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Kazakhstan points route out of crisis

French President Nicolas Sarkozy's visit to Kazakhstan for the signing of an energy pipeline deal marked a week that included two other significant events, including a novel approach to bank restructuring, that trace how the embattled country is seeking to surmount the economic crisis. Kazakhstan, Central Asia's largest economy, has moved to reinforce its banking system, hard hit by the world economic crisis, by agreeing with the creditors of Alliance Bank on terms for restructuring the financial institution. This is the first time that such a deal has been struck without the bank first having been taken under the state's protection.

It also provides that a restructuring agreement requires the approval only of two-thirds of creditors for it to be binding on all creditors, while imposing significant losses and debt-for-equity swaps on them across the board.

The second event is the purchase by China Investment Corporation, that country's sovereign wealth fund, of 11% of KazMunaiGaz Exploration Production (KMG), the oil-production subsidiary of the national energy champion of the same name.

The deal, costing nearly US$1 billion, closed over the past two-and-a-half months, was executed through the purchase of global depository receipts of the London-listed KMG. This is in line with China's continuing purchase of energy resources around the world, including half of the Kazakhstani firm MangistauMunaiGaz earlier this year (see China deal helps out Kazakhs).

The third and potentially furthest-reaching event is the agreement by Kazakhstan with a consortium of French companies on the routing of a pipeline to transport oil from the huge offshore Kashagan deposit to Baku.

The deposit, the largest discovered in the world since Prudhoe Bay in Alaska in the 1960s, is being developed by the French company Total in a consortium with Eni, Kazmunaigaz, ExxonMobil, and Shell.

Signed this week in Astana in the presence of Presidents Nursultan Nazarbaev of Kazakhstan and Sarkozy of France, it states that a French consortium composed of Spie, Manesmann-France, Europipe, GTS, and Arcelor-Mittal will have for one year the exclusive right to negotiate the terms of construction with their Kazakh partner. The contract would have a value of US$3 billion, of which more than half would go to French companies, creating several thousand jobs for French workers.

The pipeline will run from Eskene in northwest Kazakhstan to Kuryk on its western coast, whence the oil would be taken, presumably by tanker, to Baku so as to enter the existing Baku-Tbilisi-Ceyhan (BTC) pipeline ending on the eastern Mediterranean coast of Turkey. It will represent the main section of the previously announced Kazakhstan-Caspian Transport System, or KCTS (see Four-way street in Kazakhstan).

The specific terms of the banking arrangement first mentioned also have the potential to be far reaching. It represents an approach to financial restructuring that appears to have been tried nowhere else, including Europe and North America.

The deal was constructed within the framework of new Kazakhstani law, which entered into force over the course of the past year, statutorily limiting the prerogatives of creditors.

Even the US model has relied exclusively on either letting banks completely fail or on bailing them out with taxpayers' money, all the while guarding the prerogatives of creditors as integrally as possible. The Kazakhstani example demonstrates that with adequate will, the central political executive of a state can overcome creditors' resistance to such measures.

The other two events are in line with the continuing development of Kazakhstani energy resources, although the sale of limited ownership in industrial firms is relatively new for Astana and something that the leadership would probably have preferred to avoid.

Indeed, Kazakhstan has preferred to negotiate the increase its own stakes in existing projects such as Kashagan, where it successfully imposed new conditions on KMG's Western partners just a year or two ago. The world economic crisis unleashed since then, however, gives added negotiating power to financially stronger players such as China and its state companies.

Finally, the negotiation of construction of the KCTS suggests that even in present economic conditions, strong states will find ways to continue to promote energy exploration and production through economically beneficial industrial cooperation.

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URL:  http://www.robertcutler.org/blog/2009/10/kazakhstan_points_route_out_of.html
First published by Asia Times Online, 10 October 2009.

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