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Doing Business in Kazakhstan

“Strategically, politically and economically (Eurasia) has become a region to watch—and for many American companies, a place in which to do business.”

Former Secretary of Commerce Carlos Gutierrez

Business in Kazakhstan is often focused on the oil and gas sector, which has been responsible for the country’s strong economic expansion over the last decade. Kazakhstan, however, has developed into the leading market in Central Asia and is positioning itself as a transit route between China and Europe. It is also actively seeking ways to use its new mineral wealth to diversify its economy. These efforts, combined with a growing middle class, are providing trade and investment prospects for U.S. firms seeking new opportunities in one of the most dynamic of the emerging markets.

Like other former Soviet Republics, Kazakhstan is still developing a transparent and effective business culture that is attractive to foreign investment. Kazakhstan’s authorities realize the need to implement economic reforms. However, new laws and regulations that should improve the business environment are often incorrectly implemented at the local level. Foreign investors, as well as local firms, complain about burdensome regulations that often reflect a way of doing business that is reminiscent of the Soviet Union. Challenges remain in addressing problems related to the country’s competitiveness and economic diversification, its over-reliance on the extractive sector, continued corruption, need for increased rule of law, and concentration of political power.

Economic highlights include:

  • Kazakhstan has a healthy appetite for imported goods and in some, not all, cases is willing to pay more for higher quality and innovative technology/service.
  • The most recent report from the Heritage Foundation’s Index of Economic Freedom rated the country as “moderately free” and ranked it 65th out of 179 countries, well above neighboring Russia and China. The country recorded one of the 20 largest score improvements in the 2012 Index, primarily reflecting purported improvements in property rights, freedom from corruption, and the control of public spending.
  • Brief economic indicators are as follows:
 

2009

2010

2011

2012 forecast

GDP growth

1%

7%

7%

5.5-6%

Inflation

6.2%

7.6%

8.7%

7%

Industrial output

1.7%

10%

3.3%

6%

Market Challenges

Kazakhstan continues to transform its economy to create a more transparent, less regulated, and more market-driven business environment. Nonetheless, this progress continues to be steadily undermined by continued developments that have caused increased concern for U.S. investors and other stakeholders. Firms that have experience in Russia and other post-Soviet economies will be familiar with these challenges:

  • As of January 2010, the Customs Union (CU) between Belarus, Kazakhstan, and Russia became effective. It has boosted trade in the three countries, particularly between Kazakhstan and Russia. Trade in 2010 increased 40% between the two markets while Kazakhstani exports to Russia increased 47%. However, Kazakhstan’s non-CU trade may be more restricted as it had to increase the majority of its tariff levels to match Russia’s and now has similar limitations on certain categories of goods. Importers are affected by a poorly planned implementation of the territories’ integration, non-standardized application of the common customs code, and unclear documentation requirements.
  • Competition is strong as Russia and China vie for access to the country’s energy resources and growing buying power. Investment from these two neighbors remains high while inexpensive products are readily supplied across these borders.
  • Despite President Nazarbayev’s declaration to have Kazakhstan join the World Economic Forum’s “Global Competitiveness” Top 50 economies, Kazakhstan continues its descent in the rankings (142 countries ranked).
 

2006

2007

2008

2009

2010

2011

Ranking

56

61

66

67

72

72

  • Interpretation of laws by local officials is often at variance with that of the central government, especially in the implementation of Kazakhstan’s system of taxation, collection of revenues, and customs procedures. U.S. investors report taxation as one of their top concerns, reporting frequent harassments by local and national ‘financial police.’
  • Corruption remains widespread despite the government’s anti-corruption campaigns and dismissals of guilty bureaucrats. The judiciary, police, and customs are often cited as the source of problems. Kazakhstan ranked 120th of 182 countries (a 15 place drop from last year) in Transparency International’s Corruption Perceptions Index for 2011.

Market Opportunities

Kazakhstan moved up on the World Bank’s Ease of Doing Business Report for 2012, ranking 47th out of 183 countries (an 11 place jump from 2011). Of the various indicators used, Kazakhstan experienced decreased rankings in “Starting a Business”, while showing significant improvement in “Protecting Investors” and “Paying Taxes”. This report however, does not take into consideration vital business criteria such as corruption, labor skills, or investment regulations.

Demand in this developing market goes beyond the few best prospect sectors that this report is able to cover (see Chapter 4). Kazakhstan's strategic aspiration is to become a modern, diversified economy with a high value-added and high-tech component, and they are cognizant of the need for foreign expertise to accomplish this. The government is developing international partnerships and has agreed to projects with China and Germany worth billions of dollars in order to accomplish this.

The “People’s IPO” was announced in early 2011 but has yet to be implemented. The massive privatization program is now expected to see movement only in the latter half of 2012. At that time, assets of Air Astana (national airline), Kazakhstan Electric Grid Operating Company (KEGOC), and KazTransOil (pipelines) are expected to be sold.

Like other former Soviet republics, Kazakhstan’s infrastructure needs modernization, especially roads, transportation, and telecommunications. The Asian Development Bank (ADB) and the European Bank for Reconstruction and Development (EBRD) finance major infrastructure, financial, corporate, and agricultural projects in the country.

Likewise, areas such as health and environment need an infusion of investment to reach global best practices. However, firms that seize this moment to explore the country’s many business opportunities may be rewarded in the long term.

A complete copy of the Country Commercial Guide for Kazakhstan, as well as commercial guides to other countries, is available (free for U.S. companies if registered) on http://www.export.gov