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The Investment Climate

During the Soviet period, Kazakhstan was an agrarian economy supplying raw materials to the former Soviet Union. The most striking feature of Kazakhstan’s economic development during its sixteen years of independence has been the transition from central command planning to a market economy system. The first few years of Kazakhstan’s independence were characterized by economic decline (mainly due to the destabilizing influence of the disintegration of the Soviet Union): by 1995, real GDP had dropped to 61.4 per cent of its 1990 level. This economic deterioration was worse than that experienced during the Great Depression of the 1930s.

Since 1992, Kazakhstan has actively pursued a programme of economic reform to establish a free market economy through deregulation and the privatization of State enterprises. At the same time Kazakhstan has pursued a consistent policy of making itself more attractive to foreign investors in order to increase foreign direct investment (FDI). Having stood at $1.3 billion in 1993, FDI had reached $10.4 billion by 2006, the equivalent of 80 per cent of total investments made in the economies of Central Asian countries.

There was a positive trend of growing investment in the non-raw material sector of the economy (from $350 million in 1993 to $8.1 billion in 2006). In 2006 the major investors were the Netherlands (29%), the US (16%), the UK (11.5%), France (4.2%), Japan (3%), and Germany (3%).

The number of companies with foreign capital also increased (1,865 registered joint ventures in 1999 and 7,000 in 2005).

The legal framework aimed at strengthening country’s investment attractiveness has been steadily improved. The law “On Investment”, elaborated on the basis of two previous laws and adopted in January 2003, stipulates the equality of investment terms for both foreign and domestic investors, guarantees protection of investors’ rights, and provides dispute settlement mechanisms with the participation of investors. Amongst the investment privileges provided for by this law is preferential taxation, realized either through exemption from customs duties or in the form of natural grants from the State.

The law “On Special Economic Zones” (SEZ) adopted in 1996 aims to bring about a balanced distribution of foreign investments throughout the country.

At present there are four operating zones in Kazakhstan: Astana - New Capital City, Aktau Sea Port, the Information Technologies Park, and Ontustyk (South) Textile Park. The Tax Code provides tax privileges for the companies operating in zones that qualify for exemption from land and property tax.

The efforts of the Government of Kazakhstan to improve the country’s investment climate have been supported by the international community.

In 2002, in accordance with anti-dumping legislation, the Government of the United States relieved Kazakhstan of the stigma of “non-market economy” status. The factors on which the U.S. Trade Department made its decision included convertibility of national currency, free level of wages, human rights protection, and levels of foreign investment, State ownership, corruption, and barter transactions. The World Bank report “Business in 2005: Removing obstacles for growth” placed Kazakhstan in Group 5 (also including Germany, Denmark, New Zealand, Switzerland and Singapore) for protection of investors’ rights.

Under the authority of the President, the Council of Foreign Investors provides an effective mechanism for dialogue between foreign investors and the Government. As a consultative and advisory body, the Council promotes the efficient and prompt discussion of issues related to investment operations and the improvement of the investment climate. The Council consists of heads of international economic and financial organizations, foreign companies and corporations.

Although Kazakhstan has huge natural resources, mainly oil, gas and minerals, as a land-locked country it needs to develop multiple transportation routes and a modern infrastructure if it is to benefit from them fully. Alongside the presence of rich natural resource deposits, significant industries were developed in Kazakhstan during the Soviet period. These include metal-processing, chemicals, textiles and food-processing.

Kazakhstan’s chief imports are energy products, machinery and equipment, vehicles, and food. The importation of industrial machinery and technology increased in the late 1990s.

The main economic priority for Kazakhstan is to avoid over-dependence on its oil, gas and minerals sector while at the same time using these natural assets to build a modern, diversified, highly-technological, flexible and competitive economy with a high value-added component. Diversification of the economy, the introduction of international technical, financial and business standards, accession to the WTO, promotion of corporate governance, greater transparency and accountability, education, and a concerted administrative reform have been identified as the key motors for economic strategy.

As part of the drive to cut bureaucracy, the Government is introducing “e-government” mechanisms in all major sectors. Along with a number of other result-oriented administrative reform steps, this measure is regarded as an important tool in the fight against red tape and corruption.

In the last two years (2005–2007), 18 Kazakhstan companies have been listed on the London Stock Exchange (7 on the main market, and the rest on AIM).

Since 2005 Kazakhstan has been implementing the UK’s Extractive Industries Transparency Initiative, with the aim of delivering a clear signal to the international investor community and financial institutions that the Government of Kazakhstan is committed to bringing about greater transparency, further improvements in the investment climate, higher levels of accountability and good governance, and the promotion of greater economic and political stability throughout the country, on the basis of the principles of decentralization, industry specialization, free market competition, and transparency.

To help it on its way to realizing its ambitious goals, Kazakhstan has officially announced its aspiration to become a trilingual nation, with Kazakh as the State language, Russian as the language of interethnic communication, and English as the language of successful integration into the global economy and community.

Kazakhstan is taking active steps to increase the sustainability of its economy. Using foreign best practices, particularly Norway’s policy on utilizing oil surplus profits, Kazakhstan created the National Fund, which is used as a mechanism to control inflation, make efficient investments, and as a financial “pillow” in case of fluctuations of the world economy.

Recent events on the US home mortgage markets were a good test for the financial system of Kazakhstan, showing up the effectiveness of the domestic financial regulators, particularly of the National Bank, which managed to minimize the effects of the crisis. The long-term forecast for economic growth remaines positive.

Development Institutions

A number of economic institutions for sustainable development have been created in Kazakhstan, united by the development fund “Kazyna”.

The purpose of Kazyna is to increase and stimulate investment and innovation activities. Kazyna is pursuing a two-pronged strategy: on the one hand building on Kazakhstan’s industrial capacities, and on the other developing innovation and hi-tech activities that will create value-added products.

Kazyna was established as an “umbrella” holding company and principal shareholder in seven development institutions.

The first of these is the Development Bank of Kazakhstan, which provides both short-term and long-term loans. The principal aim of this institution is to provide credits strictly focused on social areas. The best way of doing this, of course, is to follow similar policies to those of benchmark institutions such as the EBRD, but locally. Other institutions in this category range from the National Innovation Fund, which is focused on grants for R&D and venture-funding, and on the injection of equity into suitable projects by the Investment Fund, through to dedicated ”think-tanks” on markets and policy analysis such as the CMAR (Centre for Marketing and Analytical Research).

Other key agencies include the Small and Medium Enterprises Support Fund, which provides loans for small and medium-sized enterprises that remain an essential part of economic activity and employment in Kazakhstan. Another is the more outward-looking KazInvest, which furnishes information and assistance to potential investors. Kazyna’s capabilities are rounded off by the State Insurance Corporation’s work in arranging terms for Kazakh exporters and investors alike.

Kazakhstan is taking specific measures to diversify and modernize its economy in order to avoid raw material specialization. The share of the industrial, agricultural, service, financial and innovative sectors of the economy is steadily increasing. A significant number of State programmes are targeted at diversification, notably the Innovative Industrial Development Strategy 2015, the “30 corporate leaders” programme, and the Regional Financial Center of Almaty.

The Innovative Industrial Development Strategy aims at promoting rapid economic modernization through the removal of structural problems, reconstruction and creation of new industries, development of the atomic industry, introduction of innovative technologies, and development of infrastructure, tourism, transportation etc.

Priority production projects have been proposed by the experts from the Center of Marketing and Analytical Research of Kazakhstan. Textile, food, beverages, agricultural products processing, furniture and leather producing are also of a primary importance.

The main goal of the “30 corporate leaders” programme is to accelerate the modernization of the economy and to make it more competitive by developing corporate leaders and implementing “breakthrough” projects. This programme is based on “PPP” principles (public-private partnership).

Kazakhstan intends to become a financial hub for Central Asia and beyond, offering companies a diversified investment platform on which to raise equity finance on the national and international markets. The Regional Financial Centre was established by President’s decree on July 7, 2006 in Almaty the former capital of Kazakhstan and the country’s largest city.

The activities of the Regional Financial Centre of Almaty (RFCA) are aimed at attracting foreign investment, developing the region’s securities market and ensuring its integration with international capital markets, facilitating Kazakh investment in international securities markets. The RFCA provides a special legal regime for registered market participants. The RFCA’s special trading floor provides tax benefits and economic incentives both to domestic and foreign RFCA participants. The RFCA has an International Advisory Board of local and foreign experts to advise on matters related to RFCA strategy and development. The members of International Council include former World Bank Chairman James Wolfenson, former President of the Singapore Stock Exchange Lim Choo Peng, and heads of such major companies as Deloitte, Numis, Renaissance Capital, ABN Amro Bank, and Bracewell and Guiliani.

On 1 September 2007, 128 issuers of stocks and bonds had been registered on the RFCA with a total capitalization of $71.8 bln.

The RFCA recently signed Memorandums on Co-operation with the stock exchanges of Frankfurt, London, Korea and Hong Kong. The RFCA is planning to co-operate with the NYSE and NASDAQ stock exchanges. The RFCA is set to become a financial hub for the Central Asian and Caspian regions, the CIS countries and Western China region.

Another significant factor of economic sustainability is the level of political stability in the country. In spite of being situated in a relatively stressful region, Kazakhstan maintains inter-ethnic and religious tolerance, and has a high level of predictability in the executive, legislative and judicial branches of power. Representatives of more than 130 ethnic groups and religions live in Kazakhstan and the Government has succeeded in creating favorable conditions for the peaceful coexistence of all citizens of Kazakhstan.

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