Kazakhstan’s sovereign development fund is trying to diversify the country’s economy away from its dependency on oil and gas – to that end, it is keen to build more relationships with state and private entities to attract investment and expertise.

Baljeet Kaur Grewal, head of strategy and portfolio investments at Samruk-Kazyna, spoke to AsianInvestor about the progress it is making and how she sees cooperation between sovereign funds growing.

Set up in 2008 as a development fund along the same lines as Malaysia’s Khazanah and Singapore’s Temasek, Samruk was hit hard by the oil price collapse in 2014, seeing its assets shrink by $20 billion to around $70 billion since then.

It is now two-and-a-half years into its overhaul of Kazakhstan’s state-owned enterprises, aimed at developing the domestic economy and moving into new industries (see box below).

KTZ, Kazakstan's biggest rail operator, is undergoing changes

The fund is implementing this process with the help of other sovereign entities. It signed an agreement in September with Italian state fund CDP Equity with a view to Kazakh and Italian companies cooperating to create new production facilities in manufacturing and agricultural industries in Kazakhstan.

Kazakhstan’s overhaul of SOEs

In 2014 Kazakhstan’s sovereign development fund started the process of transforming state enterprises such as KazMunayGas, Kazpost and Samruk-Energy. Samruk-Kazyna has made swift progress, said Baljeet Kaur Grewal, the fund’s head of strategy and portfolio investments.

 

“We needed to get our companies ready for the next stage of market reform. We streamlined the businesses. There were 600 companies in the group; we are now 300. And we restructured the companies themselves [to make them leaner and nimbler].”

“A lot of them are ready to go to public markets now and source new equity,” she added.

Samruk’s corporate transformation efforts seem to be paying off. Last year the fund’s Ebita increased by 20.6%, its net income by 56% last year and its portfolio NAV by 7%. And Kazakhstan is now number 36 out of 190 globally in the World Bank ‘ease of doing business’ ranking for 2018, up from 50 in 2014, noted Grewal.

In the process, Samruk-Kazyna has also become much more open about how it goes about its business. The fund scores the top 10 points in the Sovereign Wealth Fund Institute’s Linaburg-Maduell Transparency Index as of today, said Grewal, having leapt from a low of 2 points on a national score basis as at end-2015.

Samruk is targeting more partnerships with both public and private institutions, noted Grewal. Indeed, it hosted the annual meeting of the International Forum of Sovereign Wealth Funds (IFSWF) in early September in the Kazakh capital, Astana.

“There’s a very close cohesion between sovereign wealth funds, and the IFSWF is pivotal to this,” said Grewal, and the number and depth of such relationships is only increasing.

Certainly, other SWFs, such as Turkey’s new wealth fund and Morocco’s Ithmar Capital, are eager to build their networks and have also praised the IFSWF for the role it plays. Moreover, asset management industry executives point to ever-growing cooperation on co-investments between public and private institutions from far-distant regions and countries.

Grewal noted: “Most [sovereign] funds—at least around 15 to 20 years ago—worked in isolation; they were very domestic. Now we are slowly starting to see our mandates coalesce with each other. It’s about diversification of risk, of investments, of geography.”

She pointed to Samruk-Kazyna’s talent-development partnerships with Khazanah and Temasek. “[Temasek] have an excellent people-stewardship programme and corporate university. There are secondments taking place—we support them and vice versa,” she said. “That’s only increasing.”

Meanwhile, in May 2017 Samruk-Kazyna set up a Centre for Social Cooperation and Communications to increase the effectiveness of managing social and labour relations, added Grewal. It is working on this initiative with CDC Malaysia, a subsidiary of Khazanah.

Other countries’ companies and funds are also sharing knowledge and technology as they invest, she said.

Luring investors

Kazakhstan’s oil and gas reserves are attractive to foreign investors, noted Grewal: “Entry into other energy markets is far too expensive now, and so they see tremendous value in Kazakhstan. For them it’s a diversification strategy: resources, access to a frontier market that’s on an upward trajectory.”

She also pointed to the fact that the country offers the advantage of a common law structure and is setting up a framework with English common law, thereby offering a robust legal and regulated environment.

Indeed, Kazakhstan comes top globally (out of 190) in the category of 'protecting minority investors' and sixth for ‘enforcing contracts' in the World Bank’s latest ‘Ease of Doing Business’ ranking for 2018.

This may offer some comfort to institutional investors, which tend not to buy infrastructure assets in emerging markets, as they are often greenfield projects, which pose relatively high development risk.

At the heart of Belt and Road 

Moreover, Kazakhstan is at the geographical heart of China’s Belt and Road Asia-to-Africa infrastructure initiative, said Grewal. “One Belt One Road is an important proposition for Kazakhstan.”

She noted that Kazakhstan has updated state rail operator KTZ’s transit routes to capitalise on the BRI scheme, and Samruk-Kazyna is making a lot of co-investments in roads, railways and dry ports.

For example, in May KTZ agreed a joint investment in Khorgos, a dry port on the China-Kazakhstan border, with Chinese shipping company Cosco and Jiangsu Lianyungang Port Company.

Asked whether Samruk-Kazyna might eventually expand its portfolio into public market-type investments, Grewal did not rule out the possibility in the future. Such developments have been a natural evolution for other state funds, she said.

“If you take the example of Temasek or even Khazanah, we are very closely aligned to them in terms of our model. Temasek started like us, purely as a development fund. Now their mandate is completely different – they are looking at listed equities, they have venture capital.”