Kazakhstan’s heavily resource-biased industry is one of the major concerns. There are historical roots to this situation – Kazakhstan’s economy under the communist regime was biased towards heavy and mining industries. The republic was developed as a core resource base of the Soviet empire. Although the Government is attempting structural reforms in the economy, mineral resource extraction and primary processing (of metals, for example) represent the major source of budget and export revenues. Meanwhile, the sharp decline in processing industries and services, such as food processing, consumer good production, construction, and power generation, which has occurred during the last few years has also increased the bias towards resource-oriented industries.

Moreover, the extreme volatility of world raw material markets represents a significant danger for investment opportunities. The country’s major assets – reserves of oil and metals – are subject to dramatic price changes on world markets. For example, recent oil price crisis led to a sharp decrease in production volumes, and may influence Kazakhstan’s oil-producing companies. However, the Government is discussing various ways of lowering the tax burden for oil companies (learning from the Russian experience) in order to help the industry adjust to significant price fluctuations. This issue has not yet become too serious for Kazakhstan because of the low share of exports in total oil output (currently about 20%).

A more important problem, which Kazakhstan will face in the medium and long term, is the potential development of the "Dutch disease" by which significant oil revenues might have a negative effect on other sectors of the national economy.

The reliance on outdated equipment in most industrial enterprises is a key issue for foreign investors. The situation is especially serious in the power generation, cement, metal and transportation industries. Moreover, many companies lack modern technologies and management techniques. However, management contracts in many industrial enterprises, when concessions were given to foreign companies, are supposed to resolve this situation. Some companies, such as Kazakhtelecom have begun to implement investment programmes, partially or fully-financed by their own sources.

As a consequence of the inherited structure of the national economy, Kazakhstan is characterised by the uneven development of different sectors. Companies in oil, gas and metals sectors have experienced higher growth compared to other sectors. Some industries, such as textiles and chemicals, are still in crisis, while others are booming.

Three major factors contribute to the low level of domestic savings:

• Wage arrears and the low income of the majority of the population.

• Lack of credibility of financial institutions (as a consequence of experience with financial pyramids);

• Lack of incentives to save (including tax incentives) as well as lack of investment choice (investing in bank deposit, stocks, T-bills, etc).

As a result, the total volume of deposits of individuals in the major savings bank, Halyk Savings Bank of Kazakhstan, which attracts the vast majority of savings, were less than $200 million in 1996.

The major problems here are:

• low capitalisation of domestic banks,
• lack of institutional investors

• low capitalisation of the stock market.

The major concern of financial market professionals is the lack of local institutional investors. Privatisation investment funds (mutual funds) established in 1993 as a part of the mass privatisation programme, have not been able to serve as an efficient channel for investment and can not be considered as either current or potential institutional investors.

Insurance companies, which are key institutional investors in developed economies, are also weak from the investment point of view. They lack the capital, motivation, professionalism and proper regulation to be efficient security market players.

Private pension funds are expected to play a significant role on the stock market as institutional investors. The comprehensive social security reform initiated by the Government in 1995 resulted in the establishment of private pension funds. Currently, these serve as a complementary element of the pension system. However, the National Securities Commission, one of the three regulatory authorities for the private pension fund industry with respect to their investment activity, estimates that the monthly inflow of contributions to the industry will be over $60 million by the end of 1998.

The major issue for foreign investors is the lack reliable information, primarily financial, on companies which are the object of investment. We would argue that the key problem here is the lack of tradition on information disclosure, because of:

• lack of legal requirements and/or enforcement procedures to protect the rights of minority shareholders,
• managerial behaviour, especially of two major groups of managers – Soviet-style managers and some strategic investors, who sometimes disregard the principles of openness and transparency.

Another key aspect of the problem is methodology. Here, the two major issues are:

• Accounting standards employed in most enterprises differ from GAAP and/or IAS, although Kazakhstan was the first CIS country to implement a transformation of national accounting standards towards western principles. To date, just a few companies have completed the modernisation of their accounting standards.
• Even fewer companies have completed independent audits according to international standards, and a negligible number of companies have an audit history (audited financial reports covering several years). This is a major precondition for official listing on the Kazakhstan Stock Exchange.

• Stock market valuation poorly reflects Kazakhstan’s economic potential under a sustainable economic programme
• The greatest economic assets of the country (e.g. companies in oil, gas, metals, telecommunications) remain almost unrepresented on the equities markets. Only preferred (non-voting) shares in companies, which are of interest for portfolio investors, are traded on both the Stock Exchange and OTC market. However, the Government’s intention to sell part (or full) state shareholding in five blue chip companies in 1998, will ensure that the shares of the most promising companies will be available this year.
• There are also problems with historical data comparability and the limited ability of financial analysts to implement modern valuation techniques, including discounted cash flow valuation.