Foreign Investors in Kazakstan Face Obstacles

While shifting the economy from state socialism to capitalism, the government has not delivered prosperity to the country

THE oil and gold beneath the deserts and grassy hills of Kazakstan are impressive enough to have drawn more pledged foreign investment to these vast reaches than to any other country in the former Soviet Union, including Russia itself.

But nothing close to these tens of billions of dollars has begun to flow into this new country yet. The obstacles to business in Kazakstan, as in other economies just shifting out of state socialism, prove greater than merely the hard work of building pipelines and refining ore.

The central problem, according to Western lenders, local observers, and even some Kazakstan officials, is the murky way the government treats business.

''You never really know when you've got a deal and when you don't,'' says one European banker here.

The sometimes unpredictable decisions of the government, and the nonpublic manner in which they are made, lead to a widespread assumption of official profiteering. This is added to an undeveloped legal culture and body of law that leave contracts on shaky ground.

Some recent multimillion-dollar maneuvers by the government have burned some foreign investors and raised red flags for others.

The most recent was a billion-dollar-plus management contract for a major Kazakh firm and an Austrian partner to run the country's largest enterprise, the state-owned Karaganda Metallurgical Combine.

Government action faulted

The contract was signed in May and suddenly annulled in July by a deputy prime minister, who transferred it to an American-led consortium that included a Panama-based subsidiary of the Israeli Eisenberg Group.

The Kazakh government argues that the original partnership was failing to produce the massive amounts of cash the enterprise needed, first of all to pay back wages to its 34,000 employees.

But in the business community here, the move aggravated a growing distrust of how the government operates. It pushed some businesspeople, says Kazakh broadcast executive and journalist Sergei Duvanov, to start sending money to Swiss bank accounts for safety.

This move by the government followed by a couple months a more jarring maneuver.

Prospecting what is believed to be one of the three largest gold deposits in the world was largely carried out by Dominion Mining of Australia at a cost of several million dollars for what it believed to be exclusive negotiating rights. Instead, the government used Dominion's data to open up a proper bidding process, which was administered by the European Bank for Reconstruction and Development.

Then in April, the Kazakh government announced that the process was taking too long, so it had consummated its own deal directly with a Bahamas-based group of investors.

The senior official, who did not wish to be identified, calls this ''a beautiful example of funny-business. Basically, this is a case of clear-cut theft of $70 million from the Kazakstan treasury [because of the terms of the deal favorable to the investors].''

''This is extremely detrimental to foreign investment,'' the official adds.

''They have damaged themselves and the rest of Central Asia,'' says Michael Wilson, a partner in the law offices here of Baker & McKenzie. Part of the reason for short-circuiting the public-tender process, Mr. Wilson says, was the message ''loud and clear, that they want these deals done fast. But also private gain [by officials awarding the contract] would seem to be involved.''

''There's a lot of corruption surrounding the desire to get big international deals,'' says a Western diplomat based here. ''It seems to be worse now than a few years ago.''

The so-called nomenklatura - the officials with privilege, perks, and power in the Soviet days - are largely the same people running the country now as a highly centralized democracy. As in Russia, these officials are widely seen to be getting rich from their positions in the privatizing economy.

''It's the same people, but without the ideology, without the old motivation,'' says a Western banker. ''Only capitalism, like in the Rockefeller days'' in the United States.

As in Russia, many Westerners presume that if the old nomenklatura were not allowed to enrich themselves in the country's privatization, then they would not have permitted it to happen. Eventually, the assumption is that business and government will extricate one from the other and their conflicts of interests fade.

But there's no sign of this yet.

One Western banker says that officials are learning from their mistakes, such as the short-circuited awarding of the gold-mine contract. But the senior Kazakh official does not believe that anyone is learning any lessons. ''No one was punished,'' the official says, and the same kinds of decisions are made all the time in less public cases.

''There are quite a few reasonable people in government,'' says the official. ''The question is whether they have any influence.''

Iron-fisted leaders

The model that President Nursultan Nazarbayev, himself a career Communist in the Soviet era, holds forth is not the turn-of-the-century American robber barons, but the iron-fisted leaders who were weak on democratic rights but strong on capitalism: France under Charles de Gaulle, Chile under Augusto Pinochet Ugarte, Singapore today, and the South Korea of a few years ago.

President Nazarbayev has established strong central rule, but prosperity has yet to come.

United Nations economists have totaled the long-term value of foreign-investment deals in Kazakstan at $46 billion, compared with $36.5 billion in Russia - a country far larger, more affluent, and more democratic. But so far, actual investment has been a few hundred million per year.

Jacek Brzezinski, representative here of the European Bank for Reconstruction and Development, left his family in Vienna a year and a half ago because he was fascinated by the potential of Kazakstan. ''I see how naive Westerners were now. It was part of that emerging markets euphoria.''

But Dr. Brzezinski remains optimistic about Kazakstan. So does attorney Michael Wilson, who says he has negotiated seven gold-mining joint ventures in the past month worth $500 billion to $1 billion dollars together.

Philip Morris, the American tobacco manufacturer, has undertaken one of the most successful privatizations so far, in taking over a state cigarette factory in 1993.

Chevron has spent $700 million on its way toward a planned $20 billion investment in oil and gas projects in Western Kazakstan, but has scaled back recently because of frustration in negotiating pipeline transit to the West.

Problems of shifting laws and official corruption will not ultimately put off such big players, the Kazakh official says, and the fast-buck artists will still come. ''We'll be losing the decent, medium-sized investors.''

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