Kazakhstan: Central resources

Kazakhstan may not be the most obvious private equity hotspot. But with Russia across one border and China another, plus plenty of growth potential of its own, it's building a case for investment. 


First, it has close ties to China, which imports many of the country’s natural resources – a relationship that has been bolstered by Chinese investment in rail, road and pipeline infrastructure. And as Russia becomes an increasingly powerful consumer market, Kazakh companies are taking advantage of a free trade agreement to sell consumer items, staple goods and machinery across the border.  


“There's potential for a company like us to penetrate the Russian consumer market with products made in Kazakhstan,” says Davron Rustamkulov, CIO of Kazakh private equity group Verny Capital. “And despite a recent downturn in Chinese consumption of base metals, oil is very stable and continues to flow east. Around 40 percent of oil produced in Kazakhstan goes to China, and increasingly that's through China actively taking equity stakes in Kazakhstan businesses and investing heavily in the sector.”  


Kazakhstan is already number one in the CIS region in terms of growth – with a rate of around 6 percent this year – and Rustamkulov sees no reason why the country's ongoing relationship with China and Russia can't boost GDP per capita further. Especially as it's set to become one of the world's top five oil producers when its Kashagan offshore oil field becomes fully operational.  


But don’t expect to see a flurry of interest from major international private equity groups there just yet. “The size of the individual market segments just doesn’t justify the likes of KKR or Blackstone having a platform here,” says Rustamkulov. “Those big private equity groups are still entering Russia at the moment, and Russia has 10 times Kazakhstan's GDP. But we see this as an opportunity to do as much as we want here.” 


Rustamkulov adds that large companies like Coca Cola, Nestle and Johnson & Johnson all entered Central Asia via Kazakhstan, while Danone recently opened a production line in its largest city, Almaty. This is crucial to Verny's work. “Lots of these large corporates who cannot ignore the region want us to develop a company to a critical size in order for them to take over,” says Rustamkulov. “That's our main exit strategy.” 


For Rustamkulov the “classic” example of Verny’s model was Altyntau – a gold mine that it developed almost from scratch alongside Glencore. “We invested $700 million in a state-of-the-art facility, which took five years to get into operation. When we exited in 2012 it had created 2,000 jobs and was producing nine tons of gold a year, double the country's previous levels.” 


Verny has also invested in telecoms, zinc production and cement, as well as bringing Burger King to Kazakhstan. “There's lots of room to grow the consumer market in Kazakhstan,” says Rustamkulov. “If you benchmark it against Eastern European spending and the amount of retail space or number of cars per capita, Kazakhstan should be at their level in five to 10 years.” 


Verny's previous attempt to raise overseas funds in 2009 came to nothing, largely due to timing ­– in the wake of the US subprime crisis, many of the country's banks had to be bailed out, while its largest bank, BTA, became notorious for a fraud scandal. It may take time for the fall-out to pass.  


“Some of the stories of our previous investment climate certainly don't help,” admits Rustamkulov. “But we believe those who understand the country will continue to have a healthy appetite for investment. We certainly feel very bullish about the country and see lots of opportunity to generate double-digit returns for our investors.”