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Country Commercial Guides
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CHAPTER VII. INVESTMENT CLIMATE
A.1. Openness to Foreign Investment
Shortly after declaring its independence from the Soviet Union in 1991, Kazakhstan began a series of broad-based reforms in an effort to move from a planned economy to a market economy, and to attract foreign investment. These reforms include: de-monopolization, privatization, debt restructuring, banking reform, lifting profitability controls, price liberalization, establishing a securities and exchange commission, trade liberalization, enacting laws on investment, setting up an adequate government procurement process, customs reform, and tax reform.
Although the Kazakhstani government has made great strides in improving foreign investment legislation, key concerns remain, including the vagueness of laws, contradictory legal provisions and poor implementation, especially at the local level of government. For instance, the lack of clarity in tax laws allows for creative interpretations by the Tax Police and other government agencies. Customs always presents challenges to foreign firms. Customs officials often interpret Customs regulations arbitrarily. Government downsizing and the move to the new capital, Astana, have seriously compounded problems surrounding implementation of legislation. The State Agency on Investments, established in late 1996 and advertised as a "one-stop shop" for foreign investors, has had a mixed record in its attempts to resolve investment issues. In 1999, in an effort to raise the profile of foreign investment issues within the government, President Nazarbayev promoted then-Foreign Minister Tokayev to the rank of Deputy Prime Minister and gave him specific responsibilities to attract foreign investment and resolve investment disputes. Tokayev was subsequently chosen as Prime Minister after his predecessor resigned in October.
Beginning in 1997, there has been a trend to grant preference to domestic investors over foreigners in most state contracts. September 1999 amendments to the oil and gas law requiring oil companies to use local goods and services represent an extension of this trend. President Nazarbayev has complained publicly that previous privatizations were executed too quickly and did not allow for the involvement of domestic investors. Other government officials have further expressed the need to "protect" domestic producers from outside competition. However, it is unclear whether domestic investors have the medium-to-long term financial capacity to support major projects and whether domestic investors have the strong management and technical skills to rejuvenate largely bankrupt Kazakhstani industries. To help develop local industry, the government enacted changes to legislation, published September 1, 1999, requiring all oil and minerals companies to use domestically produced goods and services when available.
In recent years, the Kazakhstani government has enacted four major pieces of legislation affecting foreign investment. These are: 1) The Law on Foreign Investment, 1994 (amended in July 1997); 2) The Tax Code of 1995; 3) The Law on State Support for Direct Investment, 1997; 4) The Law on Government Procurement, 1997.
Poor implementation of these laws and reforms remains the key obstacle to business in Kazakhstan. Important concerns remain, for example, in the area of government tenders, despite new legislation and government promises that tendering will be conducted in an open and fair manner. Tenders are sometimes issued just a week ahead of the application deadline, thereby limiting competition.
The main features of the Law on Foreign Investment (as amended) are:
- Guarantees with regard to non-expropriation, profit repatriation, currency convertibility, and national treatment;
- Clear and unequivocal access to international arbitration in the event of a dispute between a foreign investor and the State;
- The automatic consent of the State to the dispute settlement option selected by a foreign investor;
- A definition of investment dispute that embraces authorized official bodies;
- An expanded definition of foreign investment (which includes rights to undertake activities based upon a license) that reflects an open policy towards encouraging investment;
- A compensation regime for expropriation due to ultra vires actions by State officials;
- A choice of law options for employment agreements between foreign investors and their foreign employees in Kazakhstan;
- A guarantee that only those state bodies permitted to carry out examinations of foreign investor operations should do so.
- Exemptions from customs duties for equipment and spare parts imported into Kazakhstan for the charter fund of an enterprise with foreign participation, as well as for personal property imported into Kazakhstan by foreign personnel of an enterprise with foreign participation; and
- A 10-year stability guarantee in the legal regime applicable to all foreign investors except those engaged in (I) the importation, production or sale of goods excisable in Kazakhstan, and (ii) the importation of finished products into Kazakhstan for the purpose of re-sale in Kazakhstan. Investments made under long-term contracts (over 10 years with authorized state bodies), enjoy this guarantee until the expiration of the contract, unless otherwise specified by the contract itself.
The Law on Foreign Investment was amended in April 1998 to include an anti-avoidance clause with respect to contributions to charter capital. This is primarily to prevent abuse of duty exemptions permissible under Article 22 of the same law. Independent experts can be called in under certain circumstances to verify that that no such "avoidance" is taking place.
Contracts between foreign nationals and Kazakhstani citizens must meet the requirements laid out in Article 24(2) of the investment legislation. Such contracts must address labor conditions. These are negotiated by the parties and included in the contract. The conditions agreed must meet the standards set out in Kazakhstani labor legislation, Article 25(3).
The February 1997 Law on State Support for Direct Investment was enacted to stimulate additional investment, both foreign and domestic, in "priority sectors of the economy." Currently, these priority sectors include: infrastructure (including electrical infrastructure and telecommunications); light manufacturing; high-yield varieties of crops, livestock, fertilizers and pesticides; social sector investments, including investment in the health, education, sports, and tourism sectors; and investments connected to the transfer of the capital to Astana. These sectors may be subsequently modified with the approval of the President. As inducements to stimulate additional investments in these sectors, various forms of tax and customs exemptions, together with contributions of real property by the government, may be negotiated with the Agency for Investments.
Incentives include:
--Up to 100% tax relief on the first five years of the investment;
--Up to 50% tax relief on the second five years of the investment; and
--Partial or full customs duty exemptions on equipment and raw materials needed for the investment.
Kazakhstan's generally liberal investment regime means that no sectors of the economy are closed to investors. The Government of Kazakhstan remains both an implicit and explicit player in attracting foreign investment. Government officials, sometimes at the highest level screen foreign investment proposals. Major projects, such as the Caspian offshore production sharing agreement (PSA) and the Karachaganak PSA, bear the President's personal imprimatur. The screening process itself is not a significant impediment to investment in terms of limiting competition or protecting domestic interests. However, the process is often non-transparent and can slow investment decisions.
In August 1997, Kazakhstan enacted the Law on Government Procurement, largely based on the UNCITRAL Model Government Procurement Law and the WTO Government Procurement Agreement. The new government procurement system replaced a system that was discriminatory and non-transparent. The new law provides Kazakhstani procuring entities with various competitive bidding options, including open and closed tenders. The law also establishes a more transparent government procurement process (bidding, review of bids, and contract award) and gives companies opportunities for administrative and judicial appeal. The law does not contain any discriminatory measures such as "offsets" and "margins of preferences." The Kazakhstani government, moreover, has declared its intention to join the WTO Government Procurement Agreement, a binding international commitment to ensure transparency and non-discrimination in the government procurement process.
The supervising body is the Agency for State Procurement, established by Presidential Decree in December 1997. Although the new government procurement process is significantly better than its predecessor, there are a number of provisions in the law that contradict the principle of equal treatment and allow procuring entities to provide preferences to domestic suppliers. Article 25(1) of the Law on State Procurement (16 July 1997 No. N163-1, as amended December 9, 1998) states that, "potential domestic suppliers, including small businesses, when defining a winning bid, shall have priority of preference--procedure for granting such priority preferences shall be determined by the Government." It is therefore not a question of possible discrimination but mandatory discrimination in state purchases.
Kazakhstan's Tax Code, enacted in April 1995, is considered by tax experts to be among the most comprehensive in the NIS. In general, taxes are applied universally within the Code, allowing only a limited set of exemptions. The Code essentially applies the international model of taxation, which is based on the principles of equity, economic neutrality and simplicity. In December 1996, a treaty on the Avoidance of Double Taxation between the United States and Kazakhstan came into force. A number of treaties on the avoidance of double taxation were ratified in 1998, including with the Czech Republic, France, Sweden, Bulgaria, Turkmenistan, Georgia, South Korea, Germany, Belgium and Mongolia. On the negative side, however, the administration of the Tax Code and the tax treaty is not as efficient, transparent, or consistent as it should be. There is a broad recognition of this by the Kazakhstani government, though, and a program to reform the system of tax administration is currently underway. However, U.S. and foreign firms often complain of harassment by the tax police via unannounced inspections and other methods. In 1998 the government limited the number of visits which can be made by government bodies in the course of a year to small businesses, but tax inspections were unfortunately excluded from the limitation. The government plans to amend the tax code in 2000.
Since 1995, the government has wholly privatized many large-scale companies and sold majority shares in those companies to foreign investors. Privatization moved ahead quickly in 1996 and into the summer of 1997 in all sectors of the economy, including oil and gas, power generation, coal, and telecommunications. In early 1998, however, citing low oil prices, President Nazarbayev announced the government would suspend future privatizations in the oil and gas sector. However, the suspension would not affect contracts already under discussion; for example, offshore blocks in the Caspian.
The Foreign Investment Law provides for, inter alia, guarantees for national treatment and non-discrimination among foreign investors. Generally, Kazakhstan does not restrict investment in any sector and it does not subject foreign investment to any prior authorization requirements.
Despite the general guarantee, there exists at present at least the formal possibility of denial of national treatment in the petroleum and subsurface utilization (minerals) sectors. Recent amendments to the laws regulating these activities, published September 1, 1999, require investors to contract with Kazakhstani service-providers, and to purchase Kazakhstani equipment, goods and raw materials so long as these meet the requirements for participating in government tenders. The law requires that an unnamed government body review all service contracts to ensure compliance with these requirements; however, implementing regulations to the law have not been issued and it remains unclear how these requirements will be implemented. The requirements may be challenged prior to Kazakhstan's hoped-for WTO accession negotiations since they appear to breach GATT and GATS rules and the Agreement on Trade Related Investment Measures.
By law, foreign investors are allowed to participate in all privatization projects, and are commonly allowed to do so at the initial stages of the privatization process. There appears to be no discrimination against foreign investors after an investment is made. However, many foreign companies state that they need to protect their investments from a never-ending barrage of decrees and legislative changes. Foreign investors also complain of arbitrary tax inspections and unanticipated taxes, problems with closure on contracts, delays and irregular practices in licensing, land fees, etc. Some foreign firms have expressed concern that government organizations fail to live up to their side of the contract (particularly regarding payment). This often prevents the foreign partner from moving ahead with its investment program. When this occurs, the investor is exposed to government charges of non-performance and the increasingly real possibility that the government will cancel the contract.
U.S. firms can participate in government-financed research and development projects on a national-treatment basis.
All U.S. citizens need a visa to enter or transit Kazakhstan. An official invitation from a registered Kazakhstani or Kazakhstani-based organization is the first step to receiving a Kazakhstani visa. (In June 1999, the government announced the intention to drop this requirement for business visas, but has not made this official.) Visa applications are available at any Kazakhstani Embassy. Travelers are advised that visits of more than three days require registration with the Kazakhstani Ministry of Internal Affairs-Department of Visas and Registration (OVIR). Failure to register can result in high fines and in being prevented from leaving the country. Contact the nearest Kazakhstani Embassy for more information.
Obtaining licenses to import foreign workers, and the work permits for these employees, can be difficult and expensive, and U.S. companies should consult legal firms for assistance (see A.5 for details). Although licensing and permit procedures were streamlined somewhat in 1999, under a December 1998 Law on Employment of the Population the government must assign numerical quotas on the number of foreign workers. These quotas, based on area of specialization and geographic region of employment, were scheduled to enter into effect on January 1, 2000.
A.2. Conversion and Transfer Policies
There are minimal restrictions on converting or transferring funds associated with an investment into a freely usable currency at a legal market-clearing rate.
In July 1996, the IMF accepted Kazakhstan's application to adopt Article 8 of the IMF Articles of Agreement, stipulating that Kazakhstan would not restrict current account transactions such as currency conversions or the repatriation of investment profits. In April 1999, the Government and National Bank of Kazakhstan announced that the national currency would be allowed to freely float at market rates, thus abolishing the previous managed exchange rate system. A requirement established at that time for importers to convert half of their hard currency earnings into local currency has since been abolished.
There is no distinction made between resident and non-residents when opening bank accounts. There are no restrictions whereby different types of bank accounts are necessary for investment or import/export activities. For non-residents, money transfers in currency associated with foreign investments, whether inside or outside of the country, can take place without restriction. For example, foreign entities or persons not incorporated in Kazakhstan are permitted to settle their non-cash obligations, including payment of wages to their resident and non-resident employees, in foreign currency. The National Bank introduced a regulation in June 1998 that permits the payment of wages in cash in foreign currency. Commercial banks charge transaction fees based upon the amount of withdrawals: these fees differ from bank to bank. Foreign investors may convert and repatriate tenge earnings made inside Kazakhstan. In practice, though, the rate of tenge conversions is at spot official rates. From February 4, 1999, the above procedures do not apply to contracts where the value is less than $5,000.
There are procedures and licensing arrangements set up by the National Bank to cover bank payments and transfers relating to capital movements. Inward capital flows are basically unrestricted. However, a resident company in which there is foreign investment exceeding one hundred thousand dollars must register the transaction for statistical purposes. There are restrictions on capital movements when a non-resident sells or disposes of an interest in a resident company to another resident company. These are dealt with under the licensing arrangements of the National Bank. Travelers should also be aware that the government imposes a 1% tax on the import of foreign currency (physical bank-notes) by companies, collected at the airport upon arrival; this requirement may be extended to private persons. This tax does not apply to bank-to-bank transfers, but it does apply to transfers made through banks to companies.
The procedure for licensing foreign currency transactions related to capital movements is governed by Regulations Numbers 129 and 130 of the Procedure for Licensing Activities Related to the Use of Foreign Currency of April 24, 1997.
The following types of transactions are examples of capital movements from residents to non-residents that are subject to licensing:
--Investments of residents in the business of non-residents abroad (The professional activity of authorized banks on the securities market--e.g. brokers and dealer activity with state securities of non-residents--is exempted.);
--Transfers from residents in favor of non-residents for property, including real estate, transactions;
--The carrying out by residents of payments connected with lending to non-residents concerning export-import transactions for the period of more than 180 days. (Note: the requirement to obtain a license may hinder speedy financing. This is because there is a large number of individual consents required from state bodies before the National Bank can issue a license. In the case of transactions involving the transfer of $100,000 or more, these include the written consent of the Ministry of Energy, Industry and Trade. Where secured lending involves the transfer of collateral to a third party account abroad, or the rights over property in the event of default, the will of the contracting parties can be thwarted.);
--Other loans to non-residents for over 180 days.
In mid-1997 the State Customs Committee and the National Bank implemented a new documentation requirement on import and export transactions, ostensibly for the purpose of currency control. The rules complicate import and export processing, and there is a real question whether they are effective for their stated purpose - to ensure that the proceeds from export sales are returned to Kazakhstan, and to prevent fraudulent over-invoicing of imports.
The regulations require that the importer or exporter prepare a document called an "Import [or] Export Transaction Passport" that restates the details of the import or export contract, such as price paid, name of purchaser, date of delivery, etc. Customs checks the details in the "Passport" against the contract and shipping documents presented by the importer or exporter when the goods reach the border. The importer's or exporter's bank again checks the Passport against the importer's or exporter's contract at the time the payment for the goods is made or received in Kazakhstan. The steps are reversed if the Kazakhstani importer transfers funds to the foreign seller before the goods arrive, or the Kazakhstani exporter receives payment from the foreign buyer before it ships the goods.
The Embassy is not aware of any concerns with regards to remittance policies. Indeed, foreign investors have praised Kazakhstan's liberal policies on foreign exchange availability -- in sharp contrast to some other countries in the region.
Capital inflows have enabled the National Bank to accumulate foreign exchange reserves, and at the same time to lower interest rates as inflation comes down. As of November 1999, net international reserves of the National Bank of Kazakhstan stood at approximately $1.285 million.
The National Bank has developed a set of market-based instruments with which to implement monetary policy. Until the banking system becomes sound and competitive, and money velocity and multipliers more predictable, however, the National Bank will concentrate on exchange rate stability as its operating target. The National Bank estimates that households are hoarding around $1 billion in cash. The main source of inflows remains foreign direct investment, although its growth has slowed along with the pace of privatization.
A.3. Expropriation and Compensation
The Foreign Investment Law is quite clear about the legal expropriation process. Direct expropriation may take place only in the public interest under the terms of the Foreign Investment Law, on a non-discriminatory basis, and with the payment of "prompt, adequate and effective" compensation. Compensatory payment must be at fair market value, with interest, in the currency in which the investment was made. The Amendments to the Foreign Investment Law of July 1997 substantially enhanced the guarantees against direct and indirect expropriation, unequivocally provided those guarantees to joint venture entities (in addition to their foreign shareholders), and ensured an identical, non-discriminatory compensation regime to investors that suffer either direct or indirect expropriation. Bilateral investment treaties (BIT's) between Kazakhstan and other countries, including the U.S., also refer to compensation in the event of expropriation.
Strictly speaking, there have been no expropriations of U.S. investment in Kazakhstan. Some foreign investors have encountered serious problems, however. In one instance, in 1996, three foreign companies were forced to relocate their offices under pressure from the government. In 1997, investors, after reviving an important mine, found they could not obtain export licenses for their ore, although the right to export was written into their contract. The same year another investor alleged forgery and fraud by government officials, claiming its employees had been physically threatened in a management dispute at its ferro-alloy venture in northern Kazakhstan.
There are no known instances of "creeping expropriation" or governmental action tantamount to expropriation.
Although foreign capital is allowed to participate in most areas of the economy, there are some limitations on the participation of foreign capital in the services sector. In particular, under the Law on Banks and Banking Activities in Kazakhstan (August 31, 1995), the total registered charter fund of all banks with foreign participation may not exceed 25% of the overall registered charter fund of all banks in Kazakhstan. In 1998 the National Bank submitted to parliament a change in the law to increase the ceiling of total foreign participation in total banking capital from 25% to 50%; as of December 1999, no Parliamentary decision on this issue had been made.
In addition, under the Law on Insurance (October 3, 1995), while foreign legal entities, including foreign insurance organizations and foreign citizens, are permitted to participate in insurance and re-insurance organizations in Kazakhstan, the maximum foreign participation permitted is 50%. Insurance supervision powers were transferred to the National Bank on June 30, 1998. The Insurance Supervision Department of the National Bank also controls the licensing of insurance activities.
As of January 1999 there were 71 insurance companies in Kazakhstan, of which three were fully state owned. The minimum capital for an insurance company is 40,000 tenge, less than $500 at that time. As of June 1999, the Department of Insurance of the National Bank was in the process of drafting a new insurance law.
Restrictions also exist on foreign ownership of land in Kazakhstan. See below (A.6 "Right to Private Ownership and Establishment").
General commercial law principles, including procedures for pursuing civil court cases, are established in Kazakhstan's Civil Procedural Code. Parliament passed a revised Civil Procedural Code July 13, 1999.
A.4. Dispute Settlement
There have been a number of investment disputes involving foreign companies in the past several years. While the disputes have arisen from unrelated, independent circumstances, they are all linked to alleged breaches of contract or non-payment on the part of Kazakhstani state entities. The disputes involve, in some instances, more than $100 million.
Either the Collegium for Economic Matters or the Collegium for Civil Matters handles disputes between legal entities in Kazakhstan. In general, when the dispute is between commercial entities, the matter will be decided by the Collegium for Economic Matters. When the dispute is between a commercial entity and the government, however, the particular forum that would hear the case is less clear. Jurisdictional issues are outlined in the new Civil Procedural Code, which was approved by Parliament July 13, 1999.
Kazakhstan is still in the process of building the institutional capabilities of its court 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 (including, for example, having a government official seize a debtor's property and sell it to pay the debtor's liabilities). A judicial executor system is only beginning to be established by the Ministry of Justice. Given this lack of development, there is ample opportunity for interference in judicial cases, be it by private parties or by government officials.
General commercial law principles are established in Kazakhstan's Civil Code.
The July 1997 amendments to the Foreign Investment Law provide foreign investors involved in disputes with the State with clear and unequivocal access to international arbitration. This access is restricted to arbitration fora located in states that are signatories to the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards. The U.S. is a signatory state. In addition, the amendments provide the automatic consent of the state to the dispute settlement option selected by a foreign investor.
The law contains a definition of investment disputes referring to "authorized state bodies." An authorized state body is a state entity that has the right to act on behalf of the Republic of Kazakhstan within its competence as established by legislative and normative legal acts. It does not, therefore, include a comprehensive set of state bodies or even the central state bodies. In order for a dispute to qualify as an investment dispute (and on this depends the right to refer to foreign arbitration fora), the state body itself must have been authorized to act or contract. From this it follows that lack of authority to act/contract would leave the dispute outside the definition of investment dispute. The right to foreign arbitration would then fall. Care should be taken with contracts to ensure that the contracting state body is indeed authorized. The State Agency for Investments can assist with this. Authorized bodies change frequently.
If the foreign investor requests investment dispute settlement abroad (and the government is one of the parties to the dispute, through its authorized bodies) then the consent from the government is automatic. If the government, through its authorized bodies, is the initiator of the action then the court process of Kazakhstan is utilized in the absence of a written preference from the foreign investor. If the foreign investor declines to make a choice of forum then the state body is authorized to apply to the court system of Kazakhstan. Judicial bodies of the Republic of Kazakhstan settle disputes (other than investment disputes) between foreign investors and citizens or legal entities of Kazakhstan.
If a dispute does go to international arbitration, awards rendered by certain arbitration fora should be enforced in Kazakhstan in accordance with the law. These fora are the International Center for the Settlement of Investment Disputes tribunals, any tribunal applying the United Nations Commission on International Trade Law Arbitration rules, the Stockholm Chamber of Commerce, and the Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry. The U.S.-Kazakhstan Bilateral Investment Treaty can serve to buttress the Foreign Investment Law in this area. In October 1995, Kazakhstan ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitrage Awards.
Despite such safeguards, however, there continues to be great practical difficulties for foreign investors in enforcing arbitrage awards against government enterprises in Kazakhstan, particularly given the near-bankruptcy of many such enterprises.
Kazakhstan's bankruptcy regime suffers from a complex bankruptcy law, passed in early 1997. Amendments that would somewhat simplify the law and speed up proceedings have been submitted to the Kazakhstani Parliament but not yet approved. Creditor rights are set forth clearly under the current law on bankruptcy. It is possible, however, that some of these rights may be eroded by the amendments currently before Parliament.
Kazakhstan's bankruptcy agency became a self-financed government-owned enterprise in 1997. As yet, the role this quasi-agency would take in bankruptcy proceedings is still unclear.
In general, the Kazakhstani government has a moderately good record of addressing investment disputes. However, foreign investors have often had to endure protracted negotiations with working-level officials, only to have the highest levels of the government make key decisions on the future of a given investment. Most investors generally prefer to handle investment disputes "in the corridors," fearing a real or perceived backlash from the government if the case were to be made public. Investment disputes with U.S. firms take up a considerable part of the Embassy's advocacy portfolio, and likely will continue to do so until clear and consistent application and enforcement of legislation becomes the norm.
Kazakhstan has made excellent progress in developing a proper platform for a functioning legal system with the assistance of USAID. However, while there are good laws "on the books," effective means for enforcing property and contractual rights are underdeveloped. For example, the constitution does not establish an independent judiciary. While the judiciary is trying hard to develop its own identity, "telephone law" (that is, a phone call to the "right people") is often cited by Kazakhstanis as the way court decisions are handed down. Judgments of foreign courts only sometimes are accepted in Kazakhstani courts, and enforcement is very difficult. While there is a well-written set of commercial laws on the books, there is virtually no system of case law to establish important precedents for future commercial disputes. This is another area in which USAID experts hope to make improvements.
A.5. Performance Requirements/Incentives
Performance requirements, to the extent that they are imposed, are the result of a contract between the individual investor and the Agency for Investments. They are the quid pro quo for tax, customs duty, or other privileges and benefits, as provided by the Law on State Support of Direct Investments. Typically, an investor's obligations might include financial obligations, obligations to train local specialists, and contributions to social funds or needs.
Performance requirements, in some cases, are central to investment contracts. Companies are frequently required to pay back wages, remodel factories and plants, and provide an agreed level of output. In several instances, the government has revoked contracts because firms did not follow their performance obligations.
The Agency for Investments is responsible for monitoring the fulfillment of obligations undertaken by investors. At present there have been no formally adopted procedures for the enforcement of performance requirements. Generally, however, where the Agency determines that a company has not complied with its financial or other contractual obligations, the government may revoke the operating license of the company. In order to obtain the benefits and privileges of investing in Kazakhstan, an investor is typically required to provide the Agency with detailed information on technical and financial matters of the proposed project, which may include confidential or proprietary information.
Rules on local content, hiring of nationals and local source of financing vary from contract to contract. While investors usually are not required to purchase from local sources, such terms can be written into contracts. Article 41 of the Petroleum Law requires that petroleum contractors use local equipment, goods and services, so long as these meet minimum standards necessary for participating in Government of Kazakhstan tenders. Article 63 of the Law on the Subsurface and its Utilization (covering mining operations) contains similar requirements. These requirements are contradictory to the protections offered by the U.S. - Kazakhstan Bilateral Treaty on Investment, but implementing regulations enacting these requirements had not been completed as of the time of this writing.
(See Chapter VII, D for more information on a requirement by the Kazakhstani government that foreign firms hire Kazakhstani nationals.)
There is no requirement in Kazakhstan that nationals own shares in foreign investments. In the banking sector, foreign investors have participated only through joint ventures with local entities, but this is no longer necessary. Likewise, there is no general requirement that the level of foreign equity be reduced over time. Technology transfers frequently occur and sometimes are written into contracts, but do not appear to be a necessary aspect of foreign investment.
The Law on State Support of Direct Investment (Feb. 28, 1997) authorizes the Agency for Investments to provide duty exemptions under contracts with investors on a case-by-case basis for equipment and materials imported for investment projects in Kazakhstan. The benefits and privileges of investors under the law are not based on nationality of the investor or the origin of goods.
Investment incentives also exist for investors in government-designated "priority sectors" of the economy (see Section A.1. above). There are also investment incentives for investors in Special Economic Zones (see Section E). The legal basis for these zones is Chapter 12 of the Customs Code (July 12, 1995) and numerous "Decrees of the President, Having the Force of Law." The principle decree is "On Special Economic Zones in RK." There was an important change in December 1998 that eliminated guarantees made for operations on the territory of special economic zones. Prior to the changes, the law gave guarantees that in the event of changes to the legal regime of a zone, including changes to borders, investors were protected as to their agreed terms at the time they were made. Now the guarantees are extended only to changes in legislation related to the importation of equipment, goods consumed in the processing of manufacturing, and goods used for re-processing.
The Kazakhstani Government is seeking accession to the World Trade Organization (WTO), and is bringing its export/import trade policies in line with WTO standards. During the last two years, the GOK has recognized the benefits of freer trade and has liberalized its trade policies and passed legislation that brings its legal trade regime into conformity with WTO standards. Kazakhstan submitted its Memorandum on the Foreign Trade Regime (MFTR) in July 1996 and the first round of WTO accession negotiations took place in October 1997. The quality of initial offers on goods and services made by the Kazakhstani government has slowed down the process of accession. However, the 1999 accession of the Kyrgyz Republic to the WTO, combined with agreement between China and the U.S. on the terms for Chinese WTO accession, both important Kazakhstani trade partners, will likely give Kazakhstan an incentive to move more quickly.
Kazakhstan has not had, until recently, discriminatory policies with respect to imports. However, in January 1999 Kazakhstan introduced a six-month import ban on a range of food, tobacco and milk products imported from Russia; the ban expired in June 1999. In 1999, Kazakhstan also imposed punitive duties (200%) on food and construction materials imported from Uzbekistan and Kyrgyzstan. These measures were taken in response to domestic producers' complaints of unfair trading practices following devaluation in those countries' currencies.
Kazakhstan permits the importation of goods from CIS free-trade partners and certain developing or least-developed countries free of duty or at a reduced rate within the framework of the Generalized System of Preferences. With certain exceptions, goods that originate in and are directly imported from developing countries are subject to duty at a rate that is 75% of the MFN rate, while goods that originate in and are imported directly from least-developed countries are free of duty.
Article 22 of the Foreign Investment Law provides a customs duty exemption for equipment and spare parts that are imported as a contribution to the Charter Fund of foreign-owned enterprises in Kazakhstan. The imported personal effects of foreign personnel of such enterprises may also be admitted free of duty under Article 22. Article 22 exemptions should be read together with new provisions of the Law on Joint Stock Companies. Contributions to a charter fund should be completed within one year of registration (Art. 8(3)(2) Law on JSC, 10 July 1998 n. 281-1).
There are very few quotas and duties on exports. Among the more important is an agreement signed with the EU concerning quotas on textiles. There are, in addition, some quotas for oil export that relate to capacity restrictions in Kazakhstan's oil pipeline.
Presently, there are no special requirements for engaging in trade-related activities. Registration as an entrepreneur, legal entity, or branch/representation office is required, which is in keeping with internationally accepted practices.
There are no known cases in which U.S. or other foreign firms have been denied participation in government-financed or subsidized research and development programs on a national treatment basis.
A.6. Right to Private Ownership and Establishment
Foreign and domestic private entities have the right to establish and own business enterprises, and to engage in all forms of remunerative activity. Private entities can freely buy and sell interests in business enterprises. Public enterprises often enjoy better access to markets, credits, and licenses than do private entities. However, this is changing as Kazakhstan completes the privatization of most of its economy.
Kazakhstan's constitution provides that land and other natural resources may be owned or leased by physical persons who are Kazakhstani citizens according to conditions established by law. These conditions are:
--Permanent ownership is restricted to state enterprises;
--Life inheritable tenure is granted for family farms, household plots, gardens, and dachas;
--Other land and natural resources may be leased up to 99 years.
At present, agricultural land (except for land in categories mentioned in Section 2 above) is not privately owned. A bill calling for the phased privatization of arable land was introduced in June 1999, but it was quickly withdrawn after receiving severe criticism from the Parliament. Under the draft law, only Kazakhstani citizens born in Kazakhstan would have been allowed to own farmland. Currently, foreign citizens and foreign legal entities can lease land, through a domestic partner, for a period up to 99 years.
A.7. Protection of Property Rights
Secured interests in property (fixed and non-fixed) are recognized under the Civil Code and the 1995 Land Law. Adequate enforcement of these interests, however, is seriously compromised by the absence of registries for non-fixed property (although a law that would establish such registries is currently in Parliament). Further, land cadastre for registering rights in fixed property have been fully established in only a limited number of regions (most notably Almaty and Astana). The use of mortgages on real property has just begun, with a Law on Mortgages adopted in 1996. However, legal and banking expertise in this area is limited and enforcement procedures are uncertain.
In principle, Kazakhstan's Civil Code protects U.S. intellectual property. In addition, the U.S.-Kazakhstan Trade Agreement, which came into force in 1993, obliges Kazakhstan to protect intellectual property. However, lax enforcement and the absence of criminal sanctions have meant that intellectual property rights are often violated.
Patents and trademarks: Patent protection is available for inventions, industrial designs and utility models. Patents for inventions are available with respect to processes and products that are novel and have industrial applications. However, patent protection for certain types of products and processes--such as layout designs and plant variety--is not yet available. New legislation providing these protections has been presented to Parliament but not yet passed. Formal examination of patent applications is performed by a National Patent Office, established in 1992. Existing Soviet patents are being converted to Kazakhstani patents.
Patents for inventions are granted for a period of 20 years. Patents for industrial designs are granted on a preliminary basis for five years (this period may be extended for an additional 10 years if the preliminary patent is converted to a patent). Utility models are granted a five-year initial period of protection, with the possibility of an additional three-year extension. Unsuccessful applicants have the right to appeal decisions of the National Patent Office.
The registration of trademarks began in July 1992. Trademark violation is a crime, but enforcement appears to be rare and arbitrary. There are marked disparities in fees charged to domestic patent and trademark applicants, as compared to foreign applicants. Applications for trademark, servicemark and appellations of origin protection may also be filed with the National Patent Office. Trademarks and servicemarks are afforded protection for a period of 10 years from the date of filing.
Copyrights: The Law on Copyrights and Related Rights was enacted in June 1996. The law is largely in conformity with the requirements of the WTO TRIPS Agreement and the Berne Convention.
The government is currently considering amendments to the Customs Code to provide for special border measures to deal with pirated software and counterfeit trademark problems. Amendments to the Administrative, Criminal and Civil Procedural Codes, moreover, have been adopted to bolster enforcement capabilities. Nevertheless, systematic violations persist and enforcement remains sporadic at best.
Pirated U.S. and Western movies routinely appear on television stations in Kazakhstan, but are not apparently mass-produced in Kazakhstan. Many bootleg videos and movies are provided through Russian intermediaries. Illegal software development and manufacture generally is not conducted in Kazakhstan; Russia and Ukraine are major sources of bootleg software. Several television stations routinely broadcast U.S. and Western programs and news reports pirated via satellite dish.
In November 1998, Kazakhstan ratified the Berne Convention for the Protection of Literary and Artistic Works.
Kazakhstan has several remaining steps to take to fulfill its IPR commitments under the U.S. bilateral trade agreement. It needs to adhere to the Geneva Phonograms Convention. It must provide full-term retroactive protection for U.S. copyrights. The government must specify protection for sound recordings, as well as enforce requirements that television stations broadcast only bona fide licensed programs.
Piracy of all copyrighted products is reportedly widespread, and there have been no known enforcement measures to date. 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.
Although Kazakhstan enacted a number of laws and changed many policies during the last two years, a number of additional changes are still required. Bilateral negotiations must be intensified and concluded in order to comply with WTO standards.
A.8. Transparency of the Regulatory System
Transparency in the application of laws remains a major problem in Kazakhstan and an obstacle to expanded trade and investment. Foreign investors complain of moving goalposts and corruption. While foreign participation is generally welcomed, some foreign investors point out that the government is not always evenhanded and sometimes reneges on its commitments. Although the Agency for Investment (originally the "State Investment Committee") was established to facilitate foreign investment, it has done little to address the concerns of foreign investors.
There has been some clarification of the hierarchy of laws in Kazakhstan. The 1999 Law "On Normative Acts" sets out the following hierarchy:
1. The Constitution is the highest legal authority;
2. Laws, introducing changes and additions to the Constitution;
3. Constitutional Laws of Kazakhstan and Decrees of the President, having the force of constitutional law;
4. Codes of Kazakhstan, laws, and also decrees of the President having the force of law;
5. Normative Decrees of the President;
6. Normative Acts of Parliament;
7. Normative Acts of the Government of Kazakhstan;
8. Normative orders of Kazakhstani ministries, and agency and state committees;
9. Normative decisions of local administrators (akims).The lower normative act may not in law contradict the higher. If there is a contradiction the terms of the higher act take precedence over the lower. Where there is a contradiction on the same level the terms of the most recent act apply.
Under Article 6 of the 1994 Foreign Investment Law, foreign investors were broadly guaranteed that no adverse change in the legal regime would affect their investment for a period of 10 years. However, in 1997 the government amended Article 6 to withdraw the guarantee with respect to changes in laws related to importation, production, or sale of excise goods, or laws relating to importation of finished products. Adverse changes in such laws thus would apply immediately to existing foreign investors. By worsening the position of such foreign investors, the 1997 amendment contradicted the very premise of the original 1994 law that held that foreign investors would be protected from adverse changes in the law. It should be pointed out that stability clauses of this type cannot be relied upon absolutely. This is because: 1) no law can bind the actions of a future legislature and entrench its provisions against change; 2) the law itself sits within a hierarchy of laws and is subject to the terms of those occupying a higher position; and 3) the later terms contained in a law of the same level will prevail.
Kazakhstan, by law, will answer with the assets of its treasury for violations of contracts that were properly entered into and guaranteed by the government. Where the government has merely "approved" or "confirmed" a foreign contract, Kazakhstan's responsibility will be limited to performing administrative acts necessary to facilitate the subject investment activity (acts "concerning the issuance of a license, granting of a land plot, mining allotment, etc."). While this provision might appear to be investor-unfriendly, it should be welcomed as a clear statement of the actual state of affairs.
Kazakhstan's institutional governance is weak, further adding to the problems of transparency in commercial transactions. Senior Kazakhstani government officials have a large say in major transactions, and decisions are often made "behind closed doors." The exception to this general rule is seen in major tender or international projects where the Kazakhstani government generally ensures transparency and a detailed "road map" of decision-making authority.
The Tax Code has provision for tax relief. This includes deductions "of expenses from the annual aggregate income of corporations and individuals connected with its derivation" (Art. 14). There is provision for deduction of interest on loans (Art. 16), on allocations to Reserves for insurance and subsurface users (Art.18), R&D (Art. 19) and Loss Carry Forward (Art. 27). In addition, there are exemptions on income derived from activities such as mortgage lending by banks (Art. 34(1)(8), leasing activities (Art. 34(1)(9) and on investments in government securities (Art. 34(3)). There are provisions that replicate the terms of the Law on State Support for Direct Investment where investment agreements are made with the Agency for Investments (Art. 34(8). Tax holidays can be granted to certain investors by the Agency under the new Law on State Support for Direct Investment.
An April 1995 Licensing Law established the legal framework for licensing activities in Kazakhstan. It requires the relevant agency to issue a license within one month of a company's submitting all required documents. Unfortunately, the implementation of this law has been grossly inadequate. For example, most of the qualification and procedural requirements for issuing licenses have not yet been approved by the government. This situation has left some businesses vulnerable to inspection bodies, which have threatened them with fines and shutdowns for not having licenses that are, in many instances, legally impossible to obtain. 1998 saw the adoption of many procedural acts that implement the requirements of the Edict on Licensing. Some of the most important include:
--Licensing of management of Securities Portfolios- NSC N-7 06/12/98;
--Licensing of activity of investment funds-NSC-7-06/12/98;
--Licensing activity with foreign Currency- NB Resolution N29 01/27/98.The situation has therefore improved, but many areas still lack implementing legislation.
Kazakhstan adopted WCO HS 96 as its tariff nomenclature in June 1997.
There are numerous transparency problems connected with the customs regime in Kazakhstan. These include the following:
--Granting customs exemptions stipulated in the Law on Foreign Investment continues to be problematic. Although such exemptions were stipulated in the original law of 1994, Customs has failed to issue any regulations or instructions for its implementation. Instead, Customs decides claims in an ad-hoc manner, which has resulted in inconsistent and unclear application of the law. According to investors, it is very difficult sometimes to get Customs to accept that certain imported goods are for personal use.
--Kazakhstan has adopted the international tariff nomenclature as the basis of its Tariff Schedule. However, the government has not published the Tariff Schedule in full. According to businesses, this leads to unnecessary delays in processing and increased costs for importers. Certain disputes between importers and customs officers connected with customs classification might be avoided if the importers had access to the full Tariff Schedule (up to 9 digits).
--Each year Customs issues a number of orders, regulations and instructions of general application. Neither Customs nor any other entity publishes these administrative documents in any systemic way. To the extent that these rules have been distributed to the public, Customs has relied in the past on general media or private legal information services, which have published only selective customs rules, and then not necessarily in a timely manner. In late 1996, Customs took a positive step toward improving dissemination of the legal information when it began to publish a bulletin for sale to the public for approximately $4.00. Unfortunately, due to lack of funding, publication of the bulletin has not been regular.
--Customs does not generally consult industry for its views on proposed new regulations and procedures, or amendments to existing requirements. Generally, Customs develops a rule in whole, and announces it to the trade community without the possibility of modification, often shortly in advance of the effective date. The result frequently is a rule or procedure that involves difficulties and controversy in implementation, which may not have been foreseen by Customs but which might have been avoided had the trade community been consulted. Because the trade community is not forewarned about the new rules sufficiently in advance to adjust, it can suffer unnecessary delays and costs.
A.9. Efficient Capital Markets and Portfolio Investment
For a brief description of Kazakhstan's banking system, see Chapter VIII, A.2
The free flow of capital in Kazakhstan is still very limited. Banks provide virtually all of the credit to domestic borrowers. However, foreign investors find the margins taken by local banks and the security required for credit to be very onerous. It is cheaper and simpler for them to use retained earnings or borrow from the home country. Kazakhstan's stock exchange is tiny and, as such, not yet a source of funds (see below). Kazakhstan's largest private bank, Kazkommertsbank, sold $100 million in Eurobonds in the spring of 1998. In April 1998, Kazkommertsbank received a syndicated loan of $35 million, led by Commertzbank and ING Barings. Shortly thereafter, Kazkommertsbank completed a program for the placement of $100 million of eurobonds with foreign investors with a maturity of three years. The EBRD also lent Kazkommertsbank $40 million structured as convertible debt. The government of Kazakhstan also placed a $200 million Eurobond on international markets during the late September of 1999. In December, the government paid off the principal on its first, $200 million Eurobond, issued in 1996.
The Kazakhstan Stock Exchange (KASE) has been in operation since September 1997. As of November 1999, there were eight "A-listed" companies, 11 "B-listed" and 46 Over the Counter (OTC) stocks. In November 1998, to enliven trading activity at the exchange, the Department of State Property and Privatization placed over 40 state share packages of "second tier" companies for sale on the KASE. Of these companies, 14 share packages had been sold (through mid-March 1999) for approximately 1.2 billion tenge, or almost $14 million. Inadequate financial records prevent many other companies from being put on the exchange. Moreover, company managers fear diluting control of their enterprises by selling more shares. In the second half of 1998 the government decided to postpone the sale through the exchange of shares in four or five "blue chip" companies until investors' interest in the emerging markets recovers. The sales, which were planned for 1999, had not taken place as of December of that year.
Kazakhstan's National Securities Commission has been operating since late 1996 and is consistent with the norms of the International Organization of Securities Commissioners. Resident Kazakhstani companies must compete for capital with attractive returns available from government debt (tax deductible) and are hampered by licensing procedures under the 1996 Currency Law.
In January 1998, the government introduced an accumulation pension system that requires all employed persons to contribute 10% of their salary to accumulation pension funds. As of April 1999, 14 private accumulation funds were operating in Kazakhstan. Asset management companies invest the contributions on behalf of the pension funds. The pension assets must be invested only in specific categories of instruments such as government bonds and A-listed securities. As of November 1999, the accumulation system had approximately $417 million in assets. The largest concentration of investments was in dollar-denominated Kazakhstani Eurobonds. Pension assets are held by custodian banks.
The privatization funds are also being converted to investment companies. Foreign investors may invest in these funds. In July 1998 the Law on Joint Stock Companies with some transparency and shareholder protection provisions has been passed.
Because of the recent devaluation of the tenge, some policy decisions have been taken with the aim of protecting assets denominated in tenge and held in Accumulative Pension Funds (APFs).
There appears to be no "cross-shareholding" and "stable shareholder" arrangements used by private firms to restrict foreign investment through mergers and acquisitions. Joint stock companies may not cross hold more than 25% of each others' stock unless permitted by law, and may not exercise more than 25% of the votes in a cross-held joint stock company". There is the notion of a related joint stock company, which is a company recognized as related when another company or legal entity has more than 20% of its voting shares. The company owning the shares may not vote more than 25% of the total shares at the general meeting of shareholders of the related company. The general meeting must approve various corporate actions, such as mergers and acquisitions. This rule applies to all persons, domestic or foreign.
There have been very few hostile takeovers in Kazakhstan, primarily because there are few publicly traded firms. Defensive measures are not targeted towards foreign investors. Current legislation provides a legal framework for takeovers, besides the Civil Code, which requires a company that has purchased a 20% share in another company to publish information about such a purchase.
The Autumn 1997 downturn in emerging markets stock values has meant that the prices originally hoped for under the Blue-Chip privatization program will not materialize. Therefore, the government's plan to sell small packets of stock (5-10%) in these companies will no longer cover budget/balance of payments deficits, as had been hoped. Given these low stock prices and sagging investor interest, the government has delayed privatizing the thirty or so companies included in the program.
1998 and the first half of 1999 were disappointing for the stock markets. A December 1998 tender for sales of government holdings in Kazkhrom, Kaztsink, Aluminum of Kazakhstan and Sokolovsko-Sarbaiskoye did not take place as scheduled. Moreover, the sales of part of the state holdings in Aktobemunaigas, Kazakhmis, Mangistaumunaigas and Ust-Kamenogorskii (gas and metals firms) did not take place as scheduled in April 1999.
Kazakhstan has a well-developed infrastructure for equity and debt trading with a network of brokerage firms. This is a resource for future corporate finance in Kazakhstan. However, at the present, the absence of attractive stocks for purchase is a significant obstacle to the development of this method of corporate finance in Kazakhstan.
The stocks of four privatized companies trade as Global Depository Receipts (note: unlike ADRs they are not subject to US SEC rules) on Frankfurt and Berlin exchanges. These are Kazcommertsbank, Kazakhtelecom, The Shimkent Refinery (SHNOC) and UKTMK. There may be similar plans for depository receipt programs with other category "A" companies once market sentiment improves.
In July 1998 a new Law on Joint Stock Companies was passed with extensive international input. The law provides the basis for regulation of open and closed-type joint stock companies. It also contains clauses to protect investors in often-abused circumstances such as: additional share issues, maintenance of charter capital and restrictions on payments of dividends, re-purchase by a company of its own shares, debt-to-equity conversions, fiduciary duties imposed on company officers, proxy votes, independent audit and determination of asset values during sales of company property.
The July 1998 Law on Joint Stock Companies also regulates tender offers for stock of open joint stock companies by requiring the purchaser to notify the National Commission on Securities and the target company of their intention to purchase 30% or more of the target company and; after such purchase, make an offer to all remaining shareholders to purchase their shares at the average price during the last six months before the purchase.
There are no laws or regulations specifically authorizing firms to adopt articles of incorporation or association that limit or prohibit foreign investments. The Law on Joint Stock Companies, however, allows charter limits on the number of shares or votes that one shareholder may have.
Standards, including sanitary and phyto-sanitary standards, are promulgated solely by the State Body on Standardization, Metrology, and Certification (Gosstandard). Proposals for adoption, amendment, or abolishment of state standards are normally prepared by technical committees constituted by Gosstandard, and may include producers, scientific and engineering associations, and technical experts. There are no restrictions on foreign participation in the development of standards, including participation in meetings of technical committees.
There are some general restrictions that limited liability partnerships (LLP) and closed joint stock companies can establish in their charters. LLP's can set the maximum participation that can be possessed by one founder, as well as the changes in the ratios of share holdings. Closed joint stock companies can limit the number, total nominal value or maximum number of votes possessed by one shareholder. These restrictions can be applicable to both domestic and foreign investors.
A.10. Political Violence
There have been no incidents of politically motivated violence against foreign investment projects. The political environment in Kazakhstan is stable, with opposition to the government fragmented. There are no nascent insurrections in the country and politically motivated civil disturbances are very rare. Kazakhstan has good relations with its neighbors.
A falling standard of living for many and continued economic hardship have resulted in some protests. During the winter of 1997/1998 a wave of social unrest swept through southern industrial towns Zhanatas and Kentau, where a local plant owed its employees $7 million in unpaid wages. The plant was leased to a Russian-dominated consortium, but that contract was cancelled. Rather than being forced to declare bankruptcy, the firm was allowed to survive by not paying wages or creditors. Without their wages, many workers could not pay utility bills and so had no heating all winter. Such protests have taken place relatively infrequently since then. However, unpaid wages and pensions remain a serious economic, social and political problem in Kazakhstan.
Opposition groups have spoken out on issues of economic decline. A broad coalition of the opposition, the Democratic Forum, was formed in late 1999 after most opposition parties were frozen out of political office in presidential and parliamentary elections that did not meet international standards. The authorities monitor the activities of the opposition very closely, and have occasionally engaged in low-level legal harassment of many of its leaders.
It should be noted that although there is a law enshrining complete freedom of assembly, the chief Kazakhstani prosecutor has said that the authorities would take a firm line on public meetings that had not received prior government permission.
Kazakhstan conducted peaceful presidential elections in December 1998; elections for Parliament in September 1999 were similarly peaceful. The Organization for Security and Cooperation in Europe (OSCE), of which Kazakhstan is a member, criticized the fact that the Presidential elections were moved forward two years with little notice, and that a major opposition candidate was denied access to the ballot. Regarding the 1999 parliamentary elections, the OSCE said that while the elections fell short of OSCE standards in several areas, they nevertheless marked a tentative step forward in Kazakhstan's democratic development.
A.11. Corruption
U.S. firms have cited corruption as an obstacle to investment. The Kazakhstani government and local business entities are widely aware of the legal restrictions placed on U.S. business abroad (i.e., the Foreign Corrupt Practices Act). Therefore, approaches to U.S. firms for bribes and other irregular business practices are the exception, rather than the rule.
Although the Kazakhstani Criminal Code contains special articles on penalties for accepting and giving bribes, corruption in all economic sectors is a problem in Kazakhstan. The Ministry of Interior, as well as a special subdivision of the Committee for National Security (the KNB), is responsible for combating corruption.
The Kazakhstani government has undertaken a number of initiatives to combat corruption. In late 1997 President Nazarbayev created the Higher Disciplinary Council. Its mandate is to increase discipline among government organs and identify and weed out corruption at both federal and local levels. In the spring of 1998 Parliament passed the Law on Fighting Corruption. A state body was formed to implement its terms and is directly controlled by the President.
As of the summer of 1999, however, there had been no major prosecutions and the dismissal of only few senior government officials due to the creation of the Higher Disciplinary Council or the Law on Corruption.
B. Bilateral Investment Agreements and Double Tax Treaties
In May 1992 the United States and Kazakhstan signed a Bilateral Investment Treaty, which came into force on January 12, 1994. In May 1992, the United States and Kazakhstan signed an Investment Incentive Agreement, which became effective from the date of signing. In December 1996 the United States and Kazakhstan ratified the Treaty on Avoidance of Dual Taxation.
Kazakhstan has bilateral investment agreements in force with the following countries: Great Britain, Germany, Spain, Italy, Finland, France, Switzerland, Hungary, Lithuania, Poland, Romania, the Czech Republic, Israel, Iran, Turkey, India, China, South Korea, Malaysia, Mongolia, Egypt, Azerbaijan, the Kyrgyz Republic, Georgia, and Ukraine.
A number of double tax treaties were ratified in 1998. This includes agreements with the following countries: the Czech Republic (November 1998), France (November 1998), Sweden (July 1998), Bulgaria (July 1998), Turkmenistan (July 1998), Georgia (July 1998), Republic of Korea (July 1998), Germany (November 1998), and Belgium (November 1998).
C. OPIC and Other Investment Insurance Programs
The Overseas Private Investment Corporation (OPIC) has been active in Kazakhstan since 1994 and is seeking commercially viable projects in the emerging Kazakhstani private sector. OPIC has invested in Kazakhstani oil and gas projects and, in early 1998, in two modern business centers in Almaty through the OPIC-backed New Century Holding Fund. OPIC offers a full range of
investment insurance and debt/equity stakes, and has expressed interest in Kazakhstan's power generation and telecommunication sectors.
Kazakhstan is a member of the Multilateral Investment Guarantee Agency (MIGA).
D. Labor
Kazakhstan has a highly educated and technically competent workforce, but lacks trained labor in the manufacturing and service sectors. Management expertise is also in short supply. U.S. firms employ a large variety of Kazakhstani specialists across a broad spectrum of industries.
The Labor Code of the Republic of Kazakhstan (a 1997 amended version of the 1973 Kazakhstan SSR Labor Code) and the Constitution of the Republic of Kazakhstan guarantee basic workers' rights, including the right to organize and the right to strike. Teachers, miners and workers at a variety of enterprises have gone on strike for, generally, short periods in the past several years. The 1993 Law on Professional Labor Unions provides a legal guarantee against limitations of a citizen's labor, social-economic, political or personal rights and freedoms as a result of membership in a union. It also prohibits the denial of employment, the denial of promotion or the release from employment on the basis of such membership. Kazakhstan joined the International Labor Organization (ILO) in 1993. In 1996, Kazakhstan ratified the ILO worker safety conventions.
The 1996 Law on Labor Disputes and Strikes lays out the procedure for resolving disputes. However, the Law "On Labor Disputes and Strikes" also restricts strikes by requiring that a peaceful attempt at a solution first be made, that two-thirds of the labor collective must approve the strike, and that the employer must be warned 15 days in advance in writing, among other restrictions. In addition, strikes for political purposes are forbidden.
A separate 1992 Law on Collective Bargaining Agreements sets out the basic framework for concluding such agreements. There are instances of unions successfully negotiating collective bargaining agreements with management.
There is significant hidden unemployment in Kazakhstan's enterprises, with numerous employees working only part-time or on compulsory leave. Wages are often unpaid or badly in arrears. The government has used the privatization process as one method of dealing with the wage arrears problem--settling wage arrears is usually part of any privatization contract. Nonetheless, despite some progress, non-payment of wages and pensions by both governmental and private entities remains a serious problem.
The Kazakhstani government has been putting greater emphasis on foreign firms to hire Kazakhstani nationals--a de facto performance requirement. All U.S. companies are strongly advised to contact locally based law and accounting firms, as well as the U.S. Commercial Service in Almaty, for the latest information on work permits. More and more expatriates with specialized skills have had requests for visa extensions denied or have been unable to register with the local OVIR office for not having a work permit.
E. Foreign Trade Zones/Free Ports
On April 1, 1999, by presidential decree, three special economic zones (SEZ) in Kazakhstan--Lisakovsk, Kyzylorda and Zhairem-Atasu - were closed. The Akmola SEZ, which had encompassed Akmola Oblast, is to shrink to the Astana city limits only.
The legal basis for the Special Economic Zones is Chapter 12 of the Customs Code (July 12, 1995) and the Decree of the President On Special Economic Zones in the Republic of Kazakhstan (January 26, 1996). That decree provides that individual SEZ's may be established by the President.
The four SEZ's had been established in 1996 and were initially designed to function until late next decade. The presidential decree gave no reason for the SEZ's early termination. (Note: experts say that the government tried to eliminate "unfair competition" from the companies operating in the SEZ against the ones based in other parts of the country. Some of the Lisakovsk SEZ companies were accused of illegal hard liquor production and tax evasion, although no list of lawbreakers was ever published by the government. End note.)
The Chairman of the Administrative Council of the Economic Zones is appointed and dismissed by the President. The administrative authority in the SEZ enjoys a considerable degree of autonomy and is financed by taxes and fees paid by legal entities and natural persons registered in the territory of the special economic zones.
Any commercial operation, with the exception of retail trade, may be conducted in a SEZ. Such zones are defined as located outside the customs territory. Goods may be admitted to such zones from abroad without payment of duty and taxes. Entities operating in the zone, however, are subject to taxation, registration, and licensing legislation. The tax code provides that legal entities registered and operating in the territory of a SEZ are subject to a privileged income tax rate of 20%, as opposed to the 30% rate otherwise applicable to corporations.
In order to operate within a SEZ, a company must be a Kazakhstani legal entity. However, Kazakhstani legal entities may be fully or partially foreign owned. The Decree On Special Economic Zones envisages the admission of foreign citizens into the zone.
F. Foreign Direct Investment (FDI) Statistics
According to the Agency for Investments, the stock of foreign direct investment (1993-1998) was $5.979 million.
Annual Foreign Direct Investment Flows by Country of Origin Millions of Dollars
1994 1995 1996 1997 1998 USA 247 77 83 181 470 S.Korea 0 187 391 138 0 UK 9 200 318 242 51 Virgin Islands 0 254 391 345 1 (UK) Turkey 62 49 46 51 37 France 197 41 31 9 2 Germany 16 78 40 44 41 Japan 12 5 44 39 0 Others 24 111 121 97 240 Total 567 1002 1465 1146 842 Investment Flows by Sector (Millions of dollars) 1994 1995 1996 1997 1998 Oil/Gas 556 291 210 220 423 Non-Ferrous 4 313 495 289 32 Metals Ferrous Metals 0 314 576 418 19 Electric Power 0 58 98 144 152 Food Processing 0 10 8 33 118 Communications 7 6 3 6 4 Others 0 10 75 36 94 Total 567 1002 1465 1146 842 FDI Stock (1998) as a Percentage of GDP (1998) = 26.8% Net FDI Flows as a Percentage of GDP: 1995 1996 1997 1998 6.0% 7.0% 5.1% 3.8%Largest Investments as of June 1998:
1. TengizChevrOil (TCO), a joint venture founded between Kazakhstanmunaigaz and Chevron, was formed as part of a 40-year, $20 billion agreement signed in 1993. Mobil obtained a 25-percent share in the joint venture in 1996. In March 1997, Chevron sold to the Russian company LUKoil a 5-percent share of TCO. By the summer of 1998, the joint venture partners had invested more than $1.1 billion in TCO. In September 1999, TCO stated publicly that construction of the Caspian Pipeline Consortium project, a pipeline from the Caspian across southern Russia to the Black Sea, is proceeding on schedule for completion in the summer of 2001.
2. Philip Morris signed an agreement with the Almaty Tobacco Company in 1993, under which Philip Morris pledged to invest $350 million through 1998. The project is considered to be one of the largest privatization efforts in the former Soviet Union. Philip Morris has been producing cigarettes in Kazakhstan for domestic consumption since 1994, and hopes to begin exporting large quantities of cigarettes from Kazakhstan in 1997-1998.
- Summer 1998 update: On June 25, 1998 then-Prime Minister Balgimbayev attended a ceremony to lay the cornerstone of a greenfield cigarette manufacturing plant in Almaty oblast. The $200 million investment will produce over 25 billion cigarettes annually by the year 2000.
3. The Offshore Kazakhstan International Operating Company (OKIOC), nine international petroleum companies (BP-Amoco, Statoil, British Gas, Royal Dutch Shell, Mobil, Agip, Inpex, Philips and Total), in 1993 began work to explore oil and gas reserves in the northern section of the Caspian Sea. The Government of Kazakhstan had been a member but sold its share to Inpex and Philips. Consortium members jointly paid approximately $350 million for a seismic study and a bonus to the Kazakhstani government for the rights to prospect for oil in the Caspian. Seismic work was completed in August 1996. A production sharing agreement (PSA) was signed in November 1997. Early estimates of offshore reserves are placed at ten billion barrels of oil and two trillion cubic meters of natural gas. OKIOC spouted its first well above the offshore structure known as Kashagan in August 1999. 4. Two international petroleum companies, Agip and British Gas, together with the Russian company Gazprom, signed an agreement in 1992 with the Kazakhstani government for the development of the Karachaganak gas field in western Kazakhstan. Texaco acquired a 20% interest in Karachaganak in the fall of 1997 (Agip and British Gas have a 32.5% interest, and Lukoil has 15% in the field). A PSA was signed for Karachaganak in November 1997. Western partners plan to build a pipeline to Atyrau to join into the Caspian Pipeline Consortium pipeline to Novorossisk, Russia on the Black Sea.
5. In August 1996, the American firm AES bought the Ekibastuz-1 power plant and committed to invest more than $500 million over the next six years to renovate and improve the facility. The power plant currently generates only 10% of its potential capacity of 4,000 megawatts. In the fall of 1997 AES purchased two hydroelectric power generation plants and several other coal-fired power/heating plants in and around Ust-Kamenogorsk, in eastern Kazakhstan. AES continues to upgrade its entire generation network in Kazakhstan, and is also investigating the export of power to western China and Russian Siberia. However, due to a dispute the Government, AES has requested international arbitration. The arbitration process has been put on hold while the two sides engage in direct negotiations. The government stressed in December 1999 that it has firm intentions to sign and implement contracts that will allow AES to continue its investment in Kazakhstan.
6. In October 1996, the American firm Access Industries bought the Bogatyr coal mine and 66% of the neighboring Stepnoy coal mine (both part of the giant Ekibastuz colliery) for more than $40 million. Access pledged to invest $550 million toward upgrading the coal mines over the next five years. Access Industries continues its investment program at the Ekibastuz colliery. The government is negotiating compensation with Access Industries for disruption to operations caused by competing claims to parts of the Bogatyr mine as of end-1999.
Other major investments in the past several years have included:
Trans World Metals (a UK-registered company) in October 1995 purchased Kazakhstan's chromium plant and associated mine. Trans World paid $65 million for the facilities and pledged to invest a further $400 million. As of June 1998, Trans World was locked in a legal battle with Kazakhstan Mineral Resources, a local Kazakhstani company, over rights to its chromium operation and rights to other properties in Kazakhstan.
Ispat (India), in November 1995, purchased the Karaganda steel plant. Ispat paid $225 million and pledged to invest a further $450 million. Ispat's Karaganda investment is experiencing losses because of financial problems in East Asia, where it sells most of its product.
Samsung (South Korea) bought the Zhezkazgan Copper plant in May 1996, for which it paid $49 million and pledged to invest a further $300 million. Despite falling world prices for copper in 1998, Samsung's low production costs mean its operations in Kazakhstan are still profitable. Tractebel (Belgium), in October 1996, bought the city of Almaty's electricity and heating facilities. In the spring of 1997, Tractebel also purchased rights to operate the gas pipeline network in southern Kazakhstan. In doing so, Tractebel pledged to spend $150 million on the construction of a gas pipeline by-pass around the section of pipe currently transiting the Kyrgyz Republic. Tractebel, unable to raise utility rates high enough to earn a profit, claims its Kazakhstani operation is well over $60 million in debt.
Hurricane Hydrocarbons (Canada), in November 1996, bought the state oil company Yuzhneftegas. Hurricane paid $120 million for the property and pledged to invest $280 million. Since acquiring the property, Hurricane has greatly boosted production, selling all of it to the local market in southern Kazakhstan. Triton-Vuko (Indonesia), in the spring of 1997, bought the Karazhanbas state oil company for an undisclosed sum (presumably in the tens of millions of dollars, along with an associated investment pledge in the hundreds of millions of dollars). The financial crisis in Indonesia has seriously weakened Triton-Vuko's ability to keep to its investment schedule.
Central Asian Petroleum (Indonesia), in the spring of 1997, bought a controlling share of the Mangistau state oil company. Central Asian Petroleum, similarly, is severely affected by the financial crisis in Indonesia.
China National Petroleum Company (CNPC)(PRC) purchased 65% of the Aktyubinsk state oil company in Summer 1997. CNPC paid $325 million, while pledging to invest a further $4 billion in the field and in an associated oil pipeline to western China.
CNPC (PRC), in July 1997, was awarded a tender for purchase of the Uzen state oil company. CNPC plans to pay $52 million for it and to pledge to invest several hundred million dollars in developing the field. The final contract has not yet been signed because it was conditional on building a pipeline to China. A feasibility study on the pipeline has been completed, but not released to the public.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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