Made in Kazakhstan, With a Little Israeli Help

The Kazakhs especially want more joint work in high tech, and medical and defense technologies.

Kazakhstan would very much like to ramp up its business relations with Israel. At the end of November, a giant delegation of the Central Asian nation's leading businessmen, led by the Kazakh health minister, will be visiting Israel. Kazakhstan's ambassador to Israel, Galym Orazbakov, dearly hopes this will do the trick and lead to wider Israeli investment in his home nation. The Kazakhs especially want more joint work in high tech, and medical and defense technologies. Nor do they make any bones about their ambition: to transfer knowhow and production to Kazakhstan, in exchange for government assistance.

The former Soviet republic of Kazakhstan lies between China to the east and the Black Sea to the west. It's near Iran, and Russia lies all along its northern border. Collaborating with Israel on security technology might raise a few eyebrows in this region, but then Kazakhstan has maintained diplomatic relations with Israel since its independence in 1992. Israel has had a diplomatic representation in Kazakhstan since 1996 and Kazakhstan is represented in Tel Aviv.

When the two countries first became acquainted, Kazakhstan's main interest was in the agricultural and medical sectors. It has expanded, not only to high-tech and defense technologies, but to telecommunications and even real estate.

"The emphasis is on collaboration in industry, agricultural, tourism and healthcare," says Ambassador Orazbakov. "We'd like more Israeli investments in Kazakhstan. I do not rule out the possibility of discussing investment in Israel at the same time."

There's an old Jewish saying that if a man's hungry and you want to help, don't give him a fish, give him a fishing rod. What the Kazakhs mainly want is expertise, and they suggest that it be imported by collaborating on building industrial works in Kazakhstan with the help of government funding.

The trail is already being blazed. Orazbakov points out that Israel Military Industries (IMI) and Aeronautics, which makes a vast range of aerospace and security systems, are negotiating to build joint ventures in Kazakhstan with state-owned companies.

Among other things, Aeronautics makes drones - tiny unmanned planes usually used for espionage purposes. Among other things, IMI makes ammunition. It declined to comment for this report, but Aeronautics said the negotiations, in an early stage, are being conducted through IMI. "We would be happy to cooperate with the Kazakh government," Aeronautics said.

In fact, more than 30 Israeli-Kazakh projects are taking place, Orazbakov says. Among the companies already working in Kazakhstan are none other than Lev Leviev's Africa Israel. Leviev himself hails from Tashkent, Uzbekistan.

Orazbakov also lists irrigation-technology pioneer Netafim, Direct Capital - which is investing in Kazakh real estate - the high-tech investment company MC Group, Tadiran Telecommunications, and Soltam, once a leading maker of armaments. Soltam makes artillery systems, mortars and the like, as well as pots and pans.

Things can go in both directions. In 2006 the National Fund for Inventions - a state-owned Kazakh company - invested $5 million in the Israeli venture capital fund Vertex, says the ambassador. Through Vertex it invested in four Israeli startups, putting another $7 million into these companies as an external investor.

As for Direct Capital, a year ago it bought about 45 dunams in the capital city of Astana for $35 million. It plans to build housing and stores on the site.

Another notable Israeli presence in Kazakhstan is IDE Technologies, a water technology firm jointly owned by Israel Chemical, a subsidiary of the Israel Corporation group, and Yitzhak Tshuva's Delek Group.

IDE Technologies built a $14 million seawater desalination project in Mangystau, a region of western Kazakhstan, that supplies boiler feed water to a national power plant and drinking water to the city of Aktau. As for Tadiran, it's working on a $3 million project for the Kazakh copper company.

The most important indicator of economic cooperation is bilateral trade, which increased by 75% from 2006 to 2007 to $1.3 billion. In the first nine months of 2008, the figure reached $2 billion. Most of Kazakhstan's exports are oil, and given the fluctuation in its price, it skewed the picture somewhat.

Naturally, Kazakhstan could not have remained unaffected by the financial crisis shaking the globe. The worst-hit sector is banking, which had taken large loans abroad. Another hard-hit industry is housing and other real estate sectors. Investment in Kazakhstan has all but ceased because of the credit crunch.

The price of metals, a sector on which Kazakhstan has based much of its growth, has dropped in 2008. All this led Fitch to downgrade Kazakhstan's sovereign credit rating from BBB to BBB-minus earlier this month. Moreover, the outlook for Kazakhstan is negative, Fitch says. Bulgaria, Hungary and Romania were subjected to the same indignity. The "profound shift" in the global economic and financial outlook pose special challenges for emerging markets, in terms of pure economics and policy as well, Fitch analyst David Riley explained.

For its part, the Kazakh government took steps to diminish the impact. Orazbakov says the government has earmarked $4.5 billion to support small and mid-sized businesses in construction, banking and agriculture. The president has also proposed to use $10 billion from the Next Generations Fund, which had been set up a few years ago, as needed to overcome the impact of the crisis. (The fund had been created from surplus revenues from commodity exports and today has $51 billion in assets.)

Astana is also looking at shoring up the banks with capital injections in exchange for equity stakes, as has been done in Britain and the United States. It's also looking at legislation to stabilize the financial system, Orazbakov says.

The government has already said it is guaranteeing the public's investment in Kazakhstan's banks, up to $42,000 per citizen. Aside from all that, the government intends to set up a billion-dollar fund to help resolve pinpoint problems caused by the crisis, such as funding to finish building projects that stopped.

Moving on from the crisis to the future, Kazakhstan plans a $5 billion government fund that will work with other sovereign funds around the world to invest in Kazakh government projects, mainly infrastructure and electricity. "There's a plan to found a joint billion-dollar fund with China and a $1.5 billion plan with Bahrain and Abu Dhabi," says Orazbakov.

Kazakhstan's model for the sovereign wealth fund is the Singaporean vehicle Temasek Holdings, which is a sort of management company. The Kazakhstan version would be a "friendly collaborator" with Israeli companies that want to invest in Kazakh tenders, which could be worth billions of dollars, says the ambassador.

He noted, however, that any company contending in a tender must factor in the fixed demand for 60% mutual procurement. Meaning, if an Israeli company wins a tender, it has to use 60% of the tender scope to procure from local companies. If anything, the government plans to raise that figure, explains Orazbakov. It wants to encourage Kazakh production as much as possible. It wants investments that advance goods bearing the words "Made in Kazakhstan."