Negotiating The "Bride Price"

The Daily Reckoning Presents: A Wednesday Guest Essay in which the author braves the wilds of Central Asia in search of tasty dish of… Qazy?


“If you’re not a fan of endless semi-arid steppes and decaying industrial cities, Kazakhstan may seem as bleak as a month old biscuit,” opens the Lonely Planet guide book on this Central Asian gem… “if sometimes it looks like the landscape has suffered from hundreds of nuclear explosions, well, parts of it have – ever since Russian rocket scientists started using Kazakhstan as a sandpit in the late 1940s.”

Okay. So it’s not Poughkeepsie. But it isn’t Baghdad, either. And that’s an important distinction – within the Kazakh border resides the formidable Tengiz Oil field.

When it goes live, the Tengiz Field will unleash the largest single injection of oil into international markets in 25 years. It’s estimated that the Tengiz field alone contains 6 to 9 billion barrels of recoverable reserves. And right behind it? Another oil field may contain as much as 10 billion more barrels.

At stake are billions in profits – for a handful of international conglomerates – and an even smaller number of Western-listed companies.

What’s more, next month, the Caspian Pipeline Corporation will open the it’s 982-mile pipeline between the Tengiz oil field in western Kazakhstan and the Russian Black Sea port of Novorossiisk. The pipeline will start off with a 560,000 barrel-per-day capacity… a figure that will reach 1.5 million very quickly.

That’s a lot of oil a day, especially when you consider global demand is about 75 million bpd.

Hmmn… Kazakhstan. Risky? Perhaps.

But here at the Daily Reckoning, we like to overturn the occasional emerging market rock to discover what slithery creatures lie beneath. Just a few months back, we took a peek to see if the light of progress had penetrated the Dark Continent…today, we peer into the heart of another beast: Central Asia.

Many Kazakhs are nomads… they move herd, yurt and flock from collective farms to fresh summer pastures each year. Their affinity for horses shows in sports like Kopar, a wild-free-for-all ancestor of polo where the headless goat’s carcass is used as the ball, and qyz quu, a boy-girl horse chase – if a boy catches a girl he kisses her… if she catches him, she gets to beat him with her riding whip.

Indeed, Kazakh women are confident… despite the lingering custom of wife stealing, whereby a man simply kidnaps the woman he wishes to marry – and forces her parents to negotiate the ‘bride price.’

Today Kazakhstan is grappling with “an enthusiastic brand of deregulation that tends toward anarchy,” and a growing GDP of roughly one tenth the size of GE’s market cap. But under the hopeful stewardship of the former communist president, Nursultan Nazarbayev, the country is fashioning dreams of becoming Central Asia’s economic tiger.

But unless they’re expecting a world-wide surge in the demand for smoked Qazy (horsemeat sausage), they’ll have to maximize the only resource the Western world can’t live without – oil.

The key to Kazakh oil has nothing to do with geology. It has everything to do with geography. This endless semi- arid steppe is NOT in the Middle East. And the country is NOT a member of OPEC.

And what makes the proposition even more intriguing: Kazakh pension funds are sitting on $US 1 billion. Right now, pension fund contributions are being funneled into bonds. The result has been a bull market in debt.

At a certain point, it’s not healthy to have a large portion of pension fund assets in debt instuments only. Trouble is, there aren’t a lot of liquid Kazakh shares to buy. In late June, Moody’s upgraded the foreign currency deposit ratings of several Kazakh banks. One of the banks, Kazkommertsbank, more than tripled last month, from 4 euros to 14.

But other than KKB, it’s very hard for U.S. investors to buy local Kazakh shares. Aside from the procedural difficulties, there is no free float in attractive stocks. So what to buy?

“Hurricane Hydrocarbons and Nelson Resources have substantial ties to ruling Kazakh elites,” says James Passin of Firebird Global Small Caps Fund. Some companies exist so that their owners can strip the assets from the company and sell them for cash. But “if you steal a dollar, you only have a dollar,” says Passin.

These clans have a vested interest in building up the value of the company for shareholders, rather than stripping it out by raiding the companies’ coffers.

And so far, those interests have worked out fairly well. Hurricane is up from a low of $US 0.25 in 1999 to $US 12.00. What’s more, they’ve just declared a dividend of “subordinate debentures” worth C$4 per share that will be paid on August 2nd, 2001.

“CAIH, a Netherlands-domiciled company ‘associated’ with KKB, owns 30% of Hurricane,” Passin reports. “But CAIH just lost a fight to acquire a controlling stake in Hurricane.

“Nevertheless, CAIH is controlled by extremely influential and intelligent Kazakhs, who are associated with one of the clans. CAIH also owns 35% of Nelson. IEI, another offshore vehicle, is associated with Halyk Savings Bank, which is merging with KKB in a few weeks. IEI and Halyk are both allegedly controlled by Timur Kulibaev, the President’s son-in-law.

“Kulibaev also controls KazTransOil, the domestic oil pipeline monopoly. Kulibaev is associated with the ‘Nazerbaev Clan,’ i.e., the President’s ‘family’.”

All of which is just a complicated a way of saying that Nelson looks suspiciously like THE vehicle for the son- in-law of Kazakh President Nursultan Nazerbaev to cash in, once the pipeline starts flowing. The Kazakhs reversed very attractive hydrocarbon licenses into Nelson in exchange for a 70% stake.

While Nelson is very small, and the stock much more volatile, it’s got the solid backing of powerful people interested in seeing it succeed.

Yesterday, OPEC President Chakib Khelil announced that he expects OPEC to cut oil output by 1 million barrels a day to shore up prices. OPEC wants high prices. But they’ll have trouble keeping them high if another 1.5 million barrels per day comes on-line from Kazakhstan.

And who knows… the savvy investor may be able to “steal” a piece of these clan holdings… negotiating a handsome bride price, indeed.


Dan Denning,
July 25, 2001

The Daily Reckoning

Dan Denning is the editor of The Daily Reckoning Investment Advisory.

James Passin manages the Firebird Global Small Caps Fund for Firebird Management in New York. In the interest of disclosure, Mr. Passin is a shareholder in both Nelson Resources and Hurricane Hydrocarbons. If you have more questions about Firebird or investing in Russian and Kazakh stocks, you can call James directly at 212-698- 9260.

Amazon, the ‘pro forma’ Internet retailer, was attacked by investors yesterday. The mob rushed the stock and knocked it down 25%…They must have figured out what ‘pro forma’ means.

American investors, meanwhile, seem to be figuring out what a bear market means. “I wish I’d taken your advice last year,” said a colleague from across the room yesterday, graciously forgetting previous years.

“I should have sold everything,” she added, as she looked at her account statement.

She is not alone. “401(k) Reports Full of Heartache,” declares a Business Week headline. “No doubt about it, the bear market’s claws have shredded dreams of an earlier and richer retirement for millions of Americans.”

Yesterday, alone, Mr. Bear must have postponed a few retirement dates. Stocks fell; bonds rose. Nothing seems to be working the way it should. Stocks should be rallying. It’s summer…the second half…and subsequent to 6 rate cuts!

And bonds should be going down; they should be worried about the inflation caused by lower rates and liquidity in full flood.

Commodities should be rising in price – signaling an advance of inflation. Instead, they are falling. Signs of a global deflationary meltdown – which began in Japan in 1989 – are showing up everywhere.

The Commodity Research Bureau’s Futures Index was down last week – to it’s lowest level in a year and a half. Energy and metals were both down. Cotton is at 15- year lows. Coffee has collapsed. Palladium, recently $1,000 an ounce, is now half that. Copper is at a 2-year low.

Like the bond market, commodities are telling us that times ahead are going to be tough. U.S.A. Today reports that high-end home sales have become ‘squishy’ – $1 million house sales are off 15% in the first 5 months of this year.

It is as if some major watershed has been reached. Instead of flowing down to a bright, sunny Pacific…all the news seems to drip towards a dark and stormy Atlantic of financial calamity.

But let’s check in with Eric and see what else happened on Wall Street yesterday:


– Bill, if I’m suffering from depression, I never want to be happy again. To be sure, it’s not easy making money in a rocky stock market, but bear markets do cleanse the air. This one has been particularly enjoyable – it’s been exposing the idiocy of the bubble era for what it was. Names like Blodget and Meeker – once synonyms for genius – now stand for something far less esteemed. Wall Street is a nicer place when stupidity fails to make a buck.

[Eric has found the silver lining in the bear market cloud; people are getting what they deserve…not what they expected or hoped for. It is always gratifying to see people get what’s coming to them.]

– The Dow tanked another 183 points on top of Monday’s 152-point fall. The Nasdaq surrendered 29 points to 1,959.

– Not to worry however, one of the talking heads on CNBC assured viewers yesterday, “No one I’m speaking with is talking about a retest of the Nasdaq low at 1,635.” Give it time.

– Sometimes we just get so busy with our own bear market that we forget about the bear markets of others, like Japan’s for example.

– Last week, the plummeting Nikkei finished erasing the so-called Koizumi rally – the springtime jump in share prices that accompanied the new prime minister’s firstfew weeks in office. This week, the Nikkei Average tumbled to a fresh 16-year low.

– The phrase “mired in a recession” seems to understate Japan’s economic predicament. Twelve years after the Nikkei bubble burst, the economy can’t seem to get out of its own way.

– But the Japanese economy is nothing if not schizophrenic. “Tumbling industrial production, falling business sentiment and plunging exports may keep economists and company managers at midnight,” the Far Eastern Economic Review reports. But despite sluggish economic activity, the Review observes, the middle-class seems unperturbed. “The line snaking through Tokyo’s Tony Ginza district on June 28th was not in front of a government office providing assistance to the needy or unemployed…This line hugged the newest outlet of French luxury retailer Hermes…”

– Meanwhile, back in the States, about 2,300 US companies will report earnings this week – including one-third of the S&P 500 – and you can bet that very few of them will be crowd-pleasers. As we’ve been observing for months, it’s tough to grow earnings when neither consumers nor corporations possess the means to spend.

– That’s not to say both groups wouldn’t be delighted to spend more – if only they could borrow more. But it’s starting to get tricky to pile debt on debt. For example, telecom carriers added $255 billion of debt in 1998, $326 billion in 1999 and $655 billion in 2000. Now that the telecom bubble has burst, many are unable to pay the money back. Pity the bondholders of bubble-era debt claims.

– “During the first half of 2001,” the Wall Street Journal reports, citing Ed Altman of NYU, “investors owning defaulted telecom junk bonds recovered an average of 12 cents on each $1 of face value, down sharply from 25 cents on the dollar in 1999 and 2000.”


Back to Bill in Baltimore…

*** The New York Times reports that “Dowdy Old Baltimore Turned Fashionable.” Thanks to the movie director, Barry Levinson, novelist Anne Tyler, and a spiffed up downtown, Baltimore is now hip. Or so they say.

*** But on Friday night, I took the family to see “Kiss Me Kate” at the Kennedy Center in Washington. Maria looked startlingly grown up in her theatre gown. Sophia too, but I’ve gotten used to the idea of Sophia as a young woman. (I don’t think I’m ready for Maria to reach adulthood.)

*** A very cute production, “Kiss Me Kate” is the story of a theatre company that performs a musical version of Shakespeare’s ‘Taming of the Shrew,’ with lots of gags and guffaws of modern theatre life. The play takes place in Baltimore, leading to such memorable exchanges as:

“Hey, Pat, can you lend me $2?”

“If I had $2, do you think I’d be in Baltimore?”

The Daily Reckoning