…BUT CREDITS, ECONOMIC GROWTH COULD BE A MIXED BLESSING FOR PRIVATIZATION.

These improvements in the country’s fiscal and growth prospects should also improve Kazakhstan’s investment environment. This was apparent in Astana’s ability to float eurobonds during September and November, at a time when no other CIS economies were sufficiently creditworthy to tap the international capital markets. A better investment environment could also allow Astana to re-introduce its “blue-chip” privatization program, under which the government has pledged to sell state holdings in some of Kazakhstan’s leading companies, including the Mangistaumunaigaz and Aktobemunaigaz oil firms, the zinc producer Kazzinc and the Kazakhmys copper smelter (Russian agencies, Central Asia and Caucuses Business Report, October 25-31).

Recent indications, however, suggest that these improvements in Kazakhstan’s fiscal and growth prospects are reducing the government’s interest in privatization. On November 24 the Finance Ministry announced the formal cancellation of the partial sale of the government’s 25 percent stake in the lucrative Tengizchevroil joint venture, which was thought to be worth as much as US$1 billion (Reuters, November 24). The possible sale of part of the state’s Tengiz share had been quite controversial because it was regarded by much of Kazakhstan’s political and business elite as a key investment in the country’s future. Its cancellation therefore does not come as a surprise, and is unlikely to generate future recriminations.

By contrast, the Kazakhmys “loan for shares” deal could generate quite a bit of controversy down the road. In exchange for the US$100 million loan provided to the state budget by Kazakhmys last month, the government allowed Kazakhmys management to assume control over the state’s 35 percent equity stake in the company (Reuters, November 9). This agreement will allow the smelter’s current management, whose management contract expires in June 2000, to extend its control over the company for another three years. It also effectively removes Kazakhmys from Kazakhstan’s “blue chip” privatization program, which is intended to both provide revenues for the state budget and restructure some of Kazakhstan’s key companies.

In some ways, the Kazakhmys arrangement hearkens back to Russia’s ill-fated “loans for shares” privatization deals in 1995. In exchange for providing credits to the state budget, these deals allowed managers to acquire “temporary” control over many of Russia’s leading oil and metallurgical companies. When these credits were not repaid on time, temporary control over these assets became de facto managerial ownership. While the “loans” did provide income for the state budget, these revenues were generally only a fraction of the sums for which these companies could have been sold (at that time). in open privatization tenders. Instead, these deals were a way of transferring ownership of key companies to “trusted” insider/oligarchs, who then supported Boris Yeltsin’s 1996 re-election. These deals also ensured that some of Russia’s leading companies would remain under Russian control. But while the Kazakhmys arrangement could turn out to a similar sweetheart deal, there would seem to be at least one key difference in “loans for shares a la Astana”: Kazakhmys is controlled not by Kazakhs, but by Korea’s Samsung conglomerate, which already owns a 40-percent stake in the smelter.

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