Kazakhstan: Flurry of moves by Central Bank signals strain of falling oil prices

In a number of moves all announced this week, the Central Bank of Kazakhstan looks to be feeling the strain of falling crude prices. The first arrangement sees the Kazakh central bank taking a 10% stake in KazMunaiGas, the state oil company using funds from the Kazakh sovereign wealth fund. This can only mean that the company is in danger of not meeting its credit obligations for its near-term accounting periods. Renaissance Capital analysts in Moscow commented that it was “very unconventional” for a central bank to buy equity in an energy company, noting that most other countries would prohibit their Central Bank from taking such action. Sberbank estimates of dividend income from KMG subsidiaries will fall substantially this year.

Additionally, the EBRD and a group of international commercial banks have provided a financing package of $300 million to restructure and modernize a Kazakh rail operator Kazakhstan Temir Zholy (KTZ). The proceeds of this loan will be used refinance KTZ’s Eurobonds, and will require reforms set forth by the EBRD to KTZ’s tariff system and regulatory frameworks.

Amidst the dealmaking, Kazakhstan’s Central Bank governor Kairat Kelimbetov released a statement praising the slowing of inflation to 3.9% from 7.4% at the end of 2014, praising the actions of the Central Bank board of governors in slowing inflation to ensure price stability and exchange rate stability against the weakening of national and regional currencies like the tenge and ruble, as well as declining oil price benchmarks. Private bankers, however, in Almaty and Astana have warned against the acceptance of any additional external debt ( i.e. denominated in dollars) because of extreme exchange rate volatility and the inevitability of another devaluation of the currency in the near future.

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News Briefs:

  • Yesterday, Russia vetoed a UNSC resolution that would set up an international criminal court to prosecute those responsible for shooting down MH17, the Malaysian airlines flight that was shot down over Ukraine over a year ago. The Foreign Ministers of Australia, Netherlands, and Ukraine attended a meeting to push the issue to the UNSC representatives. US Ambassador Samantha Power said that “Russia has callously disregarded the public outcry in the grieving nations,” but Russian officials have so far offered no explanation of their refusal.
  • French Foreign Minister Laurent Fabius visited Tehran on Wednesday, only the latest in a series of visits by top-ranking EU officials looking to promote closer economic and political ties with Iran after the nuclear accord was agreed to earlier this month. The visit coincides closely with efforts from French industrial giants like aircraft OEM Airbus and auto OEM’s like Peugeot Citroen and Renault have been busy renewing ties with local producers that were cut off thanks to sanctions in 2011. Fabius invited Iranian President Hassan Rouhani to visit in Paris for a meeting with French president Francois Hollande in November.
  • Global Risk Insights has released an in-depth analysis of the Power of Siberia pipeline which will be completed in 2019 and connect Russian energy markets to China. The project’s contract was a total $400 billion, 30-year long arrangement providing for 38 billion cubic meters of natural gas to the Chinese market per annum. Beijing additionally secured a favorable price of $350 per cubic meter due to low demand in international energy markets and its strong position at the bargaining table. Additionally, Russia is also pushing to export its LNG product to Japan via its port in Vladivostok once the Siberia pipeline is completed. Read the entire article here.
  • The rapid decline in the price of gold yesterday is further bad news for Russia’s Central Bank as the fifth-largest holder of gold reserves in the world right now, after the US, Germany, Italy, and France. This came as a major surprise to most analysts, who generally view the leadership of the CBR as highly competent, and have praised Elvira Naibuillina’s leadership throughout its economic crisis. Bloomberg blames this issue as political – the fear of Western sanctions after the Crimean invasion last year made the CBR dump US treasuries and seek a safe haven in gold instead, as the next best asset for ensuring short-term liquidity. Russia stopped dumping US securities earlier this year, but it has not yet slowed down gold purchases.
  • Kyrgyzstan has released a statement detailing a new gold mining venture with China in the Taldy-Bulak Levoberezhny deposit, which will come close to surpassing Kumtor as one of the country’s (and the world’s) largest gold reserves. The reserve is expected to hold some 65 tons of gold. The venture is planned to be run by Altynken, a joint venture between Kyrgyz state gold company Kyrgyzaltyn and Superb Pacific Limited Company, which is itself a wholly owned subsidiary of Zijin Mining Group, a major Chinese mining company. The mine will be profitable as long as gold does not fall below $1,080 long term, which is ironic considering that gold’s spot price in global markets fell to $1,098 per ounce in trading earlier this week.
  • The Diplomat has an article detailing Japan’s strategy for Central Asia, on the heels of an announcement by Prime Minister Shinzo Abe that he would visit all five Central Asian states in October. This arrangement is seen as balancing act against China’s strong presence in the region, and might be cause for support from Russia, who is trying to maintain its grip upon its former Soviet republics and their energy reserves through the EEU. The nuclear disaster at Fukushima in 2011 has no doubt fueled Japan’s shift towards global energy markets to fill its demand for energy. Read the entire article here.
  • The Asian Development Bank announced that it has adjusted its strategy for Tajikistan, saying the bank is allocating resources towards improving investment climate, increasing human capital and educational training as top priorities and said it will be reducing funding for fields of transportation and energy infrastructure from 80% to 55% of total assistance. The ADB is one of the top donors and lenders to the country according to the Tajik Ministry of Finance.
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