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Jan 2, 2013 | 11:47 GMT

A New Economic Program in Kazakhstan

STANISLAV FILIPPOV/AFP/Getty Images
Summary

During the last week of December, the Kazakhstan Stock Exchange opened up a second round of trading for shares in energy company KazTransOil to Kazakh citizens. The program is part of a government initiative meant to tie the Kazakh people into the major government enterprises as a social stability mechanism and raise much-needed funds for the large state firms. The idea for the initiative began in 2011, with the publicly stated goals of raising funds for the participating companies' investment plans, involving the Kazakh people in the state's economy, diversifying savings for the population and increasing the transparency of the largest national companies.

However, other former Soviet states have had little success with similar programs, and the way the Kazakh government is designing the program would leave much of the Kazakh population and many critical social programs vulnerable to economic fluctuations. Despite the risks, the Kazakh government is moving forward with the program for now because they see a serious need to tie the Kazakh population into the state system and raise cash as well. The government believes they have set up enough safeguards to mitigate the risks, though the long-term viability of the programs remains to be seen.

Kazakhstan is holding 10 initial public offerings of strategic state firms for the Kazakh people to invest in over the next three years. The program, called the People's IPO, is organized under the Samruk-Kazyna National Welfare fund and will place five to 20 percent of Kazakhstan's largest state firms in these IPOs.

The first of the program's stock offerings is currently under way, selling shares in the Kazakh oil transportation company KazTransOil. Ten percent of the company worth about $186 million is available, and the share price has been set at $4.82. Already in the first tranche of the KazTransOil IPO, approximately 60,000 people and 10 of the country's pensions funds have applied for shares. The government expects approximately 200,000 Kazakh citizens to participate in the People's IPO, and has required that all of the country's pension funds take part.

In theory, the Kazakh population would have access to the state system, giving the public the image of a more transparent government and state businesses. In reality, by linking some of the population and all of the country's pensions into these stock offerings, the state has directly linked the public into the welfare system. In addition, this program raises funds for state firms that are in the process of a desperately needed modernization push.

However, large economic programs like this in other former Soviet states have seen little success. Russia launched a series of similar stock offerings in 2007 and 2008 to try to counteract the effects of the global financial crisis. Like the Kazakh government, the Kremlin wanted to offer these IPOs to reassure the public and to raise cash for investment in specific firms. Russia offered shares in a string of companies, including the country's second-largest bank, VTB. The state raised $1.5 billion from 131,000 investors in VTB, but due to the financial crisis, VTB's share prices declined significantly. In order to prevent social backlash, the state ended up buying back the shares. Similar program failures have occurred dozens of times in Russia. And after seeing the Russian failures, Belarus canceled its planned series of stock offerings. Unlike Moscow, Minsk does not have the funds to buy back shares if their stock offerings fail.

Kazakhstan's planned IPO program seems to be vulnerable to similar risks, particularly because the government has touted this program as a cash generator for investors. However, that assertion is based on unrealistically high growth expectations for the state firms — nearly five times the growth of Russian or other former Soviet countries' state firms. So while this program may bring in money for the state from the general population, it seems unlikely that the people will earn much money in return. Moreover, having all of the country's pension funds buy in essentially means that the population's pensions would be affected should this program fail, likely causing a massive social backlash against the state.

But Astana is moving forward on the program for two main reasons: the state sees an increasing social need for such a program and feels it can mitigate quite a few of the risks seen in other countries.

As far as mitigating risks, the Kazakh government believes it can break the trend of failing state stock offerings because the region is currently not under the same economic strain as it was when the Russian VTB IPO failed. At present, Kazakhstan has a fairly stable economy, mostly due to large oil revenues, giving it a cushion of $55 billion in the National Oil Fund and another $30 billion in currency reserves. So if the People's IPO program fails, the government does have sufficient funds to buy back shares, though at the cost of the government's reputation. Moreover, the firms' IPOs will take place one at a time over the next two years, so if the programs look like they will fail, the government will have time to restructure how the program will proceed or abandon it altogether.

The Kazakh government's decision to launch the People's IPO despite the risks has much to do with growing instability in the country. The state has had to crack down on dissidence and homegrown militancy, as well as deal with fears of what will happen when aging Kazakh President Nursultan Nazarbayev can no longer rule. The government already subsidizes many social and economic programs and this IPO program is meant to further the state's ability to manage its population, even if there are risks involved.

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