Clare Nuttall in Almaty -

Thousands of kilometres from the EU's eastern borders, the oil- and mineral-rich countries of the Caucasus and Central Asia have so far seen little impact from the growing fears of a Greek exit or a wider collapse of the Eurozone. The region's largest economy, Kazakhstan, has continued to grow and, thanks to increasing oil exports, its foreign currency reserves stand at a record level.

In the first quarter of 2012, Kazakhstan's GDP growth was slightly below expectations but at a still healthy 5.6%, according to state statistical agency Kazstat. The International Monetary Fund (IMF) forecasts that Kazakhstan will achieve annual growth of 6% in 2012. Longer term, the picture is even better, with the massive offshore Kashagan oilfield due to start commercial production in 2013, lifting oil production to record levels.

That's not to say Kazakhstan would be impervious to the fallout from a deterioration of the situation in the Eurozone. Although Greece's June 17 elections means an immediate "Grexit" from the Eurozone is less likely, it is still a possibility, and the effect an event on this scale would have on international markets is not something that Kazakhstan would remain immune from.

As an exporter of oil and gas, metals and minerals, Kazakhstan's export revenues fluctuate according to world demand and commodity prices. Ainur Medeubayeva, analyst at Troika Dialog Kazakhstan, points out that a Greek exit would not be an isolated event, as it would most likely have a domino effect on other countries. "There will be a negative indirect impact through a slowdown in Kazakhstan's economy as a commodity-exporting country," she explains.

The effect of the uncertainty in global markets has already taken its toll on Kazakh equities along with those of other emerging markets. "Events in the Eurozone haven't yet affected the performance of Kazakhstan's economy. Kazakhstan is still accumulating wealth, and reserves and foreign currency are at a record high," says Jean-Christophe Lermusiaux, managing director and head of research at Visor Capital. However, he notes that the current crisis has affected risk appetite, with investors growing increasingly nervous, which "would cause some 'collateral damage' for some listed companies whose assets are in Kazakhstan."

Financial link

The last financial crisis in 2007-2008 dealt a huge blow to Kazakhstan's banks, due in part to the large amount of funding on international debt markets that had fuelled their growth over the previous years. Today, the situation is different, with there being no direct link between Kazakh banks and the problems in the Eurozone, argues Medeubayeva. "They have no direct exposure to Eurozone countries on either the funding or asset side," she says, pointing out that the banks' foreign-currency assets now exceed their forex liabilities.

The US sub-prime mortgage crisis also precipitated the collapse of Kazakhstan's real estate bubble, which in turn helped to push the country's over-leveraged banks nearer to failure. Since then, most of the banks have deleveraged and reduced their exposure to real estate, so are considerably healthier. BTA Bank, once the country's largest, is still struggling but is of less importance systemically today.

The Kazakh government was caught on the hop in 2007, although it came through with a multi-billion-dollar stimulus package in late 2008, and intervened to bail out BTA and Alliance Bank in 2009. This time around, government officials have been making plans for potential problems for over a year. Whether they will be implemented depends on if this crisis is a "small hurricane or a tsunami", according to Lermusiaux. "If Brent [oil] drops to $50 per barrel, and copper and ferrochrome prices go into freefall, [the government] will have to fight, and will be able to do it... for some time," he reckons.

One immediate Kazakh casualty of a Grexit could be the national currency, the tenge, which has been maintained at around KZT147-150 to the dollar since its depreciation in January 2008. "The tenge should, in theory, be rock solid because Kazakhstan's reserves are increasing and because M3 coverage ratio is in excess of 110%. But in practice, the probability for a depreciation of the tenge is around 35%," says Lermusiaux. "Now that Kazakhstan is in the Customs Union, a considerable strengthening of the tenge against the ruble would not be healthy for the Kazakh economy. In addition, there is less need to maintain the tenge now since most banks have deleveraged and BTA is no longer considered to be of systemic importance. Conversely, the powerful mining sector, which bears costs in tenges but sells in dollars, would immediately benefit from a depreciation... which would partly offset significant embedded cost inflation."

With the uncertainty already bringing down Kazakh share prices, there is also some question about what will happen with the government's "People's IPO" programme. The first in the series of IPOs of major state-owned assets, pipeline operator KazTransOil, is due to take place in September, with nine more companies set to follow between 2013 and 2015. However, Astana has previously taken a pragmatic approach to the programme, waiting for favourable conditions rather than seeking to push the IPOs through at any cost.

The Georgian government faced a similar decision in May. The IPO of Georgian Railway, which was due to take place on the London Stock Exchange on May 24, was postponed after consultations with government advisers because of the difficult situation in international markets. The IPO of the rail monopoly had been hotly anticipated, with the company expected to list with a valuation of between $800m and $1bn. "Unfortunately, the international market has worsened... accordingly we rescheduled the process," Prime Minister Nika Gilauri said in a statement.

These concerns aside, however, the Caucasus and Central Asia (CCA) region looks relatively healthy. In its April "Regional Economic Update", the IMF forecasted a slight slowdown from 2011 for both the oil-producing and oil-exporting countries of the region.

The high level of growth achieved in 2011 was driven by robust commodity exports and remittances. "Although growth of such flows is expected to moderate in the near term - reflecting a weaker external environment - CCA economies are still expected to hold up well," says the IMF report.

Only if there is a much sharper global downturn than currently expected, including a big jolt to the Chinese and Russian economies, would the region expect to see a serious risk to its own growth prospects.