Clare Nuttall in Almaty -

There is a window of opportunity to diversify Kazakhstan's economy as the crisis ebbs and before commodity prices shoot up again, the European Bank for Reconstruction and Development's country director for Kazakhstan tells bne, and the EBRD plans to invest up to $1bn to support the government's development plans.

Michael Weinstein believes that the recovery has already started in Kazakhstan, and forecasts modest growth in 2010. "We think Kazakhstan has turned the corner. The price of oil is increasing, as is demand for goods," he says.

Even so, the recent crisis has highlighted some major problems that need to be fixed, namely a heavy reliance on primary industries and commodity exports, the banking sector's dependence on foreign capital markets, and the need for investment in energy and transport infrastructure.

3-year strategy

The EBRD's new three-year strategy for Kazakhstan, approved in February, will focus on these areas. The bank has also signed an agreement with Kazakhstan's state holding and investment company Samruk-Kazyna and the Industry and Trade Ministry to invest up to $1bn in projects to diversify the Kazakh economy.

A list of priority projects is being drawn up by Samruk Kazyna and the Kazakh government after President Nursultan Nazarbayev set out the country's medium-term development priorities in his annual address to the nation. "In the past, there have been various diversification programmes that for one reason or another did not succeed," says Weinstein. "The newly announced programme is more promising. Momentum is building, and there is a window of opportunity to diversify post-crisis, but before oil prices go through the roof again."

Weinstein considers the government's new plans to be more realistic than some of those outlined in the past. "The government has set its sights a bit lower this time," he says. "The priority sectors Nazabayev has selected are the right ones. Rather than looking at high-tech sectors, the government is targeting sectors such as pharmaceuticals, chemicals, petrochemicals, metals, construction materials and fertilisers - the things the country needs.

Agriculture is another sector with huge potential for development, but with considerable problems as well. In December, the EBRD lent $35m to agro-industrial holding company Kazexportastyk, its first investment into the sector after a long hiatus. "Building the value chain in agriculture is very important. However, the agriculture sector is difficult to invest in because it is dominated by companies that are non-transparent," explains Weinstein. "We hope this investment will encourage other companies to become more transparent."

He points out that within the agricultural sector, Kazakhstan needs to develop related infrastructure such as logistics centres and warehouses. "We are interested in supporting the development of agricultural infrastructure - provided it is a bankable project," he says.

Support for infrastructure of all types, including transport, energy and municipal utilities, is crucial. In the energy sector, the EBRD and other international organisations helped to finance construction of a new north-south power line to address the imbalance between the ends of the country, while the state is also investing in additional generation capacity. "Coal is likely to be the dominant source of energy in Kazakhstan for the foreseeable future," says Weinstein. "We are happy to work with coal-fired generators, but we would never finance sub-optimal technology. We would like to help rehabilitate existing coal-powered generation facilities and develop new facilities through the use of the best available technologies."

Municipal infrastructure has also suffered from a lack of investment in Kazakhstan. Under Kazakhstan's budget code, most municipalities, except Astana and Almaty, are restricted from borrowing or guaranteeing municipal companies' debt, making the raising of finance difficult. The EBRD has already made a loan to Shymkent Vodokanal, a private water company in Shymkent. A planned investment into a municipal water and heating company in Aktau is currently at the final review stage. If approved by the board of directors, it would be the first time the bank has financed a municipal company in Kazakhstan.

Raising cash

For the country as a whole, resolving the problems currently besetting the financial sector is key to channelling money into the various parts of the economy that need it. According to Weinstein, "the single biggest problem for Kazakhstan-based companies is access to financing."

The EBRD wants to help create a more sustainable financial model - without the excessive reliance on foreign capital markets seen in the past - as well as supporting alternatives to bank finance. "In the banking sector, the worst is behind us. Problems with non-performing loans continue to haunt us, but in general risks are down, as shown by the lower [credit default swap] bands. The restructuring of BTA Bank and Alliance Bank has so far progressed better than expected. Investors are now able to breathe a little easier," Weinstein says. "However, for the banking sector to develop in the long term, it must learn the lessons from the crisis, namely more reliance on local currency deposits, increased capacity for local currency lending, less foreign currency lending and a raising of core competencies."

He adds that the EBRD could in the future play a role in a restructured BTA or Alliance. "It's not something we would consider right now, but might after the restructuring is completed," Weinstein says.