Ladies and gentlemen of the Western world, we have a problem.
If you thought China rising was a threat, try lumping it in with the massive, resource rich landmass north and west of Beijing– linking Russia, the former Soviet states of Central Asia, with the Asia Pacific manufacturing centers. These people are hungry for growth. They’re business savvy. They’re not debating who is more woke than the other. And they’re developing faster than the West. The region is increasingly trying to integrate into the capital, infrastructure, and manufacturing markets the Western world helped build throughout the Asia Pacific.
Russian president Vladimir Putin knows it.
Earlier this month, at the mostly virtual East Economic Forum 2021 (EEF21) in Moscow, Putin told a packed center that, “Far Easterners in the broad sense of this word - both the previous generation and today - are pioneers and discoverers. Can you imagine what work had to be done in order to develop these territories, given its scale? Think of the personal, business qualities that you need in order to achieve the results we have now,” adding that development of Russia’s far east, near Japan and China, opens the door to more economic cooperation and investment between them and the Asia Pacific.
We hear little about this tilt. Most of the real news flow on these nations is behind a financial press paywall. Or the handiwork of the big multilateral institutions and private business intelligence firms.
Beyond the good guys/bad guys drama, most people in the market have heard about Russia’s string of successful IPOs here this year, like Ozon, Russia’s AmazonAMZN. Bloomberg wrote about this on September 19, as did I seven days earlier.
Kazakhstan’s fintech firm Kaspi.Kz was a surprise hit last year in London, which I highlighted here. The country’s economy is recovering from COVID faster than its post-Soviet peers and other developing countries, boosted by the commodities cycle.
Just as the U.S. had its “Pivot to Asia” under President Obama (largely in the guise of the now defunct, massive free trade deal known as the Trans Pacific Partnership) so do the big countries east of Warsaw. The Asia-Pacific region which accounts for a third of the world GDP, has been the locomotive of the global economy for many years.
Over the past six years, the volume of accumulated foreign direct investment in the Far East has almost doubled to reach $80 billion. Over the years, industrial growth was about 20% over the same period. Capital investments in new development territories like the free port of Vladivostok in Russia, Khorgos dry port in Kazakhstan, and Astana International Financial Center (AIFC) have created tens of thousands of new jobs, and not in the commodity space for which these nations are mostly known.
The Far East was declared a national priority for Russia for the entire 21st century, with a focus on integrating it with the Asia Pacific region. Not that far-away territory of Russia is not the only one seeking regional and global economic ties.
Central Asia Goes Even More Asian
At the EEF21, Kazakhstan’s president, Kassym-Jomart Tokayev said , “This region is of great importance as a strategic partner, since it geographically connects Eurasia with the Asia-Pacific region… The Asia-Pacific region has already become the world's center of economic activity. We plan to strengthen our presence in this region.”
Some $3.2 billion in foreign direct investment flowed into Kazakhstan last year, with Russia, China, and South Korea accounting for roughly 80% of this amount, Tokayev said.
According to UNCTAD, Kazakhstan’s net foreign direct investment rose more than 17 emerging and frontier market economies. They’re the second largest recipient of FDI in the region now, where inflows grew by 35% last year to $3.9 billion. It’s nothing compared to Brazil, but Brazil is a much larger economy and has been open for years. Kazakhstan is young, by comparison.
“Growing investment in mining, transport, financial services, telecommunication and energy compensated for declining inflows in construction, metallurgy and trade, which suffered particularly from the effects of the pandemic,” the UNCTAD report stated.
From a corporate and portfolio investor’s viewpoint, Kazakhstan is the main play in the Eurasian countries. If there is going to be an investment push from China on from the south-east Asian countries, the old Asian Tigers, then if one country is to benefit from that, that is Kazakhstan.
It’s the largest country in Central Asia by territory, and the richest per capita. In 2013, their GDP per capita was greater than that of China’s, at around $13,000. Now it’s closer to $9,500. No former Soviet state in Central Asia comes close to it.
Tokayev knows the growth opportunities are in the East, but a lot of the immediate opportunities, including capital raising, is either home dependent, or in the West. For example, the AIFC – the Epcot looking financial hub — is less than five years old and is where Kazakhstan’s newest securities exchange is linked to the West and East. It follows the financial laws of London, not Moscow or Shanghai. The AIFC, therefore, is as testament that Kazakhstan isn’t exactly shutting itself out from the main economies of the world in order to bet on China lifting some southeast Asian nations up out of poverty. (Vietnam and Cambodia GDP per capita is under $2,800 a year.)
U.S. companies are involved in the AIFC, and American oil companies are more important there than the Chinese. Most of the FDI for oil and gas is going to the so-called Tengiz project expansion with ChevronCVX, expected to be completed next year some time.
For transportation, Chinese are more important. Kazakhstan is a key part of its One Belt One Road investment, though investment advisory firm Emerging Advisors Group pointed out in a report dated September 20 that it’s impact has been “extremely muted.” Trade (valued in dollars) “between Kazakhstan and China has been growing in the past few years, but is still nowhere near historical 2012-13 peaks,” says Mandy Ong from China-based Emerging Advisors Group.
Other global corporate investment projects include telecom firm VEON Group, based in The Netherlands.
The transit of goods through Kazakhstan increased by 17% last year, despite the pandemic, according to their government’s figures. They have been investing in this space for at least 10 years now and have allocated over $30 billion to land ports, railroads, and the like, in order to connect their part of the world to Asia, namely China in their case.
“This investment allowed for the opening of five new rail and six road routes connecting Asia and Europe,” Tokayev said. The Caspian Sea port of Aktau was given some upgrades. And a new Caspian port was built in Kuryk, to handle 13.9 million tons of cargo annually.
“We will continue to improve this infrastructure,” Tokayev said, eyes on developing markets and the linkup with China. He said they are starting the construction of a new railway line, Dostyk-Moiynty, which will integrate them even more with China. Total investment will be about $2 billion, a lot of money in Kazakhstan.
The World Bank forecasts the region to grow over 3% this year and next. Kazakhstan is 3.2%, just like Russia. Next year, they might beat it at 3.7% if the World Bank’s call is right.
Up and comer, Uzbekistan, Jim Rogers’ preferred investment for the private equity crowd and frontier bond fans, may do better – growing at 4.8% and 5.5%. That should be expected, though. Uzbekistan is starting from my a much lower baseline, and is a much higher risk.
Kazakhstan is BBB investment grade, based on Fitch’s rating. Uzbekistan is speculative grade, at BB-.
“Thanks to low public debt and the presence of significant (monetary) reserves, Kazakhstan is relatively successful in overcoming the consequences of the pandemic,” Tokayev said in a Presidential address on September 1. “This is a substantial competitive advantage. It’s important not to lose it.”
Kazakhstan is growing, and their unemployment rate is fairly flat over the last 10 years, averaging out at around 4.9% compared to over 10% official rate in Uzbekistan.
Unlike Russia, the cost of capital there is expensive. Interest rates in Kazakhstan are round 9%. They’re around 14% in Uzbekistan, pushing forward the need for cheaper foreign capital on one hand, which is dangerous for both countries because they would need to pay that back in foreign currencies. If their currency’s weaken, they end up paying back more. But that’s for another discussion. Central bankers can always hedge. It just makes it harder for them to invest, take on debt, and grow. This is the tried and true expansion model of Asian powers like Japan, and surely the U.S.
Where’s the US?
The U.S. is paying attention to these countries. While Russia and China (especially China) sees themselves on the outs with the West, this makes it more interesting for Kazakhstan, for instance, to develop local and regional markets rather than focus on selling solely to the Europeans and Americans, and hoping they will put some capital to work there.
If you could put a rectangle starting from Moscow and going to Vladivostok on the Sea of Japan all the way down to Vietnam, then this is the market they’re all hoping for.
We keep hearing that it will probably surpass the Western world’s economy within a decade. What that ultimately means is still a moving target. For now, that part of the world is dependent on Western capital, and Western markets for growth.
“China is a strategic partner for us,” says Tokayev. More than 50 joint investment projects with China worth around $24.5 billion are underway, according to Kazakhstan government’s numbers. Over the past five years, 19 joint investment projects were either started or finished, worth around $4 billion. By the end of this year, China and Kazakhstan are supposed to launch four new projects, but it is unclear what they are exactly.
Then there is South Korea. Tokayev was there in August. There is about 550 Kazakh companies that have a Korean partner somewhere along the supply chain.
“There’s another 16 promising, corporate investment projects under development in automotive, housing, metals and agriculture,” Tokayev told EEF21 participants about Korea. “We are all strengthening trade relations with the Asia-Pacific region. We have a lot of potential for further development of trade here,” he said.
Follow me on LinkedIn.