Almaty, the former capital city of Kazakhstan, has continued to serve as an investment hub in Central Asia. (Photo by (Photo by Ruslan Pryanikov/AFP via Getty Images)

The former capital of Kazakhstan, Almaty, is set in the dramatic foothills of the Trans-Ili Alatau mountains. Home to two million people, it is Kazakhstan’s largest city and the primary hub for trading, banking, culture, transport, education, industry (and most things, frankly speaking). Since Kazakhstan is Central Asia’s largest economy and geography, it may come as no surprise that Almaty is also the region’s main business centre

Nonetheless, Almaty has not been spared the enormous hardships of Covid-19. Kazakhstan’s economy was in good shape before the pandemic, with gross domestic product (GDP) growth of 4.5% in 2019. The following year, however, GDP fell to the lowest (-2.6%) since the late 1990s – at which point the nation began to boom following its transition to free markets from a former-Soviet centrally planned economy (an ongoing process). 

Covid-19 could have hit Kazakhstan even harder

The pandemic is not the first economic crisis faced by resource-rich Kazakhstan. The collapse in oil prices in 2009 and 2015 battered aggregate demand and rocked the stability of the country’s financial sector.

These oil crises explain why Kazakhstan’s inward flow of foreign direct investment (FDI) has decreased so significantly over the past six years (see below chart) – something that has, of course, impacted Almaty. 

On the flip side, past economic traumas have helped Kazakhstan withstand the current one. After 2015, the country adopted a much more disciplined approach to overall leverage. Systems were put in place to react to downturns in oil prices.

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In fact, over the past decade, the Kazakh government has shown a strong, coordinated policy response to its lack of economic diversification. Although the country remains significantly exposed to natural resources, major progress has been made. That said, much more is still needed. 

To this day, Kazakhstan’s oil industry and metallurgy have been, by far, the main target for foreign investors, accounting for more than 70% of the country’s total FDI stock, based on 2019 figures from the UN Conference on Trade and Development.

It is no surprise, therefore, that these sectors were hit the hardest by Covid-19, with oil and gas seeing a 30% drop in foreign investment compared with the previous year. However, in manufacturing and industry (the nation’s next largest sectors), investment remained largely stable – while Covid-19 created growth opportunities for infrastructure, healthcare, IT services and education.

Indeed, in 2020, the Kazakh government said it would create 250,000 jobs through large infrastructure projects, including the construction of 19 new hospitals.

In short, Covid-19 has not put a lid on Kazakhstan’s (and, therefore, Almatry’s) liquidity, investment appetite and credentials as a safe haven for investment. This is reflected by the success of the nation’s 2020 bond issue for KazMunayGas, Kazakhstan’s state-owned oil and gas company. The bond was highly oversubscribed and the company achieved the lowest yield among issuers in the Commonwealth of Independent States (CIS).

Reflecting this stability is the fact that Kazakhstan’s sovereign wealth fund, Samruk-Kazyna, has maintained its credit rating of BBB with a stable forecast, according to Standard and Poor’s. Samruk manages key national assets across oil and gas, transport, mining, telecommunications and more.

A home for Kazakhstan’s traditional strengths

The Almaty region boasts key investment opportunities across a range of well-established sectors, such as petrochemicals, meaning & metallurgy, engineering, infrastructure, trade and agribusiness

Meanwhile, the head offices of Kazakhstan’s largest banks and multinationals (domestic and foreign) tend to be located in Almaty. Reflecting the diversity of the above industries, some of the key international players based in Almaty include Tokyo Rope Manufacturing, OBI, Estralin, NACAgro, Leroy Merlin, and Nobel AFF. 

Located at the crossroads of Europe and Asia, Kazakhstan has welcomed huge investments through China’s Belt and Road Initiative programme to upgrade its transport infrastructure. The country is rapidly developing as a hub for transport and logistics in Central Asia, underpinned by its attractiveness as an overland freight transit hub linking China and Europe. 

In fact, Kazakhstan’s transport sector is expected to drive growth over the next five years. Under the government’s Nurly Zhol initiative, the nation will invest $9bn to develop and modernise the country’s roads, railways, ports, airports and IT infrastructure. Many of these opportunities will be in Almaty and its surrounding regions. 

The city has already secured foreign funding and investment for numerous large-scale investment projects, most of which have been a resounding success. For example, Almaty’s new subway (commissioned in 2011) received a recognition of excellence from the European Society for Quality Research. Numerous foreign companies were involved in the mega project, such as Hyundai Rotem.

This flow of infrastructure investment explains partially why greenfield FDI to the country has continued to shoot up in recent years, despite the overall drop in headline FDI. Total FDI stock stood at $150bn in 2019, meaning that Kazakhstan was the second-largest recipient of foreign investment in the CIS region, behind Russia

How Almaty benefits from a privatisation drive

As part of the nation’s transition towards a market economy, Kazakhstan has initiated numerous waves of privatisation, making available key state-owned assets to private investors (many of which are in Almaty). Leading this charge has been Samruk-Kazyna.

The country’s most recent privatisation programme led to the dual listing of Kazatomprom, the world’s largest uranium producer, on the Astana International Financial Centre and the London Stock Exchange (LSE).

The sovereign wealth fund plans to increase its portfolio’s net asset value listing from 14% in 2020 to more than 70% by 2025. Huge state-owned companies such as KazMunayGas and Air Astana will be floated in 2022, while Kazakhstan’s national railroad company will be introduced to the stock market in 2023.

Over the past few years, Samruk-Kazyna has attracted numerous investors, amounting to $600m, while during the past two years it concluded 37 offtake contracts.

As part of Kazakhstan’s efforts to diversify away from oil dependence, green energy has become a priority for the sovereign wealth fund, alongside manufacturing, logistics, chemical engineering, IT, scientific research, infrastructure, healthcare and agriculture.

Zooming in on manufacturing, 2020 saw the Kazakh government review legislation with regards to pharmaceuticals and medical products, as it hopes to double production in this sector by 2025. The country currently imports 80% of its pharmaceuticals and medical products.

Across Almaty’s light and hard industry, many investors set up shop in the city's Industrial Zone of Almaty, which specialises in food, engineering, construction, pharmaceuticals, chemicals and light industry. Currently, 41 companies are residents.

For more tech-related industries, investors head to Almaty’s Park of Innovative Technologies, whose main objective is to support growth in the fields of IT, telecommunications and communications, electronics, renewable energy, resource conservation and efficient environmental management, new materials, Industry 4.0, transportation and the processing of oil & gas. Today, 144 companies are registered in the zone. 

Home to Kazakhstan’s rising stars

Mass-scale international tourism is a fairly new phenomenon for Kazakhstan and Almaty. As per the below chart, the number of arrivals to the city grew strongly over the past decade, especially the past five years. In fact, 2020 was Almaty’s strongest year on record.

Although Covid-19 brought this streak to a bitter end, the nascent industry is set to bounce back. Some of the largest international chains are already present in Almaty and based on the past few years of the pre-Covid-9 growth, many more were expected to come. 

Almaty’s landmarks include the Central State Museum and Panfilov Park, home to the bright-yellow towers of Zenkov Cathedral, a tsarist-era Russian Orthodox church. The city is also known for its large swathes of green spaces and access to ski slopes.

Almaty is also one of Central Asia’s main sporting hubs, having hosted prestigious competitions, such as the 2011 Asian Games, the World Boxing Championship, the Judo and Ski Jumping world cups, and many others.

Tourism aside, Almaty is also home to Kazakhstan’s burgeoning tech scene. Covid-19 has only increased tech opportunities in Kazakhstan.

“We are looking at the market quite bullishly these days,” Dennis Fulling, managing director of Da Vinci Capital, a private equity fund focused on tech ventures, told Investment Monitor,

“We think there is an entrepreneurial spirit there, and companies that really want to internationalise. Kazakhstan is a very well-educated country, its skill sets are strong, the cost base from our perspective is quite competitive. We think the government has done a very good job in providing stability – the geopolitical risks are much lower than some of the other areas in the region,” he added. Many of Da Vinci Capital’s businesses operating in Kazakhstan provide remote IT services to customers.

Reflecting Almaty’s rising tech scene is local fintech superstar, Kaspi, which was recently valued on the LSE at $6.5bn, the most valuable Kazakh company ever listed.

In short, Almaty’s hidden gems are being discovered by international tourists and investors alike. While Covid-19 put a pause on things, the city’s regional economic prowess, alongside its role in Kazakhstan’s diversification and privatisation process, make it one of the most exciting propositions in Central Asia. 

This is the third in Investment Monitor's 'Future of Eurasian Cities' series. Click here to read about Baku and here for our profile on Tbilisi. In the coming weeks, we will cover Nur-Sultan, Tashkent and Yerevan.