small business chalkboard resized for edge

Small Business: A Driving Force in Kazakhstan’s Developing Economy

By Yelden Sarybay

small business chalkboard resized for edgeAt Kazakhstan’s present state of development, small and medium enterprises (SMEs) are becoming a major factor in improving the country’s competitiveness in international trade. The development of entrepreneurship in the SME sector contributes to increased employment, increased volumes and a qualitative improvement in domestic production.

By the end of 2013, in Astana alone, the volume of production in SMEs exceeded $5.4 billion. Government programs have helped support entrepreneurs in the young country, but there is more to be done to support this crucial economic force.

SMEs at a Glance

Kazakhstan’s National Statistics Agency considers any company with less than 50 employees a small business and companies with between 50 and 250 people to be medium-sized. According to the agency’s figures, SMEs in Kazakhstan employ just over 2.5 million people, and by the end of 2014 they contributed about 17.5 percent of the country’s gross domestic product (GDP). The development of the SME sector continues against the background of a gradual stabilization of the economic situation in Kazakhstan on one hand and the increasing influence of external economic factors on the other.

Currently, trade and commerce makes up the largest portion of all SMEs (41 percent), followed by agriculture (22 percent), services (11 percent), transport and communication (7 percent), construction (3 percent) and heavy industry (3 percent). Other enterprises make up the remaining 13 percent.

The dynamism of the SME sector and its exposure to changes in the business environment means risk can be high, even for enterprises that generally function well, and the survival rate of new companies is low. A number of problems related to SME development in Kazakhstan emerged over the early years of independence, when the country was forming its sovereign economy, and remain unresolved to this day.

To help rectify these problems, the state has come to play an active role in managing SMEs. From 2009 – 2011, the government conducted several large-scale programs aimed at developing small and medium-sized businesses, and the development of SMEs is at the core of the country’s current Kazakhstan 2050 Strategy, which holds improving quality of life in Kazakhstan as one of its main goals. During his most recent state-of-the nation address, President Nursultan Nazarbayev announced that Kazakhstan needs to bring the SME contribution to GDP up to 50 percent by 2050.

Hands-on Support

The government supports the development of SMEs in a variety of ways. Information and analytical support and training through the Damu damu logo for edgeEntrepreneurship Development Fund are popular among those aspiring to start or expand businesses in the country. Damu also provides credit lines through partner banks.

Chairman of the Board of the Damu Fund Lyazzat Ibragimova suggests that people do what they do best.

“When I am in meetings with entrepreneurs, they often ask me this question: ‘What should I do to create a successful business?’ I respond by asking the entrepreneur three simple questions. The first is: ‘What can you do better than anyone?’ And the answer is most often associated with professional activities. This question is important because small and medium businesses are where people sell some value that another person cannot create and is willing to pay money for. …

The second question is: ‘Do you have a favorite thing that you are doing for free, and whether you have a steady source of income from it?’ Answers to this question are often different from the first response; people say that more than anything else, for example, they like to grow flowers.

The third question I ask is: ‘Imagine that you have a year left to live – what would you do over these 12 months, no matter what?’ And sometimes they answer that they would cultivate flowers. So [they] need to grow flowers and try to earn some money. Business success is when a person does something that he considers the most important thing for himself. So I think that the creation of a successful business is a commandment: do the things you love.”

greenhouse ag resezedA Damu client from Petropavlovsk, Anastassiya Omarova, did just that, Ibragimova said. “Realizing that her hobby could make good money, [she] got credit from a partner bank under the guarantee of the fund and began growing flowers in a greenhouse.”

Facing Educational Challenges

By its own admission, Damu faces problems in Kazakhstan’s regions, where people lack the legal and economic literacy to, for example, purchase or lease agricultural machinery, obtain credit, draft a contract and fill out legal documents correctly.

Entrepreneurs do not have sufficient knowledge of business planning and reporting on financial matters. In rural areas, business activity is limited, and people are mainly engaged in agricultural production. Processing their agricultural products, however, is often neglected, and a lack of jobs in rural areas is driving young people to leave in search of seasonal work in Astana, Almaty and other cities.

Damu, therefore, creates business support centers in the country’s rural regions that provide consulting services to local businessmen and budding entrepreneurs. These centers provide business support packages with free standard services like consultations on how to prepare and file tax reports, how to develop business plans and apply for funding, how to register a new business or how to market your business. They also provide educational support programs, including training courses and seminars aimed at increasing the knowledge and skills of existing and potential entrepreneurs in business management and the basic functions of business.

Supported Successes

In 2011, the government launched the Business Road Map 2020 program, which supports small businesses. The main operator of this program is the Damu fund.

One company that took advantage of the Business Road Map is Garant-7 LLP.

Director of the company Kadyrkul Kurmangaliyeva started her business in 2007 with his family. Her husband, son and daughter-in-law are all doctors with years of experience, so when Kurmangaliyeva thought of starting a business, she chose the medical sphere. With the support of her family, Kurmangaliyeva opened the OtauMed medical clinic.

According to the entrepreneur, she started the business with capital she had saved on her own. Eventually, she needed more money to purchase new equipment, but was only able to borrow at very high interest rates. Through the Business Road Map program, however, she was able to get a loan through Temirbank at a rate of 6 percent. The money went to buy an ambulance for her clinic.

Today, the OtauMed clinic is one of the best in the country’s Kyzylorda region. It provides urology, gynecology, cardiology, dentistry and cosmetology services. The clinic also operates daycare and an acupuncture office.

In 2014, the OtauMed clinic was named 2014 Industry Leader and Kurmangaliyeva was named 2014 Business Leader of the Year and awarded the Order of the Star of Fame of Kazakhstan’s Economy. Through another management training program targeting SMEs, deputy director of the firm Zhanar Dulibayeva got to study at Nazarbayev University. Now, the company plans to send Dulibayeva to Germany for more business training and to purchase equipment for a new clinic.

Some bold entrepreneurs even hope to compete with giants like Microsoft. “The statement, of course, seems like a fantasy, but we have developed a product that will compete with a Microsoft product: Microsoft Lync, which is something like a corporate Skype,” said founder and owner of the innovative company The One Capital, Kairat Akhmetov. “It is called Open HC. It is cheaper and compatible with any landline. Plus, after the scandal with [whistleblower Edward] Snowden, everyone is afraid that U.S. software contains a component that allows you to track information, so we, if necessary, can show our source code.”

Akhmetov believes that the support from government in Kazakhstan is unlike any other he has encountered.

“In 2012, I traveled to America through a U.S. State Department program that annually brings together 30 information technology businesspeople from around the world. There, I interviewed colleagues from South America and Southeast Asia. I asked whether they have government support for start-ups. It turned out that in Kazakhstan, conditions are better than anywhere else,” he said. “Of course, there are private investors in the U.S. who are willing to give $100,000 for an idea, but in no other country except Russia and Kazakhstan do the authorities hand out grants so generously. Presumably, this is due to raw material revenue, and I think that’s normal.”

From a relaxed office with a foosball table, Akhmetov runs an IT start-up. “It is important that people feel really comfortable at work. Many don’t feel a connection to the office, but we are trying to interest the staff; they want to come here, as though they’re part of a select group.” People like Akhmetov are at the forefront of the new business culture the government is trying to promote.

Another successful entrepreneur was laughed at when he bought over $81,000 worth of worms to start his business. Andrei Strelets, an agronomist and economist, got the idea to produce vermicompost in 2011. Vermicompost is the end-product of the breakdown of organic matter by earthworms. It has been shown to contain fewer contaminants and more nutrients than do organic materials before vermicomposting.

Strelets took a five-year loan and bought the equipment he needed from Russia.

“I liked the technology,” said Strelets. “Vermicompost in an environmentally friendly product; consequently, it produces organic products, because they do not need to be fertilized with chemicals.” Vermicompost increases soil productivity and the shelf life of products produced in it, he says.

Strelets decided to build his worm farm in his native village, Yavlenka, in the Yessil district of the North Kazakhstan region. In Kazakhstan,small manufacturing resized vermiculture is only beginning to be developed, which is why it took three years for him to implement the project.

“I took a loan of $81,710 for five years for the purchase of technology in Russia, worms and the construction of the farm. In two years, almost all of it was repaid and I only had $7,081 worth of debt left to repay. It took two years to get to the break-even point. From 2012 to November of this year, I’ve made an estimated $762,631 (PLEASE CHECK THE NUMBER. LOOKS TOO BIG. MAYBE 76,000 not 762,000???) of net profit,” Strelets said.

With his Russian technology, 1 million worms can be contained in 200 square meters of a winter workshop. However, Strelets was able to improve the technology and in the same area now holds 10 million worms. He also has a summer pasture of 600 square meters.

According to Strelets’ estimates, he and his seven farm workers should produce 870 tonnes of vermicompost for sale from May to November of 2015. The business sells vermicompost at $1.63 per liter to farmers throughout Kazakhstan. Lining up for his vermicompost are buyers from Kuwait, Nepal and the United Arab Emirates.

Overall, the analysis shows that in Kazakhstan, the SME sector is growing and recovering from its early setbacks. However, further state coordination of small businesses is still needed in order to adjust and improve negative trends, both through financial and non-financial instruments.

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