Companies that have shunned Russia for its war with Ukraine are discovering an alternative just over the border: Kazakhstan.
After a rough start to the year for Central Asia’s biggest country (it’s about as big as Western Europe), Russia’s new outcast status in Western capital markets presents a major window of opportunity for them. Kazakhstan has been opening up its economy for years. It has new political leadership now. Talks of privatizing state assets are moving forward. Oil and gas are par for the course with KazMunayGaz (KMG) ready fr its market debut. Good luck buying Russian oil and gas if you’re an American investor.
KMG: It’s Finally Happening
After talking about privatizing its oil and gas sector for years, Kazakhstan’s sovereign wealth fund Samruk Kazyna announced it will sell some of its 90% stake in KMG, Kazakhstan’s later this year. The upcoming Initial Public Offering on the AIX which belongs to the Astana International Financial Center (AIFC) and other domestic and international exchanges is welcome news for Kazakhstan because investors are tired of hearing about privatizing KMG and want to have it at now.
Plus, the January unrest spooked investors. The Kazakhstan dollar bond index collapsed this winter after being one of the favorite frontier bond markets and has only partially recovered since.
The Russian invasion of Ukraine has given new urgency to Kazakhstan’s long-term economic reform plans.
The sale of KMG is part ot those plans. Its sale was planned and delayed in 2018. With investors unable to access Russian oil and gas due to sanctions, KMG looks like it should do even better than Kaspi did a few years ago, the e-commerce surprise hit that took the London Stock Exchange by storm in its IPO.
KMG’s advantage has been compounded by the EU’s realization that wind and solar panels are not enough to provide a surefire baseload of energy capacity.
Kazakhstan will have to up the ante in its energy infrastructure to take advantage of Russia’s isolation from international energy markets. No matter how successful Kazakhstan’s multi-vector foreign policy has been at preserving a diplomatically neutral stance with the West while also navigating its relationship with Russia and dealing with collateral damage from sanctions, long-term investments in Kazakhstan’s oil and gas sector will be needed. The IPO will give KMG more access to the capital this sector needs if it is to be considered an alternative to Russia for European oil and gas markets.
Lackluster investment could make KMG less exciting in the near-term and is likely the most easily identifiable risk.
Unlike Russia, Kazakhstan is not in a recession. Like Russia, it is a hydrocarbon powerhouse.
Given the cash flows generated by the current global energy market conditions, Kazakhstan has a chance to transform from a mostly extractive, smokestack economy of state-owned industries to a modern and diversified economy of the 21st century. But, oil and gas are key to its economy in the near- and mid-term. KMG is the most interesting for emerging market investors but not the only game in town.
QazaqGaz, which was renamed last year from KazTransGaz, is another candidate for an IPO in the next few years. The company is part of Kazakhstan’s plan to become a regional natural gas power.
They operate natural gas transport via main gas pipelines, provide international transit, and sell natural gas on domestic and foreign markets. It develops, finances, constructs, and maintains pipelines and gas storage. They run some 48 thousand miles of pipelines, including 12 thousand miles of main gas pipelines with an annual capacity of up to 267.8 billion cubic feet and gas distribution networks with a length of about 34 thousand miles.
In June, they issued a warning. QazaqGaz forecasted a gas shortage starting in 2024 saying domestic market demand will surpass available gas reserves by 1.7 billion cubic meters, likely forcing the government to curb exports. This shortage is partly caused by an increasing number of new consumers and the conversion of coal-fired thermal power plants to gas.
KZ Oil: It’s Not Russian Oil
Kazakhstan is a known energy hub sitting between a surplus of fossil fuel resources in the west and the north, and shortages elsewhere. Kazakhstan’s growing oil export industry, now accounting for 57% of all exports, has been threatened by the war in Ukraine as the majority of Kazakh oil is exported through Russia. Fears of sanctions and transit disruptions resulted in a war risk premium, decreasing the price of Kazakh oil flowing through Russia forcing buyers to consider alternative routes.
On the other hand, a higher global oil price and growing demand for alternatives to Russian oil can benefit Kazakhstan and partly offset the economic impacts of the war.
A higher oil price means the logistical constraints on exporting oil to either China or to Europe via the Caspian and the South Caucasus are less dire. It also gives Kazakhstan’s government and private sector the impetus to build out these export routes.
Logistics: As Good as Oil?
Kazakhstan is arguably China’s most strategic partner in Central Asia. Any future transport link connecting China to the EU has at least one pathway through Kazakhstan. This means FDI from China, South Korea and Europe are supposed to flow here, the AIFC often states during investment meetings and conferences.
Kazakhstan stands to benefit from any increase in railroad investment and in rail freight between Europe and China as the world is recovering from the pandemic. However, Russia has already started to restrict this movement to punish Kazakhstan. Kazakhstan is looking into creating a Eurasian Rail Alliance, along with Azerbaijan and Georgia, to have more control over logistics between Asia and Europe, especially any Asian route to the Caspian Sea, without having to traverse Russia.
Samruk, the Kazakh sovereign wealth fund that owns KMG, is also planning to sell shares in Air Astana, the country’s leading airline, in the next two to three years on the AIX.
The Russian war with Ukraine is still hot as this winter’s political crisis in Kazakhstan has cooled down. In the meantime, the Western world, led by Europe, has realized that oil and gas are as economic necessities.
After years of promises, Kazakhstan is ready to sell KMG shares, one of its best fossil fuel companies.
Without the investment themes caused by the war in Ukraine, KMGs long-awaited IPO is an old-school industry trade. But given the dynamics of the Kazakhstan economy, the region, and the developed world’s realization that fossil fuels will have a role to play for many years to come, betting that KMG does better than Kaspi seems as safe a bet as any in frontier market stock picking.