bne IntelliNews. "But one can only guess why the NBK devalued [the tenge] in February [2014] when the oil price was high and resists at such high costs to the economy now, when the oil price is so low."

With sufficient tools at hand to maintain the level or trajectory of the exchange rate, Khakimzhanov believes the central bank can keep the tenge strong for as long as it sees it fit. "But in order to achieve that, it would have to sacrifice reserves, the stability of interest rates, financial stability and competitiveness – usually in that order," he says.

Since the February 2014 devaluation, the NBK has operated in the area of a trade-off between forex reserves and interest rates. "Financial stability is not yet at stake. But at some point the central bank will have to choose between devaluation, letting banks fail or capital controls," Khakimzhanov suggests.

While ensuring the competitiveness of Kazakh goods on the domestic market is a valid concern, it has a lower priority relative to the stability of the national currency or the financial system, analysts argue. Despite the fact that the economic climate for Kazakh producers has



deteriorated as a result of the ruble's devaluation in the short term, growth in the physical volumes of imports is offset by a decrease in their dollar value, believes Kasymkhan Kapparov of the Almaty-based National Bureau for Economic Research. "As a result, pressure on the balance of trade will be felt only if the ruble stabilises and physical volumes of Russian imports start growing," he tells bne IntelliNews.

Consumer benefitsWhile the authorities debate whether or not to devalue the tenge, Kazakh consumers are taking advantage of the strong tenge by shopping north of the border in neighbouring Russian regions.

The weak ruble has prompted Kazakhs to go on a shopping spree in Russia, snapping up everything from foodstuffs to furniture to cars. According to the Kazakh State Revenue Committee, Kazakh citizens imported over 22,000 cars from Russia in the last two months of 2014 alone. And that figure is only preliminary; according to Zhambyl Suraganov, a spokesman for the committee, the deadline for declaring goods imported in December expires on January 20 and so importers still have time to raise that number further. VAT paid on cars imported from Russia during the last two months of 2014 stood at over KZT4bn ($22mn), which at the 12% rate

translates into KZT33bn ($183mn) or KZT1.5mn ($8,300) per car. The establishment of the Eurasian Economic Union on January 1 cancelled the need to pay VAT on cars imported from fellow member states Russia, Belarus and Armenia.

This buying frenzy has had other consequences. It has pushed up the buying of rubles in Kazakhstan: according to Tengrinews agency, in November Kazakhs bought the Russian currency to the tune of RUB16bn ($336mn) – or 45% more than in October. It has also invited the ire of local businessmen, who have urged the government to protect local businesses against the falling ruble. "The collapse of the ruble has put our local producers in unequal competitive conditions, especially in the border regions," Abylay Myrzakhmetov, chairman of the National Chamber of Entrepreneurs, complained on January 14. He cited the Association of Car Producers figures that showed domestic sales of cars falling by 60% on year in recent months. "The collapse [of the ruble] is reality and producers are now in an uncompetitive environment," he moaned.

The upshot is that should the oil price remain low and the ruble continue to weaken for a prolonged period, threatening public finances, exports and local jobs, the Kazakh government will have little choice but to devalue the tenge.



Kazakh car dealers hit by cheap Russian ruble

Car dealers in Kazakhstan are headed toward a crash as the plummet in the value of Russian ruble punctures a big hole in their business.

The president of the Association of Kazakh Auto Business, Andrey Lavrentyev, told a news conference in Almaty on January 23 that official dealerships sold 163,600 cars in 2014 – falls of 1.3% in volume and 2% in value. The sales of new cars in Kazakhstan were affected by the reduced purchasing power of Kazakh citizens following a 19% devaluation of the tenge in February 2014 and cheap imported cars from Russia thanks to the weak ruble, Lavrentyev explained. The ruble lost around 40% against the dollar in 2014. "All this had an impact on the market, which unfortunately has shown a negative growth for the first time since 2009," he said.

In Kazakhstan cars are priced in dollars, which makes purchases expensive in tenge terms when the national currency falls against the dollar (the central bank devalued the tenge by 25% also in

February 2009). In contrast, cars are priced in the ruble in Russia and the weak ruble means that cars sold there become cheap in dollar terms.

Lavrentyev noted that sales of four-wheel drives were hit most; they fell by over 10.5% in 2014. This is again explained by the depreciation of the Russian ruble when a potential Kazakh car owner preferred to buy an SUV in Russia instead of buying a smaller car in Kazakhstan.

In general, out of the total amount of new cars sold, 31,157 cars and 2,567 buses and lorries were assembled in Kazakhstan last year, correspondingly 1% down on year and 12% up. Dealerships sold 131,230 new imported cars in 2014 against 130,868 a year earlier. Russian-made cars dominated the official sales with 91,277 units, followed by those made in Uzbekistan and Japan – 12,512 and 10,707 cars respectively.

Lada was the best-selling brand with a market share of 27.66% last year, despite sales falling by 7.03% year on year to 45,234 units. KIA came second with 17,709 cars and Hyundai third with 14,104 cars.

Sales of new cars were valued at $3,939.6mn or KZT662.4bn in 2014 against $3,705.1mn or KZT574.2bn in 2013. Taking into account the February 2014 devaluation, the tenge value of car sales decreased by 4% in real terms. The value of locally-assembled cars was estimated at $770.4mn.

As a result, the average price of a new card sold in Kazakhstan stood at $21,309 in 2014 against $23,650 a year earlier, with the decrease being blamed on the devaluation of the tenge and the ruble.

According to the Kazakh Statistics Committee, the level of car

Sector



registration increased by 16.2% year on year to 699,578 units in 2014, of which 147,705 were cars with an age of under three years. For comparison, the number of registered cars aged under three stood at 46,012 in 2013. The number of registered cars aged over 10 years stood at 365,951 in 2014 against 342,646 in 2013.

These numbers, according to Lavrentyev, translated into the average age of cars driven in Kazakhstan being 13-19 years. The total number of cars registered the country exceeds 4mn units.

Weak ruble lures Kazakh motoristsNurlan Smagulov, a member of the association and president of the Astana Motors dealership, told the news conference that the falling Russian ruble had negatively affected the car business in Kazakhstan as Kazakh shoppers have taken advantage of the weak ruble to buy durables in neighbouring Russian regions. According to his information, Kazakh motorists imported over 40,000 cars from Russia in November and December alone, bypassing official Kazakh dealerships.

He said this situation had forced Kazakh dealerships to make significant discounts at cost. As one of the measures to equalise prices in

Russia and Kazakhstan, Smagulov suggested car dealers would demand Russian carmakers set the prices of their cars for Kazakh dealerships in rubles.

The falling oil price and weak ruble have increased expectations of the devaluation of the Kazakh tenge, which is currently trading within the upper end of KZT170-188 band against the dollar. Kairat Kelimbetov, head of the central bank, has repeatedly said that the National Bank of Kazakhstan would not allow sharp fluctuations of the tenge "this year".

Kelimbetov said the central bank would correspondingly react to changes in the foreign capital markets and maintain a "smooth and flexible" exchange rate. For this, the National Bank has over $100bn in foreign currency and gold reserves, he noted.

While the Kazakh authorities might actually maintain the exchange rate of the tenge against the dollar within a reasonable corridor, the Association of Kazakh Auto Business fears that risks associated with the volatility of the ruble would continue to affect Kazakh dealerships' sales of new cars: it forecasts that Kazakh consumers will buy only 110,000 cars from official dealerships in 2015.



Kazakhstan, Samruk-Kazyna to embark on cost cutting amid lower ratings

Kazakhstan's sovereign wealth fund Samruk-Kazyna will cut its spending in 2015 as will the government because of the low price of oil and unfavourable global market conditions. Meanwhile, rating agency Standard & Poor's has cut issuer credit ratings on Kazakhstan and Samruk-Kazyna.

At a government meeting on February 11, Kazakh President Nursultan Nazarbayev announced that the government would cut budget spending by 10% or KZT700bn ($3.8bn) and that Samruk-Kazyna and the national companies it runs would cut their spending by KZT337bn ($1.8bn), including capital spending by KZT240bn ($1.3bn).

The announcement coincided with S&P lowering Samruk-Kazyna's long-term foreign and local currency issuer credit ratings on to 'BBB' from 'BBB+'. At the same time, the agency affirmed the short-term foreign and local currency ratings at 'A-2'. The outlook is negative.

"The ratings on Samruk-Kazyna reflect our classification of it as a government-related entity (GRE) and our assessment that there is an

almost certain likelihood that the government of Kazakhstan would provide timely and extraordinary support to Samruk-Kazyna if needed," S&P said in a statement. "Accordingly, we equalise our ratings on Samruk-Kazyna with those on Kazakhstan."

The ratings agency said that there was an "almost certain likelihood" of extraordinary government support because the fund had an integral link with the government, which fully owns Samruk-Kazyna and offers strong direct and implicit support, including regular capital injections. "Despite several changes at the shareholder level, the government is closely involved in determining Samruk-Kazyna's strategy, which is set out in several key strategic documents," it said.

Samruk-Kazyna also plays a critical role "as the government's main vehicle for implementing its agenda for strategic industrialization and long-term economic sustainability and diversification," S&P said, adding that "Samruk-Kazyna controls essentially all strategic assets in Kazakhstan".

The negative outlook mirrors the outlook on the sovereign rating, the agency said. It cut its long-term foreign and local currency sovereign credit ratings of Kazakhstan from 'BBB+' to 'BBB' with a negative outlook. The outlook on the fund's rating "also reflects our opinion that we are unlikely to change our assessments of Samruk-Kazyna's role for the government as critical and its link with the government as integral".

Meanwhile, the board of directors has approved the sovereign wealth fund's development plan until 2019. "The development plan is based on forecasts of the socioeconomic development of Kazakhstan in 2015-2019 taking into account prices and tariffs of goods and services of a group of companies run by Samruk-Kazyna Fund," it said in a statement.

Corporate statement



Prospects for the country's socioeconomic development, however, look bleak: in addition to budget cuts announced by the president, the government earlier cut its forecast of economic growth in 2015 from 4.8% made last year to 1.5%, as the price of oil dipped from $80 per barrel to around $50. The country is also suffering from the falling demand for its main exports items such as metals and minerals because of the slowdown in its major markets –Russia and China. As a result, major Kazakh metals companies such as copper giant KAZ Minerals and steel smelter ArcelorMittal Temirtau announced either suspension of unprofitable enterprises or wage cuts for the personnel.

Lower economic growth prospects forced the government to mothball a number of planned investment projects until better times. For example, the president suggested the postponement of the $1.23bn expansion of the underground in Almaty.

However, as happened in the past, should the oil price pick up the government will use the unexpected windfall to expand budget spending, including on vanity projects such as Winter Universiade in Almaty in 2017 and Expo 2017 in Astana.

Is it a bird? Is it a plane? No, it’s Aue Taxi

Passengers arriving in Kazakhstan can choose several ways to reach their hotels or homes. In addition to the conventional ways – taking the bus or flagging down a taxi – they can now travel by air.

Astana Business Aviation has launched the first air taxi service under the brand of Aue Taxi ("air taxi" in Kazakh) in the country. The service, launched in the capital cities of Astana and Almaty, comes with a price tag of KZT300,000-800,000 ($1,640-4,320) an hour. The company, which operates 16 Eurocopter helicopters assembled in Kazakhstan, seven Russian-made helicopters MI-8 and three Robinson helicopters, offers services to a distance of up to 600km.

An aircraft of the company can transport up to 12 passengers. Charges depend on various factors, including distance, number of passengers and the aircraft model. The air taxi firm requires a half-day advance booking during the summer months and 24-hour notice during winter. The client is required to be in a good physical condition – though it doesn’t specify why. The new air taxi service will help

wealthy and corporate clients to travel fast, avoiding the terrible traffic jams that blight Astana and Almaty’s roads.

Recently, though, there has been some good news for passengers who travel more conventionally. Kazakh police have started applying legislation that outlaws client solicitation in public – something that should solve the problem of passengers being hassled by pushy private taxi drivers when they leave railway stations or airports. The new legislation came into force in 2015 and was hailed as a long-awaited measure that should improve the first impressions of travellers to the country.

People who think taxi drivers are too pushy can make a voice recording on their mobiles and it will be enough in order to press charges against them. On February 2 a woman complained to police urging action against pushy taxi drivers at the Astana railway station. As a result, four men were fined $54 for breaking the law. If they are charged again, they will face a $104 fine or end up in custody for up five days.



Kazakhstan denies plans to impose limits on imports of some Russian productsKazakh First Deputy Prime Minister Bakytzhan Sagintayev denied reported plans that the government is planning to impose restrictions on imports of certain Russian products.

According to Russian media reports (led by Kommersant), talks over restrictions were supposed to be held at the meeting of the Eurasian Intergovernmental Council held on February 6, the the body that brings together the four countries of the Russia-led Eurasian Economic Union (EEU), which also includes Kazakhstan, Belarus and Armenia.

According to a source at the Kazakh Agriculture Ministry quoted by Interfax, "consultations are currently underway on possibly imposing restrictions on imports of some types of food products whose supplies to the Kazakh market have grown dramatically since the Russian ruble exchange rate was adjusted."

Kommersant reported that Kazakhstan was seeking limits on imports of petroleum products, motor vehicles, cable and wire products, glass containers, meat, eggs, pasta, confectionery, flour and juice. The consultations on the issue were held for a week, Kommersant said, adding that no results were achieved.

The reports were disputed by Russian Agriculture Minister Nikolay Fedorov, who said any efforts to put the issue on the agenda would not work. "It isn't serious for somebody to put an issue like this on the agenda. We've set up a Customs Union, we're strengthening it actively, putting uniform rules in place, some of them stating that restrictions are inadmissible," he said. At the

same time, however, he confirmed that there are some parties that are for "initiating this theme".

Despite the remarks by Sagintayev, the issue of limiting imports on certain Russian products does indeed seem to be on the agenda - at least unofficially. According to Eurasian Economic Commission Trade Minister Andrei Slepnev, quoted by Interfax, the issue was not raised at the recent meeting but "was shifted to the bilateral level". At the same time, Eurasian Economic Commission Board Chairman Viktor Khristenko declared that: "Speaking of Kazakhstan's initiatives, I have not seen official initiatives of this kind. There are no formal initiatives to this effect. Such issues are being discussed in the business and expert communities."

Kazakhstan and Russia are members of the Eurasian Economic Union that creates a common market of goods and services. At the same time, the trade bloc allows for periodical measures to protect the competitiveness of an economy, which includes import limits.

Although trade data does not show a surge in imports from Russia, Kazakh domestic producers are apparently suffering from a recently popular practice among Kazakh citizens to buy cars, furniture and home appliances in neighbouring Russia due to the weakness of the Russian ruble (the Russian currency has lost 47% of its value against the Kazakh tenge, according to Kommersant). The practice was criticized by the government and local car dealers are demanding measures to stop the trade.

Meanwhile, the Russian agriculture watchdog Rosselkholnadzor returned to Ukraine 66 tonnes of tinned fish that was bound for Kazakhstan. The watchdog said that "the veterinary certificate does not contain information confirming the safety of the product."

Economics & finance



Significantly, these are yet more examples of souring relations between the two countries. Astana seems to have no tools enabling it to resist the growing pressure from Moscow. In November, Kazakhstan imposed a ban on imports of Russian alcohol, which was lifted after few days, immediately after a phone talk between the leaders of the two countries took place. At the same time, Russia has started unilaterally blocking transit of some EU-produced goods to Kazakhstan quoting sanitary requirements. The Kremlin clearly ignores the economic interests of its EEU partner demanding full political subordination of Astana. In this context, the fuss about the recent talks created by the Russian media outlets was aimed to prevent Astana from making any attempts to protect its market.

EBRD financing for Central Asia grows by 46% y/y in 2014The European Bank for Reconstruction and Development (EBRD) intensified its financing activity in Central Asia in 2014, with local annual bank investment (ABI) reaching ¤802m, up from ¤548mn in 2013, the bank said in a statement on January 15.

Kazakhstan, "where the Bank teamed up with the authorities to help re-energise the reform process", remained the region's largest recipient with local financing growing by 75.6% y/y to ¤576mn in 2014, the statement said.

Financing also increased in Mongolia (+82.8% y/y to ¤117mn), Tajikistan (+342.8% y/y to ¤62mn), and Turkmenistan (+46.3% y/y to ¤12mn), whereas it decreased in Kyrgyzstan (-73.8% y/y to ¤35mn). The EBRD curtailed its operations in Uzbekistan due to the unfavourable political and economic situation in the country in 2004.

The bank also increased funding in Armenia (+132.6% to $114mn), Azerbaijan (+46% to $238mn) and Georgia (+84.5% to $214mn).

The EBRD's total 2014 ABI slightly grew to ¤8.85bn, from ¤8.5bn in 2013. Investment in Russia plummeted to ¤608mn in 2014 from ¤1,816mn in 2013. As a result, Turkey replaced Russia as the bank's single largest recipient with local financing reaching ¤1,394mn, up from ¤920mn in 2013.

Forex trade jumps 270% to $48.8bn on Kazakh exchange in JanuaryTrade in foreign currency, including currency swaps, totalled KZT8,978.8bn ($48.82bn) on the Kazakhstan Stock Exchange (KASE) in January 2015, according to KASE figures.

This is a 270% increase in tenge terms and 210% increase in dollar terms on January 2013. The trade increased by 14.9% in tenge terms (13.7% in dollar terms) compared to December 2014. The large volume of currency trade is explained by high expectations of devaluation: the Kazakh currency is under great pressure from the falling oil price and weak Russian ruble which dropped against the dollar by over 50% since 2014.

Trade in dollars on the sport market decreased by 36% y/y to $4,685.2mn, while on the swap market jumped by 272.1% y/y to $44.1bn. Trade in the Russian ruble also jumped by 436.4% y/y to RUB1,954.8mn on the spot market. Despite jumping by 83.3% spot trade in the euro was a meagre ¤1.7mn. Spot transactions in the yuan started only in September and there are no comparable data: they totalled CNY1.4mn in January 2015.

KASE didn't publish figures for swap trade in the euro, ruble and yuan.

In January, the average weighted exchange rate of the tenge of the main (morning) trading sessions was KZT183.71/$1 and that of all sessions - KZT181.39.



The rate of the devaluation of the tenge to the dollar based on the average weighted bourse rate is estimated at annualised 14.95%, while the Kazakh currency devalued in nominal terms by 1.15% in January 2015.

The devaluation of the tenge against the dollar in nominal terms was 18.36% in 2014 and 2.2% in 2013.

Kazakh forex, gold reserves grow by 1.07% m/m to nearly $29bn in DecemberGross foreigh exchange and gold reserves grew by 1.07% m/m to $28.919bn in Kazakhstan in December. Net foreign reserves of Kazakhstan increased by 0.33% m/m to $27.967bn, according to data of the National Bank of Kazakhstan (NBK). Thus, December was the sixth consecutive month since July when reserves posted a growth (in May and June, decrease was observed). Reserves held in foreign currency increased by 0.26% m/m to $21.524bn while gold reserves went up by 3.49% m/m to $7.395bn.

Overall, in 2014, Kazakhstan's gross FX/gold reserves increased by 15.77%. Reserves in foreign currency went up by 12.32% while gold reserves expanded by 33.21%.

On the other hand, the National Oil Fund’s assets shrank by 4.17% m/m after posting a decrease of a megre 0.1% m/m in November. In total, reserves amounted to $73.562bn as of January 1. The NBK did not explain the reason for the shrinkage of the National Oil Fund’s reserves and it remains unknown whether it is a result of lower oil prices or the allocation of promised $3bn annually for the development of the economy in 2015-2017.

In total, the National Oil Fund’s assets expanded by 3.91% in 2014. Generally, it is expected that oil prices will remain low in 2015 and given the planned allocation of $9bn from the National Oil Fund’s reserves for development of economy in

2015-2017 we would expect the shrinkage of the fund's reserves this year.

It is worth noting that the Kazakh national currency is under pressure from the devaluation of the Russian ruble which leads to speculation about another devaluation in Kazakhstan. The scale of devaluation is predicted at 20-40%. The head of the NBK is expected to make a statement later this year and there is an expectation that he will address the issue.

KEGOC attracts $72mn in framework of "People's IPO"Kazakhstan Electricity Grid Operating Co. (KEGOC) attracted KZT13.13bn ($72mn) in the framework of the so-called People's IPO programme, Samruk Kazyna, the main shareholder in KEGOC has informed.

The shares were sold to individual purchasers ($52mn), market maker Halyk Bank ($1.1mn) and United Pension Fund ($18.9mn). According to Samruk Kazyna, requests for shares were accepted from November 5 to November 10. The number of requests from the individual clients exceeded the volume of offered shares by 27% amounting to KZT16.7bn ($91.6mn).

Shares of KEGOC was first traded on local stock exchange KASE on December 19. The price went up from KZT500 to KZT508.99 per 1 share.

The first company that started trading its shares in framework of People's IPO programme was KazTransOil in 2012. The main goal of the program was to increase citizens' participation in the country's financial market. In fact, the current economic slowdown and difficulties on the market diminished the attractiveness of the program for the citizens. According to original plan, in 2015 SamrukEnergo and railway operator Kazakhstan Temir Zholy are to start trading shares on KASE. However, we assume that the current difficult economic situation might delay realization of these plans.



Chart

Kazakhstan has carried out two sharp devaluations of the national currency over the past six years, both in in the month of February. With the low oil price and the weak currency of the country's main trading partner Russia, pressure is building on the central bank for another February devaluation. Kazakhs certainly seem to think so if retail deposits – a good indicator of the population's trust in the national currency – is anything to go by.

The bne:Chart shows that Kazakh depositors had more money saved in the tenge in 2008 before the crisis hit and the 2009 devaluation, after which

they rushed to convert their savings into foreign currency. The situation had stabilised the following year and Kazakhs' trust in the tenge stabilised somewhat until 2014, when the 2009 situation repeated itself. At the end of 2014, over two-thirds of Kazakh retail deposits were in foreign currency.

Although no official data for January 2015 have yet been published, few believe the deposit situation has reversed; in fact some experts estimate the share of retail deposits in foreign currency has grown to around 90% at the moment, implying that Kazakhs believe another devaluation is on the cards.

Bank deposits show Kazakhs fear another devaluation



Contributions to Kazakhstan's Pension Fund grow by 12% in 2014

Contributions to Kazakhstan's Pension Fund amounted to KZT632bn ($3.4bn) last year, which is 12% more than in 2013. Single employer average contribution was KZT104,000, or KZT10,000 more than a year earlier. The amount of pension savings amounted to KZT4.5tn as of end-2014. The yield reached 6.3%.

Pension contributions grew at the fastest pace in the Mangistau Region and Astana City (growth of 24% and 23% respectively). The largest amount of pension payments in the last year fell in Almaty - more than 18.6% of all payment in the country (KZT117.8bn).

Kazakhstan nationalized pension funds in 2013 and created a single pension fund in order to stimulate economic development. Under a concept of development of financial sector of Kazakhstan until 2030, part of the pension fund's assets is invested in the country's economy through the National Bank of Kazakhstan's financial instruments.

EBRD provides $70mn loan to Kazakhstan for modernization of infrastructure

European Bank for Reconstruction and Development (EBRD) is providing $70mn in total for modernization municipal infrastructure facilities in Kyzylorda. The funds will be used to improve water and wastewater, heating, electricity and street lightening, the press release says.

The EBRD will provide financing to three municipal companies in the city of Kyzylorda: $10mn will go to Kyzyorda Su Zhuyesi, a municipal water management company, $24mn will go to Kyzylordateploelektrocentr, a municipal district heating and electricity production company and $24.7mn will be provided to Kyzylorda Regional Electricity Company, a power utility company responsible for distributing electricity to the entire Kyzylorda region.

Apart from that, the EBRD is considering lending up to $12.5mn for modern, energy efficient street lightening in the city. The pre-financing agreement was already signed and the city authorities started preparing the project.

Modernization of Kyzylorda facilities is being also supported by the Kazakh government that offered $21.7mn grant for co-finance water and district heating modernization projects. Kazakhstan and the EBRD signed Enhanced Partnership Framework Agreement in May. The EBRD has invested up to $6.7bn in Kazakh economy so far.

Ethnic migration to Kazakhstan reaches 1mn since independence

The number of ethnic Kazakhs living abroad who have migrated to Kazakhstan in the past 24 years amounted to 952,800 people, the Ministry of Health and Social Development has informed on its website. The number of families reached 250,000. This means that ethnic Kazakh migrants account for approximately 5.5% of the country’s population.

News in brief



According to the data presented by the ministry, most of the ethnic migrants came from Uzbekistan (61.5%) which was followed by China (14.3%), Mongolia (6.8%), Turkmenistan (4.6%) and Russia (3%). Around 5% of all ethnic Kazakh migrants came from other countries.

Ethnic Kazakh migrants mainly settled in South Kazakhstan Region (21.2%), Almaty Region (16.3%), Mangistau Region (13%) and Zhambyl Region (9.4%).

People of working age accounted for 55.6% of the ethnic migrants, children under 18 years of age for 40% and pensioners for 4.5%. Around 8.7% of working-age ethnic Kazakh migrants have higher education, 20.5% - secondary specialiased education and 61% - secondary education.

Kazakhstan launched a programme for the resettlement of ethnic Kazakh people living abroad in order to increase the share of ethnic Kazakhs in the country when it gained independence. At that time Kazakhs were minority in their country and the Kazakh language was spoken by a fraction of the country’s population. An influx of ethnic Kazakhs helps the government revive and develop national culture which was suppressed in Soviet times. At the same time, periodically ethnic Kazakh migrants are experiencing problems with adaptation and hostile attitudes from the local population.

Growth in Kazakh property prices in 2014 backed by currency devaluation

Prices of housing in newly constructed buildings increased by 11.5% y/y to KZT215, 531 ($1,177) per square metre in December, data from the State Statistics Committee shows. In m/m terms, growth amounted to a mere 0.1%. At the same time, average annual growth in prices in newly constructed buildings stood at 15.2%.

The data indicate that an increase in the price of property was mainly driven by the devaluation of national currency in February 2014 by 19%. Then, prices surged by 11.4% m/m and in the following months of 2014 m/m growth did not exceed 0.8% and mainly stood at 0.2-0.3%. This signals stagnation on the market. In 2013, prices increased by 9.6% and in 2012 – by 12.1%. Kazakhstan experienced decrease in real estate prices in 2008 (by 8.7%) and in 2009 (by 6.9%).

Prices on the secondary market moved up by 0.3% m/m and stood at KZT173,298 in December. During 2014, a growth of 17.6% was reported, while in annual average terms growth was strong at 19.9%. Rent went up by 0.7% m/m and by 13% y/y to KZT1, 238 per square metre.

Italy's Saipem to build $1.8bn of new pipelines at Kashagan oilfield

Italy's Saipem won a $1.8bn pipeline contract for the Kashagan oilfield through its ERSAI Caspian Contractor unit, which is co-owned by Kazakh company ERC Holdings. The company will build two 950km pipelines to connect an onshore plant in Kazakhstan with the artificial island on the Caspian Sea. Some work will be outsourced to contractors, Saipem said. Construction work is expected to be completed by the end of 2016.

Saipem built the original pipelines at Kashagan that started leaking in September 2013, just weeks after the first oil had finally started flowing. The reason for the leak was a high concentration of corrosive hydrogen sulfide. The new carbon-steel pipelines will be internally clad with a corrosion-resistant alloy, the company has said.

The massive Kashagan oil project has been plagued by delays and cost overruns. The first oil was supposed



to be originally produced in 2005 and the total cost now exceeds over $50bn. The consortium developing Kashagan comprises ENI, state-owned KazMunaiGas, ExxonMobil, Total, and Shell, with each holding a 16.81% stake. In addition, Japan's Inpex has a 7.56% stake and China National Petroleum Corp. holds 8.33%.

Kazakh fugitive banker's extradition appeal postponedA court of appeal in France has postponed hearing an appeal by Mukhtar Ablyazov, the former head of Kazakh bank BTA, against his extradition to Russia until February 18, according to Russia's RIA Novosti news agency. The hearings were expected to take place on February 4.

In January 2014, a court in France's Aix-en-Provence ruled that he could be extradited to Russia but in April the criminal chamber of Paris’s Cour de Cassation, the court of final appeal for civil and criminal cases in France, blocked Ablyazov’s extradition because of procedural issues.

Ablyazov, a billionaire banker and a vocal critic of President Nursultan Nazarbayev, fled Kazakhstan after the government seized the bank he headed in 2009. He is wanted in Kazakhstan, Russia and Ukraine for allegedly embezzling $6bn of the bank's assets - allegations he denies. He claims that the Samruk-Kazyna sovereign wealth fund's acquisition of a 75.1% stake in BTA was "state raiding".

Should the cassation court uphold Ablyazov's extradition, the decision will require the French prime minister's approval, which could also be appealed to the Council of State.

On February 3 Ablyazov filed an appeal against a Moscow court's seizure of his assets in Russia. The Moscow City Court will hear the appeal against Moscow's Tverskoy District Court on February 9.

Kazakh mobile operator urges prosecutors to open probe against ex-staff

Kazakhstan's largest mobile operator Kcell, a subsidiary of Nordic telecom giant TeliaSonera, has asked the Prosecutor-General's Office to launch a criminal investigation against its former managers following an internal probe into some of the contracts signed during their tenure.

In late September the mobile operator's board of directors initiated an internal probe into alleged wrongdoings during the signing of supply contracts by its top managers. The announcement of the probe led to the resignation of the company's Chief Financial Officer Baurzhan Ayazbayev and Chief Executive Officer Ali Agan.

Kcell said in a statement on February 4 that the internal "investigation has concluded that Kcell has formal grounds to request the Prosecutor-General's Office of the Republic of Kazakhstan launch a criminal investigation against actions of a number of former staff of the company who purportedly violated internal procedures and policies of the company".

"The board of directors will ensure the submission of a claim to the relevant law-enforcement agencies," the statement adds.

The mobile operator said that the individuals suspected of bearing responsibility for the wrongdoings did not work for the company any more.

"There are no grounds to assume that any material relating to the investigation could have a significant impact on the company's financial results," the statement concludes.

Kcell is TeliaSonera's largest subsidiary in Central Asia.Following a scandal over TeliaSonera's



business dealings in Uzbekistan, in April the Nordic telecom giant said it could not rule out that its subsidiaries in other Eurasian markets had broken the law. In 2012 Swedish prosecutors opened a probe into bribery allegations linked to the firm's acquisition of a 3G licence in Uzbekistan.

"The board can unfortunately say that several transactions and practices have not been handled in accordance with good business practice," chairwoman Marie Ehrling said in remarks carried by Reuters. "It cannot be excluded that certain actions have been criminal."

The probe focused on Kazakhstan, Nepal, Azerbaijan, Tajikistan and Georgia, Reuters said.

Kazakh oil output shrinks by 1.2% y/y to 80.8mn tonnes in 2014

Oil and gas condensate production shrank by 1.2% y/y to 80.8mn tonnes in Kazakhstan in 2014, the State Statistics Committee has informed. This means that the government missed the original target of 83mn tonnes which was during the year revised downwards to 81.8mn tonnes. Moreover, 2014 was the second year in the past decade when Kazakhstan posted a drop in annual oil production. In 2012, oil output amounted to 79.2mn tonnes against 80mn tonnes a year earlier.

The main reason for the weaker output in 2014 was the failed start of the giant offshore Kashagan oil field in the Caspian Sea in September 2013. According to original forecasts, the field was expected to provide around 8mn tonnes of oil in 2014. As launch of production at Kashagan is delayed due to the need to replace pipelines linking the field with onshore facilities we would expect this year’s production at the level of 2014 with even a small shrinkage possible. Small fields

in Kazakhstan are in the process of depletion and growth in production is being generated mainly by big projects: Tengiz, Karachaganak and Kashagan. Problems with the last one has pushed the government to accept plans for the further development of the Tengiz field but the project is planned to be finished only in 2017-18. Meanwhile, maintenance works at Tengiz had an adverse impact on this year’s production and prevented the government form achieving the production target . The resumption of oil production at Kashagan is planned for 2016. Thus, the next two years will be a period of stagnation of oil output.

According to the more specific data from the statistics committee, the production of crude oil amounted to 76.225mn tonnes, down from 77.1mn tonnes in 2013, while the output of gas condensate amounted to 4.6mn tonnes slightly down from 4.7mn tonnes a year earlier. Natural gas output grew by 1.6% y/y to 42.922bn cubic metres (bcm), of which 21.272 bcm is natural gas and 21.561 bcm is associated petroleum gas.

Kazakhstan cuts grain, legumes output by 5.9% y/y to 17.2mn tonnes in 2014

Kazakhstan harvested 17.16mn tonnes of grain and legumes in 2014, up 5.9% y/y, according to the Kazakh State Statistics Committee.

Wheat accounted for 75.7% of the total output of grain and legumes.

The total output of oilseed crops increased by 3.3%, potatoes by 3%, field vegetables by 3% and melons, watermelons and gourds by 12.6%. The statistics committee didn't provide output figures in absolute terms.


Documents

bne:Invest in Astana - February 2015