WASHINGTON, April 28 (UPI) -- The dramatic downturn in energy prices has heavily impacted oil-producing nations, few more than Kazakhstan, which had a marginal oil industry prior to the 1991 breakup of the Soviet Union. Having attracted more than $40 billion in foreign investment since then, Astana is now caught between a fiscal rock and a hard place as foreign investors seek to retrieve their funds. In its search for foreign capital to cover its balance-of-payments problems, Kazakhstan, like many nations, is turning to a nation flush with an astounding $2 trillion in foreign reserves, besides running a massive trade surplus -- China.
During an April 15-19 state visit to Beijing, Kazakh President Nursultan Nazarbayev secured a $10 billion loan package from China on April 16, giving Beijing in return a significant foothold in the Central Asian state's oil and gas sector. Half of the Chinese loan is intended to bolster Kazakhstan's energy sector, with the other half being allocated by the Development Bank of Kazakhstan to stimulate the diversification of Kazakhstan's economy.
Beijing, however, did not become wealthy by squandering its reserves, and the deals it is seeking in Kazakhstan make the initial deals signed by Kazakhstan after 1991 with Western companies seem positively benign. Being short on liquidity, however, the Kazakh government is going to have to agree to Beijing's terms, and if recent deals are anything to go by, the terms will involve ceding significant chunks of Kazakhstan's hydrocarbon industry to Chinese ownership.
Kazakhstan has been battered by a perfect economic storm of declining foreign direct investment, foreign investors' attempts to reclaim the principle on their investments and interest payments on loans coming due at a time of declining energy prices. Putting a brave face on the country's economic woes, Kazakh Deputy Minister of Economics and Budget Planning Timur Suleimenov recently told journalists in Almaty, "We forecast a substantial level of foreign direct investment this year at around $10 billion." Suleimenov added that the data covered gross direct foreign investment, which excluded recent agreements reached with China.
What Suleimenov neglected to add was that this amount represented a dramatic decline from last year, when Kazakhstan raised a record amount in FDI of almost $20 billion gross; stripped of fiscal complexity, in net terms, this amounted to $14.5 billion, up 30 percent from 2007's FDI level of $11.1 billion.
But for foreign credit markets, the real handwriting on the wall came on April 24 when Kazakhstan's largest bank, BTA, announced it could no longer repay $11 billion in foreign debt and that consequently it would pay only interest to its foreign creditors.
BTA is not the only hard-pressed Kazakh financial institution. On April 28, Kazakhstan's fourth-largest bank, Alliance, announced plans to restructure its medium- and long-term debt while servicing short-term liabilities. BTA's fiscal woes are not a private-sector problem, as the state, in the form of the national welfare fund Samruk-Kazyn, has been the chief owner of BTA since Feb. 2. This year, BTA must repay approximately $3 billion in external debt.
Kazakhstan's commercial banks posted net losses of about $1.95 billion in the first quarter of 2009 compared with net profit of $181 million in January-March 2008.
BTA's problems are symptomatic of the woes of Kazakhstan's financial industry, which, gorged on a massive influx of foreign funds into its petrochemical industries, grew explosively until credit markets seized up two years ago. Rather than raise money through deposits, Kazakh banks massively borrowed from international lenders, but when the first glimmers of the recession began to appear, the lines of credit extended to Kazakhstan dried up more quickly than elsewhere, given the relatively risky nature of doing business there. At the beginning of 2009, Kazakh banks were estimated to owe external creditors $39 billion, while Kazakhstan's total foreign debt has now reached $108 billion.
The government has responded with efforts to shore up its finances with new oil deals. Enter China.
The centerpiece of China's shopping spree during Nazarbayev's visit is the state-owned China National Petroleum Corp. acquiring a 50 percent interest in Kazakhstan's fourth-largest energy company, MangistauMunaiGaz, which controls an estimated 500 million barrels of oil reserves and produces 113,000 barrels per day. MMG owns 36 oil fields, of which 15 are currently under development, along with 41.8 billion cubic meters of natural gas reserves.
The deal means that Chinese energy companies will control around 15 percent of Kazakhstan's current total oil output. Under the terms of the joint venture, CNPC is lending $5 billion to cash-strapped MMG's parent company, KazMunaiGas, which will own the remaining 50 percent of MMG.
CNPC's acquisition of 50 percent of MMG is the most recent company acquisition of Kazakh assets; four years ago, CNPC purchased Canadian oil producer PetroKazakhstan for $4.18 billion, the largest foreign purchase by a Chinese company at the time.
CNPC is not alone in its rush for Kazakh energy assets; other Chinese companies, including Sinopec and the government-owned CITIC investment company, are also involved in developing and operating promising Kazakh oil fields, which they see as a solid bet. By 2025, Kazakhstan intends to become one of the world's 10 largest crude oil producers, doubling its current oil output to a potential of 3 million bpd.
Nor are China's Eurasian energy interests limited to Kazakhstan. Seeing opportunity in another cash-strapped former Soviet republic in February, China signed a $25 billion long-term oil supply contract and pipeline deal with Russia for 300,000 bpd from Siberia for 20 years.
Not surprisingly, the Chinese deal has generated some opposition in Kazakhstan. Naubet Bisenov, an analyst at the Institute for Economic Strategies-Central Asia in the former capital Almaty, observed bluntly, "The economy is in dire straits; Kazakhstan needs this money. China is using Kazakhstan's problems to its advantage." But Nazarbayev's deal enables Kazakhstan to continue its ongoing oil exploration program, as the Chinese cash tops up the 2008 $14.5 billion FDI in its energy sector. The big question for Astana is whether additional sites can be brought online to boost exports to offset flat market prices and potential new loans.
Kazakhstan's fiscal difficulties mesh with China's growing appetite for oil imports, which is expanding by around 10 percent annually, with China last year importing 179 million tons. The question is whether the economy will recover before another set of deals becomes necessary, a question of no little interest in Astana, as opposition to China's largesse has now acquired political overtones with the opposition Azat Party charging that the government is selling off vital assets instead of protecting them for the good of the country, commenting in a statement the day before Nazarbayev signed the agreement that the Chinese "partnership" could do "irreparable damage to our country's economic security and even more so to its national security."
The Beijing-Astana energy waltz is far from over; on April 28, Kazakhstan's national nuclear power company Kazatomprom issued a statement noting that it has begun mining uranium at a new field in southern Kazakhstan with an annual production capacity of 750 metric tons. "The field's operator is the joint venture Semizbai-U, and the project is being implemented as part of the agreement on strategic partnership between Kazatomprom and China Guangdong Nuclear Power Co.," the statement added. Two months ago, Kazakh Minister for Energy and Mineral Resources Sauat Mynbayev announced that Kazakhstan intended to boost uranium production this year by 40 percent to 11,900 tons, with plans to increase output by 2010 to 15,400 tons annually. If the global recession continues, expect to see Beijing increase its Kazakh nuclear portfolio as well.