Succession uncertainty poses contractual risks in Kazakhstan

30 August 2018

Kazakhstan’s high renewable energy potential will generate opportunities for investment, particularly as the government seeks to reduce its dependence on hydrocarbons. However, the lack of a clear successor to President Nursultan Nazarbayev raises contractual risks.

Security Environment

Kazakhstan’s political environment is broadly stable, but the issue of who will succeed ageing President Nursultan Nazarbayev remains unresolved and has the potential to trigger civil unrest.

Should Nazarbayev pass away before the end of his term in 2020, the risk of protests would rise in oil-producing provinces and economically deprived regions of southern Kazakhstan such as Zhambyl, where a number of solar plants are under construction. However, solar plants are unlikely to be specifically targeted and security forces will seek to avoid responding with force so as not to provoke additional protests.

The threat of terrorism in Kazakhstan is moderate but has increased in recent years following a recruitment drive by Islamic State. Attacks are likely to be low-capability in nature and government personnel rather than business assets will remain the primary targets. In June and July 2016, suspected Islamist terrorists carried out small arms attacks on security forces in Aktobe and Almaty, which resulted in over 20 fatalities.

Trading Environment

Kazakhstan’s economic prospects have improved following the recovery in oil prices last year, as real GDP growth rebounded to 4.0% in 2017 and is forecasted at 3.5% in 2018. Output from the Kashagan oil field remains robust and expansion of the Tengiz oil field is expected to raise production by 12 million tons by 2022.

Despite efforts to diversify the economy, Kazakhstan remains highly dependent on commodities, which account for approximately 75% of current account receipts. Oil prices are forecasted to remain at around USD 75 per barrel in 2018 and USD 80 per barrel in 2019, but in the medium-term, commodity price fluctuations could undermine Kazakhstan’s economic outlook.

The general government debt-to-GDP ratio is low and stable at around 22% of GDP and Kazakhstan has strong international reserves, providing 15 months of current account payments cover in 2017. However, Kazakhstan’s banking system is relatively fragile as a result of high levels of dollarisation and non-performing loans.

The government is taking steps to strengthen the banking system and approved a USD 1.2 billion assistance programme for commercial banks in October 2017, butthe sector poses contingent liability risks and further bailouts may be required.

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Investment Environment

Kazakhstan is attempting to attract investment in renewable power as it seeks to reduce its reliance on coal-fired electricity generation. The government has pledged to commission over 50 renewable power schemes worth a combined USD 3.1 billion by the end of 2020, and aims to produce 30% of its energy requirements from renewable sources by 2030. A feed-in-tariff scheme was introduced in 2013, although its value is subject to exchange rate fluctuations.

The risk of contract revisions and expropriation is moderate in Kazakhstan but would rise significantly in the event of a disorderly presidential succession. Although the mining and energy sectors would be the most likely targets of any attempts to undo the commercial relationships established under the Nazarbayev administration, similar action in the renewable energy sector cannot be ruled out.

The performance of the judiciary is undermined by high levels of corruption, and the courts are likely to side with domestic rather than foreign firms in legal rulings. In addition, international arbitration is unlikely to be ratified by local courts. However, the government launched the Astana International Financial Center in July 2018, which is staffed by foreign judges and is likely to gradually improve judicial impartiality.

Kazakhstan Pricing Table

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Nicaragua, Ethiopia, Mongolia and Kazakhstan all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review September 2018

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com.

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