Serious Western Investment Finally Flowing Into Central Asian Republics

by Gordon Feller

With the final agreements in place for the multibillion-dollar, multinational Caspian Pipeline Consortium, things seem to be moving faster in the Central Asian republics—at least when it comes to foreign investment. The European Bank for Reconstruction and Development (EBRD), based in London with offices in each of the Central Asian republics, is especially busy these days, as indicated by a look at some of the news reports that follow:

EBRD Will Be Financing the New AIG Silk Road Fund Focused on Central Asia

As an investment fund managed by American International Group Inc., AIG Silk Road Fund will be a private equity investment fund targeting Kazakhstan, Uzbekistan, Azerbaijan, Kyrgyzstan, Tajikistan and Turkmenistan (“Central Asia”). The EBRD will finance an investment in shares of the fund up to US$ 15 million (ECU 12 million). The fund target size is US$ 100 million (ECU 80 million). The project will provide equity finance to small and medium-sized private sector enterprises and joint ventures operating in the countries of Central Asia. The project is being designed in such a fashion that it will contribute to the development of the private sector and economic growth of Central Asian countries by mobilizing private-sector funds and encouraging Western strategic investors to invest in viable projects and bring technical expertise to the region.

EBRD Financing for Kazakhstan Port

The EBRD is lending the equivalent of $54 million to the Republic of Kazakhstan to rehabilitate the port of Aktau, which is subject to flooding by the Caspian Sea. Located in the northeastern corner of the Caspian, Aktau lies close to Kazakhstan’s major on-shore and off-shore oil reserves, as well as near the country’s major grain-producing regions. The port is likely to become a major logistics center for the country’s oil and gas industry in the future.

A major objective of the loan, which is the EBRD’s first long-term, 15-year loan to Kazakhstan, is to finance construction of a 400-meter quay wall, which will be two meters higher than the existing one. “EBRD financing will keep the port operational by raising the level of cargo berths to protect them from the sea,” said EBRD Vice President Ron Freeman. “The port is an extremely important asset for the country, especially for western Kazakhstan, which is rich in agricultural production and in oil and gas. It is Kazakhstan’s only port and provides a low-cost distribution outlet for grain and general cargo.”

Modern equipment for bulk cargo-handling as well as other mobile equipment will be installed to allow the existing cargo berths to handle increased volumes of cargo. Two-way trade between Kazakhstan and its neighbors will also benefit as a result of improved cargo-handling at the port.

Finally, the port is being redesigned to enable the private sector to develop specialized cargo handling and storage facilities to further increase the port’s capacity. The EBRD loan, which has a three-and-a-half-year grace period, is in two tranches, one for $44 million (ECU 34.6 million) and another for $10 million (ECU 7.9 million). A $1.9 million technical cooperation component will be used to develop management and privatization strategies, and to implement financial controls and monitoring.

Uzbekistan Gets Loan for New Bank

The EBRD is making a $5 million equity investment in a new South Korean-backed Uzbek bank. The London-based EBRD said the UzDaewoo Bank (UZB) will provide commercial and investment banking services for local private-sector companies. The EBRD statement said the investment aims to widen the competitive base of Uzbekistan’s banking sector.

EBRD Vice President Freeman said the bank is expected to play a key role in mobilizing additional funds for the region. He said it will facilitate transfer of skills and know-how, such as the development of sound banking practices, credit and risk management and new product development, now in big demand in Uzbekistan.

Joon Huh, chairman of Daewoo Securities Company Limited, main sponsor of UZB, said: “As we strive to become a customer-focused bank, our goal is to gain a strong position in the market by providing high-quality banking products at affordable prices and with maximum efficiency.”

UZB’s initial capital will be US$ 20 million, of which the EBRD’s equity participation is 25 percent. The other sponsors are Daewoo Securities Company Limited (55 percent), KorAm Bank (10 percent), the National Bank for Foreign Economic Activity of the Republic of Uzbekistan (5 percent) and Turon Bank (5 percent). UZB will focus on foreign trade operations, credit activities and cross-border trade-related payment services.

The EBRD has funded four other projects in the financial sector in Uzbekistan worth a total of US$ 116.6 million (ECU 91.8 million), including investment in ABN AMRO NB Uzbekistan.

Currently there are 32 commercial banks in Uzbekistan, 16 of which have foreign exchange licenses and participate in the Currency Exchange. A number of foreign banks have representative offices in Uzbekistan as well.

Turkmenistan Suspends Gas Supplies to Armenia

Turkmenistan has suspended natural gas supplies to Armenia because of the latter’s $15 million debt for 1996, Noyan Tapan and AFP reported on Dec. 19. Armenian Energy Minister Gagik Martirosyan said that Armenia’s energy sector now has debts of $75 million as a result of nonpayments by enterprises, government agencies, and individuals. He added that Armenian officials are currently negotiating with the Turkmen side and suggested that gas supplies may soon resume.

Turkmenistan’s Agricultural Crisis May Spur Privatization

President Saparmurad Niazov told a State Council session yesterday that the 1996 harvest was only 480,000 tons of grain and 450,000 tons of raw cotton, instead of the planned 1 million tons and 1.4 million tons, respectively. Niazov called for “immediate solutions” by handing croplands over to the producers. In a major policy address in September, Niazov urged leasing former kolkhoz and sovkhoz croplands to private producers for terms up to 10 years.

IMF Suspends Loan To Uzbekistan

The International Monetary Fund on Dec. 19 suspended a $185 million standby loan to Uzbekistan, Reuters reported. Further disbursements have been postponed because Uzbekistan failed to meet the fund’s inflation targets, according to Mark O’Brien, the IMF’s resident representative in Tashkent. Uzbekistan’s target for 1996 was 25 percent, but inflation is estimated to have exceeded 40 percent. Another factor was the introduction of draconian foreign exchange controls in October. Further payments have been conditioned on a “very tight financial policy...combined with a full liberalization of access to foreign exchange.”

Kazakhstani Pipeline For Rent, Ministry Conflict an Obstacle

Kazakstan is preparing to rent out its network of transit pipelines for gas from Russia, Uzbekistan and Turkmenistan.

The pipelines are offered as 15-year concessions, providing the investor with management control and the right to levy transit fees, in return for investments and upkeep of the pipelines. Enron of the United States, Gaz de France, Bridas of Argentina and Nacosta of Switzerland purchased the bidding documents; Saipem, a subsidiary of Agip of Italy, may also join in.

Many of the potential bidders produce or hope to produce gas in the region and would like to ensure access to export pipelines. But they will also face the challenge of managing part of a large gas network that used to be unified under Moscow’s control but now is divided among 15 republics. They will have to obtain transit fees from Turkmenistan and Uzbekistan and persuade the Russian gas monopoly Gazprom to increase access to its pipelines.

“The sector needs investments, it needs smart management,” said Askar Alshinbayev, deputy chairman of KazKommertsBank, a powerful Kazakhstani commercial bank which organized the tender for the government. While the investors can provide cash for constructing badly needed compressor stations, Alshinbayev suggested that they can also offer some badly needed leverage with Gazprom, which has cut access to its pipelines and blocked exports to Western Europe altogether to keep out competition.

“Theoretically, it’s interestingtransporting your own gas,” one gas company official said. “But this whole tender puzzles me. They have to clarify what’s in the bid.”

The official complained of insufficient information on the pipelines, a short concession period, and an ongoing tender for management of Kazakgaz, one of the two gas companies, that would conflict with the new tender.

Political analysts in Almaty say that the oil and gas minister, with cautious support of President Nursultan Nazarbayev, has been battling hard to isolate his sector from a fierce privatization drive by Prime Minister Akezhan Kazhegeldin. Numerous officials have lost their jobs in recent weeks, a sign that this battle is only heating up.

“The line of command in the government is not clear. You have two groups fighting each other,” the official said. “If you want to do anything here you need this battle to settle first.”

The pipelines, now controlled by two state gas companies, export Russian gas to Europe, connect Uzbek gas fields to Russia, and export both Turkmen and Uzbek gas to Russia.

Kyrgyz President Sees Economic Growth

Askar Akayev told government officials on Dec. 28 that while living standards had not improved during 1996, “new dynamic sectors of the national economy” would correct that trend in 1997. Akayev was alluding to the Kumtor gold mining operation which is scheduled to begin production in 1997. Akayev said the government will take measures to keep the national currency, the som, stable at the present rate of 15-17 somes/$1, cut annual inflation to 15 percent, and raise the minimum wage and pensions by 30 percent.