Doing Business the Kazakh Way
by Ryan Dalrymple
During the summer of 2012 Ryan interned at the U.S. embassy in Astana, Kazakhstan. He worked in the political and economic section of the embassy, assisting the economic officers in evaluating the economic conditions in Kazakhstan. Although he lived in Astana, Ryan’s work took him to several other cities. Here is the story of one of his trips.
The U.S. Embassy located on the outskirts of Astana.
The unknown can be scary, especially if millions of dollars are on the line. To many, the business practices of Kazakhstan are just that — unknown. On August 23, 2012, I flew from the Kazakhstani capital of Astana to Almaty, the country’s commercial center, to meet with business leaders from several economic sectors and learn about the experience of international investors. As an intern at the U.S. Embassy, I was trying to develop a better picture of the business environment in Kazakhstan. I learned that the level of competition varies by industry. More importantly, three of my meetings illustrated starkly different business cultures. European companies seemed open, and to the point, while state-owned companies often seemed bureaucratic and hierarchical. The Kazakhstani government’s attitude towards the economy has its flaws, but that does not prevent major multinational corporations from operating successfully in the country. A major question remains for potential investors: Will Kazakhstan support the development of western style business or will it maintain the status quo of familial and hierarchical business structures? The success of several of the companies I visited could be an indicator of Kazakhstan’s overall potential for international businesses.
My first meeting in Almaty with Saken,* the deputy director of a relatively small state-owned telecommunications company, was started five hours late after a questionable flight delay. Instead of meeting at an office like I had planned, the patio of CoffeeRoom, a fashionable and lively café near the center of Almaty, became the site of my first interview. When I arrived, the waitress led me outside to a well-dressed, well-fed man in his mid-thirties smoking a hookah. I expected him to be at least a little annoyed that I was so late; instead he was very friendly and content relaxing on the patio on a summer night.
The KazMunaiGas building, Kazakhstan's state owned oil and gas company.
Saken has been with his current company for less than a year. Before that, he worked in a variety of state-owned companies in the oil and gas industry. He seemed generally satisfied with his career progression and had a general knowledge of the industry in which he now worked. Saken explained the general responsibilities of his company within the telecommunications market. The market was competitive, he said, but the major government telecommunications company (his company’s parent company) had an advantage in size and money. That however, did not interfere with competitive bidding for contracts. According to Saken, the most competitive bid always won. Most private companies disagree.
The conversation quickly moved to other topics, as Saken explained the Kazakh telecommunications industry requires too much infrastructure investment to be profitable for international investors. As the conversation shifted to other areas of the economy I began to understand why Saken was willing to meet me. He understands how the economy works in Kazakhstan and he wants to be a part of new American investment projects.
The Ministry of Agriculture in Astana.
Saken was happy to elaborate on areas of the economy in which Americans could profit. His position at the telecommunications firm is not his only source of income. He is part of a “family business” that operates in the oil and gas industry. Based on his explanation, the operation seems to be opaque and reliant on inside political connections. Oil and gas, according to Saken, is an area in which Americans can profit in Kazakhstan. In fact, Saken had just returned from Beijing where he was working on a deal to purchase oil pump equipment, although he believes western-made equipment is of higher quality and he would like to see more of it in Kazakhstan. Saken also described other opportunities and offered to set up meetings for American investors with the prime minister. This gave me the impression that Saken could be related to the then-prime minister, Karim Massimov, or at least could be from the same tribe. Kazakhs generally come from one of three tribes and know at least their seven most recent progenitors, making for a large web of extended families. Understanding these relationships can be important when navigating the political and economic scene in Kazakhstan.
Managers such as Saken can be desirable business partners for foreign investors given their many connections. While connections of this type can be essential for doing business, such access is not indicative of personal merit or skill. Saken may be the deputy director at his company because of his family relations — not necessarily because of his managerial skills. At the end of our meeting, Saken lingered at the CoffeeHouse to talk with other friends, but generously offered me the services of his driver. On my first night in Almaty, I was chauffeured in his $100,000 Mercedes to my hotel.
The next day I met the CEO of another telecommunications firm, Tele 2. Since I had met with other company executives in Kazakhstan, I found Tele 2’s business culture surprising. As my embassy colleague and I entered Tele 2’s offices, we met the receptionist who politely directed us to the company’s CEO, Andrei. Instead of running things from behind closed doors, Andrei’s desk sat in the middle of the large open office space, allowing each employee direct access to the boss. Tele 2’s employees were young, competent and efficient. Rather than wearing suits and ties, the dress code was casual. The Tele 2 office and business environment was a change from the typical formality and closed doors of work places in Kazakhstan.
The Baiterek, representing a golden eagle egg at the top of a tree, is the center of the new part of Astana.
Andrei was happy to share his experiences working in the field. Educated at the University of Pennsylvania’s Wharton Business School, Andrei was the only Russian speaker in the program. He understood Tele 2’s operations both in Kazakhstan and in its European markets, and was clearly directing the company’s strategy in Kazakhstan. Our meeting was short — he understood our questions and gave concise answers packed with valuable information.
The future of Tele 2 will serve as an indicator of Kazakhstan’s integration into the global economy, and the possibility for international companies to operate in Kazakhstan. There was a distinct Western feel to the company, unsurprising, considering its parent company is based in Sweden. In its first year of operation in Kazakhstan, Tele 2 gained a 10 percent share of the mobile communications market. It is aggressively marketing mobile services and expects to see its market share grow significantly in the coming years. Yet the question remains: Will Kazakhstan encourage these western style businesses, or will it shelter state companies like Saken’s from competition? In the telecommunications market, Kazakhstan has welcomed a new player in the market, but other industries — particularly extractive industries — are a different story.
This pyramid surrounded by a park is the palace of peace and understanding. It houses a conference center and a theater. Behind it is Central Asia's newest biggest mosque.
John, a British mining executive, described some of the successes and the challenges he experienced in Kazakhstan since entering the gold mining market in the early 1990’s. We talked over lemonades in the privacy of the VIP room of a small cafe, while most of the café’s patrons enjoyed the weather outside. John spoke positively of Kazakhstan’s business potential. Still, all of the experiences he shared were negative. His gold mining operation had just been hit with a second environmental fine for the same offense (environmental fines are a common way for regional governments to raise money, he said). John did not deny that his company had violated environmental regulations — which he said are impossible not to violate due to the nature of the legislation — but said they had already resolved the issue when the regulators levied this additional fine. John expressed optimism that his appeals in the courts would be successful, but if he did not receive a favorable ruling, the company’s financial situation would force it to shut down operations in Kazakhstan and its assets would likely be sold off to a state enterprise. International investors are sometimes wary of investing because they fear that a state enterprise will take over their company’s assets. John did not believe this would be the fate of his company. He was optimistic about Kazakhstan’s future, but his 20 years of experience working in Kazakhstan gave him a realistic understanding of the current situation.
Ryan Dalrymple during his internship in Kazakhstan.
Kazakh culture heavily influences business culture in Kazakhstan. Family relations are key, and an executive with relatives in high positions has a much better chance of success. This type of business culture can scare away international investors who fear ending up on the wrong side deals based on family relations. The success of several Western-style companies, such as Tele 2, will be a good indicator of how well Kazakhstan’s economy can adjust to international business and investment. Tele 2 seems to be thriving in the telecommunications market, where the government is encouraging competition. In other sectors of the economy the government has not done as much to encourage competition. Opportunities to invest certainly exist, but John’s mining experience shows that there can be serious risks. Can Kazakhstan reduce these risks enough to encourage more investment? That question remains unanswered.
Ryan Dalrymple is in his second year of a dual MPA/MA degree program in the Evans School of Public Affairs and the REECAS program. He is focusing on Russian and Central Asian economics.
*To protect the identity of those who wished to remain off the record, some names have been changed.