Kazakhstan’s Bet on Rail

Courtesy of the New York Times, an interesting article on Kazakhstan’s efforts to build a railway network to help the region diversify its exports and end reliance on Russia:

The railroad locomotive factory here on the outskirts is one of the most modern in the world, with huge yellow overhead cranes and a work force of 1,100. An engine factory being built next door will soon make some of the world’s most fuel-efficient 12-cylinder diesel engines.But in Aktogay, a Kazakh rail junction town 600 miles to the southeast, the roads are mostly dirt and the houses are low and cramped. Just a few yards outside the entrance to the main freight rail yard, cars swerve to avoid a pothole more than a yard across and deep enough to snap an axle.

With oil finally having started to flow in September from the vast Kashagan field in the shallow Kazakh waters of the Caspian Sea, this big but sparsely populated Central Asian nation is considering how to spend its coming wealth. An early beneficiary is the country’s sprawling railroad network, a large, state-owned business empire. It is investing heavily with cash from the country’s oil-financed sovereign wealth fund and is now considering initial public offerings for one or more of its business units.

The rail business, Kazakhstan Temir Zholy, better known by its initials as K.T.Z., reached a deal this summer to build a $100 million freight and logistics center on the coast of China at Lianyungang port, roughly halfway between Beijing and Shanghai. The goal is to bring goods in and out of Central Asia through a combination of rail and sea freight, and help the region diversify its exports beyond an overwhelming dependence on Russia that has lasted for more than two decades after the demise of the Soviet Union.

“We can see the change of the market toward more shipments to China,” said Kanat K. Alpysbayev, the chief operating officer of K.T.Z., in an interview here.

The railroad has opened a second line from Kazakhstan to China that runs through a southern mountain pass that is less prone to the high winds and blizzards that bedevil a Soviet-era border crossing farther north built under the Soviet leaders Khrushchev and Brezhnev. The company is frenetically building new rail lines within Kazakhstan to distribute goods, too, and has more than quadrupled its annual investment in the last four years, to $3.1 billion this year.

Kazakhstan faces a difficult challenge in trying to spend its oil wealth in ways that will create prosperity beyond the city limits of the capital, Astana, and there is no guarantee that its emphasis on the rail industry will work.

Through history, many countries reaping bonanzas from natural resources have seen other domestic industries hollowed out as their currencies surged and other industries became uncompetitive. Spain’s wool and garment industries lost competitiveness in the 1600s and 1700s as gold and silver flowed in from its colonies in the Americas. The Netherlands suffered a broad industrial decline after the large-scale development of offshore natural gas in the 1960s, as the climbing value of the Dutch guilder made other exports less competitive. Nigeria has endured a steady decline in recent years in its role as an industrial hub of Africa as it has become dependent on its considerable oil wealth. From the Persian Gulf to Algeria, Arab countries with oil and natural gas wealth have largely failed to create new industries, with Saudi Arabia’s ambitious plans to grow wheat in the desert often cited as one of the most conspicuous failures.

Like Saudi Arabia, Kazakhstan is trying to use oil wealth to foster new industries that barely existed before. When it was part of the Soviet Union, Kazakhstan’s economy relied heavily on wheat production, iron ore mining and military spending. Now it is trying to become a powerhouse in railroad manufacturing and operations.

A large, black steam engine with a bright red Bolshevik star on the front sits as a museum piece in front of the main train station in this city of 800,000. Railroad tracks link practically every town and village in a country with fewer people than Florida scattered across an area larger than the United States east of the Mississippi.

President Nursultan Nazarbayev, the country’s authoritarian ruler since before its independence in 1991, visits the locomotive factory here every year to inspect progress. He attends not only the opening of practically every new train station in Kazakhstan, no matter how small, but even attends the reopening of stations that have been refurbished. “He has been committed to moving away from just an oil base and commodity base and toward industrializing the country,” said Lorenzo Simonelli, who helped oversee the Kazakhstan locomotive project as chief executive and president of General Electric’s transportation division for the last five years. He became head of G.E.’s oil and gas unit in October.

One issue facing Mr. Nazarbayev is whether Kazakhstan’s young but small population will be interested in the skilled blue-collar jobs that the government is trying to produce. The government has set up training programs, and towns like Aktogay and Dostyk still have a strong blue-collar culture.

The nation is changing in many ways, thanks to its wealth. Expensive, Western-style shopping malls are displacing Soviet-era stores in big cities like Astana and Almaty, which have been the biggest beneficiaries of oil wealth and also what critics describe as lavish spending by a politically connected, sometimes corrupt elite.

Having licensed locomotive designs from G.E., the railroad has set up a joint venture with a Russian company, Transmashholding, to manufacture and distribute the vehicles. The joint venture has already begun exporting to Tajikistan and is in discussions to sell more locomotives in Central Asia.

As the cash-flush transportation giant increasingly reaches out to neighboring China, it changes the geopolitical equations for the West and for Russia. While most of China’s imports of raw materials and exports of finished goods currently travel on sea routes controlled by the United States Navy, the development of land routes across Kazakhstan and access to Kazakhstan’s plentiful oil, iron ore and wheat mean that a growing share of China’s trade is traveling through areas outside of American dominance.

For China, “it’s an added level of assurance that China will not find its options restricted by whatever the United States decides to do,” said Jonathan D. Pollack, a specialist in Chinese geopolitical strategies at the Brookings Institution.

After years of limiting Chinese investment for fear of being overwhelmed by its far more populous neighbor, the Kazakh government is showing a new willingness to accept Chinese investments in logistics ventures inside Kazakhstan, although none has started yet. “If the Chinese want to do that, we would like to discuss it,” said Mr. Alpysbayev of K.Z.T.

Russia is wary of Central Asia’s willingness to turn to China to avoid dominance by Russia. Mr. Alpysbayev said that K.T.Z. was not seeking to shift from Russia to China, but rather simply to balance its freight traffic. Nearly all of the rail freight transiting Kazakhstan until the last few years consisted of goods traveling between Russia and former Soviet republics like Kyrgyzstan. But now a quarter of the transit traffic is with China and K.T.Z. expects it will soon grow to half.

“We need to work with Russia as well. The main idea for us is to diversify our routes,” said Mr. Alpysbayev, who also said that container rail freight traffic to and from China had increased 62 percent in the first nine months of this year compared to the same period a year ago.

And now, top Western investment bankers are flying here to seek underwriting assignments for a planned initial public offering of shares in one or more units of K.T.Z., when the government begins privatizing them. Mr. Alpysbayev said that the government was still discussing how to do that.

Any public listing is almost certain to be done on the Kazakhstan Stock Exchange in Almaty, a city of 1.3 million in southern Kazakhstan, and not in New York or other foreign markets, he said.

The trickiest problem for K.T.Z.’s expected offering lies in what to do with its huge work force, which it must pay and provide with a wide range of social benefits. In rail junction towns like Aktogay and Dostyk, the stationmaster is essentially the mayor as well, as K.T.Z. takes responsibility for schools, roads and more.

K.T.Z. employs 160,000 people in a country with a labor force of only 8.6 million, or one in every 54 workers in the entire country.

If the work force is not pared, and the responsibility for social benefits transferred to government agencies, then the initial public offering will be a much harder sell. “The reduction will come,” Mr. Alpysbayev said, “but we try to make it very smooth so as not to raise any social aspect with the people.”

This entry was posted on Thursday, November 21st, 2013 at 2:49 am and is filed under Kazakhstan.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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