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

CHAPTER IV. MARKETING U.S. PRODUCTS AND SERVICES

A. Distribution and Sales Channels

A weak distribution network, poor telecommunications, and the country's enormous size present several challenges to any company wishing to distribute its products in Kazakhstan. Although a number of agents and distributors are beginning to emerge, U.S. companies currently active in Kazakhstan prefer to use a combination of methods to get their products to market.

The following are the most widely used methods: distributing or selling the product directly; working through a country-wide distributor or agent; working through more than one local-area distributor or agent; and, distributing or selling products directly from a warehouse.

Most of Kazakhstan's population is concentrated in two geographic areas: the southeast (Almaty, South Kazakhstan, and Zhambyl oblasts) and the north/northeast (Astana, Karaganda, Kustanai, North Kazakhstan, Pavlodar, and East Kazakhstan regions). U.S. consumer-product companies are advised to first target their efforts in these regions. People in both areas (particularly in the south) have greater purchasing power than elsewhere in the country.

B. Use of Agents and Distributors; Finding a Partner

Finding a reliable, credit-worthy partner in Kazakhstan is difficult. Extensive due diligence is critical to avoid the pitfalls of Kazakhstan's challenging market. Given the country's relative youth and the legacy of Soviet central planning, there are no reliable databases (i.e. Dun and Bradstreet, etc.) to verify a firm or partner's ability to distribute U.S. products. U.S. firms are advised to: verify client lists offered by potential partners; check banking records and correspondent account capability with Western banks; and, verify the personal bona fides of key company officers. Transactions should be started on an irrevocable letter-of-credit basis or, if possible, full pre-payment. A trading relationship should be developed over time. Conservative, non-rotating credit lines may be extended to Kazakhstani importers/distributors if business and trust warrant it.

U.S. companies looking at international markets can take advantage of several excellent trade promotion programs created by the U.S. Department of Commerce and carried out by its overseas arm, the U.S. Foreign and Commercial Service (USFCS).

One such program offered by USFCS Almaty is the Agent/Distributor Service (ADS), which assists U.S. companies in finding potential distributors of their products in Kazakhstan. For a nominal fee, USFCS will do all the legwork and screening to identify up to six potential local contacts. The ADS is ordered through Commerce Department's regional Export Assistant Centers (EAC) located throughout the U.S. Contact the Commerce Department or any USFCS office for more information.

For U.S. companies interested in taking a closer look at Kazakhstan, there is no better program than the Gold Key Service (GKS). GKS includes: a commercial briefing with U.S. Commercial Service staff; an appointment schedule of up to five meetings per day tailored to the company's needs; hotel and air ticket reservations; and, arrangements for a car/driver and an interpreter. Contact USFCS Almaty for more information.

Commerce's Business Information Service for the Newly Independent States (BISNIS) publishes its monthly "Search for Partners" newsletter, which lists local companies looking for U.S. partners. The newsletter is also available through the Internet.

Finally, a few local business associations, including the Almaty-based Kazakhstani Union of Industrialists and Entrepreneurs, provide contact services. U.S. companies, however, must be careful to investigate potential local partners thoroughly before doing business with them.

C. Franchising

Although franchising is new in Kazakhstan, the idea is appropriate for Kazakhstani consumer industries since many business people do not have sufficient experience and knowledge in establishing their own businesses. The Kazakhstani Chamber of Commerce believes the following industries have the most potential for franchising: fast food, dry cleaning/laundry services, hotels and motels, and auto parts/service.

Franchising has great potential in Kazakhstan due to the bare minimum start-up investment required. But successful franchising will need a stronger legal environment. Any franchising contract should be carefully drafted because many judges in Kazakhstan are not familiar with this area of law. The contract would be judged under the Civil Code, which does not explicitly deal with franchising agreements, and there is no body of precedents on this subject.

D. Direct Marketing

The practice of direct marketing is growing slowly in Kazakhstan, especially in Almaty. A popular form of direct marketing is distributing free samples at points of sale, at major cultural events, and door-to-door. Marketing by mail is generally not used due to Kazakhstan's unreliable postal system. There are more than a dozen local and several Western advertising firms in Almaty. Television and radio are useful media in this respect. (See Chapter XI for Kazakhstani contacts)

E. Joint Ventures and Licensing

Prior to the August 1998 Russian financial crisis, there were more than 1,000 joint ventures registered in Kazakhstan, according to the Legal Entities Registration Department of the Ministry of Justice. Joint ventures may be organized into an unlimited partnership, a limited liability partnership, or a joint stock company. In some cases, such as a particular privatization deal, a joint venture structure may be required as part of the tender package. Kazakhstani companies, because they often have little working capital and face high interest rates from local banks, depend on Western partners to shoulder the majority of capital investment in a joint venture.

According to the 1995 Law on the Registration of Legal Entities, all legal entities created on Kazakhstani territory, irrespective of the form of their incorporation and founding partners, are subject to state registration. The Kazakhstani Ministry of Justice is in charge of the registration of all legal enterprises and organizations.

U.S. companies have identified licensing as an obstacle to investment: more than 300 types of economic activities are subject to licensing. Licensing procedures are slow and non-transparent. It is also an added cost to doing business in Kazakhstan. There are several government agencies that have licensing authority, with most licensing responsibility concentrated in the Ministry of Energy, Industry and Trade. USAID is providing technical assistance to the government of Kazakhstan on reforming licensing policy.

F. Steps to Establishing an Office

U.S. companies wishing to establish themselves in Kazakhstan are highly encouraged to contact the USFCS Almaty for consultations. Contact information is provided in Chapter XI.

Registration with the Ministry of Justice is the first step to establishing an office in Kazakhstan. The registration process should take no more than 15 days, but some foreign companies have complained that the process can take several months. Turning in all requested materials from the start will facilitate processing. There is also a registration fee that varies depending on the type of organization being registered. Joint stock companies and limited liability partnerships must pay an additional fee equivalent to one-tenth of one percent of their charter fund capital when they issue securities. The Embassy recommends that legal counsel be used in registering one's company.

Renovated, Western-style office space rents for $20-$40 per square meter per month in Almaty and $10-$30 per square meter per month in other major cities (some rents have gone up as high as $70 per square meter). In general, domestic telephone service is poor but getting better. International service is reliable, although expensive. Most U.S. business representatives prefer to use a cellular phone, which is widely used in Almaty and is gaining popularity elsewhere in Kazakhstan. Office equipment (fax machines, telephones, photocopiers), parts, and service are readily available in Almaty.

While Almaty remains the commercial capital of Kazakhstan, an increasing number of U.S. and foreign firms are establishing satellite offices in Astana due to the importance of government relations in Kazakhstan. U.S. firms have generally bought renovated apartments in Astana, with costs of up to $40,000-50,000 for a decent albeit not renovated office/apartment layout. The Inter-Continental Astana Hotel offers ready-made Western style office space with fully equipped business facilities.

With the exception of Almaty, it is difficult to find an English-speaking labor pool in Kazakhstan's cities. Moreover, finding local managers with Western work experience and a business education is still a rarity--even in Almaty. Training is an essential component to any start-up operation in Kazakhstan.

The Kazakhstan Institute of Management and Economic Strategic Research (KIMEP) was created to develop a cadre of young business professionals to meet the growing needs of the country. Funded with foreign grants (USAID, Soros, TACIS), corporate grants, and tuition, KIMEP offers its students graduate degrees in business management and public administration. Most courses are taught in English, and many international firms recruit KIMEP graduates. KIMEP offers a possible recruitment pool for U.S. firms.

G. Selling Factors and Techniques

Transportation costs and product pricing are two important considerations for U.S. companies looking at the Kazakhstani market. Kazakhstan's handful of major cities should be considered first as potential markets, since they are well-connected to the country's transportation system and their populations generally have greater purchasing power. U.S. products have a good reputation in Kazakhstan, but competition is growing. U.S. firms must provide customer support and a reliable supply of product to their distributors. Distribution networks within Kazakhstan cover great distances because of the country's vast size (equivalent in area to Western Europe). Transportation costs from the U.S. are significant (approximately $5,000 for a 20-foot container shipped to Kazakhstan from the American eastern seaboard). This affects the price competitiveness of American-made products.

Selling in Kazakhstan differs from other markets, and detailed marketing surveys should be prepared before launching a product. For example, mosquito repellant creams will sell much better than sprays because of Kazakhstanis' aversion to chemical sprays on the skin. Also, many Kazakhstanis prefer all-natural products to products with additives or preservatives.

H. Advertising and Trade Promotion

Several means of advertising are effective in Kazakhstan. Print and television are among the most popular. The Russian-language weekly "Caravan" is the most-widely read newspaper in Kazakhstan, and the best for advertising. Other Russian-language newspapers in which U.S. firms might consider advertising are "Panorama" and "Delovaya Nedelya." Both carry current economic, political, and business articles of interest to the entire business community. The English-language "Almaty Herald" is widely read by the foreign community. The most popular TV channels in Almaty are: ORT (country-wide), Khabar (country-wide), and KTK (Almaty). Radio, billboard, and transport (buses) advertising are also commonly used by U.S. and local companies. U.S. firms may wish to consult with one of the several international advertising and public relations firms operating in Kazakhstan.

Kazakhstan has several trade shows throughout the year. The largest is the Kazakhstan International Oil and Gas Exhibition (KIOGE) held every October in Almaty. Other scheduled events include: Consumer Expo (April); the Kazakhstan International Health Exhibition (KIHE) (May); a transportation conference and exhibition (May); the Kazakhstan International Telecommunications Exhibition (KITEL) (June); and, a power and energy exhibition (KAZPOWER) (September). (See Chapter XII for a complete list of Trade Events).

USFCS maintains a library that displays up-to-date advertising sources including information on catalog shows, specialized trade missions, and product literature.

I. Pricing Product

Western products are expensive for the average Kazakhstani consumer. High transport costs, high taxes, customs duties, and high expectations of profits by importers all contribute to keeping Western imports out of the reach of most Kazakhstanis. The overall trade-weighted import tariff is 12%, and there is also a value-added tax (VAT) of 20% (although VAT on food and medicines is only 10%). Importers also pass along to consumers the extra costs incurred clearing goods through Kazakhstani customs more quickly (i.e. by bribes).

Conditions demand that U.S. companies take into account the extreme price sensitivity of Kazakhstani consumers when pricing products. Kazakhstani consumers will, however, pay a premium for high-quality goods. For example, Kazakhstani mothers, once educated in the value of quality baby food or diapers, will reserve a portion of their income for these higher-priced items.

J. Customer Support

Strong customer support service can be a value-added aspect of a U.S. company in Kazakhstan. In a country where the practice of customer service still leaves much to be desired, providing after-sales service (either directly or through a trained Kazakhstani representative) can make a lasting difference. U.S. companies should be prepared to commit resources to customer-service training for local staff.

K. Selling to the Government

In August 1997, President Nazarbayev signed the Law on State Procurement. This provides foreign bidders with enhanced access to government tenders, assurances of national and most-favored-nation treatment, and international standards of transparency and public accountability. However, what appears in print and what happens in practice can be very different. Short deadlines for tenders, a lack of transparency in business dealings, and serious non-payment issues make for an extremely challenging commercial environment. U.S. companies are advised to approach any government contract with extreme caution. However, lucrative opportunities do exist, and U.S. companies have had successes in Kazakhstan. U.S. companies should be wary of payment-after-service arrangements and request full or partial payment in advance. Not doing so puts any U.S. firm at great risk, with little to no recourse in the Kazakhstani judicial system.

L. Protecting Your Product from IPR Infringement

Legislation on patent and trademark protection was adopted in 1992 and 1993, respectively, and legislation on copyright protection was adopted in June 1996. Adequate enforcement, however, remains a critical shortcoming. There is still very little understanding of or respect for intellectual property rights in Kazakhstan. The government is currently considering amendments to the Customs Code to provide for special border control measures to deal with pirated software and counterfeit trademark problems. Moreover, amendments to the Administrative, Criminal and Civil Procedural Codes have been adopted to bolster enforcement capabilities. Nevertheless, systematic intellectual property violations persist and enforcement remains sporadic at best.

U.S. companies should depend on their locally based repre-sentatives or distributors to protect their products. In one case, a local company immediately stopped using a major U.S. franchise's copyrighted trademark after receiving cease-and-desist orders from the franchise's Almaty-based U.S. law firm. This effective "shot across the bow" approach is one way of dealing with IPR and/or copyright infringement.

Although Kazakhstan has improved enforcement of intellectual property rights, intellectual property losses to U.S. firms, in terms of computer software and audio/video goods, are estimated to amount to more than $50 million annually. Increased trade with China may exacerbate this problem. A large percentage of computer software and videos available are pirated, but apparently are not mass-produced in Kazakhstan. Kazakhstan was removed from the USTR "Special 301" watch list in 1999.

M. Need for a Local Attorney

The need for competent counsel, either Western or Kazakhstani, is critical for both understanding this challenging market and protecting your investment.

Kazakhstan is still in the process of building the institutional capabilities of its judicial system. Until this is complete, the performance of courts in the country will be less than optimal. Further problems exist in having a judgment enforced. A judicial executor system is only beginning to be established by the Ministry of Justice. Given this level of development, it is likely that interference in judicial cases by private parties or by government officials will sometimes occur.

General commercial law principles are established in Kazakhstan's Civil Code. The General Provisions of the Civil Code was adopted in December 1994; the Specific Provisions were passed by the Parliament in July 1999. The General Provisions were amended several times between 1995 and 1998. Commercial law development is ongoing, further necessitating strong legal counsel.

There are currently more than 10 U.S. law firms operating in Kazakhstan. In addition to expatriate staff, most employ local attorneys or work with a local firm.

Many major U.S. accounting firms have offices in Almaty that provide accounting services and business counseling. They also offer services in tax matters, payroll, employee benefits, and registration.

The Embassy strongly recommends that businesses contemplating working in Kazakhstan hire legal and accounting professionals with "on the ground" experience.

N. Due Diligence

Any U.S. company wishing to establish a joint venture or partnership with a Kazakhstani company should find out as much about a potential partner as possible. There are many cases where the Kazakhstani partner proved unreliable or even turned on the foreign partner after their joint venture started making money. Spending a little money on due diligence early on could save a company a lot of money later. U.S. companies may want to contact an American consulting firm in Almaty for assistance, or utilize the U.S. Commercial Service's Company Profile service (Contact USCS Almaty for more information).