SWFI. Special Report Into Kazakhstan. April questions:

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1 Special Report Into Kazakhstan April questions: This briefing is a joint publication between the Sovereign Wealth Fund Institute (SWFI) and Samruk Kazyna Research Team. SWFI No statement in this issue is to be considered as a recommendation to buy or sell any security or other investment. This report does not constitute legal, regulatory, accounting, tax or similar professional advice normally provided by licensed or certified practitioners. Neither this issue nor any part of it may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system, without prior written permission of the Sovereign Wealth Fund Institute, Inc. Please read the disclaimer at the end of a sovereign wealth quarterly for specifics Sovereign Wealth Fund Institute, Inc. All rights reserved. Sovereign Wealth Fund Institute and SWFI are registered trademarks of the Sovereign Wealth Fund Institute.

2 Copyright 2017 Sovereign Wealth Fund Institute Inc. All Rights Reserved. Published by Sovereign Wealth Fund Institute Sovereign Wealth Fund Institute 2300 West Sahara Avenue, Suite 800 Las Vegas, NV 89102, United States Events: Phone: +1 (415) Fax: +1 (866) Web: LEAD DESIGN Den Ward, CUSTOM CONTENT SOLUTIONS Vince Berretta, COPIES Aaron Abrahamson, CHIEF EDITOR Michael Maduell, All Rights Reserved. No part of this publication (text, data or graphic) may be reproduced, stored in a data retrieval system or transmitted, in any form whatsoever or by any means (electronic, mechanical, photocopying, recording or otherwise) without obtaining prior written consent from the Sovereign Wealth Fund Institute. Violators may be subject to legal proceedings and liable for substantial monetary damages per infringement as well as costs and legal fees. Printed in the United States Co-Founders: Michael Maduell & Carl Linaburg SWFI 2 : swfinstitute.org Into Kazakhstan

3 About Us We cover an investor segment with an aggregate AUM of greater than US$ 30 trillion. The Sovereign Wealth Fund Institute (SWFI) is a global organization that focuses on public investors, including sovereign wealth funds, pensions, superannuation funds, afores, central bank reserves, endowments and more. We provide specialized services such as research and consulting to various corporations, funds and governments. Our flagship publication, the Sovereign Wealth Quarterly, is the premier publication on public sector asset ownership and management globally. In addition, SWFI facilitates sovereign fund, pension, endowment and central bank events around the world. We have molded the public investor market and have defined concepts and terms like the Linaburg-Maduell Transparency Index (LMTI) and Sovereign Wealth Enterprise (SWE). Our subscribers enjoy trend reports as part of their subscription package. If your organization is not yet a subscriber, contact Aaron Abrahamson at aabrahamson@swfinstitute.org or support@swfinstitute.org for further information. Samruk Kazyna Sovereign Wealth Fund Samruk-Kazyna Joint Stock Company is the Fund, where the sole shareholder is the Government of the Republic of Kazakhstan. Following the Presidential Decree in 2008, the Fund was established as a business corporation an investment holding, whose Mission is to improve the national welfare of the Republic of Kazakhstan and to support the modernization of the national economy. Learn more: Consulting & Advisory Services Park Alpha is a global full-service consulting firm providing a broad range of services to: institutional investors, governmental funds, investment managers, and corporations. We are a trusted advisor to our clients and find solutions to complex, sophisticated issues. CONTACT contact@parkalpha.com Park Alpha is the consulting arm of the Sovereign Wealth Fund Institute, Inc., a privately held company. Park Alpha is not a brokerage or 3rd party marketer. 3 : swfinstitute.org Into Kazakhstan

4 Institutional investors are tactically re-examining opportunities in Central Asia, as government money is steadily leaving the sidelines to fund numerous projects in areas such as transportation, logistics and energy connectivity. Long-term institutional investors, often partner with government arms and units, to provide funding regarding potential mega infrastructure investments. Eagle Eye View Institutional investors are tactically re-examining opportunities in Central Asia, as government money is steadily creeping on the sidelines to fund numerous projects in areas such as transportation, logistics and energy connectivity. Long-term institutional investors, often partner with government arms and units, to provide funding regarding potential mega infrastructure investments. In this report, we are focusing on Kazakhstan, a country that has entered into a number of reforms, even before the oil price crisis. Kazakhstan is well-known for its massive natural resources sector in areas such as mining, oil and gas, but is working to reposition the country to develop, promote and refine new sectors. Kazakhstan is an exporter of fuel, energy, chemical, and mining and grain industries key sectors for a resource boom cycle. Russia, China, the European Union, Turkey and the United States are key trading partners. With a growing demographic, strategic location and ease-of-doing-business, institutional investors across the world are taking a second look at Kazakhstan. The Kazakhstan Constitution affords foreign companies and individuals the same rights and obligations as Kazakhstan nationals. Foreigners may invest in almost all sectors of the economy, but restrictions do exist for specific industries. The country has a number of sovereign/public wealth vehicles such as the Kazakhstan National Oil Fund and Samruk-Kazyna. Brief History of Samruk-Kazyna Samruk-Kazyna is organized as a joint stock company and was founded in 2008 as a state-owned enterprise entrusted to hold and manage the commercial assets of the Kazakhstan government, while partaking in new strategic development investments. The fund was formed as the direct result of the biggest merger of state-owned conglomerates, the Sustainable Development Fund Kazyna and Kazakhstan Holding for Management of State Assets Samruk. This approach is modeled after Comparison of Similarly Styled Sovereign Funds by Total Assets 400 USD Billion Temasek Holdings Samruk Kazyna Mubadala (before merger) Source: Samruk Kazyna Research, National Bank of Kazakhstan 4 : swfinstitute.org Into Kazakhstan

5 Overseas Investors into Kazakhstan - Select Direct Transactions Type Period Target Public Institutional Investor Open Market Q4 Y2013 Kazkommertsbank AO Norges Bank Investment Management Open Market Q4 Y2013 Kcell AO Norges Bank Investment Management Open Market Q4 Y2013 Razvedka Dobycha KazMunayGaz AO Deal Q3 Y2009 JSC KazMunaiGas Exploration Production Norges Bank Investment Management Fullbloom Investment Corporation (China Investment Corporation) Source: Sovereign Wealth Fund Transaction Database - Extracted April 5, 2017 several success stories, such as Singapore s Temasek Holdings, Malaysia s Khazanah Nasional Berhad and Abu Dhabi s Mubadala. If the Kazakhstan government could emulate the successes of Singapore, Malaysia and Abu Dhabi, Samruk Kazyna has the potential of being a well-diversified large strategic development sovereign wealth fund. Temasek Holdings and Khazanah Nasional Berhad both started as holding entities of governmentlinked companies. Over time, they have evolved and contributed significantly to the economies of Singapore and Malaysia respectively. The main objective of Samruk Kazyna is to effectively manage the portfolio of companies and assets, to ensure long-term value, coupled with sustainable GDP Growth % & GDP Value in USD Billion (2017f) GDP USD Billion Kyrgyz Republic Kazakhstan Kazakhstan contributes more than 60% of Central Asia s GDP and will continue to be a key driver of the region s growth. Tajikistan Uzbekistan Turkmenistan GDP Growth % USD Billion development. The fund is also tasked with Transaction promoting some of these Amount - Million state-owned companies USD to stimulate demand with 2.64 Kazakhstan, creating jobs and opportunities for its citizens. Furthermore, in March, the fund is targeting 9.38 to invest 121 billion tenges to catalyze new industries. 940 Kazakhstan is positioning itself to transition from having corporate and multilateral institutions, like the European Bank for Reconstruction and Development (EBRD), as key direct investors in non-resource sectors, to luring a more diverse base of asset owners such as long-term pensions, institutional investors and sovereign funds Privatization Efforts In early April, Samruk-Kazyna stated it sold over 120 small and mid-sized firms through an online electronic auction. Samruk-Kazyna is in the midst of a massive privatization bid, to shore up finances and open its state-owned entities to the public. Some of the smaller companies were liquidated. About 35 to 40 companies were left out of the original 172 selected for the online auction. Kazakhstan s International Reserves in USD Billion GDP U National Oil Fund assets Gross Reserves Source: Samruk Kazyna Research, International Monetary Fund Source: National Bank of Kazakhstan, Samruk Kazyna Research 5 : swfinstitute.org Into Kazakhstan

6 Larger portfolio holdings are in line to be opened to investors such as the country s flagship air carrier Air Astana, Samruk Energy, KazMunayGaz and Kazatomprom. Other assets to be privatized include railway operator Kazakhstan Temir Zholy and Kazpost. Samruk-Kazyna s portfolio of companies once was up to 600 companies in 2014, aiming to be whittled down to 300 by the end of Kazakhstan s Annual Gross FDI Inflows in USD Billion USD Billion e Source: National Bank of Kazakhstan, Samruk Kazyna Research Efforts are moving forward. In April, GE Transportation, part of American industrial conglomerate General Electric, finalized the acquisition of a 50% ownership interest in Astana, Kazakhstanbased Lokomotiv Kurastyru Zauyty JSC (LKZ), a locomotive manufacturer and marketer from KTZ (Kazakhstan Temir Zholy). KTZ is Kazakhstan s national railway company and is owned by Samruk-Kazyna. KTZ is the largest transportation and logistics company in the Commonwealth of Independent States (CIS) region, managing railways, ports, and airports, as well as transportation and logistics centers. GE Transportation is keen on getting exposure to China s One Belt One Road program, as a massive force of capital will be flowing through the CIS region from East to West. LKZ was formed in It was a 50:50 joint venture between KTZ and Moscow-based CJSC Transmashholding (TMH), a rail equipment manufacturer. LKZ manufactures GE Evolution Series locomotives for freight and passenger transportation in Kazakhstan and the broader CIS region. KTZ has worked with GE Transportation for an excess of 10 years, in which KTZ produced over 300 Evolution Series locomotives. 6 : swfinstitute.org Into Kazakhstan

7 Deep Dive with Umirzak Shukeyev Michael Maduell, President of the Sovereign Wealth Fund Institute (SWFI): Thank you Umirzak Shukeyev for the opportunity to learn more about Kazakhstan and the current developments within Samruk-Kazyna. The Kazakhstan government has approved Samruk- Kazyna to privatize a number of domestic champions such as KazMunayGas. How is the process coming along? Umirzak Shukeyev, President of Samruk Kazyna: Samruk Kazyna has successfully started the implementation of Comprehensive Privatization Plan adopted by the Government in late The first half of 2016 was spent building proper organizational structure, setting up rules and sale mechanisms. In the second half of 2017 most efforts were put to the sale of smaller and medium companies. As a result, more than 120 legal entities left the Fund s group in The overall proceeds are around US$ 52 million but these are the results of privatization of smaller and medium business. The most interesting and attractive assets are set for sale now. In December 2016 we started a series of two-staged tenders on privatization of major assets in the energy sector. These are East Kazakhstan Electricity Distribution Company, Mangistau Electricity Distribution Company, Aktobe Central Heating and Power Station, Tegis- Munai (natural gas deposit in the South of 7 : swfinstitute.org Into Kazakhstan

8 4 distinct areas of potential partnerships that are promoted via fund level Number Description 1 Partnerships with existing mature portfolio companies in their core businesses 2 Partnerships with growing portfolio companies with special emphasis on Chemical, Mining, and Real Estate segments 3 Strategic partnerships for new joint investments into emerging sectors for the Fund including, but not limited to Agriculture/Agribusiness, Industrial Technology Applications, and Infrastructure 4 Co-investment partnerships to support both local and foreign investors looking for reputable partners in Kazakhstan for initial phase of new venture establishment for the country. Kazakhstan). Recently three of those two-staged tenders were successfully completed. Upon the completion of those deals, we expect to earn US$ 85 million more. Moreover, Samruk Kazyna already has its own vision on the schedule of privatizing, the remaining major assets. The idea is to privatize most parts of the remaining large companies in As for largest national companies (like Air Astana, KazAtomProm, etc.), the Government s Privatization Decree stipulates that those companies have to go public. Therefore, we plan to bring our largest assets to IPO (or SPO) not earlier than Of course, there will be a careful and weighted consideration before taking a decision to go or not to go public. Maduell: 2017 has appeared to be a very industrious year. How can long-term, patient investors, such as sovereign wealth funds, access some of these privatization opportunities? Shukeyev: The easiest way to get the information about privatization opportunities is to contact the Project Management Office of Samruk-Kazyna. All the information on rules, mechanisms and objects of privatization is available on the website of the Fund ( Please also be informed that Samruk Kazyna had a successful information event that occurred on April 5, It was an Investor Day at the London Stock Exchange. Maduell: I heard about the event and some of the successes that it drummed up. Is Samruk-Kazyna willing to create joint venture vehicles with overseas corporate giants or other institutional investor partners? Shukeyev: Since Samruk-Kazyna is open for international investors, we are ready to consider different options of involving strategic partners into different companies. We do have a number of companies set for privatization where we could successfully collaborate with international companies, transnational corporations. Also in Samruk-Kazyna we have a New Industries Block where we also provide great opportunities for joint ventures, cooperation and strategic partnership through New Portfolio Investments. The Fund s new vision is directed towards the growth of its new investments portfolio as well as identifying new opportunities that are strategic to the nation, in terms of building country s long-term competitiveness in the global markets. The New Portfolio Investments are in effect will have dual catalytic and financial mandates and will drive the structural transformation of the national economy. The Fund, in line with its portfolio companies, is actively engaged in attracting foreign direct investment into the country through mutually beneficial investment structures. Maduell: Kazakhstan is improving its marks on the easeof-doing-business. The World Bank ranked Kazakhstan 35th for However, one of the hurdles is getting electricity. How is the country addressing this issue? Shukeyev: Kazakhstan has improved its ranking in terms of getting electricity from 102nd in DB 2016 to 75th in DB The cost of setting up the connection is significantly lower than average in Europe and Central Asia in relative terms (50.6% of income per capita in Kazakhstan vs % in Europe and Central Asia and 62.5% in OECD high income countries). Kazakhstan also compares favorably against these groups of countries in terms of reliability of supply and the time it takes to set up a connection to the electricity grid. However, one of the largest obstacles is the number of procedures. To address this issue, in , Kazakhstan 8 : swfinstitute.org Into Kazakhstan

9 The cost of setting up the connection is significantly lower than average in Europe and Central Asia in relative terms (50.6% of income per capita in Kazakhstan vs % in Europe and Central Asia and 62.5% in OECD high income countries). streamlined the process of obtaining an electricity connection by eliminating the need for an official excavation permit and an inspection by the State Energy Supervision Committee. Kazakhstan also reduced the time needed to fulfill utility technical requirements and to sign supply contracts. The reliability of the power supply in Kazakhstan was also improved following the establishment of normative levels for the annual system average interruption duration index (SAIDI) and system average interruption frequency index (SAIFI). Consequently, in our view, further reforms should be aimed at reducing some of the remaining procedures to speed up the connection process. Maduell: At the end of 2016, the European Bank for Reconstruction and Development (EBRD) provided financial support to Samruk-Energy. Can you go into detail regarding the privatization plans of Samruk- Energy? Shukeyev: In accordance with the Privatization complex plan in part of power directorate supervised portfolio companies, planned to sell a number of Samruk-Energy assets. In 2017, these assets should be privatized i.e. East Kazakhstan REC JSC (include Shygysenergotrade Llp), Mangystau REC, Aktobe TEC JSC, Tegis-Munay Llp (include Mangyshlak-Munay Llp). In accordance with government decree No dated December 30, 2015 and the letter of the Prime- Minister addressed to Head of Nation No /И-474 dated October 31, 2016 there is a plan to implement an IPO of 25% of the shares of Samruk-Energy in Regarding financial support provided by EBRD, the intended purpose is the refinancing of Eurobonds of Samruk-Energy, where repayment period in accordance with the prospect is December Maduell: Are you optimistic on more economies opening up for trade? Shukeyev: The Kazakh economy was resilient and has adjusted to changes in the external environment. Since March 2016, the USD/KZT exchange rate stabilized support by growing oil prices. Following the recovery in external trade in 2016, the volume of external trade is expected to pick up further in 2017 and beyond, supported by anticipation of higher oil prices, increased oil production domestically (with the resumption of oil production in the Kashagan oilfield), and an economic recovery in key trade partners (Russia). Electricity Region Procedures (number) Time (days) Cost (% of income per capita) Reliability of supply and transparency of tariff index (0-8) East Asia & Pacific Kazakhstan Europe & Central Asia Latin America & Caribbean Middle East & North Africa OECD High Income South Asia Sub-Saharan Africa : swfinstitute.org Into Kazakhstan

10 External trade will also be supported by Kazakhstan s accession into the World Trade Organization (WTO) since At the moment, Kazakhstan and other members of the Eurasian Economic Union (EAEU) are in the process of harmonization of internal legislation with the WTO standards, this process will result in a gradual harmonizing of trade regulations in all EAEUmembers. As a result, within the next five years, Kazakhstan will enjoy the full advantages of WTO-membership, including deregulation of trade in goods and services. Maduell: What about the One Belt One Road project and its impact on your country s infrastructure? Shukeyev: Infrastructure spending under the One Belt One Road initiative is expected to drive trade turnover between Asia and Europe, boosting China- Kazakhstan turnover. In 2015, the total volume of transit cargoes carried through Kazakhstan along the Europe-Asia route was about 47,400 TEU 1, while the Suez Canal marine cargo flow during the same period amounted to a staggering 14.6 million TEU. According to the UN Conference on Trade and Development (UNCTAD), by 2020, the volume of trade between major markets in Eurasia will increase by 1.5 times to US$ 1.2 trillion from US$ 800 billion in 2014, with the trade between China and the EU rising to more than USD800 billion by Freight transportation is forecasted to increase from 117 million tons to 170 million tons (to about 17 million TEU). Meanwhile, bilateral trade between Kazakhstan and China is projected to reach US$ 40 billion by 2020 from US$ 10 billion in 2015, growing at 32% CAGR. Maduell: We at SWFI agree, that the One Belt One Road project will have a significant impact in your part of the world. What are some unknown sectors in Kazakhstan that have bright paths for 2020? Shukeyev: Kazakhstan s government has been implementing numerous projects within several diversification programs. Existing and new projects in such industries as petrochemicals, agriculture, machinery manufacturing, textiles and light industries among others, represent growth potential. One new growth area that the President recently highlighted in his annual address to the nation i.e. digitalization that offers potential value creation in Kazakhstan s main business the commodity sector, but also for diversification and unlocking the potential of other sectors, stimulating entrepreneurial activity, amplifying the structure of the economy due to the diversity of opportunities. Samruk Kazyna and our portfolio companies view that enhanced efficiency and productivity resulting from the application of digital technology in our businesses will result in the creation of national champions and hence attract investments by strategic partners. In driving digitalization at the Fund and our portfolio companies level, for instance, the development of 3D-printing has significantly changed the production and logistics processes for our portfolio company KazPost, resulting in significantly improved efficiency and productivity. Meanwhile, big data and advanced analysis has enabled better and faster decision making from predictive maintenance to fighting fraud for other national companies. Digitalization is also reaching out to our transportation sector. Kazakhstan Temir Zholy, the national railway operator and also one of our key portfolio Infrastructure spending under the One Belt One Road initiative is expected to drive trade turnover between Asia and Europe, boosting China-Kazakhstan turnover. In 2015, the total volume of transit cargoes carried through Kazakhstan along the Europe-Asia route was about 47,400 TEU, while the Suez Canal marine cargo flow during the same period amounted to a staggering 14.6 million TEU. 1. TEU stands for twenty-foot equivalent unit and is an inexact unit of cargo capacity often used to describe the capacity of container ships and container terminals. 10 : swfinstitute.org Into Kazakhstan

11 companies, started introducing digital technologies in customer services and traffic management. Online ticketing service allows passengers to purchase domestic and international railways tickets from various online platforms. Starting this year s freight forwarders will have an opportunity to place and track their orders online through an electronic document and contracting system using a computer or a smartphone. All locomotives are equipped with sensors, which enables real-time identification of their location using satellite and fiber optic communication lines. Digitalization represents a new driver for Kazakhstan s economic growth; it will create new job opportunities and encourage more efficient use of existing resources. We are confident that embracing digitalization to potentially drive growth momentum in the next 3-5 years, we are looking at higher GDP growth of up to 3.1% by 2021 (2016: 1.0%). Maduell: Let s talk about the Silk Road. How can Kazakhstan connect Asia to Europe in areas of energy transportation? Shukeyev: In 2018, Kazakhstan Electricity Grid Operating Company (KEGOC) is planning to finish construction and commissioning of Third transit 500 kv North-East-South in directions Ekibastuz-Semey- Ust-Kamenagorsk and Semey-Aktogay-Taldykorgan- Almaty to achieve the implementation of government infrastructure programs, Nurly-Zhol on According to the concept of fuel-energy complex development till 2030 planned growth of electric load in Kazakhstan with dynamic power of about 500 Mw per year, will create 2030 export potential of about thousand Mw. Wherein in 2016 electricity export to Russian Federation in amount 1.8 billion kwh, to Kyrgyzstan in amount 133 million kwh. In 2017 there is a plan to increase exports to the Russian Federation of 4 billion kwh, and to Kyrgyzstan in the amount of 500 million kwh. Nowadays, Kazakhstan s power system works in parallel regime with neighbor countries, has transit potential for export-import electric energy from the Russian Federation to Kyrgyzstan and Uzbekistan (volume of power regulation contracted in amount 1,000 Mw). In perspective planning, further work will be done on the potential export of electric energy to Tadzhikistan, Pakistan, Afghanistan and Chinese People s Republic. In driving digitalization at the Fund and our portfolio companies level, for instance, the development of 3D-printing has significantly changed the production and logistics processes for our portfolio company KazPost, resulting in significantly improved efficiency and productivity. Maduell: Can you give some general comments on the automobile sector and its growth? Shukeyev: Automobiles are the dominant mode of transportation in Kazakhstan, accounting for 89% of the total Kazakhstan s passenger turnover in billion revenue passenger kilometers. On the cargo front, automobile transport constituted over 31% of total freight turnover (161 billion ton-km), while its share in the total freight transported stood at 85% (3.2 billion tons), attributable to the short average distance covered by automobiles. The automobile sector revenue rose to KZT194 billion in 2016 from KZT92 billion, with 16% CAGR. The growth was primarily driven by positive macroeconomic conditions, as the sector generally is highly correlated with GDP. For 2016, the industry s revenue declined by 2%, affected by moderate economic growth. However, over the medium term, One Belt & One Road program is expected to support the performance of the automobile sector, attributable to rising transit freight volumes and efficiency improvements. Maduell: Thank you for your time and to learn more about Samruk-Kazyna, please visit, 11 : swfinstitute.org Into Kazakhstan

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