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Country Commercial Guides FY 2000: Kazakhstan Report prepared by U.S. Embassy Almaty, released July 1999 Note*

CHAPTER I. EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Kazakhstan's commercial environment, using economic, political and market analyses. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. embassies through the combined efforts of several U.S. Government agencies.

Falling oil prices in 1998 combined with the lingering effects of the Asian and Russian financial crises to interrupt two consecutive years of GDP growth (1.1 percent in 1996 and 1.5 percent in 1997). The resulting fall in 1998 GDP was 2.5 percent. The Russian devaluation severely impacted on Kazakhstani exports to Russia. A poor harvest also contributed to the fall in GDP. The slowing of economic activity led to a government revenue shortfall, forcing expenditure cuts of USD 750 million, or 20 percent of the budget. Revenues in 1999 also have fallen short of budget projections (34 percent below forecasts for the first 10 months of the year), again forcing the government to cut expenditures to keep the budget deficit within roughly 5.6 percent of GDP. By the third quarter of 1999, rising oil prices and the stimulating effects of the April devaluation led to a return to growth; the government expects 1999 GDP growth of 0.6%.

In early 1999 the government introduced protectionist measures to stem the outflow of hard currency reserves as part of its defense of the local currency (the Tenge). In January, the government introduced a six-month ban on the import of over 20 Russian-produced food products; this ban expired in June. In February, Kazakhstan imposed indefinite 200-percent tariffs on selected food items and other imports from Kyrgyzstan and Uzbekistan as well as introducing a requirement that companies convert 50% of their foreign currency earnings into local currency. This conversion requirement was rescinded in December 1999.

Kazakhstan is a major recipient of U.S. assistance, much of which has been provided for nuclear disarmament and defense conversion projects. Since 1993, Kazakhstan has also received $260 million for economic reform, commercial law reform, democracy-building, health care and environmental projects. In October 1999, President Nazarbayev named a new government. Among other changes, the President named three new Deputy Prime Ministers: First Deputy PM Pavlov has responsibility for economic development issues, Deputy PM Daniyal Akhmetov is responsible for industry and energy, and Deputy PM Yerzhan Utembayev is responsible for economic and financial issues. In addition, there is a new Minister for Energy, Industry and Trade, the former Science Minister Vladimir Shkolnik, and a new Minister of Finance, Mazhit Yesembayev.

President Nursultan Nazarbayev is the central political figure in Kazakhstan. He served as Communist Party Secretary from 1989-1991 and has been President since Kazakhstan's independence in 1991. In January 1999, President Nazarbayev was re-elected to a seven-year term in a campaign that fell far short of meeting international standards for transparency, freedom and fairness, according to the Organization for Security and Cooperation in Europe (OSCE), which Kazakhstan joined shortly after independence. President Nazarbayev's current term will expire in 2006. The 1995 constitution concentrates power in the presidency, which exercises extensive influence over the judiciary and the parliament. The OSCE judged that the conduct of the Parliamentary elections in October 1999 represented an improvement over the January Presidential elections, but they still fell short of the international standards by which Kazakhstan agreed to abide.

The U.S.-Kazakhstan Bilateral Investment Treaty is in force, as is the U.S.-Kazakhstan Treaty on the Avoidance of Double Taxation. Kazakhstan has applied for membership in the World Trade Organization (WTO). Joining the WTO will help integrate Kazakhstan into the world economy, as well as help conform its trade regime to international standards. Kazakhstan's effort to join the WTO is proceeding slowly; however, significant progress has been made in creating a WTO consistent legal framework.

U.S. companies have been active in Kazakhstan since 1991, particularly in the oil and gas, business services, telecommunications and electrical energy sectors. The Chevron-Kazakhstani Tengizchevroil joint venture (now with Exxon-Mobil and LukArco participation) is one of the landmark U.S. investments in the former Soviet Union. In 1999, construction began on the Caspian Pipeline Consortium (CPC) oil pipeline from oil fields on the Caspian Sea to a port on the Black Sea; the CPC pipeline is will be finished in 2001. The pipeline is expected to facilitate the supply of Caspian basin oil to world markets. Oil exports from Kazakhstan will also be facilitated by the construction of a Main Export Pipeline from Baku, Azerbaijan, through Georgia and Turkey to the Turkish Mediterranean port of Ceyhan. The Government of Kazakhstan pledged to facilitate the delivery of significant volumes of Kazakhstani oil to the pipeline during a November 1999 Summit in Istanbul, Turkey. Two U.S. companies, Exxon-Mobil and Philips, are partners in a nine-company consortium (OKIOC) to develop Kazakhstan's offshore petroleum resources. The consortium began drilling its first exploratory well in late summer 1999.

U.S. exports to Kazakhstan were $268 million in 1998, up from $202 million in 1997. U.S. imports from Kazakhstan were $76 million in 1998, down from $139 million in 1997. U.S. companies have invested more than $2 billion in Kazakhstan, accounting for the largest foreign investment in the country.

Kazakhstani consumers are very open to Western products, but are quite price sensitive, given that, according to official statistics, the average monthly wage in 1999 was approximately $75. Kazakhstan encourages joint venture arrangements. A foreign partner should expect to supply financing, Western-style management practices and high-tech equipment. The privatization tendering process often lacks transparency. The government continues to scrutinize past privatizations to foreigners and expects greater participation by domestic investors in the future. While in the past year the government has strengthened its commercial laws to make doing business in Kazakhstan more attractive to investors, there are a handful of high-profile U.S. investment and business disputes which the USG has urged the government of Kazakhstan to resolve. Furthermore, amendments to Kazakhstan's Petroleum and Subsurface Use laws gave the National Oil Company, Kazakhoil, a regulatory role and further required foreign oil and minerals companies to use local goods, services and raw materials have caused deep concern among foreign investors in Kazakhstan. Implementing regulations to put the law into force are still being drafted. A new work permits quota system, which limits the number of work permits available to foreigners based on area of specialization and geographic region, was scheduled to go into effect on January 1, 2000 but has not yet been promulgated.

Kazakhstan's customs system is at times an obstacle to doing business, especially because customs procedures are not always conducted in an orderly, consistent, and business-friendly manner. Other obstacles include arbitrary implementation of many key laws (e.g. customs, intellectual property, licensing), widespread corruption and a weak, though improving, banking system.