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The government of Kazakhstan is deeply conscious of the need to diversify in order to reduce its dependence on oil and gas. "Any country endowed with natural resources has to be wary because prices are up and down and it cannot last forever," one partner says....

The government of Kazakhstan is deeply conscious of the need to diversify in order to reduce its dependence on oil and gas. "Any country endowed with natural resources has to be wary because prices are up and down and it cannot last forever," one partner says. To this end, the country is engaged in rapid industrialisation to diversify its economy and develop sectors like pharmaceuticals, transport, food processing, telecommunications, IT and petrochemicals. "There's a move to industrial laws that rely on natural resources. Telecom, the development of leisure, there's development in all sectors. The government tried to develop things related to natural resources," says one partner.

In energy, there has been a lot of Chinese investment. "We have seen a lot of interest from China in the last five years," says one partner, adding: "Through excess liquidity they bankroll assets and infrastructure here to link to China's economy," says one partner. The Chinese are among the largest consumers of Kazakhstan's natural resources. However, as one partner says: "The Chinese are not only consumers but operators," another adds: "The Chinese gobbled up 50% of all but one [of the] onshore oil producers. Western companies turn their noses up and focus on offshore greenfield investments...they're [Chinese] willing to pay higher prices than others". Renewable energy is at an embryonic stage in Kazakhstan but there is potential in the coming years. "It makes sense; Kazakhstan has a lot of wind and sun. It's not being ignored," says one partner, adding: "They'll make efforts but won't move towards it as we have gas, oil and coal. You hear about it a lot more than it actually happens".

In comparison to the midst of the crisis when the market dried up, last year was an upturn of sorts. "There was some return to finance work, some project finance and regulated finance," says one partner. However, the capital markets were still a far cry from pre-crisis levels. The equity capital markets were a stop-start affair with very few deals completed. "Hong Kong became a hot market because China has money. But it's a difficult exchange to work with. We worked on deals to Hong Kong but they've been abandoned," says one partner.

There has been unease on the banking side with the banks still adopting a cautious and conservative attitude, reluctant to extend new credit and looking to work out their own loan books. "Banks here have liquidity and can lend but they're looking for good borrowers. After the crisis, banks are doubly careful...there are creditworthy borrowers but matching the borrower to the bank is a problem," says one partner, with another adding: "One of the challenges is how to repay, refinance the debt burden". Additionally, there has been a spate of bank bankruptcies with BTA Bank being the most high profile. With the notable exception of HSBC, presently, other international banks are not seeking growth in the market. Nevertheless, banks are starting to turn to the bond market as a means of alternative financing. "The bond market is cheap financing for banks," says one partner, while another says: "Last year we've seen Kazakh corporates going back to the market with some bond issues...slowly things are returning to normal."

The government has also dabbled with PPP (public-private partnerships) and PFI (private finance iniatives) models in order to get some projects off the ground. Unfortunately, this has been met with very limited success and it has been a source of much criticism. "They passed a concession law and tried road, rail and none got off the ground...it's difficult to finance projects because the government wanted low tariffs for socio-economic reasons," says one partner. "There is political will, but PPP/PFI is a sophisticated market thing. PFI projects are so sophisticated; no one knows how to get it done." Other market commentators have challenged the wisdom of road projects when one contrasts a small population with large land mass. "With the roads, we have a small population and a massive country. It doesn't make sense," says one partner, with another adding: "Road projects with a small population and cross subsidies on tariffs. There are no people to use road and rail."

There hasn't been too much activity on the M&A front, nevertheless, HSBC's $50 million acquisition of the retail banking business of RBS Bank in Kazakhstan is a case in point. "There's no voluntary natural M&A activity. Although Unicredit does want to sell out," says one partner. Apart from the banking sector, M&A has seen some activity in construction, infrastructure and telecoms. "Tele2 from Sweden entered the market. They're aggressive on the market. There's talk now of wi-fi," says one partner, adding: "It's becoming more competitive. There is M&A by globals looking for entrance to increase their footprint." Moreover, a lot of interest is generated by private equity investors looking to part with their money. "A lot of money is local," says one partner, adding: "The money is comfortable but this is not exclusive. Foreigners are looking." The market has also evidenced political will to re-launch privatisations. "[The government are considering] sales to the public on the local stock market to kick start, reform and bring in private equity," one partner says.