If you blinked last week, you might have missed the news that the president of the Central Asian country of Uzbekistan, Islam Karimov, died. A former Soviet state of 32 million people, Uzbekistan produces gold, cotton and natural gas.
Partly because I lived in Central Asia – back in the mid-1990s – and have been back numerous times since, I follow these markets more closely than most. And Karimov’s death is the first step in what will be some big changes in a region that’s usually ignored – but which won’t be any more in coming years.
Karimov was not a nice guy. During his 27 years as the country’s first (and only) post-Soviet leader, he oversaw – in the words of the Financial Times – “one of the world’s most repressive dictatorships, with thousands of political prisoners and a gruesome record of torturing its opponents.”
Karimov had been Uzbekistan’s president since the end of the Soviet Union in 1989. One of the many things Karimov didn’t do well — besides be a fair and just leader — was prepare the country for his succession. Death isn’t much fun to think about, especially when it’s your own. So his passing has set off a mad scramble for power. “In the worst case scenario, the transition could trigger a revolt among rival officials,” wrote Foreign Affairs magazine a few days ago.
The “Death Watch” investment strategy
I know it’s morbid to anticipate death. But death is an investment catalyst people don’t usually think about. The demise of a key leader in power doesn’t happen often. When it does, it can create huge uncertainty – and opportunity.
The “Death Watch” investment strategy is only relevant in some markets. You see, in some countries – especially those where a single individual holds a lot of power – death can be a big driver of asset prices. So I’m willing to toe the line of bad taste if it means possibly finding a great opportunity.
In many developed democracies, for example, the unexpected death (or departure) of a leader would be big news… but it wouldn’t change the fundamental direction or structure of government.
In these countries, institutions – like the presidency, the judiciary, and the parliament – are strong and stable. They operate, generation after generation, based on a clear set of rules that are universally respected, regardless of political party or economic circumstances. If a key leader dies, there’s little question about who takes over and what happens next. The rules of the game don’t change, regardless of who’s in power.
However, in many countries, individuals – rather than institutions – hold power. Highly personalised governments operate at the whim and will of one person. In these countries, the abrupt departure of this individual can throw a country’s entire government structure into chaos. Russia and Zimbabwe are just two examples.
Even though there may be a succession plan, there’s no telling if it will be followed. Everything could quickly become a political free-for-all. That’s what we’re seeing in Uzbekistan.
Uzbekistan matters to the regional balance of power… and because it borders the powder keg of Afghanistan. But for most investors, the death of Uzbekistan’s leader doesn’t matter much. It hardly figures on the global investment horizon for anyone but the most intrepid frontier investor.
And then there’s Kazakhstan
It’s a different story for Uzbekistan’s neighbour, Kazakhstan. To many people (even most Russians), Kazakhstan is “another one of the ‘stans,” one of the string of former Soviet countries in Central Asia that are a mess to varying degrees.
Kazakhstan is important partly because it’s China’s commodity pantry. It’s the world’s largest producer of uranium, the key input for nuclear power. Kazakhstan has the ninth-largest oil reserves in the world (neighbour China buys around a third of its oil), and vast quantities of chromium, lead, zinc, copper, iron, and gold. Without Kazakhstan fueling its growth, China would need to search elsewhere for a lot of its economy’s critical inputs.
Kazakhstan’s leader is cut from the same cloth as Uzbekistan’s Karimov. Nursultan Nazarbayev has been the country’s president since 1990. During that time, he’s never received less than 90 percent of the vote in any election – which is more a reflection of how elections work there, than his popularity.
The country’s TV stations and newspapers say what he wants them to say. In the rare event that anyone dares to speak up, they’re treated to the sharp end of a steel boot.
But even Nazarbayev can’t overturn the laws of nature… He’s a 76-year-old man in a country where the life expectancy of the average man is 64. Sure, he could live another decade or two. But as Karimov’s death highlights, Nazarbayev is already living on borrowed time.
Kazakhstan isn’t like many more democratic countries, where the vice-president or the head of parliament steps in when the president dies, via a carefully crafted constitution. In theory, Kazakhstan has a plan in place – but like Uzbekistan now, in practice, anything could happen. And Nazarbayev has been able to stay in power so long in part because he hasn’t let anyone position himself as a successor. A lot of pretenders have come… and gone.
Meanwhile, Russia – with which Kazakhstan shares a long and thinly populated border – is watchfully anticipating any weakness in its neighbour. In September 2014, Russian President Vladimir Putin “said Kazakhstan’s history of independent statehood is scant and its people’s desire for closer ties with Russia is profound – a rhetoric reminiscent of Moscow’s stance on Ukraine – and inhabitants of Kazakhstan are worried,” reported the Moscow Times.
Kazakhstan’s stock market has been in the doldrums for years. It’s down 61 percent from its all-time highs in 2007, and never recovered after being a flavour-of-the-day frontier market before the global economic crisis in 2008-2009.
So would Nazarbayev’s death be a good or bad thing for Kazakhstan? I don’t know. When I visited Kazakhstan a few years ago, a lot of people were scared about a big power vacuum.
On the other hand, it would remove a source of enduring uncertainty. And it could open the door to enormous positive change.
That’s why Kazakhstan is also on “death watch.” It could become an exciting place to invest. And if its leader follows Uzbekistan’s soon, there could be a lot of opportunity.