The Times of Central Asia - update of 17 November 2011

In this issue:

1. Kyrgyzstan’s president-elect and new prime minister

3. Cheap gas prevents Uzbekistan from switching to coal

1. Kyrgyzstan’s president-elect and new prime minister (Kyrgyzstan, November 17, 2011-issue 695) By Giorgio Fiacconi TCA publisher

BISHKEK (TCA) – Interim President Roza Otunbayeva signed a decree stating President-elect Almazbek Atambayev will be inaugurated as the new President of the Kyrgyz Republic on December 1, 2011. This may be a good step toward strengthening democracy and stability in Kyrgyzstan, although only the Kyrgyz Government will be able to prove to its country, and the world, that Kyrgyzstan is entering a new phase of much needed stability. There is no doubt that there are issues in the present Parliament, where deputies constantly disagree and where the political arena is far from showing a united front, that need ironing out before stability is achieved. This may represent a huge obstacle to the required reforms. During his wait to be sworn-in as President, Atambayev is back working as Prime Minister. Once he becomes President, the choice as new Prime Minister is crucial for the future of the country and for the future of the present Parliament. The two weeks before Atambayev takes over as President the nominations for, and the election of, the future Prime Minister will leave no room for other issues. Currently, First Vice Prime Minister Omurbek Babanov and former Bishkek Mayor Tyuleyev are the frontrunners to obtain the approval of the Parliament for their appointment. With all political parties currently being in disarray, Babanov has become the favoured candidate. However, the individual playing the “music of money” may wind up being the next Prime Minister. Whoever emerges as the Prime Minister, there is still no guarantee of stability. Kyrgyzstan’s economic development should have priority over private interest in the Government’s agenda but there is no guarantee such consideration will prevail. During the last ten years, the recurring motif of Kyrgyz policy has always been one of blackmail toward foreigners, with the American base at Manas and the Canadian management of Kumtor mine as the main targets. Manas Base is presented to the public as a political issue and an example of American imperialism. Something that big brother Russia says, in one way or another, should be gotten rid of. The recent announcement on the closure of Manas base after 2014 may be a political bargaining tool or the real intention of President-elect Atambayev but, given the present Constitution, the decision to do so remains with Parliament. But, while Atambayev’s announcement may please those with anti-American feelings, it may not be in the best interest of Kyrgyzstan or the locals that are involved in the base operation, taking millions of dollars from the Kyrgyz economy. Kumtor is the working image of a professionally run company that brings to the Kyrgyz budget billions of soms, provides work to thousands of Kyrgyz workers and is one of the few industrial enterprises to really economically support the country. But Parliament, instead of creating incentives to further attract other serious mining companies, decided that all mining companies should pay to the local budget an additional 2% tax on their income. This additional tax seemed just to benefit the local administration’s pockets and to increase the tax burden on the mining industry. In the end, it just deters further investment in mining due to the unpredictability of Kyrgyz legislators. Both the closing of Manas and the increase in mining taxes have been full of criticism. With the argument that these actions were not done with the intention to solve the different challenges but mainly to squeeze more money and gain political visibility and power. While the two above mentioned entities, Manas Transit centre and Kumtor mine, are continuously targeted as contributors to the State budget, little or nothing is done to have economic development spread into less fortunate areas of the country. Economic reform is needed but with Parliament fractioned and internal fighting prevailing it is difficult to believe that such change will come anytime soon. We should not forget that a new President does not cancel existing debts, problems or government habits and that the solution of present difficulties does not lie only with foreign donors or foreign investors but depends much more on what the country itself is able to generate.

2. Kazakhstan’s economic performance: caution over development, confusion over state budget (Kazakhstan, November 17, 2011-issue 695) By CHARLES VAN DER LEEUW SPECIAL TO TCA

ALMATY — Contradictory facts and figures strike attention in a much-trumpeted upgrading of Kazakhstan by Standard & Poor’s – which actually values Kazakhstan’s national economy better than Russia’s. Not only does this contradict earlier reports on the country’s state budget’s balance sheet in years to come, but figures recently presented by the Interstate Statistics Committee of the Commonwealth of Independent States seem to cast doubt on S&P’s observation as well. “Lower government spending makes Kazakhstan less reliant on revenue from commodities than Russia,” Bloomberg opined in a report published on November 9. “The Russian government is boosting social spending and pledged to raise military salaries by 170 percent next year as voters head to the polls in parliamentary elections on Dec. 4 and a presidential vote in March. Kazakh crude output will almost double over the next decade and an $8 billion cap on spending from the oil fund means that the nation is saving about half of its revenue from the fuel each year,” the agency paraphrased S&P’s report published on November 7. The upgrading may be relative, but its motives are bound to raise eyebrows. “Moody’s Investors Service rates Kazakhstan one level lower at Baa2, while it maintains a Baa1 rating on Russia, a step higher. Fitch Ratings has Kazakhstan at its lowest investment grade, BBB- compared with BBB for Russia, its second lowest,” Bloomberg noted in its report.

* Government spending

S&P appears to base its judgment on figures presented in October by the International Monetary Fund. “The Kazakh budget surplus will widen this year to 1.7 percent of gross domestic product and stay at the same level next year, compared with 1.4 percent last year,” Bloomberg wrote in its report – referring to S&P which in turn refers to the IMF. “Russia will post a deficit of 1.1 percent this year and 2.1 percent in 2012, from a 3.5 percent shortfall in 2010,” the Washington-based lender forecast in October. “Russia’s budget was 1.1 trillion roubles in surplus in the first nine months, equal to 2.8 percent of gross domestic product, the Finance Ministry said on Oct. 13. […] Government spending in Kazakhstan will account for 22.8 percent of economic output next year, compared with 37.7 percent in Russia, according to IMF forecasts.”

* Booms and slumps

In the early years of its independence, Kazakhstan’s economic performance worsened dramatically. As of 1996, economic growth set in, and with the exception of a net on-year decline of 1.9 per cent in 1998, it has persisted throughout the rest of the period, varying from a 13.6 per cent peak in 2001 to a decade-low 1.2 per cent in 2009. It means that Kazakhstan is far from insensitive to global booms and slumps, but also that it is sufficiently aware of the global economic conditions to put safety nets in place with the aim to prevent the worst. In the first three quarters of the current year, Kazakhstan’s economic growth has stood at 7 per cent in comparison to the same period of 2010, the Moscow-based CIS Interstate Statistics Committee reported in early November. The figure puts Kazakhstan ahead of the overall CIS economic growth estimate over the period, the latest update of which stands at 4.2 per cent over the first half of this year.

* Revolutions pay

The CIS figure has been drawn down by Russia’s slower-than-expected economic recovery, with a disappointing 3.7 per cent on-year growth index over the first six months. Other weak performers over the first three quarters have been the three Transcaucasian republics – Azerbaijan in particular with a mere 0.5 per cent increase – while Uzbekistan and Kyrgyzstan figure at the upper end with 8.2 and 8.7 per cent on-year growth respectively. Azerbaijan posted a net decline in industrial output of 3.2 per cent in the first nine months of this year, against a 4.3 per cent increase in Kazakhstan and a 5.8 per cent increase in the CIS. This puts Kazakhstan below the Russian Federation with 5.2 per cent increase, and way behind Ukraine, Belarus and Kyrgyzstan with 8.6, 10.6 and 25.4 per cent growth in industrial output respectively. It looks as though at least in the case of Kyrgyzstan, revolutions and subsequent political reforms tend to pay. Investments in the country picked up by 5 per cent on-year in the first nine months of 2011 – a clear sign of recovered investors’ confidence in the new regime.

* Eternal pitfall

Following a mild retreat in the full year of 2010, capital investments in Kazakhstan have come back into the black figures with an on-year increase of 1.5 per cent in the first nine months of 2011 – as compared to 4.8, 14.9 and 21.9 per cent in Russia, Belarus and Azerbaijan respectively, and 6.4 per cent on average in the CIS. The poor state of Kazakhstan’s banking sector, dragged behind by the worsening performance of its one-time leading bank BTA which has been victim of massive fraud by its former management amounting to the range between 10 and 12 billion US dollars, is most likely to represent the most important brake on capital investment in the country. As for inflation, the eternal pitfall under overall economic development, only Belarus is falling victim to hyper-inflation with the startling figure of 74.5 per cent on-year – mainly due to financial drains, illustrated by an 82.3 per cent on-year rise in production costs. The same, to lesser proportions, is true for Kazakhstan and the Russian Federation, where inflation over the first three quarters has stood at 6.2 and 4.7, and rises in production costs at 10.7 and 20.5 per cent respectively. Once more, this contradicts S&P’s assumption that Kazakhstan performs better than its mighty neighbour to the north. The disappointing truth could well be, in all, that virtually no CIS member country is out of the woods yet, and there is more between heaven and earth than in any rating agency’s sweetest dreams.

KEY ECONOMIC INDICATORS OF KAZAKHSTAN IN 2007-2011

period 2006 2007 2008 2009 2010 Q1-Q3 2011

GDP +10.7% +8.9% +3.3% +1.2% +7.0% +7.0%

industry +7.0% +5.0% +2.0% +1.7% +10.0% +4.3%

agriculture +6.0% +9.0% -6.0% +13.8% -11.7% n.a.

investment +11.0% +14.0% +5.0% +2.1% -0.5% +1.5%

consumer index +9.0% +11.0% +17.0% +7.3% +7.1% +6.2%

source: CIS Interstate Statistics Committee, Moscow

3. Cheap gas prevents Uzbekistan from switching to coal (Uzbekistan, November 17, 2011-issue 695) By Dilshod Ashurmatov

TASHKENT (TCA) — Uzbekistan is going to increase the share of coal in energy consumption to 15 percent by 2016. However, the social significance of cheap gas hinders the switch of thermal power plants (TPPs) to coal and the modernization of coal mines. In late October, Uzbekenergo State Joint Stock Company announced plans to upgrade the Angren TPP in the Tashkent region, one of the two power plants in Uzbekistan which is partly operating on coal (in winter, during the heating season). The project, worth almost $250 million, includes the construction of a new coal-fired power unit with the capacity of 150 megawatts. It is planned that as a result of modernization by 2015, coal burning at the power plant will increase from 20 percent to 45 percent (to one million tons). The project will be financed through a $165.6 million loan from China’s Exim Bank and Uzbekenergo’s own funds worth $83.7 million. Currently, the installed capacity of eight power units of the Angren TPP is 484 megawatts. The plant was commissioned in 1957 and provides electricity to major industrial facilities and the population of Tashkent region. Except for the project at the Angren TPP, currently the first phase worth $73 million to transfer the Novo-Angren TPP in the Tashkent region (the first five power units) on a year-round coal-burning is underway. The last sixth and seventh power units of the plant will be transferred to coal during 2013-2015. As a result of modernization, electricity production at the plant will increase from 3.59 billion kilowatt hours to 8.4 billion kilowatt hours, including electricity production using coal which will increase from 2.5 billion kilowatt hours to 5.5 billion kilowatt hours. This will free up 4-5 billion cubic meters of natural gas per year and increase coal supplies to the plant to 6.5 million tons instead of 2.3 million tons in 2010. The reconstruction of the Angren coal mine in the Tashkent region, which produces over 90 percent of coal in the country, is being implemented alongside the modernization of the Novo-Angren TPP. In May 2010, China’s Sino Coal International Engineering signed a contract with Uzbekugol to upgrade a coal mine worth $120.4 million. The project, worth $154 million, will bring coal production to 6.4 million tons by 2012 from 3.2 million tons in 2009. Also, coal supply to the Novo-Angren TPP will be increased from 2.3 million tons to 4.2 million tons in order to provide year-round operation on coal. Currently, Uzbekugol, the country’s largest coal producer, has developed technical and economic calculations for the second phase of the project to increase the coal production at the coal mine up to 11.5 million tons per year. According to experts, if China’s Exim Bank issues a new loan to upgrade the coal mine, Sino Coal will get a contract for the second phase of the project as well. "The arrival of international investors in the development of gas fields with simultaneous growth in exports of Uzbek gas, as well as the inevitable rise in gas consumption in the domestic market point to the need to switch from gas to coal-gas energy, increasing the share of coal in the supply-demand balance,” said Batyr Teshabayev, chairman of the board of Uzbekenergo. In fact, it is not so easy, experts say. On the one hand, a significant part of Uzbek power plants are designed only for the use of gas or need gas and coal for burning. On the other hand, the social significance of cheap gas hinders the transfer of thermal power plants to solid fuels and modernization of coal mines.

* The vicious circle of coal deficit

Uzbekenergo estimates that with 8 percent GDP growth in Uzbekistan, the total economic demand for gas may reach 80 billion cubic meters by 2015. However, the country’s provision with gas by that time, according to forecasts, will be 73-75 billion cubic meters. Even with the implementation of measures envisaged, gas supply deficit by 2016 may total 5-7 billion cubic meters. According to experts, taking into account the increasing efficiency of coal power generation, the domestic energy sector will be able to free up at least 4-5 billion cubic meters of gas annually. “However, in order to make coal competitive with gas, the latter should be at least by 1.5-fold more expensive, because the efficiency of coal-fired power plants is lower than that of the gas-fired power plants," believes expert Dilmurad Kholmatov. This proportion has not yet been achieved. Since the current pace of growth in gas prices in the coming years will remain moderate, this type of fuel for the Uzbek consumers will continue to be the most attractive energy source. Ilkhat Tushev, an analyst at Central Asia Investments, notes that Uzbekistan has to burn low-calorie Angren brown coal, the quality of which is deteriorating. Attempts to enrich it cause multiple increases in the price. Moreover, all existing calculations of the energy consumption do not consider the growing public demand for coal, believes analyst Anvar Jumayev. With the coming winter heating season, a number of internet resources are filled with reports of shortages in gas supplies throughout the country and of expected jump in coal prices. According to uzmetronom.com, due to the lack of a proper gas supply in the Andijan region, the government decided to transfer almost the entire region to coal heating. To reduce social tensions, the coal price for residents of the Andijan region was limited by $35 per ton. However, in reality the coal is sold at the price of $100-$120 per ton on the black market. Still, it is quite common for many Uzbek cities and villages to see the chimneys sticking out of the windows of houses, and thick white smoke being produced in cold weather. According to independent experts, in the case a ‘coal initiative’ covers the entire Ferghana region, coal supply to the housing sector during the heating season may total about one million tons. Similar calculations for the entire country have not been conducted, but it is obvious that they will increase several times over.

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