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 KAZAKHSTAN International Business Magazine №4, 2007
 Chief Financial Officer is the Only Master after God
Chief Financial Officer is the Only Master after God
In November 2007, the Adam Smith Institute held the ‘First CFO Summit Kazakhstan’ in Almaty. During three days, financiers from Kazakh and international corporations shared their experience in ways of achieving high performance measurements and broadening corporate investment horizons. Experts and analysts from Kazakhstan, the U.K., the U.S.A. and Russia spoke at the Summit. The Adam Smith Institute has already arranged several similar forums for chief financial officers in the CIS countries: four forums in Russia and two forums in Ukraine. In his opening address, Daulet Saudabayev, Vice Minister of Finance, said that such conferences had a positive impact, because ‘they provide chief financial officers with the platform for dialogue about professional issues and skills.’ Mr. Saudabayev is sure that such experience could be highly profitable for Kazakh financiers. Today, chief financial officers are not only managers, but also the primary advisers for senior executives. The cost basis of a company depends on adequate planning and the disposition of financial assets which can enhance the company’s competitive ability.
СFO is a strategist, risk-manager and controller
The post of Chief Financial Officer is rather new for companies in Kazakhstan and in the CIS countries. Only a few years ago, such positions were occupied by expatriates in the local market. However, as the country has developed, the business scene has also undergone considerable changes. Today CFOs are the most valuable specialists on the Kazakh labour market.
According to Marat Daukenov, the Managing Director (Finance) of the Eurasian Development Bank, the area of the CFO’s responsibility in local companies is expanding continuously. There are new tasks, besides the maintenance of accounting records, financial and tax accounts, which determine a CFOsnewqualitylevel, for example, the direct financial management and strategic development of the company, optimisation of the key business processes, and conformance of corporate management standards with international practice.
According to Andrew Large, the Chief Financial Officer of MaxPetroleumPlc in Kazakhstan, a CFO is a financier who works with historical data and also is in charge of accounting records, assets and liabilities, cost value control, and financial and tax accounts. A CFO must have a talent for strategic thinking and the ability to reach out to newfrontiers, as well as the capability to settle treasury and general financial issues, optimisetax assessment and tax planning, and be responsible for risk management. Inaddition, aCFO is normally responsible for human resources management and IT.
Mr. Large stressed that one of the CFO’s key activities today is management accounting and reporting. A CFOmustproducefinancialdata on a timely basis, carry out reviews of operating performance and provide recommendations in order to help senior executiveswith long-term planning and budgeting, while assuming direct responsibility towards the company’s management, the Board of Directorsand shareholders.
ACFOdetermines key performance indicators for assessing the company’s efficiency, such as EBITDA (EarningsbeforeInterest, Taxes, Depreciation, andAmortization), cost of equity, operating costs, net income, etc. Asanillustration, Mr. Largegave an example of the oil industry, where the key parameter is the amount of resources required for producing one barrel of production. Besidefinancial variables and indicators, there are other types of key performance parameters, or so called soft parameters, including quality evaluation and assessment of customers’ and employees’ satisfaction.
A CFO must pay special attention to the risk management system. It is urgent to estimate key risks to the company and general risks to the business, including assets, labour reserves and the competence of management, contractors and suppliers. A CFO must develop his or her own risk profile, so that, top management can take decisions, on the basis of the CFO’s recommendations, on the neutralisation or insurance of risks (for example, by means of hedging, financial futures and warrant certificates).
Finally, Mr. Large emphasised a matter concerning the tax code as topical for Kazakhstan. It is good practice for a Managing Director to require a СFO to set up crucial schemes for tax assessment optimisation. The CFO must therefore acquire the necessary technical and managerial skills, as well as have a close knowledge of relevant laws in order to ensure the legality of all such actions. 
One of the main areas of a CFO’s responsibility is the attraction of investment, so this theme was a high priority during the Summit.
According to Sholpan Ainabayeva, the General Director of Kazkommerts Securities, there are several sources of long-term business financing besides the internal reserves of the company, such as bank loans, the investment programmes of international organisations and financial institutions, government financing and securities market instruments. Meanwhile, the choice of the source of financing is within a CFO’s direct competence.
Speakers mentioned that among the most profitable ways to raise capital is the IPO or initial public offer of shares on international stock exchanges, a field in which Kazakhstan’s big business is not a newcomer. John Edwards, Senior Manager of the London Stock Exchange for the CIS countries, Central and Eastern Europe, reported that there were 46 companies from the CIS countries, including 23 Russian, 7 Ukrainian and 9 Kazakh companies on the LSE’s Alternative Investment Market. In 2007, approximately $465 million have been attracted by means of IPO. According to Mr. Edwards, this fact shows that during the current year, international investors have shown marked interest in companies in the CIS countries. A real proof of this thesis was a dispute between John Edwards and Aaron Goldstein, Head of Russia/CIS Business Development, International Listings at Euronext. The representatives of the two main European Stock Exchanges could not agree who could provide the most liquidity. So, competition for the Kazakh issuers is rather strong.
Nevertheless, the instability of global financial markets negatively affected the GDR (Global Depositories Receipts) ratings of domestic companies. In this connection, Ms Ainabayeva considers that the current situation is not as favourable for international IPO, as it has been over the last couple of years. She added that even if a company had fully prepared for carrying out its business in accordance with international standards, had developed an audit system and a corporate culture, the preparation for IPO would still take from 6 to 9 months. If any business processes needed to be restructured or improved, it may well take between eighteen months and two years. Therefore, if a company plans to realize any IPO in the near future, that company should prepare for such realization now.
Ms Zhanetta Bekezhanova, KazMunaiGas E&D’s chief financial officer shared her own experience. KazMunaiGas E&D is recognised as the first Kazakh company with the state as its major shareholder, to successfully realise double IPO in the LSE and the KASE. Today, when the KazMunaiGas E&D’s success is held up as an example to domestic companies planning to enter global markets, it may appear that the way to IPO is strewn with roses. However, as Ms Bekezhanova says, roses have thorns, and in her speech, she referred to those thorns.
According to Ms Bekezhanova, preparation to IPO consisted of four basic elements: 1) financial due diligence and implementation of new procedures, 2) technical and environmental audit, 3) legal due diligence, and 4) assessment of corporate management and fund history. Ms Zhanetta Bekezhanova emphasized the role of the company’s finance department, and, in particular, of the company’s CFO, who took full responsibility for IPO realization. The CFO became involved in the all four elements of the preparation for listing, since practically all business processes involve financial statements, prospectuses or other documents to be submitted by the CFO to sponsors, auditors, stock exchanges, the board of directors, and others.
The speaker presented details of the audit of financial statement for 2005 and the first five months of 2006. A special data room was organised in the Company’s Head Office to hold all historical data on KazMunaiGas E&D, together with its oil assets, from the inception of the Company’s operating activities. The following items were prepared: 1) an independent accountant’s report, 2) a monthly preliminary review of business activities, 3) a review of operating and financial activities based on annual interim financial statements, 4) a report on a working capital model, 5) an assessment of transfer pricing risks, and 6) a business plan for future directions of activities. Additionally, regulations for financial and management accounting, budgeting, IT-strategy and security, internal audit and control were implemented. The above tasks required not only the development of new documents, but also the approval of relevant procedures and preparation of explanatory notes. In addition, the Company’s Top Management and all executive bodies had to be fully briefed on all the developments.
According to Ms Bekezhanova, development of techniques for preparing financial statements became an outgoing task, since the KASE required issuing bodies to submit their financial statements four times a year, and within 90 days of the expiration of a reporting period. Previously, KazMunaiGas E&D’s auditing statements had been delayed. The Company had kept accounts in accordance with the standards of Kazakhstan, but independent auditors subsequently converted these accounts to comply with international accounting standards. In connection with this, a special department was established, within KazMunaiGas E&D itself, to convert the accounts from Kazakh to international accounting standards. Owing to the considerable support from the independent auditors, the Company was able to satisfy the requirements of both stock exchanges.
In conclusion, Ms Bekezhanova stressed that for a domestic company who intends to be listed on the stock exchange, the biggest potential pitfall was the necessity to submit financial statements on time. Advisers can provide support during IPO preparation, but then the Company should utilise the experience of these advisers to develop its own strategies. According to Ms Bekezhanova, even if a Company has its own qualified staff, the preparation of the first financial statements is likely to take between 12 and 18 months. For this reason it is preferable for a company to postpone the IPO placement, rather than approach a stock exchange with a badly prepared IPO. In addition, the activities to be carried out after the IPO placement should be taken into account, as the publicity gives new obligations as well as new privileges.
CFO and liquidity crisis
Problems related to the liquidity crisis and instability in capital markets were also discussed in the summit. In response to the question about the influence of the mortgage crisis in the U.S.A. on the Kazakhstan economy, Joseph Carter, McGuireWoods Kazakhstan partner, referred to the strong banking system greatly supported by the state. Mr Carter stated that, as a minimum commitment, the government has declared its support to major second-tier banks. In addition, it had indicated its willingness to act if necessary, thus ensuring the stability of the situation. Such a scenario could not be guaranteed if the government was not involved. At the same time, Mr Carter considers that a certain period will be required to allow the situation to reach equilibrium.
As for the effect of the crisis on attracting investments into Kazakhstan, Mr Carter indicated some decrease owing to the reluctance of investors to take risks. However, itisaglobalsituation. At the same time, from the microeconomics point of view, the situation in Kazakhstan showed that the country could rely on the primary industry. Manycountriesdonothavesuchpositivefactor.
According to Mr Carter, the Development Bank of Kazakhstan is considering the possibility of issuing its own bonds and the government is ready to carry out sovereign transactions using bonds. Foreign investors will probably be most interested in these methods. In conclusion, Mr Kartner stressed that it was impossible to restore confidence in a day, but our government is doing the right thing.
For his part, Mr John Edwards stated that the liquidity crisis reduced share prices of many companies in the LSE. However, that was the market’s natural response to the August events. According to Mr Edwards, the main objective of each company is to prove its stability and reliability to investors in order to avoid aggravating the existing crisis of confidence.
Mr Saudabayev declared the position of the State by explaining that internal sources of financing would now be developed within the context of limited external borrowings. He also indicated that, as well as the State, chief financial officers of private companies should apply themselves to this development. This is because chief financial officers are in a position to demonstrate the attractions of the domestic stock market to their managers. Hence chief financial officers will decide whether or not unrealized domestic liquidity will operate for the Kazakhstan economy.

Table of contents
Competitiveness. A Step Forward, Two Backward  Sergey Gakhov, Yelena Zabortseva 
Rating of Kazakhstan... Goes Down  Ben Faulks, Luc Marchand 
Corporate Governance. Kazakh Reality  Anastasiya Raziyeva 
Stock Market: Evaluation and Forecasts  Zhasulan Bekzhigitov 
Exchange Summaries. Mess and Disorder  Tatyana Kudryavtseva 
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