Genghis Khan’s heirs – the return of the Silk Road?


More and more investors are looking to invest in listed companies in the countries along the Silk Road, such as China, Mongolia, India, Russia, Turkmenistan, Kazakhstan and Turkey. The region is being acclaimed as the missing link in the global value chain and is considered to still have largely untapped investment potential. The fact of the matter is that firstly, political and economic reforms in the region are accelerating the process of economic integration, and secondly, the region boasts some of the largest commodity resources in the world. What’s more, just like in the rest of Asia, an increase in purchasing power is generating greater domestic consumption and creating new sales markets.

Central Asia is becoming increasingly important for the European export sector. This up and coming region comprises commodity-rich countries such as Kazakhstan and Turkmenistan, and also places such as Uzbekistan, Kyrgyzstan and Tajikistan, which represent opportunities in specific niches. The vast expanse of land between the Black Sea and the Chinese border is difficult to get a handle on, and is not an easy place to do business: corruption is rife, deals are frequently based on gut instinct, and agreements are often not honoured. But the region also has oil reserves which exceed those of Saudi Arabia and half of the world’s gas reserves are dotted around the Caspian Sea. The people in charge of the fuel supplies of tomorrow are, however, autocrats in every respect, who tend to base their legitimacy on the billions they have earned with commodities and who are prone to foster the cult of personality.

In the west, Kazakhstan is most associated with the comedy figure of Borat, who parodies the backwardness of this steppe country. But it is actually the fourth most important supplier of oil for Germany.

And President Nursultan Nazarbayev even compares his country with the tiger economies of South-East Asia and pledges that Kazakhstan will be among the top 50 most modern countries in the world by 2030. 70-year-old Nazarbayev rules Kazakhstan like a sultan in the Orient and recently effected a constitutional amendment that made him president for life. He attracted a lot of attention during the financial crisis when he called for the introduction of a global currency. But Kazakhstan is becoming an increasingly important investment destination thanks to its vast natural resources such as oil, gas, copper, uranium and numerous other minerals. Billions of dollars are being pumped into the country in order to mine these commodities and Kazakhstan has therefore become a major economic driving force within central Asia, above all because of the oil and mining sectors. The prices of numerous commodities including metals such as palladium, platinum, copper, gold and silver soared dramatically in 2010, and Kazakh metal and mining companies were therefore able to reap the rewards. Consumerism and increasing prosperity are becoming all the more evident in Kazakhstan’s largest city, Almaty. A brand-new stadium has been constructed for the 2011 Asian Winter Games and there are now also huge shopping centres like those found all over the world. And then there is the dazzling new capital city, Astana.

The Kazakh autocrat Nazarbayev played the role of a democrat earlier this year when he scheduled an early presidential election for 3 April, stating that he was not interested in holding a referendum to extend his term of office until 2020. But no compelling argument came from Nazarbayev as to why he didn’t simply wait until the next regular election date of December 2012. And it hardly came as a surprise when he managed to secure the majority of the votes. The official presidential inauguration was held on 8 April, after which the government resigned, as decreed by the Kazakh constitution, and a new cabinet was brought in. 

But Nazarbayev’s priority is evidently continuity, as the former Prime Minister Karim Massimov has been reinstated, as have a large number of other ministers. The hasty elections in Kazakhstan were probably a precautionary measure veiled in democracy in response to the protests in the Arab world. But uprisings and political upheavals such as those witnessed in Tunisia, Egypt, Bahrain and now also Libya are not likely to occur in Kazakhstan, or in any other central Asian country, in the near future.

Kyrgyzstan unseated its third president since gaining independence by removing Kurmanbek Bakiyev from power last April and is now taking its first tentative steps in the direction of parliamentary democracy. The new government under the leadership of Prime Minister Almazbek Atambayev has been in place since January, but the Kyrgyzstani are still waiting for meaningful reforms. Kazakhstan, Uzbekistan, Turkmenistan and Tajikistan carry on as autocratic dictatorships of varying hues, from the more open Kazakhstan to Turkmenistan which is as good as hermetically sealed in terms of its politics. Apart from the Turkmen President Gurbanguly Berdymuhamedov, the rulers of these countries – Nazarbayev in Kazakhstan, Islam Karimov in Uzbekistan and Emomalii Rahmon in Tajikistan – have all been in power for at least 15 years. And for a long time now, these countries have been in the lower echelons of international rankings of freedom of the press and corruption. The billions of dollars generated by oil and gas in Uzbekistan, Kazakhstan and Turkmenistan largely line the pockets of the elite, rather than helping to diversify their economies or put sustainable social security systems in place.

Some commentators in the west foresee the emergence of an “anti-NATO” alliance in the form of the Shanghai Cooperation Organisation (SCO), which comprises Russia, China and the central Asian states with the exception of Turkmenistan. But China knows that Russia is ultimately looking westward (albeit without wishing to be swallowed up by the west in the foreseeable future), as demonstrated by Russia’s strategic missile defence system and its continued refusal to sell state-of-the-art weapons to China. Sino-Russian relations in central Asia are characterised by an interplay of cooperation and competition. Beijing is becoming increasingly important to central Asia, to the detriment of Moscow, but a fundamental confrontation between the two countries is unlikely.

The same applies to Mongolia, which has been the focus of much attention of late. Mongolian shares were hard to beat in 2010 and the MSE Top 20 Index at the stock exchange in Ulan Bator was the best performer in the world by far. Mongolia is now referred to as the Asian Kuwait and its immense natural resources bring promise of serious economic growth. However, Mongolia is still a developing country with an ailing infrastructure and serious poverty issues in many parts of the country. But Mongolia is also among the top ten countries with the largest natural resources, with immense gold, copper, coal, zinc, uranium and molybdenum reserves waiting to be mined from under its desert sand and steppes. Some of these resources were discovered and sometimes also mapped up to 30 or 40 years ago, but are still a long way off being mined. And that won’t happen without money from outside, because Mongolia is poor in spite of its dormant riches. It is four times the size of Germany, but only generates a gross domestic product of EUR 3 billion because, with a population of just 2.8 million, it is the most sparsely populated country in the world.

Half of all Mongolians are nomads who subsist on livestock and arable farming in the country’s 21 aimags (provinces).

The Mongolian government has made it clear that its top priority is mining – investors can acquire licences to mine mineral resources from 25% of the country’s surface area. It has identified 39 strategic mining deposits and also lays claim to 1,170 mineral deposits. One of the largest mining deposits is Oyu Tolgoi in the Gobi Desert, 600 kilometres to the south of the capital Ulan Bator and just 90 kilometres from the Chinese border. It is one of the world’s biggest mining projects and at least three billion tonnes of ore, 25 million tonnes of copper, 1,030 tonnes of gold and 5,100 tonnes of silver have been identified there. The Mongolian government has gone the whole hog with Oyu Tolgoi. Mongolia could be on the brink of a breakthrough similar to those in Kazakhstan and Qatar, with vast natural resources waiting to be mined by international conglomerates. For many, Mongolia is the most attractive of the “frontier markets”.

Investing directly in the Mongolian Stock Exchange is not easy, however. Trading is highly illiquid and investors currently still have to make do with the shares of mining companies listed in Hong Kong or Canada. The opportunities may sound tempting, but there are risks involved too, as demonstrated by the fluctuations on the Mongolian Stock Exchange: in euro terms, the benchmark index depreciated by more than 70% between mid-2007 and mid-2009. The market is undergoing a correction now too, and the MSE Top 20 Index has forfeited a quarter of its value since hitting a high at the end of February 2011. Nonetheless, it has been 63% up since the beginning of the year.

In any case, frontier markets such as Kazakhstan and Mongolia are tomorrow’s emerging markets. But the economies in these markets are frequently very much focused on domestic economic activities and the number of listed companies is limited. But that is not to say that the degree of risk in the new frontier markets is any greater than in the existing emerging markets. As ever, it is ultimately a question of choosing the right company or the right shares. In the context of changing global trade flows, central Asia is beginning to once again play a part that it previously played for centuries, namely acting as a bridge between Asia and Europe – with the Silk Road as the artery for economic and cultural exchange.

This article was originally published in Berenberg Bank Newsletter – Asian Monitor – Issue 5

(July 1st, 2011, N° 25/ 2011)

 

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