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Dauren Oshakbayev: Kazakh agroholdings too big to fail

04 November 2018 - The biggest agroholdings in Kazakhstan have one thing in common – huge debts. Dauren Oshakbayev, analyst and director of agricultural economics research program in Center of Applied Research Talap in Astana, Kazakhstan, describes recent developments in the large scale agriculture of Kazakhstan.

What were the main drivers of the development of agroholdings in Kazakhstan?

With the end of the Soviet period, land plots of many kolkhozes and sovkhozes were allocated among employees who then joined together into agricultural cooperatives. The idea was to split the land in a fair way and create private farms. However, the financial crisis in the late 1990s as well as poor management of these cooperatives resulted in high debts owed to input suppliers and traders. As a result, these farming entities were taken over by outside investors that developed agroholdings. Another key driver was foreign capital inflow into the country that boosted economy in the beginning of 2000s. Local banks were chasing businesses, which could afford themselves to take big loans, showed good financial results and had collateral. Agroholdings were able to meet these criteria and enjoyed the best access to borrowed capital among agricultural producers.

How does the landscape of large scale farms look like in today’s Kazakhstan?

There are no accurate data sources on that. Estimations are that the biggest agroholding, Alibi, operates around one million hectares; the second biggest – Olzha – about 700,000 hectares; and the third biggest –Kazexportastyk – about 600,000 hectares.

Agroholdings in Kazakhstan have some specific characteristics. They have almost no formal holding structure. This is due to the fact that the preferential tax regime for agricultural producers does not apply to farms linked to each other through ownership ties – a precautionary measure to prevent agricultural producers from fraud in value added tax  (VAT) refund. Therefore, the subsidiary farms of agroholdings are publicly referred to as ’partners’.

Most agroholdings in Kazakhstan are specialized in grain and cash crops production. Some of them, e.g. Atameken-Agro or Kazexportastyk are specialized in oilseeds and pulses as well as in livestock production. With a few exceptions, Kazakh agroholdings are not vertically integrated. There are opposite examples, such as Maslodel, when a vertically integrated holding gets rid of primary agriculture.

What are the main problems that large scale farms face in Kazakhstan?

One of the main problems is the financial distress and bankruptcy of some of the biggest agroholdings due to financial crisis. There were also other external reasons for this situation, such as wheat export ban of 2009, low prices for wheat in 2009 and 2011, droughts in 2010 and 2012, rainfalls and snow during harvesting in 2013 and 2014, and a twofold devaluation of the local currency, Tenge, in 2015. Agroholdings took loans and could not repay them on time. The government even had to get involved into resolving this issue in 2013.

Another big problem is theft. For example, 10 % of the 2017 grain harvest was stolen by local mafia from the Olzha agroholding (former Ivolga holding). As a result, some $ 45-60 million were lost. The robbery was well planned. Local mafia built storage infrastructure and brought a lot of machinery next to the agroholding’s fields, then, simply harvested what has been growing, and stored it in its own silos. There was also an attempt to rob diesel from Olzha’s facilities which ended up with a gunfight between mafia and the company’s security employees.

One more problem is low transparency of agroholdings. New large players are emerging in beef and sheep sectors, but we practically do not know anything about them. They are quite reluctant to share information. So, these are the major issues that agroholdings still have to deal with, alongside traditional problems of weather, price and currency rate volatility, management issues, and so on.

How big is the financial distress issue among Kazakh agroholdings?

It is a severe problem. Some agroholdings such as Ivolga, Bogvi, Agrocenter Astana, Nastyusha, Transavto announced defaults. The situation around the largest agroholding, Alibi, is unknown. Another agroholding, KazExportAstyk, undergoes debt restructuring with the help of its new strategic partner, Sberbank Investments LLC. The partners have agreed with the creditors on early debt repayment at a discounted rate. The state-owned KazAgro agroholding received support from the government for debt repayment. KazAgro borrowed $ 2 billion abroad in 2014-2015. To repay the loan was more difficult than originally expected, especially on the background of a sharp devaluation of Tenge.

Why does the government get involved in ’rescuing’ some agroholdings?

The government feels responsible for big farms. They operate huge farmland areas, employ large numbers of people and manage big volumes of financial resources. Quick resolution of financial problems is important since they cause further problems: worker layoffs, delays in technological progress, instability in the banking system and, last but not least, burden for the state budget. The societal expectations regarding large farms are high, and this makes them ‘too big to fail’.